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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
COMMISSION FILE NUMBER: 1-13762
RECKSON OPERATING PARTNERSHIP, L. P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 11-3233647
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(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
225 BROADHOLLOW ROAD, MELVILLE, NY 11747
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(631) 694-6900
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) YES X NO__, AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES NO X
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RECKSON OPERATING PARTNERSHIP, L.P.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED MARCH 31, 2004
TABLE OF CONTENTS
INDEX PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004
(unaudited) and December 31, 2003........................ 2
Consolidated Statements of Income for the three months
ended March 31, 2004 and 2003 (unaudited)................ 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 (unaudited)................ 4
Notes to the Consolidated Financial Statements (unaudited).. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 31
Item 4. Controls and Procedures..................................... 32
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings........................................... 41
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities...................................... 41
Item 3. Defaults Upon Senior Securities............................. 41
Item 4. Submission of Matters to a Vote of Securities Holders....... 41
Item 5. Other Information........................................... 41
Item 6. Exhibits and Reports on Form 8-K............................ 42
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SIGNATURES
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1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RECKSON OPERATING PARTNERSHIP, L.P
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT UNIT AMOUNTS)
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(Unaudited)
ASSETS:
Commercial real estate properties, at cost:
Land ................................................................... $ 380,660 $ 379,989
Building and improvements .............................................. 2,562,883 2,215,200
Developments in progress:
Land ................................................................... 89,959 90,706
Development costs ...................................................... 71,664 68,127
Furniture, fixtures and equipment .......................................... 11,460 11,338
----------- -----------
3,116,626 2,765,360
Less accumulated depreciation .............................................. (490,308) (464,821)
----------- -----------
Investment in real estate, net of accumulated depreciation ................. 2,626,318 2,300,539
Properties and related assets held for sale, net of accumulated depreciation 35,099 47,590
Investments in real estate joint ventures .................................. 5,950 5,904
Investments in mortgage notes and notes receivable ......................... 55,484 54,986
Investments in service companies and affiliate loans and joint ventures .... 77,817 75,544
Cash and cash equivalents .................................................. 86,498 22,512
Tenant receivables ......................................................... 8,803 11,959
Deferred rents receivable .................................................. 116,760 112,133
Prepaid expenses and other assets .......................................... 62,791 34,911
Contract and land deposits and pre-acquisition costs ....................... 60 20,203
Deferred leasing and loan costs ............................................ 68,083 64,399
----------- -----------
TOTAL ASSETS ............................................................... $ 3,143,663 $ 2,750,680
=========== ===========
LIABILITIES:
Mortgage notes payable ..................................................... $ 968,726 $ 721,635
Liabilities associated with properties held for sale ....................... 557 778
Unsecured credit facility .................................................. 90,000 169,000
Senior unsecured notes ..................................................... 549,093 499,445
Accrued expenses and other liabilities ..................................... 106,100 90,082
Distributions payable ...................................................... 32,870 28,290
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TOTAL LIABILITIES .......................................................... 1,747,346 1,509,230
=========== ===========
Minority partners' interests in consolidated partnerships .................. 234,301 233,070
----------- -----------
Commitments and contingencies .............................................. -- --
PARTNERS' CAPITAL
Preferred Capital, 8,854,162 and 10,854,162 units outstanding, respectively 231,690 281,690
General Partners Capital:
Common units, 66,630,805 and 58,275,367 units outstanding, respectively 879,855 682,172
Limited Partners' Capital:
Class A common units, 3,084,713 units issued and outstanding ........... 43,785 38,613
Class C common units, 465,854 units issued and outstanding ............. 6,686 5,905
=========== ===========
Total Partners' Capital ................................................ 1,162,016 1,008,380
=========== ===========
Total Liabilities and Partners' Capital ............................. $ 3,143,663 $ 2,750,680
=========== ===========
(see accompanying notes to financial statements)
2
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER UNIT AND UNIT AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2004 2003
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REVENUES:
Property operating revenues:
Base rents ..................................................................... $ 111,210 $ 94,919
Tenant escalations and reimbursements .......................................... 18,095 14,017
------------ ------------
Total property operating revenues ................................................... 129,305 108,936
Interest income on mortgage notes and notes receivable
(including $590 and $1,033 respectively from related parties) .................. 1,616 1,531
Investment and other income ......................................................... 4,047 5,728
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TOTAL REVENUES .................................................................. 134,968 116,195
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EXPENSES:
Property operating expenses ......................................................... 51,484 43,396
Marketing, general and administrative ............................................... 7,079 7,577
Interest ............................................................................ 25,661 20,097
Depreciation and amortization ....................................................... 29,166 28,825
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TOTAL EXPENSES ................................................................. 113,390 99,895
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Income before minority interests, preferred distributions, equity in earnings of real 21,578 16,300
estate joint ventures and service companies and discontinued operations
Minority partners' interests in consolidated partnerships ........................... (6,181) (4,401)
Equity in earnings of real estate joint ventures and service companies .............. 114 106
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Income before discontinued operations and preferred distributions ................... 15,511 12,005
Discontinued operations:
Gain on sales of real estate .................................................... 5,506 --
Income from discontinued operations ............................................. 416 3,244
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Net Income .......................................................................... 21,433 15,249
Preferred unit distributions ........................................................ (4,533) (5,590)
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Net income allocable to common unit holders ......................................... $ 16,900 $ 9,659
============ ============
Net income allocable to:
Common unit holders ............................................................. $ 16,767 $ 7,591
Class B common unit holders ..................................................... -- 2,068
Class C common unit holders ..................................................... 133 --
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Total ............................................................................... $ 16,900 $ 9,659
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Net income per weighted average common units:
Income from continuing operations ............................................... $ .17 $ .09
Discontinued operations ......................................................... .09 .05
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Basic net income per common unit ................................................ $ .26 $ .14
============ ============
Class B common - income from continuing operations .............................. $ -- $ .18
Discontinued operations ......................................................... -- .03
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Basic net income per Class B common unit ........................................ $ -- $ .21
============ ============
Class C common - income from continuing operations .............................. $ .19 $ --
Discontinued operations ......................................................... .10 --
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Basic net income per Class C common unit ........................................ $ .29 $ --
============ ============
Weighted average common units outstanding:
Common units..................................................................... 64,447,810 55,477,170
Class B common units............................................................. -- 9,915,313
Class C common units............................................................. 465,845 --
(see accompanying notes to financial statements)
3
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ...................................................................... $ 21,433 $ 15,249
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including discontinued operations) ......... 29,235 31,984
Gain on sales of real estate .............................................. (5,506) --
Minority partners' interests in consolidated partnerships ................. 6,325 4,690
Equity in earnings of real estate joint ventures and service companies .... (114) (106)
Changes in operating assets and liabilities:
Tenant receivables ........................................................ 3,132 2,471
Prepaid expenses and other assets ......................................... 7,113 1,314
Deferred rents receivable ................................................. (3,817) (4,101)
Accrued expenses and other liabilities .................................... (15,074) (11,917)
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Net cash provided by operating activities ................................. 42,727 39,584
========= =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to developments in progress ..................................... (4,781) (5,888)
Purchase of commercial real estate ........................................ (72,691) --
Additions to commercial real estate properties ............................ (7,627) (14,916)
Additions to furniture, fixtures and equipment ............................ (68) (89)
Payment of leasing costs .................................................. (4,584) (4,787)
Distributions from investments in real estate joint ventures .............. 68 117
Proceeds from sales of real estate ........................................ 18,450 --
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Net cash used in investing activities ..................................... (71,233) (25,563)
========= =========
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of general partner common units ................................. -- (4,538)
Principal payments on secured borrowings .................................. (2,909) (2,881)
Payment of loan costs ..................................................... (2,635) (29)
Proceeds from issuance of senior unsecured notes .......................... 150,000 --
Repayment of senior unsecured notes ....................................... (100,000) --
Proceeds from unsecured credit facility ................................... 90,000 35,000
Repayment of unsecured credit facility .................................... (169,000) --
Distributions to minority partners in consolidated partnerships ........... (5,093) (5,693)
Contributions ............................................................. 162,778 --
Distributions ............................................................. (30,279) (35,580)
--------- ---------
Net cash provided by (used in) financing activities ....................... 92,862 (13,721)
========= =========
Net increase in cash and cash equivalents ................................. 64,356 300
Cash and cash equivalents at beginning of period .......................... 23,012 30,576
--------- ---------
Cash and cash equivalents at end of period ................................ $ 87,368 $ 30,876
========= =========
(see accompanying notes to financial statements)
4
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
Reckson Operating Partnership, L. P. (the "Operating Partnership") commenced
operations on June 2, 1995. Reckson Associates Realty Corp. (the "Company"),
which serves as the sole general partner of the Operating Partnership, is a
fully integrated, self administered and self managed real estate investment
trust ("REIT"). The Operating Partnership and the Company (collectively the
"Company") were formed for the purpose of continuing the commercial real estate
business of Reckson Associates, the predecessor of the Operating Partnership,
its affiliated partnerships and other entities.
The Operating Partnership is engaged in the ownership, management, operation,
leasing and development of commercial real estate properties, principally office
and to a lesser extent industrial buildings and also owns land for future
development (collectively, the "Properties") located in the New York City
tri-state area (the "Tri-State Area").
The Company was incorporated in Maryland in September 1994. In June 1995, the
Company completed an initial public offering (the "IPO") and commenced
operations.
The Company became the sole general partner of the Operating Partnership by
contributing substantially all of the net proceeds of the IPO in exchange for an
approximate 73% interest in the Operating Partnership. At March 31, 2004, the
Company's ownership percentage in the Operating Partnership was approximately
94.6%. All Properties acquired by the Company are held by or through the
Operating Partnership. In conjunction with the IPO, the Operating Partnership
executed various option and purchase agreements whereby it issued common units
of limited partnership interest in the Operating Partnership ("OP Units") to
certain continuing investors in exchange for (i) interests in certain property
partnerships, (ii) fee simple and leasehold interests in properties and
development land, (iii) certain other business assets and (iv) 100% of the
non-voting preferred stock of Reckson Management Group, Inc. and Reckson
Construction Group, Inc.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Company, the Operating Partnership and the Service
Companies (as defined below) at March 31, 2004 and December 31, 2003 and the
results of their operations and their cash flows for the three months ended
March 31, 2004 and 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 service companies which provide management,
development and construction services to the Company and the Operating
Partnership are Reckson Management Group, Inc., RANY Management Group, Inc.,
Reckson Construction Group New York, Inc., Reckson Construction Group, Inc. and
Reckson Construction & Development LLC (the "Service Companies"). All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.
Reckson Construction Group, Inc., Reckson Construction Group New York, Inc. and
Reckson Construction & Development LLC use the percentage-of-completion method
for recording amounts earned on their contracts. This method records amounts
earned as revenue in the proportion that actual costs incurred to date bear to
the estimate of total costs at contract completion.
Minority partners' interests in consolidated partnerships represent a 49%
non-affiliated interest in RT Tri-State LLC, owner of a seven property suburban
office portfolio, a 40% non-affiliated interest in Omni Partners, L.P., owner of
a 579,000 square foot suburban office property and a 49% non-affiliated interest
in Metropolitan 919 Third Avenue, LLC, owner of the property located at 919
Third Avenue, New York, NY.
The Operating Partnership follows the guidance provided for under the Financing
Accounting Standards Board ("FASB") Statement No. 66, "Accounting for Sales of
Real Estate" ("Statement No. 66"), which provides guidance on sales contracts
that are accompanied by agreements which require the seller to develop the
property in the future. Under Statement No. 66 profit is recognized and
allocated to the sale of the land and the later development or construction work
on the basis of estimated costs of each activity; the same rate of profit is
attributed to each activity. As a result, profits are recognized and reflected
over the improvement period on the basis of costs incurred (including land) as a
percentage of total costs estimated to be incurred. The Operating Partnership
uses the percentage of completion method, as the future costs of development and
profit are reliably estimated.
5
The accompanying interim unaudited financial statements have been prepared by
the Operating Partnership's management pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") may
have been condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate to not make the
information presented misleading. The unaudited financial statements as of March
31, 2004 and for the three month periods ended March 31, 2004 and 2003 include,
in the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial information set forth
herein. The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. These financial statements should be read in conjunction with the
Operating Partnership's audited financial statements and the notes thereto
included in the Operating Partnership's Form 10-K for the year ended December
31, 2003.
The Company intends to continue to qualify as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT,
the Company will not generally be subject to corporate Federal income taxes as
long as it satisfies certain technical requirements of the Code relating to
composition of its income and assets and requirements relating to distributions
of taxable income to shareholders.
The Operating Partnership considers highly liquid investments with maturity of
three months or less when purchased to be cash equivalents. Cash balances at
March 31, 2004 include approximately $50 million of the net proceeds received
during the three month period ended March 31, 2004 relating to property sales,
the Company's equity offering (see Note 7) and the Operating Partnership's
issuance of senior unsecured notes (see Note 4).
Certain prior period amounts have been reclassified to conform to the current
period presentation.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement No. 144 provides
accounting guidance for financial accounting and reporting for the impairment or
disposal of long-lived assets. Statement No. 144 supersedes Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". It also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
related to the disposal of a segment of a business. The Operating Partnership
adopted Statement No. 144 on January 1, 2002. The adoption of this statement did
not have a material effect on the results of operations or the financial
position of the Operating Partnership. The adoption of Statement No. 144 does
not have an impact on net income allocable to common unit holders. Statement No.
144 only impacts the presentation of the results of operations and gain on sales
of depreciable real estate assets for those properties sold or held for sale
during the period within the consolidated statements of income.
On July 1, 2001 and January 1, 2002, the Operating Partnership adopted FASB
Statement No.141, "Business Combinations" and FASB Statement No. 142, "Goodwill
and Other Intangibles", respectively. As part of the acquisition of real estate
assets, the fair value of the real estate acquired is allocated to the acquired
tangible assets, consisting of land, building and building improvements, and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, other value of in-place leases, and value
of tenant relationships, based in each case on their fair values. The Operating
Partnership assesses fair value based on estimated cash flow projections that
utilize appropriate discount and capitalization rates and available market
information. Estimates of future cash flows are based on a number of factors
including the historical operating results, known trends, and market/economic
conditions that may affect the property. If the Operating Partnership
incorrectly estimates the values at acquisition or the undiscounted cash flows,
initial allocation of purchase price and future impairment charges may be
different.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes the current
practice in the accounting for, and disclosure of, guarantees. Guarantees and
indemnification agreements meeting the characteristics described in FIN 45 are
required to be initially recorded as a liability at fair value. FIN 45 also
requires a guarantor to make significant new disclosures for virtually all
guarantees even if the likelihood of the guarantor having to make payment under
the guarantee is remote. The disclosure requirements within FIN 45 are effective
for financial statements for annual or interim periods ending after December 15,
2002. The initial recognition and initial measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The Operating Partnership adopted FIN 45 on January 1, 2003. The adoption of
this interpretation did not have a material effect on the results of operations
or the financial position of the Operating Partnership.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which explains how to identify variable
interest entities ("VIEs") and how to assess whether to consolidate such
entities. The initial determination of whether an entity qualifies as a VIE
shall be made as of the date at which a primary beneficiary becomes involved
with the entity and reconsidered as of the date of a triggering event, as
defined. The provisions of this interpretation are immediately effective for
VIEs formed after January 31, 2003. In December 2003 the FASB issued FIN 46R,
deferring the effective date until the period ending March 31, 2004 for
interests held by public companies in VIEs created before February 1, 2003,
which were non-special purpose entities. The Operating Partnership adopted FIN
46R during the period ended March 31, 2004. The Operating Partnership has
determined that its consolidated and unconsolidated subsidiaries do not
represent VIEs requiring consolidation pursuant to such interpretation. The
Operating Partnership will continue to monitor any changes in circumstances
relating to certain of its consolidated and unconsolidated joint ventures which
could result in a change in the Operating Partnership's consolidation policy.
6
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("Statement No. 150"). Statement No. 150 is effective for financial instruments
entered into or modified after May 15, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
The adoption of Statement No. 150 did not have a material effect on the
Operating Partnership's financial position or results of operations.
3. MORTGAGE NOTES PAYABLE
As of March 31, 2004, the Operating Partnership had approximately $968.7 million
of mortgage notes payable, which mature at various times between 2004 and 2027.
The notes are secured by 20 properties with an aggregate carrying value of
approximately $1.83 billion which are pledged as collateral against the mortgage
notes payable. In addition, approximately $43.8 million of the $968.7 million is
recourse to the Operating Partnership and certain of the mortgage notes payable
are guaranteed by certain limited partners in the Operating Partnership and / or
the Company.
The following table sets forth the Operating Partnership's mortgage notes
payable as of March 31, 2004, by scheduled maturity date (dollars in thousands):
Principal Interest Maturity Amortization
Property Outstanding Rate Date Term (Years)
- ---------------------------------------------- ----------- -------- --------------- ------------
1185 Avenue of the Americas, NY, NY $ 250,000 4.95%(f) August, 2004 Interest only
395 North Service Road, Melville, NY 19,199 6.45% October, 2005 $34 per month
200 Summit Lake Drive, Valhalla, NY 18,822 9.25% January, 2006 25
1350 Avenue of the Americas, NY, NY 73,631 6.52% June, 2006 30
Landmark Square, Stamford, CT (a) 43,750 8.02% October, 2006 25
100 Summit Lake Drive, Valhalla, NY 17,353 8.50% April, 2007 15
333 Earle Ovington Blvd, Mitchel Field, NY (b) 52,609 7.72% August, 2007 25
810 Seventh Avenue, NY, NY (e) 80,910 7.73% August, 2009 25
100 Wall Street, NY, NY (e) 35,061 7.73% August, 2009 25
6900 Jericho Turnpike, Syosset, NY 7,197 8.07% July, 2010 25
6800 Jericho Turnpike, Syosset, NY 13,636 8.07% July, 2010 25
580 White Plains Road, Tarrytown, NY 12,421 7.86% September, 2010 25
919 Third Ave, NY, NY (c) 243,557 6.87% August, 2011 30
One Orlando Center, Orlando, FL (d) 37,600 6.82% November, 2027 28
120 West 45th Street, NY, NY (d) 62,980 6.82% November, 2027 28
--------- ----
Total/Weighted Average $ 968,726 6.65%
=========
- ------------------
(a) Encompasses six Class A office properties.
(b) The Operating Partnership has a 60% general partnership interest in
this property and its proportionate share of the aggregate principal
amount is approximately $31.6 million.
(c) The Operating Partnership has a 51% membership interest in this
property and its proportionate share of the aggregate principal amount
is approximately $124.2 million.
(d) Subject to interest rate adjustment on November 1, 2004 to the greater
of 8.82% per annum or the yield on non-callable U.S. treasury
obligations with a term of fifteen years plus 2% per annum. The
Operating Partnership has the ability to pre-pay the loan at that time.
In addition, these properties are cross-collateralized.
(e) These properties are cross-collateralized.
(f) Such rate is based on the greater of one month LIBOR or 2.15% plus a
weighted average spread of approximately 2.80%. An interest rate hedge
agreement was acquired to limit exposure to increases in LIBOR above
5.825%.
In addition, the Operating Partnership has a 60% interest in an unconsolidated
joint venture property. The Operating Partnership's share of the mortgage debt
at March 31, 2004 is approximately $7.8 million. This mortgage note payable
bears interest at 8.85% per annum and matures on September 1, 2005 at which time
the Operating Partnership's share of the mortgage debt will be approximately
$6.9 million.
On March 19, 2004, the Operating Partnership entered into two anticipatory
interest rate hedge instruments, which are scheduled to coincide with an August
2004 debt maturity, totaling approximately $100 million, to protect itself
against potentially rising interest rates. At March 31, 2004, the fair value of
these instruments reasonably approximate their carrying value.
7
4. SENIOR UNSECURED NOTES
On January 22, 2004, the Operating Partnership issued $150 million of seven-year
5.15% (5.196% effective rate) senior unsecured notes. Prior to the issuance of
these notes, the Operating Partnership entered into several anticipatory
interest rate hedge instruments to protect itself against potentially rising
interest rates. At the time the notes were issued, the Operating Partnership
incurred a net cost of approximately $980,000 to settle these instruments. Such
costs 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 (as defined below) and to
invest in short-term liquid investments.
On March 15, 2004, the Operating Partnership repaid $100 million of the
Operating Partnership's 7.4% senior unsecured notes at maturity.
As of March 31, 2004, the Operating Partnership had outstanding approximately
$549.1 million (net of issuance discounts) of senior unsecured notes (the
"Senior Unsecured Notes"). The following table sets forth the Operating
Partnership's Senior Unsecured Notes and other related disclosures by scheduled
maturity date (dollars in thousands):
FACE
ISSUANCE AMOUNT COUPON RATE TERM MATURITY
---------------- -------- ----------- ---- ----------------
June 17, 2002 $ 50,000 6.00% 5 years June 15, 2007
August 27, 1997 150,000 7.20% 10 years August 28, 2007
March 26, 1999 200,000 7.75% 10 years March 15, 2009
January 22, 2004 150,000 5.15% 7 years January 15, 2011
--------
$550,000
========
Interest on the Senior Unsecured Notes is payable semi-annually with principal
and unpaid interest due on the scheduled maturity dates. In addition, certain of
the Senior Unsecured Notes were issued at discounts aggregating $1,231,000. Such
discounts are being amortized over the term of the Senior Unsecured Notes to
which they relate.
5. UNSECURED CREDIT FACILITY
The Operating Partnership currently has a $500 million unsecured revolving
credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association, as syndication
agent, and Citicorp North America, Inc. and Wachovia Bank, National Association,
as co-documentation agents. The Credit Facility 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. As of March 31, 2004, based on a
pricing grid of the Operating Partnership's unsecured debt ratings, borrowings
under the Credit Facility were priced off LIBOR plus 90 basis points and the
Credit Facility carried a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's unsecured credit ratings the
interest rates and facility fee are subject to change. At March 31, 2004, the
outstanding borrowings under the Credit Facility aggregated $90 million and
carried a weighted average interest rate of 1.99%.
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 March 31, 2004, the Operating Partnership had availability
under the Credit Facility to borrow approximately an additional $410 million,
subject to compliance with certain financial covenants.
In connection with the acquisition of certain properties, contributing partners
of such properties have provided guarantees on indebtedness of the Operating
Partnership. As a result, the Operating Partnership maintains certain
outstanding balances on its Credit Facility.
In accordance with the provisions of FASB Statement No. 144, the Operating
Partnership allocated $0 and approximately $2.6 million of its unsecured
corporate interest expense to discontinued operations for the three month
periods ended March 31, 2004 and 2003, respectively.
8
6. COMMERCIAL REAL ESTATE INVESTMENTS
As of March 31, 2004, the Operating Partnership owned and operated 77 office
properties (inclusive of ten office properties owned through joint ventures)
comprising approximately 14.6 million square feet, 11 industrial / R&D
properties comprising approximately 1.1 million square feet and one retail
property comprising approximately 9,000 square feet located in the Tri-State
Area.
As of March 31, 2004, the Operating Partnership also owned approximately 313
acres of land in 12 separate parcels of which the Operating Partnership can
develop approximately 3.0 million square feet of office space. The Operating
Partnership is currently evaluating alternative land uses for certain of the
land holdings to realize the highest economic value. These alternatives may
include rezoning certain land parcels from commercial to residential for
potential disposition. As of March 31, 2004, the Operating Partnership had
invested approximately $161.6 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. As of March 31, 2004, the Operating
Partnership has capitalized approximately $2.8 million related to real estate
taxes, interest and other carrying costs related to these development projects.
In October 2003, the Operating Partnership entered into a contract to sell a 113
acre land parcel located in New Jersey. The contract provides for a sales price
ranging from $18 million to $36 million. The sale is contingent upon obtaining
zoning for residential use of the land and other customary approvals. The
proceeds ultimately received from such sale will be based upon the number of
residential units permitted by the rezoning. The cost basis of the land parcel
at March 31, 2004 was approximately $2.7 million. The closing is scheduled to
occur upon the rezoning, which is anticipated to occur within 12 to 24 months. A
second contract to sell a separate parcel of land was signed in October 2003.
That contract was subsequently cancelled. During February 2004, a 3.9 acre land
parcel located on Long Island was condemned by the Town of Oyster Bay. As
consideration for the condemnation the Operating Partnership anticipates it will
initially receive approximately $1.8 million. The Operating Partnership's cost
basis in this land parcel at March 31, 2004 was approximately $1.4 million. The
Operating Partnership is currently contesting this valuation and seeking payment
of additional consideration from the Town of Oyster Bay but there can be no
assurances that the Operating Partnership will be successful in obtaining any
such additional consideration.
In November 2003, the Operating Partnership disposed of all but three of its 95
property, 5.9 million square foot, Long Island industrial building portfolio to
members of the Rechler family (the "Disposition") for approximately $315.5
million, comprised of $225.1 million in cash and debt assumption and 3,932,111
OP Units valued at approximately $90.4 million. Approximately $204 million of
cash sales proceeds from the Disposition were used to repay borrowings under the
Credit Facility. For information concerning certain litigation pertaining to
this transaction see Part II-Other Information; Item 1. Legal Proceedings of
this Form 10-Q.
In January 2004, the Operating Partnership sold a 104,000 square foot office
property located on Long Island for approximately $18.5 million. Net proceeds
from the sale were used to repay borrowings under the Credit Facility. As a
result, the Company recorded a net gain of approximately $5.2 million. In
accordance with FASB Statement No. 144, such gain has been reflected in
discontinued operations on the Operating Partnership's consolidated statement of
income for the three month period ended March 31, 2004.
In January 2004, the Operating Partnership acquired 1185 Avenue of the Americas,
a 42-story, 1.1 million square foot Class A office tower, located between 46th
and 47th Streets in New York, NY for $321 million. In connection with this
acquisition, the Operating Partnership assumed a $202 million mortgage and $48
million of mezzanine debt. The balance of the purchase price was paid through an
advance under the Credit Facility. The floating rate mortgage and mezzanine debt
both mature in August 2004 and presently have a weighted average interest rate
of 4.95%. Such rate is based on the greater of one month LIBOR or 2.15% plus a
weighted average spread of approximately 2.80%. An interest rate hedge agreement
was acquired to limit exposure to increases in LIBOR above 5.825%. The property
is also encumbered by a ground lease which has a remaining term of approximately
40 years with rent scheduled to be re-set at the end of 2005 and then remain
constant for the balance of the term. There can be no assurances as to the
outcome of the rent re-set process. In accordance with FASB Statement No. 141,
"Business Combinations", the Operating Partnership allocated and recorded net
deferred intangible lease income of approximately $14.2 million, representing
the net value of acquired above and below market leases, assumed lease
origination costs and other value of in-place leases. The net value of the above
and below market leases is amortized over the remaining terms of the respective
leases to rental income which amounted to approximately $1.8 million for the
three month period ended March 31, 2004. In addition, amortization expense on
the value of lease origination costs was approximately $527,000. At acquisition,
there were 31 in-place leases aggregating approximately one million square feet
with a weighted average remaining lease term of approximately 6 years.
In April 2004, the Operating Partnership sold a 175,000 square foot office
building located on Long Island for approximately $30 million, of which the
Operating Partnership owned a 51% interest, and a wholly owned 9,000 square foot
retail property for approximately $2.8 million. Net proceeds from these sales
are currently being held in short-term, liquid investments. In addition, the
Operating Partnership completed the sale on two of the remaining three
properties from the Disposition for approximately $5.8 million. Proceeds from
the sale were used to establish an escrow account with a qualified intermediary
for a future exchange of real property pursuant to Section 1031 of the Code (a
"Section 1031 Exchange"). A Section 1031 Exchange allows for the deferral of
taxes related to the gain attributable to the sale of property if qualified
replacement property is identified within 45 days and such qualified replacement
property is then acquired within 180 days from the initial sale. There can be no
assurances that the Operating Partnership will meet the requirements of Section
1031 by identifying and acquiring qualified replacement properties in the
required time frame, in which case the Operating Partnership would incur the tax
liability on the capital gain realized of approximately $1.5 million. The
disposition of the other industrial property, which is subject to certain
environmental issues, is conditioned upon the approval of the buyer's lender,
which has not been obtained. As a result, the Operating Partnership may not
dispose of this property as part of the Disposition. Management believes that if
the Operating Partnership were to
9
continue to hold this property, the cost to address the environmental issues
would not have a material adverse effect on the Operating Partnership, but there
can be no assurance in this regard.
During February 2003, the Operating Partnership, through Reckson Construction
Group, Inc., entered into a contract with an affiliate of First Data Corp. to
sell a 19.3-acre parcel of land located in Melville, New York and was retained
by the purchaser to develop a build-to-suit 195,000 square foot office building
for aggregate consideration of approximately $47 million. This transaction
closed on March 11, 2003 and development of the aforementioned office building
is near completion. In accordance with FASB Statement No. 66, the Operating
Partnership has estimated its book gain, before taxes, on this land sale and
build-to-suit transaction to be approximately $23.7 million, of which $4.6
million and $5.8 million has been recognized during the three month periods
ended March 31, 2004 and 2003, respectively, and is included in investment and
other income on the accompanying consolidated statements of income.
Approximately $300,000 is estimated to be earned in future periods when the
development is completed.
The Operating Partnership holds a $17.0 million note receivable, which bears
interest at 12% per annum and is secured by a minority partnership interest in
Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class A office
property located in Uniondale, New York (the "Omni Note"). The Operating
Partnership currently owns a 60% majority partnership interest in Omni Partners,
L.P. and on March 14, 2007 may exercise an option to acquire the remaining 40%
interest for a price based on 90% of the fair market value of the property. As
of March 31, 2004, the Operating Partnership held a $15 million participating
interest in a $30 million junior mezzanine loan which is secured by a pledge of
an indirect ownership interest of an entity which owns the ground leasehold
estate under a 1.1 million square foot office complex located on Long Island,
New York (the "Mezz Note"). During April 2004, the Operating Partnership
acquired the remaining interest in the Mezz Note for approximately $15.5
million. The Mezz Note matures in September 2005, currently bears interest at
12.68%, and the borrower has the right to extend for three additional one-year
periods. The Operating Partnership 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 and
the Mezz Note, the "Note Receivable Investments"). During April 2004,
approximately $2.7 million of the Other Notes were repaid by the minority
partner exchanging, and the Operating Partnership redeeming, approximately 3,081
preferred units. The preferred units were redeemed at a par value of $3.1
million. Approximately $400,000 of the redemption proceeds was used to offset
interest due from the minority partner under the Other Notes and for prepaid
interest. As of March 31, 2004, management has made subjective assessments as to
the underlying security value on the Operating Partnership's Note Receivable
Investments. These assessments indicate an excess of market value over the
carrying value related to the Operating Partnership's Note Receivable
Investments. Based on these assessments the Operating Partnership's management
believes there is no impairment to the carrying value related to the Operating
Partnership's Note Receivable Investments.
The Operating Partnership also owns a 355,000 square foot office building in
Orlando, Florida. This non-core real estate holding was acquired in May 1999 in
connection with the Operating Partnership's initial New York City portfolio
acquisition. This property is cross-collateralized under a $100.6 million
mortgage note payable along with one of the Operating Partnership's New York
City buildings. The Operating Partnership has the right to prepay this note in
November 2004, prior to its maturity.
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV"), which it manages. As of March 31, 2004, the 520JV had
total assets of $20 million, a mortgage note payable of $11.8 million and other
liabilities of $549,000. The Operating Partnership's allocable share of the
520JV mortgage note payable is approximately $7.8 million. This mortgage note
payable bears interest at 8.85% per annum and matures on September 1, 2005. The
operating agreement of the 520JV requires joint decisions from all members on
all significant operating and capital decisions including sale of the property,
refinancing of the property's mortgage debt, development and approval of leasing
strategy and leasing of rentable space. As a result of the decision-making
participation relative to the operations of the property, the Operating
Partnership accounts for the 520JV under the equity method of accounting. In
accordance with the equity method of accounting the Operating Partnership's
proportionate share of the 520JV income was approximately $114,000 and $106,000
for the three month periods ended March 31, 2004 and 2003, respectively.
During September 2000, the Operating Partnership formed a joint venture (the
"Tri-State JV") with Teachers Insurance and Annuity Association ("TIAA") and
contributed nine Class A suburban office properties aggregating approximately
1.5 million square feet to the Tri-State JV for a 51% majority ownership
interest. TIAA contributed approximately $136 million for a 49% interest in the
Tri-State JV which was then distributed to the Operating Partnership. In August
2003, the Operating Partnership acquired TIAA's 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, for approximately $12.4 million.
In addition, as previously discussed, the Tri-State JV sold a 175,000 square
foot office building located on Long Island for approximately $30 million during
April 2004. Net proceeds from this sale were distributed to the members of the
Tri-State JV. As a result of these transactions, the Tri-State JV owns seven
Class A suburban office properties aggregating approximately 1.2 million square
feet. The Operating Partnership is responsible for managing the day-to-day
operations and business affairs of the Tri-State JV and has substantial rights
in making decisions affecting the properties such as leasing, marketing and
financing. The minority member has certain rights primarily intended to protect
its investment. For purposes of its financial statements the Operating
Partnership consolidates the Tri-State JV.
On December 21, 2001, the Operating Partnership formed a joint venture with the
New York State Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby
NYSTRS acquired a 49% indirect interest in the property located at 919 Third
Avenue, New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Operating Partnership. The Operating
Partnership is responsible for managing the day-to-day
10
operations and business affairs of the 919JV and has substantial rights in
making decisions affecting the property such as developing a budget, leasing and
marketing. The minority member has certain rights primarily intended to protect
its investment. For purposes of its financial statements the Operating
Partnership consolidates the 919JV.
7. PARTNERS' CAPITAL
An OP Unit and a share of common stock of the Company have essentially the same
economic characteristics as they effectively share equally in the net income or
loss and distributions of the Operating Partnership. Subject to certain holding
periods, OP Units may either be redeemed for cash or, at the election of the
Company, exchanged for shares of common stock of the Company on a one-for-one
basis. The OP Units currently receive a quarterly distribution of $.4246 per
unit. As of March 31, 2004, the Operating Partnership had issued and outstanding
3,084,708 Class A OP Units and 465,845 Class C OP Units. The Class C OP Units
were issued in August 2003 in connection with the contribution of real property
to the Operating Partnership and currently receive a quarterly distribution of
$.4664 per unit
During March 2004, the Operating Partnership declared the following
distributions:
RECORD PAYMENT THREE MONTHS ANNUALIZED
SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION
- ----------------------- ------------ ------ ------- ----- ------------
Common unit $ .4246 April 6, 2004 April 19, 2004 March 31, 2004 $ 1.6984
Class C common unit $ .4664 April 6, 2004 April 19, 2004 March 31, 2004 $ 1.8656
Series A preferred unit $ .4766 April 14, 2004 April 30, 2004 April 30, 2004 $ 1.9063
On November 25, 2003, the Company exchanged all of its 9,915,313 outstanding
shares of Class B common stock for an equal number of shares of the Company's
common stock. The Board of Directors declared a final cash dividend on the
Company's Class B common stock to holders of record on November 25, 2003 in the
amount of $.1758 per share which was paid on January 12, 2004. This payment
covered the period from November 1, 2003 through November 25, 2003 and was based
on the previous quarterly Class B common stock dividend rate of $.6471 per
share. In order to align the regular quarterly dividend payment schedule of the
former holders of Class B common stock with the schedule of the holders of
common stock for periods subsequent to the exchange date for the Class B common
stock, the Board of Directors also declared a cash dividend with regard to the
common stock to holders of record on October 14, 2003 in the amount of $.2585
per share which was paid on January 12, 2004. This payment covered the period
from October 1, 2003 through November 25, 2003 and was based on the current
quarterly common stock dividend rate of $.4246 per share. As a result, the
Company declared dividends through November 25, 2003 to all holders of common
stock and Class B common stock. The Board of Directors also declared the common
stock cash dividend for the portion of the fourth quarter subsequent to November
25, 2003. The holders of record of common stock on January 2, 2004, giving
effect to the exchange transaction, received a dividend on the common stock in
the amount of $.1661 per share on January 12, 2004. This payment covered the
period from November 26, 2003 through December 31, 2003 and was based on the
current quarterly common stock dividend rate of $.4246 per share. In connection
with the Company's exchange of its Class B common stock, the Operating
Partnership exchanged its Class B common units held by the Company for an equal
number of OP Units. Further, with respect to the foregoing declarations on
dividends on the Company's common and Class B common stock, the Operating
Partnership made distributions on its OP Units and Class B common units in like
amounts on the same dates.
During the three month period ended March 31, 2004, approximately 630,000 shares
of the Company's common stock were issued in connection with the exercise of
outstanding options to purchase stock under its stock option plans resulting in
proceeds to the Company of approximately $13.3 million. Such proceeds were then
contributed to the Operating Partnership in exchange for an equal number of OP
Units.
During the quarter ended March 31, 2004, the Operating Partnership issued $150
million of seven-year 5.15% (5.196% effective rate) senior unsecured notes.
Prior to the issuance of the senior unsecured notes the Operating Partnership
entered into several anticipatory interest rate hedge instruments to protect
itself against potentially rising interest rates. At the time the senior
unsecured notes were issued the Operating Partnership incurred a net cost of
approximately $980,000 to settle these instruments. Such costs will be amortized
over the term of the senior unsecured notes. The Company completed an equity
offering of 5.5 million shares of its common stock raising approximately $149.5
million, net of an underwriting discount, or $27.18 per share. Net proceeds
received from these transactions were used to repay outstanding borrowings under
the Credit Facility, repay $100 million of the Operating Partnership's 7.4%
senior unsecured notes and to invest in short-term liquid investments.
The Board of Directors of the Company authorized the purchase of up to five
million shares of the Company's common stock. Transactions conducted on the New
York Stock Exchange 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. Since the Board's authorization, the Company has purchased
3,318,600 shares of its common stock for an aggregate purchase price of
approximately $71.3 million. No purchases were made during the three months
ended March 31, 2004.
The Board of Directors of the Company also formed a pricing committee to
consider purchases of up to $75 million of the Company's outstanding preferred
securities.
On March 31, 2004, the Company had issued and outstanding 8,834,500 shares of
7.625% Series A Convertible Cumulative Preferred
11
Stock (the "Series A preferred stock"). The Series A preferred stock is
redeemable by the Company on or after April 13, 2004 at a price of approximately
$25.7625 per share with such price decreasing, at annual intervals, to $25.00
per share on April 13, 2008. In addition, the Series A preferred stock, at the
option of the holder, is convertible at any time into the Company's common stock
at a price of $28.51 per share.
On January 1, 2004, the Company had issued and outstanding two million shares of
Series B Convertible Cumulative Preferred Stock (the "Series B preferred
stock"). The Series B preferred stock was redeemable by the Company as follows:
(i) on or after June 3, 2003 to and including June 2, 2004, at $25.50 per share
and (ii) on or after June 3, 2004 and thereafter, at $25.00 per share. The
Series B preferred stock, at the option of the holder, was convertible at any
time into the Company's common stock at a price of $26.05 per share. On January
16, 2004, the Company exercised its option to redeem the two million shares of
outstanding Series B preferred stock for approximately 1,958,000 shares of its
common stock. In connection with the Company exercising its option to redeem the
Series B Preferred Stock, the Operating Partnership redeemed its Series B
preferred units with the Company for approximately 1,958,000 OP Units. As a
result of this redemption, based on current OP Unit distribution rates,
annual net distributions will decrease by approximately $1.1 million.
As of March 31, 2004, the Operating Partnership had issued and outstanding
approximately 19,662 preferred units of limited partnership interest with a
liquidation preference value of $1,000 per unit and a current annualized
distribution of $55.60 per unit. These units were issued in 1998 in connection
with the contribution of real property to the Operating Partnership. On April
12, 2004, the holder of these units gave notice to the Operating Partnership to
convert approximately 3,081 of these units. The Operating Partnership has
elected to redeem these units for approximately $3.1 million, including accrued
and unpaid dividends which will be applied to amounts owed from the unit holder
under the Other Notes.
The Company had historically structured long term incentive programs ("LTIP")
using restricted stock and stock loans. In July 2002, as a result of certain
provisions of the Sarbanes Oxley legislation, the 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 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 March 31, 2004, and
giving effect to the settlement of the employment contracts of certain former
executive officers, there remains 233,143 shares of common stock subject to the
original stock loans which are anticipated to vest between 2004 and 2011.
Approximately $308,000 and $1.1 million of compensation expense was recorded for
the three month periods ended March 31, 2004 and 2003, respectively, related to
these LTIP. Such amounts have been included in marketing, general and
administrative expenses on the accompanying consolidated statements of income.
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $4.9 million at March 31, 2004, and have been included
as a reduction of additional paid in capital on the accompanying consolidated
balance sheets. Other outstanding loans to executive and senior officers at
March 31, 2004 amounted to approximately $2.3 million primarily related to tax
payment advances on stock compensation awards and life insurance contracts made
to certain executive and non-executive officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively, and collectively, the "Rights"). Each Right represents the right
to receive, upon vesting, one share of common stock if shares are then available
for grant under one of the Company's stock option plans or, if shares are not so
available, an amount of cash equivalent to the value of such stock on the
vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 190,524 shares of the Company's common stock and the 2003
Rights aggregate 60,760 shares of common stock. As of March 31, 2004, and giving
effect to the settlement of the employment contracts of certain former executive
officers, there remains 47,126 shares of common stock related to the 2002 Rights
and 26,040 shares of common stock related to the 2003 Rights. During the three
month periods ended March 31, 2004 and 2003, respectively, the Company recorded
approximately $101,000 and $216,000 of compensation expense related to the
Rights. Such amounts have been included in marketing, general and administrative
expenses on the accompanying consolidated statements of income.
In March 2003, the Company established a new LTIP for its executive and senior
officers. The four-year plan has a core award, which provides for annual stock
based compensation based upon continued service and in part based on attaining
certain annual performance measures. The plan also has a special outperformance
award, which provides for compensation to be earned at the end of a four-year
period if the Company attains certain four-year cumulative performance measures.
Amounts earned under the special outperformance award may be paid in cash or
stock at the discretion of the Compensation Committee of the Board. Performance
measures are based on total shareholder returns on a relative and absolute
basis. On March 13, 2003, the Company made available
12
1,106,324 shares of its common stock under its existing stock option plans in
connection with the core award of this LTIP for ten of its executive and senior
officers. On March 13, 2004, the Company met its annual performance measure with
respect to the prior annual period. As a result, the Company issued to the
participants approximately 207,000 shares of its common stock related to the
core component of this LTIP. As of March 31, 2004, and giving effect to the
settlement of the employment contracts of certain former executive officers,
there remains 620,832 shares of common stock reserved for future issuance under
the core award of this LTIP. With respect to the core award of this LTIP, the
Company recorded approximately $699,000 and $268,000 of compensation expense for
the three month periods ended March 31, 2004 and 2003, respectively. Such
amounts have been included in marketing, general and administrative expenses on
the accompanying consolidated statements of income. Further, no provision will
be made for the special outperformance award of this LTIP until such time as
achieving the requisite performance measures is determined to be probable.
As of March 31, 2004, the Company had approximately 4.7 million shares of its
common stock reserved for issuance under its stock option plans, in certain
cases subject to vesting terms, at a weighted average exercise price of $23.25
per option. In addition, the Company has approximately 810,000 shares of its
common stock reserved for future issuance under its stock option plans.
Net income per common partnership unit is determined by allocating net income
after preferred distributions and minority partners' interest in consolidated
partnerships income to the general and limited partners' based on their weighted
average distribution per common partnership units outstanding during the
respective periods presented.
Holders of preferred units of limited and general partnership interest are
entitled to distributions based on the stated rates of return (subject to
adjustment) for those units.
The Operating Partnership issues additional units to the Company, and thereby
increases the Company's general partnership interest in the Operating
Partnership, with terms similar to the terms of any securities (i.e., common
stock or preferred stock) issued by the Company (including any securities issued
by the Company upon the exercise of stock options). Any consideration received
by the Company in respect of the issuance of its securities is contributed to
the Operating Partnership. In addition, the Operating Partnership or a
subsidiary funds the compensation of personnel, including any amounts payable
under the Company's LTIP.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
-------- ---------
Cash paid during the period for interest $ 31,501 $ 30,076
======== =========
Interest capitalized during the period $ 2,072 $ 1,854
======== =========
9. SEGMENT DISCLOSURE
The Operating Partnership's portfolio consists of Class A office properties
located within the New York City metropolitan area and Class A suburban office
and industrial properties located and operated within the Tri-State Area (the
"Core Portfolio"). The Operating Partnership's portfolio also includes one
office property located in Orlando, Florida. The Company has formed an Operating
Committee that reports directly to the President and Chief Financial Officer who
have been identified as the Chief Operating Decision Makers due to their final
authority over resource allocation, decisions and performance assessment.
The Operating Partnership does not consider (i) interest incurred on its Credit
Facility and Senior Unsecured Notes, (ii) the operating performance of the
office property located in Orlando, Florida, (iii) the operating performance of
those properties reflected as discontinued operations in the Operating
Partnership's consolidated statements of income, and (iv) the operating results
of the Service Companies as part of its Core Portfolio's property operating
performance for purposes of its component disclosure set forth below.
The accounting policies of the reportable segments are the same as those
described in the summary of significant account policies. In addition, amounts
reflected have been adjusted to give effect to the Operating Partnership's
discontinued operations in accordance with FASB Statement No. 144.
13
The following table sets forth the components of the Operating Partnership's
revenues and expenses and other related disclosures (in thousands):
Three months ended or as of
------------------------------------------------------------------------------
March 31, 2004 March 31, 2003
-------------------------------------- --------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
---------- ---------- ------------ --------- ---------- ------------
REVENUES:
Base rents, tenant
escalations and reimbursements ....... $ 127,314 $ 1,991 $ 129,305 $ 107,135 $ 1,801 $ 108,936
Interest, investment and other income .. 1,425 4,238 5,663 701 6,558 7,259
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues ......................... 128,739 6,229 134,968 107,836 8,359 116,195
---------- ---------- ---------- ---------- ---------- ----------
EXPENSES:
Property operating expenses ............ 50,716 768 51,484 42,552 844 43,396
Marketing, general and administrative .. 4,216 2,863 7,079 3,984 3,593 7,577
Interest ............................... 15,630 10,031 25,661 10,007 10,090 20,097
Depreciation and amortization .......... 27,536 1,630 29,166 27,225 1,600 28,825
---------- ---------- ---------- ---------- ---------- ----------
Total Expenses ......................... 98,098 15,292 113,390 83,768 16,127 99,895
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before minority interests,
preferred distributions, equity in
earnings of real estate joint ventures
and service companies and discontinued
operations ........................... $ 30,641 $ (9,063) $ 21,578 $ 24,068 $ (7,768) $ 16,300
========== ========== ========== ========== ========== ==========
Total Assets ........................... $2,864,793 $ 278,870 $3,143,663 $2,625,518 $ 282,946 $2,908,464
========== ========== ========== ========== ========== ==========
10. NON CASH INVESTING AND FINANCING ACTIVITIES
In January 2004, in connection with the Operating Partnership's acquisition of
1185 Avenue of the Americas, New York, NY, the Operating Partnership assumed a
$202 million mortgage note payable and $48 million of mezzanine debt (see Note
6).
In connection with the Company exercising its option to redeem its Series B
Preferred Stock, the Operating Partnership redeemed its Series B preferred units
with the Company for approximately 1,958,000 OP Units.
11. RELATED PARTY TRANSACTIONS
In connection with the Disposition, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, New York (the Company's current headquarters) for five years and
to release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.
In addition, in April 2004, the Company completed the sale to the Rechler family
two of the three properties remaining in connection with the Disposition (see
Note 6).
In connection with the Company exercising its option to redeem the Series B
Preferred Stock, the Operating Partnership redeemed its Series B preferred units
with the Company for approximately 1,958,000 OP Units.
As part of the Company's REIT structure it is provided management, leasing and
construction related services through taxable REIT subsidiaries as defined by
the Code. During the three month periods ended March 31, 2004 and 2003, Reckson
Construction Group, Inc. or its successor, Reckson Construction & Development,
LLC billed approximately $461,000 and $125,100, respectively, of market rate
services and Reckson Management Group, Inc. billed approximately $66,000 and
$71,000, respectively, of market rate management fees to the Remaining Option
Properties.
Reckson Management Group, Inc. leases approximately 26,000 square feet of office
space at a Remaining Option Property located at 225 Broadhollow Road, Melville,
New York for its corporate offices at an annual base rent of approximately
$760,000. 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.
14
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.
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine") and Reckson Strategic Venture Partners,
LLC ("RSVP"). RSVP is a real estate venture capital fund which invested
primarily in real estate and real estate operating companies outside the
Company's core office and industrial / R&D focus and whose common equity is held
indirectly by FrontLine. In connection with the formation and spin-off of
FrontLine, the Operating Partnership established an unsecured credit facility
with FrontLine (the "FrontLine Facility") in the amount of $100 million for
FrontLine to use in its investment activities, operations and other general
corporate purposes. The Company has advanced approximately $93.4 million under
the FrontLine Facility. The Operating Partnership also approved the funding of
investments of up to $100 million relating to RSVP (the "RSVP Commitment"),
through RSVP-controlled joint ventures (for REIT-qualified investments) or
advances made to FrontLine under an unsecured loan facility (the "RSVP
Facility") having terms similar to the FrontLine Facility (advances made under
the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine Loans").
During March 2001, the Company increased the RSVP Commitment to $110 million and
as of March 31, 2004 approximately $109.1 million had been funded through the
RSVP Commitment, of which $59.8 million represents investments by the Company in
RSVP-controlled (REIT-qualified) joint ventures and $49.3 million represents
loans made to FrontLine under the RSVP Facility. As of March 31, 2004, interest
accrued (net of reserves) under the FrontLine Facility and the RSVP Facility was
approximately $19.6 million.
A committee of the Board of Directors, comprised solely of independent
directors, considers any actions to be taken by the Company in connection with
the FrontLine Loans and its investments in joint ventures with RSVP. During the
third quarter of 2001, the Company noted a significant deterioration in
FrontLine's operations and financial condition and, based on its assessment of
value and recoverability and considering the findings and recommendations of the
committee and its financial advisor, the Company recorded a $163 million
valuation reserve charge, inclusive of anticipated costs, in its consolidated
statements of operations relating to its investments in the FrontLine Loans and
joint ventures with RSVP. The Company has discontinued the accrual of interest
income with respect to the FrontLine Loans. The Company has also reserved
against its share of GAAP equity in earnings from the RSVP controlled joint
ventures funded through the RSVP Commitment until such income is realized
through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code, charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest, and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
In September 2003, RSVP completed the restructuring of its capital structure and
management arrangements. In connection with the restructuring, RSVP redeemed the
interest of the preferred equity holders of RSVP for an aggregate of
approximately $137 million in cash and the transfer to the preferred equity
holders of the assets that comprised RSVP's parking investment valued at
approximately $28.5 million. RSVP also restructured its management arrangements
whereby a management company formed by its former managing directors has been
retained to manage RSVP pursuant to a management agreement and the employment
contracts of the managing directors with RSVP have been terminated. The
management agreement provides for an annual base management fee, and disposition
fees equal to 2% of the net proceeds received by RSVP on asset sales. (The base
management fee and disposition fees are subject to a maximum over the term of
the agreement of $7.5 million.) In addition, the managing directors retained a
one-third residual interest in RSVP's assets which is subordinated to the
distribution of an aggregate amount of $75 million to RSVP and/or the Company in
respect of its joint ventures with RSVP. The management agreement has a
three-year term, subject to early termination in the event of the disposition of
all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of assets sales by RSVP.
In April 2004, American Campus Communities, Inc. ("ACC"), a student housing
company owned by RSVP and a joint venture between RSVP and a subsidiary of the
Operating Partnership, filed a registration statement on Form S-11 with the
Securities and Exchange Commission in connection with a proposed initial public
offering ("IPO") of its common stock. RSVP and the joint venture between RSVP
and a subsidiary of the Operating Partnership plan to liquidate their ownership
positions in ACC in connection with the IPO transaction.
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 March 31, 2004. Such amount has been reflected in
investments in service
15
companies and affiliate loans and joint ventures on the Company's consolidated
balance sheet.
Scott H. Rechler, who serves as Chief Executive Officer, President and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of Reckson Operating Partnership, L. P. (the "Operating
Partnership") and related notes thereto.
The Operating Partnership considers certain statements set forth herein to be
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, with respect to the Operating Partnership's expectations for future
periods. Certain forward-looking statements, including, without limitation,
statements relating to the timing and success of acquisitions and the completion
of development or redevelopment of properties, the financing of the Operating
Partnership's operations, the ability to lease vacant space and the ability to
renew or relet space under expiring leases, involve risks and uncertainties.
Many of the forward-looking statements can be identified by the use of words
such as "believes", "may", "expects", "anticipates", "intends" or similar
expressions. Although the Operating Partnership believes that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, the actual results may differ materially from those set forth in
the forward-looking statements and the Operating Partnership can give no
assurance that its expectation will be achieved. Among those risks, trends and
uncertainties are: the general economic climate, including the conditions
affecting industries in which our principal tenants compete; changes in the
supply of and demand for office in the New York Tri-State area; changes in
interest rate levels; changes in the Operating Partnership's credit ratings;
changes in the Operating Partnership's cost and access to capital; downturns in
rental rate levels in our markets and our ability to lease or re-lease space in
a timely manner at current or anticipated rental rate levels; the availability
of financing to us or our tenants; financial condition of our tenants; changes
in operating costs, including utility, security, real estate tax and insurance
costs; repayment of debt owed to the Operating Partnership by third parties
(including FrontLine Capital Group); risks associated with joint ventures;
liability for uninsured losses or environmental matters; and other risks
associated with the development and acquisition of properties, including risks
that development may not be completed on schedule, that the tenants will not
take occupancy or pay rent, or that development or operating costs may be
greater than anticipated. Consequently, such forward-looking statements should
be regarded solely as reflections of the Operating Partnership's current
operating and development plans and estimates. These plans and estimates are
subject to revisions from time to time as additional information becomes
available, and actual results may differ from those indicated in the referenced
statements.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Operating Partnership include
accounts of the Operating Partnership and all majority-owned subsidiaries. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the Operating Partnership's consolidated financial statements and related
notes. In preparing these financial statements, management has utilized
information available including its past history, industry standards and the
current economic environment among other factors in forming its estimates and
judgments of certain amounts included in the consolidated financial statements,
giving due consideration to materiality. It is possible that the ultimate
outcome as anticipated by management in formulating its estimates inherent in
these financial statements may not materialize. However, application of the
critical accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of the Operating Partnership's results
of operations to those of companies in similar businesses.
Revenue Recognition and Accounts Receivable
Minimum rental revenue is recognized on a straight-line basis, which averages
minimum rents over the terms of the leases. The excess of rents recognized over
amounts contractually due are included in deferred rents receivable on the
Operating Partnership's balance sheets. The leases also typically provide for
tenant reimbursements of common area maintenance and other operating expenses
and real estate taxes. Ancillary and other property related income is recognized
in the period earned.
The Operating Partnership makes estimates of the collectibility of its tenant
accounts receivables related to base rents, tenant escalations and
reimbursements and other revenue or income. The Operating Partnership
specifically analyzes tenant receivables and analyzes historical bad debts,
customer credit worthiness, current economic trends, changes in customer payment
terms, publicly available information and, to the extent available, guidance
provided by the tenant when evaluating the adequacy of its allowance for
doubtful accounts. In addition, when tenants are in bankruptcy the Operating
Partnership makes estimates of the expected recovery of pre-petition
administrative and damage claims. In some cases, the ultimate resolution of
those claims can exceed a year. These estimates have a direct impact on the
Operating Partnership's net income because a higher bad debt reserve results in
less net income.
The Operating Partnership incurred approximately $1.1 million and $2.0 million
of bad debt expense during the three month periods ended March 31, 2004 and
2003, respectively, related to tenant receivables and deferred rents receivable
which accordingly reduced total revenues and reported net income during the
periods presented.
17
The Operating Partnership records interest income on investments in mortgage
notes and notes receivable on an accrual basis of accounting. The Operating
Partnership does not accrue interest on impaired loans where, in the judgment of
management, collection of interest according to the contractual terms is
considered doubtful. Among the factors the Operating Partnership considers in
making an evaluation of the collectibility of interest are: (i) the status of
the loan, (ii) the value of the underlying collateral, (iii) the financial
condition of the borrower and (iv) anticipated future events.
Reckson Construction Group, Inc., Reckson Construction & Development LLC, (the
successor to Reckson Construction Group, Inc.) and Reckson Construction Group
New York, Inc. use the percentage-of-completion method for recording amounts
earned on their contracts. This method records amounts earned as revenue in the
proportion that actual costs incurred to date bear to the estimate of total
costs at contract completion.
Gain on sales of real estate are recorded when title is conveyed to the buyer,
subject to the buyer's financial commitment being sufficient to provide economic
substance to the sale and the Operating Partnership having no substantial
continuing involvement with the buyer.
The Operating Partnership follows the guidance provided for under the Financing
Accounting Standards Board ("FASB") Statement No. 66, "Accounting for Sales of
Real Estate" ("Statement No. 66"), which provides guidance on sales contracts
that are accompanied by agreements which require the seller to develop the
property in the future. Under Statement No. 66 profit is recognized and
allocated to the sale of the land and the later development or construction work
on the basis of estimated costs of each activity; the same rate of profit is
attributed to each activity. As a result, profits are recognized and reflected
over the improvement period on the basis of costs incurred (including land) as a
percentage of total costs estimated to be incurred. The Operating Partnership
uses the percentage of completion method, as the future costs of development and
profit are reliably estimated.
Real Estate
Land, buildings and improvements, furniture, fixtures and equipment are recorded
at cost. Tenant improvements, which are included in buildings and improvements,
are also stated at cost. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred. Renovations and / or replacements, which
improve or extend the life of the asset, are capitalized and depreciated over
their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the estimated
useful lives of ten to thirty years for buildings and improvements and five to
ten years for furniture, fixtures and equipment. Tenant improvements are
amortized on a straight-line basis over the term of the related leases.
The Operating Partnership is required to make subjective assessments as to the
useful lives of its properties for purposes of determining the amount of
depreciation to reflect on an annual basis with respect to those properties.
These assessments have a direct impact on the Operating Partnership's net
income. Should the Operating Partnership lengthen the expected useful life of a
particular asset, it would be depreciated over more years and result in less
depreciation expense and higher annual net income.
Assessment by the Operating Partnership of certain other lease related costs
must be made when the Operating Partnership has a reason to believe that the
tenant will not be able to execute under the term of the lease as originally
expected.
On July 1, 2001 and January 1, 2002, the Operating Partnership adopted FASB
Statement No.141, "Business Combinations" and FASB Statement No. 142, "Goodwill
and Other Intangibles", respectively. As part of the acquisition of real estate
assets, the fair value of the real estate acquired is allocated to the acquired
tangible assets, consisting of land, building and building improvements, and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, other value of in-place leases, and value
of tenant relationships, based in each case on their fair values. The Operating
Partnership assesses fair value based on estimated cash flow projections that
utilize appropriate discount and capitalization rates and available market
information. Estimates of future cash flows are based on a number of factors
including the historical operating results, known trends, and market/economic
conditions that may affect the property. If the Operating Partnership
incorrectly estimates the values at acquisition or the undiscounted cash flows,
initial allocation of purchase price and future impairment charges may be
different.
18
Long Lived Assets
On a periodic basis, management assesses whether there are any indicators that
the value of the real estate properties may be impaired. A property's value is
impaired only if management's estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by the property are
less than the carrying value of the property. Such cash flows consider factors
such as expected future operating income, trends and prospects, as well as the
effects of demand, competition and other factors. To the extent impairment has
occurred, the loss will be measured as the excess of the carrying amount of the
property over the fair value of the property.
The Operating Partnership is required to make subjective assessments as to
whether there are impairments in the value of its real estate properties and
other investments. These assessments have a direct impact on the Operating
Partnership's net income because recognizing an impairment results in an
immediate negative adjustment to net income. In determining impairment, if any,
the Operating Partnership has adopted FASB Statement No. 144, "Accounting for
the Impairment or Disposal of Long Lived Assets." In accordance with the
provisions of Statement No. 144, the Operating Partnership allocated $0 and
approximately $2.6 million of its unsecured corporate interest expense to
discontinued operations for the three months ended March 31, 2004 and 2003,
respectively.
Cash and Cash Equivalents
The Operating Partnership considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash balances at
March 31, 2004 include approximately $50 million of the net proceeds received
during the three month period ended March 31, 2004 relating to property sales,
the Company's March 2004 equity offering and the Operating Partnership's January
2004 issuance of senior unsecured notes.
OVERVIEW AND BACKGROUND
The Operating Partnership, which commenced operations on June 2, 1995, is
engaged in the ownership, operation, acquisition, leasing, financing, management
and development of office and to a lesser extent industrial properties and also
owns land for future development located in the commercial real estate markets
in and around the New York City tri-state area (the "Tri-State Area"). Reckson
Associates Realty Corp. ("the Company"), is a self administered and self managed
real estate investment trust ("REIT"), and serves as the sole general partner of
the Operating Partnership. The Operating Partnership conducts its management;
leasing, construction and development related services through the Company's
taxable REIT subsidiaries. Reckson Management Group, Inc., RANY Management
Group, Inc. and Reckson Construction & Development, LLC (the "Service
Companies") currently provide these services. The Operating Partnership and the
Company (collectively the "Company") were formed for the purpose of continuing
the commercial real estate business of Reckson Associates, the predecessor of
the Operating Partnership, its affiliated partnerships and other entities.
As of March 31, 2004, the Operating Partnership owned and operated 77 office
properties (inclusive of ten office properties owned through joint ventures)
comprising approximately 14.6 million square feet, 11 industrial / R&D
properties comprising approximately 1.1 million square feet and one retail
property comprising approximately 9,000 square feet located in the Tri-State
Area.
As of March 31, 2004, the Operating Partnership also owned approximately 313
acres of land in 12 separate parcels of which the Operating Partnership can
develop approximately 3.0 million square feet of office space. The Operating
Partnership is currently evaluating alternative land uses for certain of the
land holdings to realize the highest economic value. These alternatives may
include rezoning certain land parcels from commercial to residential for
potential disposition. As of March 31, 2004, the Operating Partnership had
invested approximately $161.6 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. As of March 31, 2004, the Operating
Partnership has capitalized approximately $2.8 million related to real estate
taxes, interest and other carrying costs related to these development projects.
In October 2003, the Operating Partnership entered into a contract to sell a 113
acre land parcel located in New Jersey. The contract provides for a sales price
ranging from $18 million to $36 million. The sale is contingent upon obtaining
zoning for residential use of the land and other customary approvals. The
proceeds ultimately received from such sale will be based upon the number of
residential units permitted by the rezoning. The cost basis of the land parcel
at March 31, 2004 was approximately $2.7 million. The closing is scheduled to
occur upon the rezoning, which is anticipated to occur within 12 to 24 months. A
second contract to sell a separate parcel of land was signed in October 2003.
That contract was subsequently cancelled. During February 2004, a 3.9 acre land
parcel located on Long Island was condemned by the Town of Oyster Bay. As
consideration from the condemnation the Operating Partnership anticipates it
will initially receive approximately $1.8 million. The Operating Partnership's
cost basis in this land parcel at March 31, 2004 was approximately $1.4 million.
The Operating Partnership is currently contesting this valuation and seeking
payment of additional consideration from the Town of Oyster Bay but there can be
no assurances that the Operating Partnership will be successful in obtaining any
such additional consideration.
In November 2003, the Company disposed of all but three of its 95 property, 5.9
million square foot, Long Island industrial building portfolio to members of the
Rechler family (the "Disposition") for approximately $315.5 million, comprised
of $225.1 million in cash and debt assumption and 3,932,111 common units of
limited partnership interest in the Operating Partnership ("OP Units") valued at
approximately $90.4 million. Approximately $204 million of cash sales proceeds
from the Disposition were used to repay borrowings under the Credit
19
Facility (as defined below). For information concerning certain litigation
matters pertaining to this transaction see Part II-Other Information; Item 1.
Legal Proceedings of this Form 10-Q.
In connection with the Disposition, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, New York (the Company's current headquarters) for five years and
to release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.
During the three months ended March 31, 2004 and 2003, Reckson Construction
Group, Inc. or its successor, Reckson Construction & Development, LLC billed
approximately $461,000 and $125,000, respectively, of market rate services and
Reckson Management Group, Inc. billed approximately $66,000 and $71,000,
respectively, of market rate management fees to the Remaining Option Properties.
Reckson Management Group, Inc. leases approximately 26,000 square feet of office
space at a Remaining Option Property located at 225 Broadhollow Road, Melville,
New York for its corporate offices at an annual base rent of approximately
$760,000. The Operating Partnership 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.
In January 2004, the Operating Partnership sold a 104,000 square foot office
property located on Long Island for approximately $18.5 million. Net proceeds
from the sale were used to repay borrowings under the Company's unsecured credit
facility. As a result, the Operating Partnership recorded a net gain of
approximately $5.2 million. In accordance with FASB Statement No. 144, such gain
has been reflected in discontinued operations on the Operating Partnership's
consolidated statement of income for the three month period ended March 31,
2004.
In January 2004, the Operating Partnership acquired 1185 Avenue of the Americas,
a 42-story, 1.1 million square foot Class A office tower, located between 46th
and 47th Streets in New York, NY for $321 million. In connection with this
acquisition, the Operating Partnership assumed a $202 million mortgage and $48
million of mezzanine debt. The balance of the purchase price was paid through an
advance under the Credit Facility. The floating rate mortgage and mezzanine debt
both mature in August 2004 and presently have a weighted average interest rate
of 4.95%. Such rate is based on the greater of one month LIBOR or 2.15% plus a
weighted average spread of approximately 2.80%. An interest rate hedge agreement
was acquired to limit exposure to increases in LIBOR above 5.825%. The property
is also encumbered by a ground lease which has a remaining term of approximately
40 years with rent scheduled to be re-set at the end of 2005 and then remain
constant for the balance of the term. There can be no assurances as to the
outcome of the rent re-set process. In accordance with FASB Statement No. 141,
"Business Combinations", the Operating Partnership allocated and recorded net
deferred intangible lease income of approximately $14.2 million, representing
the net value of acquired above and below market leases, assumed lease
origination costs and other value of in-place leases. The net value of the above
and below market leases is amortized over the remaining terms of the respective
leases to rental income which amounted to approximately $1.8 million for the
three month period ended March 31, 2004. In addition, amortization expense on
the value of lease origination costs was approximately $527,000. At acquisition,
there were 31 in-place leases aggregating approximately one million square feet
with a weighted average remaining lease term of approximately 6 years.
In April 2004, the Operating Partnership sold a 175,000 square foot office
building located on Long Island for approximately $30 million, of which the
Operating Partnership owned a 51% interest, and a wholly owned 9,000 square foot
retail property for approximately $2.8 million. Net proceeds from these sales
are currently being held in short-term, liquid investments. In addition, the
Operating Partnership completed the sale on two of the remaining three
properties from the Disposition for approximately $5.8 million. Proceeds from
the sale were used to establish an escrow account with a qualified intermediary
for a future exchange of real property pursuant to Section 1031 of the Code (a
"Section 1031 Exchange"). A Section 1031 Exchange allows for the deferral of
taxes related to the gain attributable to the sale of property if qualified
replacement property is identified within 45 days and such qualified replacement
property is then acquired within 180 days from the initial sale. There can be no
assurances that the Operating Partnership will meet the requirements of Section
1031 by identifying and acquiring qualified replacement properties in the
required time frame, in which case the Operating Partnership would incur the tax
liability on the capital gain realized of approximately $1.5 million. The
disposition of the other industrial property, which is subject to certain
environmental issues, is conditioned upon the approval of the buyer's lender,
which has not been obtained. As a result, the Operating Partnership may not
dispose of this property as part of the Disposition. Management believes that if
the Operating Partnership were to continue to hold this property, the cost to
address the environmental issues would not have a material adverse effect on the
Operating Partnership, but there can be no assurance in this regard.
20
During the quarter ended March 31, 2004, the Operating Partnership executed a
lease with Nassau County for the entire building and concourse level at 60
Charles Lindbergh Blvd., Long Island, comprising approximately 200,000 square
feet, including 127,000 square feet previously vacated by WorldCom/MCI. 60
Charles Lindbergh Blvd. will be repositioned to satisfy Nassau County's use,
requiring customary municipal approvals.
During February 2003, the Operating Partnership, through Reckson Construction
Group, Inc., entered into a contract with an affiliate of First Data Corp. to
sell a 19.3-acre parcel of land located in Melville, New York and has been
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 is near completion. In accordance with FASB Statement No. 66,
the Operating Partnership has estimated its book gain, before taxes, on this
land sale and build-to-suit transaction to be approximately $23.7 million, of
which $4.6 million and $5.8 million has been recognized during the three month
periods ended March 31, 2004 and 2003, respectively, and is included in
investment and other income on the Operating Partnership's consolidated
statements of income. Approximately $300,000 is estimated to be earned in future
periods when the development is completed.
The Operating Partnership holds a $17.0 million note receivable, which bears
interest at 12% per annum and is secured by a minority partnership interest in
Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class A office
property located in Uniondale, New York (the "Omni Note"). The Operating
Partnership currently owns a 60% majority partnership interest in Omni Partners,
L.P. and on March 14, 2007 may exercise an option to acquire the remaining 40%
interest for a price based on 90% of the fair market value of the property. As
of March 31, 2004, the Operating Partnership held a $15 million participating
interest in a $30 million junior mezzanine loan which is secured by a pledge of
an indirect ownership interest of an entity which owns the ground leasehold
estate under a 1.1 million square foot office complex located on Long Island,
New York (the "Mezz Note"). During April 2004, the Operating Partnership
acquired the remaining interest in the Mezz Note for approximately $15.5
million. The Mezz Note matures in September 2005, currently bears interest at
12.68%, and the borrower has the right to extend for three additional one-year
periods. The Operating Partnership 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 and
the Mezz Note, the "Note Receivable Investments"). During April 2004,
approximately $2.7 million of the Other Notes were repaid by the minority
partner exchanging, and the Operating Partnership redeeming, approximately 3,081
preferred units. The preferred units were redeemed at a par value of $3.1
million. Approximately $400,000 of the redemption proceeds was used to offset
interest due from the minority partner under the Other Notes and for prepaid
interest. As of March 31, 2004, management has made subjective assessments as to
the underlying security value on the Operating Partnership's Note Receivable
Investments. These assessments indicate an excess of market value over the
carrying value related to the Operating Partnership's Note Receivable
Investments. Based on these assessments the Operating Partnership's management
believes there is no impairment to the carrying value related to the Operating
Partnership's Note Receivable Investments.
The Operating Partnership also owns a 355,000 square foot office building in
Orlando, Florida. This non-core real estate holding was acquired in May 1999 in
connection with the Operating Partnership's initial New York City portfolio
acquisition. This property is cross-collateralized under a $100.6 million
mortgage note payable along with one of the Operating Partnership's New York
City buildings. The Operating Partnership has the right to prepay this note in
November 2004, prior to its maturity.
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV"), which it manages. As of March 31, 2004, the 520JV had
total assets of $20 million, a mortgage note payable of $11.8 million and other
liabilities of $549,000. The Operating Partnership's allocable share of the
520JV mortgage note payable is approximately $7.8 million. This mortgage note
payable bears interest at 8.85% per annum and matures on September 1, 2005. The
operating agreement of the 520JV requires joint decisions from all members on
all significant operating and capital decisions including sale of the property,
refinancing of the property's mortgage debt, development and approval of leasing
strategy and leasing of rentable space. As a result of the decision-making
participation relative to the operations of the property, the Operating
Partnership accounts for the 520JV under the equity method of accounting. In
accordance with the equity method of accounting the Operating Partnership's
proportionate share of the 520JV income was approximately $114,000 and $106,000
for the three month periods ended March 31, 2004 and 2003, respectively.
During July 1998, the Operating Partnership formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. Currently the Operating Partnership owns, through Metropolitan, six
Class A office properties, located in the New York City borough of Manhattan,
aggregating approximately 4.5 million square feet.
During September 2000, the Operating Partnership formed a joint venture (the
"Tri-State JV") with Teachers Insurance and Annuity Association ("TIAA") and
contributed nine Class A suburban office properties aggregating approximately
1.5 million square feet to the Tri-State JV for a 51% majority ownership
interest. TIAA contributed approximately $136 million for a 49% interest in the
Tri-State JV which was then distributed to the Operating Partnership. In August
2003, the Operating Partnership acquired TIAA's 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, for approximately $12.4 million.
In addition, as previously discussed, the Tri-State JV sold a 175,000 square
foot office building located on Long Island for approximately $30 million during
April 2004. Net proceeds from this sale were distributed to the members of the
Tri-State JV. As a result of these transactions, the Tri-State JV owns seven
Class A suburban office properties aggregating approximately 1.2 million square
feet. The Operating Partnership is responsible for managing the day-to-day
21
operations and business affairs of the Tri-State JV and has substantial rights
in making decisions affecting the properties such as leasing, marketing and
financing. The minority member has certain rights primarily intended to protect
its investment. For purposes of its financial statements the Operating
Partnership consolidates the Tri-State JV.
On December 21, 2001, the Operating Partnership formed a joint venture with the
New York State Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby
NYSTRS acquired a 49% indirect interest in the property located at 919 Third
Avenue, New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Operating Partnership. The Operating
Partnership is responsible for managing the day-to-day operations and business
affairs of the 919JV and has substantial rights in making decisions affecting
the property such as developing a budget, leasing and marketing. The minority
member has certain rights primarily intended to protect its investment. For
purposes of its financial statements the Operating Partnership consolidates the
919JV.
The total market capitalization of the Operating Partnership at March 31, 2004
was approximately $3.7 billion. The Operating Partnership's total market
capitalization is based on the sum of (i) the market value of the Operating
Partnership's OP Units (which for this purpose is based on the closing price of
the Company's common stock on March 31, 2004), (ii) the liquidation preference
values of the Operating Partnership's preferred units and (iii) the
approximately $1.5 billion (including its share of consolidated joint venture
debt and net of minority partners' interests share of consolidated joint venture
debt) of debt outstanding at March 31, 2004. As a result, the Operating
Partnership's total debt to total market capitalization ratio at March 31, 2004
equaled approximately 40.0%.
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine") and Reckson Strategic Venture Partners,
LLC ("RSVP"). RSVP is a real estate venture capital fund, which invested
primarily in real estate and real estate, operating companies outside the
Company's core office and industrial / R&D focus and whose common equity is held
indirectly by FrontLine. In connection with the formation and spin-off of
FrontLine, the Operating Partnership established an unsecured credit facility
with FrontLine (the "FrontLine Facility") in the amount of $100 million for
FrontLine to use in its investment activities, operations and other general
corporate purposes. The Company has advanced approximately $93.4 million under
the FrontLine Facility. The Operating Partnership also approved the funding of
investments of up to $100 million relating to RSVP (the "RSVP Commitment"),
through RSVP-controlled joint ventures (for REIT-qualified investments) or
advances made to FrontLine under an unsecured loan facility (the "RSVP
Facility") having terms similar to the FrontLine Facility (advances made under
the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine Loans").
During March 2001, the Company increased the RSVP Commitment to $110 million and
as of March 31, 2004, approximately $109.1 million had been funded through the
RSVP Commitment, of which $59.8 million represents investments by the Company in
RSVP-controlled (REIT-qualified) joint ventures and $49.3 million represents
loans made to FrontLine under the RSVP Facility. As of March 31, 2004, interest
accrued (net of reserves) under the FrontLine Facility and the RSVP Facility was
approximately $19.6 million.
In September 2003, RSVP completed the restructuring of its capital structure. In
connection with the restructuring, RSVP redeemed the interest of the preferred
equity holders of RSVP for an aggregate of $137 million in cash and the transfer
to the preferred equity holders of the assets that comprised RSVP's parking
investments valued at approximately $28.5 million. As a result of this
transaction amounts formerly invested in the privatization, parking and medical
office platforms have been reinvested as part of the buyout transaction.
A committee of the Board of Directors, comprised solely of independent
directors, considers any actions to be taken by the Company in connection with
the FrontLine Loans and its investments in joint ventures with RSVP. During the
third quarter of 2001, the Company noted a significant deterioration in
FrontLine's operations and financial condition and, based on its assessment of
value and recoverability and considering the findings and recommendations of the
committee and its financial advisor, the Company recorded a $163 million
valuation reserve charge, inclusive of anticipated costs, in its consolidated
statements of operations relating to its investments in the FrontLine Loans and
joint ventures with RSVP. The Company has discontinued the accrual of interest
income with respect to the FrontLine Loans. The Company has also reserved
against its share of GAAP equity in earnings from the RSVP controlled joint
ventures funded through the RSVP Commitment until such income is realized
through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code, charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest, and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
RSVP also restructured its management arrangements whereby a management company
formed by its former managing directors has been retained to manage RSVP
pursuant to a management agreement and the employment contracts of the managing
directors with RSVP have been terminated. The management agreement provides for
an annual base management fee, and disposition fees equal to 2% of the net
proceeds received by RSVP on asset sales. (The base management fee and
disposition fees are subject to a maximum over the term of the agreement of $7.5
million.) In addition, the managing directors retained a one-third residual
interest in RSVP's assets which is subordinated to the distribution of an
aggregate amount of $75 million to RSVP and/or the Company in respect of its
joint ventures with
22
RSVP. The management agreement has a three-year term, subject to early
termination in the event of the disposition of all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of assets sales by RSVP.
In April 2004, American Campus Communities, Inc. ("ACC"), a student housing
company owned by RSVP and a joint venture between RSVP and a subsidiary of the
Operating Partnership, filed a registration statement on Form S-11 with the
Securities and Exchange Commission in connection with a proposed initial public
offering ("IPO") of its common stock. RSVP and the joint venture between RSVP
and a subsidiary of the Operating Partnership plan to liquidate their ownership
positions in ACC in connection with the IPO transaction.
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 March 31, 2004. 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 Chief Executive Officer, President and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP.
RESULTS OF OPERATIONS
The following table is a comparison of the results of operations for the three
month period ended March 31, 2004 to the three month period ended March 31, 2003
(dollars in thousands):
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
CHANGE
---------------------
2004 2003 DOLLARS PERCENT
-------- -------- -------- -------
PROPERTY OPERATING REVENUES:
Base rents .......................... $111,210 $ 94,919 $ 16,291 17.2%
Tenant escalations and reimbursements 18,095 14,017 4,078 29.1%
-------- -------- --------
TOTAL PROPERTY OPERATING REVENUES ... $129,305 $108,936 $ 20,369 18.7%
======== ======== ========
PROPERTY OPERATING EXPENSES:
Operating expenses .................. $ 30,879 $ 26,442 $ 4,437 16.8%
Real estate taxes ................... 20,605 16,954 3,651 21.5%
-------- -------- --------
TOTAL PROPERTY OPERATING EXPENSES ... $ 51,484 $ 43,396 $ 8,088 18.6%
======== ======== ========
INVESTMENTS AND OTHER INCOME ......... $ 5,663 $ 7,259 $ (1,596) -22.0%
======== ======== ========
OTHER EXPENSES:
Interest expense .................... $ 25,661 $ 20,097 $ 5,564 27.7%
Marketing, general and
administrative ...................... 7,079 7,577 (498) -6.6%
-------- -------- --------
TOTAL OTHER EXPENSES ................ $ 32,740 $ 27,674 $ 5,066 18.3%
======== ======== ========
23
The Operating Partnership's property operating revenues, which include base
rents and tenant escalations and reimbursements ("Property Operating Revenues")
increased by $20.4 million for the three months ended March 31, 2004 as compared
to the 2003 period. Property Operating Revenues increased $11.8 million
attributable to lease up of newly developed or redeveloped properties and from
the acquisitions of 1185 Avenue of the Americas in January 2004 and 1055
Washington Avenue in August 2003. In addition, Property Operating Revenues
increased by $1.4 million from built-in rent increases for existing tenants in
our "same store" properties and by a $4.1 million increase in termination fees.
Property Operating Revenues also increased by approximately $1.4 million due to
the reduction in tenant receivable write-offs and to a weighted average
occupancy increase in our "same store" properties. Tenant escalations and
reimbursements increased $4.1 million attributable to increased operating
expense and real estate tax costs being passed through to tenants as base years
for 2002 take effect. These increases were offset by the allocation of $1.4
million of revenue attributable to discontinued operations in accordance with
FASB Statement No. 144, $300,000 in same space rental rate decreases and
$700,000 of free rent concessions.
The Operating Partnership's property operating expenses, real estate taxes and
ground rents ("Property Expenses") increased by approximately $8.1 million for
the three months ended March 31, 2004 as compared to the 2003 period. The
increase is primarily attributable the Operating Partnership's acquisitions of
1185 Avenue of the Americas and 1055 Washington Avenue amounting to
approximately $5.2 million. The remaining increase in Property Expenses is
attributable to approximately $1.0 million from newly developed or redeveloped
assets and $1.5 million in real estate taxes and $400,000 in operating expenses
from the Operating Partnership's "same store" properties. Increases in real
estate taxes is attributable to the significant increases levied by certain
municipalities, particularly in New York City and Nassau County, New York which
have experienced fiscal budget issues.
Investment and other income decreased by $1.6 million or 22.0 % from the three
month period ended March 31, 2003 as compared to the same quarterly period of
2004. The decrease is primarily attributable to a decrease in the gain
recognized on the Operating Partnership's land sale and build-to-suit
transaction of approximately $1.2 million.
Interest expense increased by $5.6 million or 27.7 % from the three month period
ended March 31, 2003 as compared to the same quarterly period of 2004. The
increase is primarily attributable to the net increase of $50 million in the
Operating Partnership's senior unsecured notes which resulted in approximately $
1.2 million of additional interest expense and approximately $ 3.1 million of
interest expense incurred on the mortgage debt on 1185 Avenue of the Americas
which was acquired in January 2004. In addition, during the three month period
ended March 31, 2003, the Operating Partnership allocated approximately $2.8
million of its interest expense to discontinued operations in accordance with
FASB Statement No. 144 with no such allocation in the current period. This
allocation resulted in an additional increase in interest expense from
continuing operations. These increases were offset by decreases in interest
expense of approximately $317,000 incurred under the Operating Partnership's
"same store" mortgage portfolio, in capitalized interest expense of
approximately $218,000 attributable to a decrease in development projects and in
interest expense of approximately $1.0 million incurred under the Operating
Partnership's unsecured credit facility as a result of a decrease in the
weighted average balance outstanding. The weighted average balance outstanding
under the Operating Partnership's unsecured credit facility was $119.7 million
for the three months ended March 31, 2004 as compared to $285.6 million for the
three months ended March 31, 2003.
Marketing, general and administrative expenses decreased by $498,000 or 6.6%
from the three month period ended March 31, 2003 as compared to the same
quarterly period of 2004. This overall decrease is attributable to the
efficiencies the Operating Partnership achieved as a result of its November 2003
restructuring and related termination of certain employees and the settlement of
the employment contracts of certain former executive officers of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and non-incremental capital expenditures,
excluding incremental capital expenditures of the Operating Partnership. The
Operating Partnership expects to meet its short-term liquidity requirements
generally through its net cash provided by operating activities along with its
unsecured credit facility described below. The credit facility contains several
financial covenants with which the Operating Partnership must be in compliance
in order to borrow funds thereunder. During recent quarterly periods, the
Operating Partnership has incurred significant leasing costs as a result of
increased market demands from tenants and high levels of leasing transactions
that result from the re-tenanting of scheduled expirations or early terminations
of leases. The Operating Partnership is currently experiencing high tenanting
costs including tenant improvement costs, leasing commissions and free rent in
all of its markets. For the three month period ended March 31, 2004, the
Operating Partnership paid $10.1 million for tenanting costs including tenant
improvement costs and leasing commissions. For the year ended December 31, 2003,
the Operating Partnership paid $50.3 million for such tenanting costs. As a
result of these and / or other operating factors, the Operating Partnership's
cash flow from operating activities was not sufficient to pay 100% of the
distributions paid on its common units. To meet the short-term funding
requirements relating to these leasing costs, the Operating Partnership has used
proceeds of property sales or borrowings under its credit facility. Based on the
Operating Partnership's forecasted leasing for 2004, it anticipates that it will
incur similar shortfalls. The Operating Partnership currently intends to fund
any shortfalls with proceeds from non-income producing asset sales or borrowings
under its credit facility. The Operating Partnership periodically reviews its
distribution policy to determine the appropriateness of the Operating
Partnership's distribution rate relative to the Operating Partnership's cash
flows. The Operating Partnership adjusts its distribution rate based on the
forecasted increases and decreases in its cash flow as well as required
distributions of the Company's taxable income to maintain its status as a
24
REIT. There can be no assurance that the Operating Partnership will maintain the
current quarterly distribution level on its common units. The Operating
Partnership expects to meet certain of its financing requirements through
long-term secured and unsecured borrowings and the issuance of debt and equity
securities of the Operating Partnership. There can be no assurance that there
will be adequate demand for the Operating Partnership's equity at the time or at
the price in which the Operating Partnership desires to raise capital through
the sale of additional equity. Similarly, there can be no assurance that the
Operating Partnership will be able to access the unsecured debt markets at the
time when the Operating Partnership desires to sell its unsecured notes. In
addition, when valuations for commercial real estate properties are high, the
Operating Partnership will seek to sell certain land inventory to realize value
and profit created. The Operating Partnership will then seek opportunities to
reinvest the capital realized from these dispositions back into value-added
assets in the Operating Partnership's core Tri-State Area markets. However,
there can be no assurances that the Operating Partnership will be able to
identify such opportunities that meet the Operating Partnership's underwriting
criteria. The Operating Partnership will refinance existing mortgage
indebtedness, senior unsecured notes or indebtedness under its credit facility
at maturity or retire such debt through the issuance of additional debt
securities or additional equity securities. The Operating Partnership
anticipates that the current balance of cash and cash equivalents and cash flows
from operating activities, together with cash available from borrowings, equity
offerings and proceeds from sales of land and non-income producing assets, will
be adequate to meet the capital and liquidity requirements of the Operating
Partnership in both the short and long-term. The Operating Partnership's senior
unsecured debt is currently rated "BBB-" by Fitch, "BBB-" by Standard & Poors
and "Ba1" by Moody's. The rating agencies review the ratings assigned to an
issuer such as the Operating Partnership on an ongoing basis. Negative changes
in the Operating Partnership's ratings would result in increases in the
Operating Partnership's borrowing costs, including borrowings under the
Operating Partnership's unsecured credit facility.
As a result of current economic conditions, certain tenants have either not
renewed their leases upon expiration or have paid the Operating Partnership to
terminate their leases. In addition, a number of U.S. companies have filed for
protection under federal bankruptcy laws. Certain of these companies are tenants
of the Operating Partnership. The Operating Partnership is subject to the risk
that other companies that are tenants of the Operating Partnership may file for
bankruptcy protection. This may have an adverse impact on the financial results
and condition of the Operating Partnership. 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. The Operating Partnership's 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 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. As a result, it is anticipated that the Operating Partnership
will make distributions in amounts sufficient to meet this requirement. The
Operating Partnership expects to use its cash flow from operating activities for
distributions and for payment of recurring, non-incremental revenue-generating
expenditures. The Company intends to invest amounts accumulated for distribution
in short-term liquid investments.
The Operating Partnership currently has a $500 million unsecured revolving
credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association, as syndication
agent, and Citicorp North America, Inc. and Wachovia Bank, National Association,
as co-documentation agents. The Credit Facility 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. As of March 31, 2004, based on a
pricing grid of the Operating Partnership's unsecured debt ratings, borrowings
under the Credit Facility were priced off LIBOR plus 90 basis points and the
Credit Facility carried a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's unsecured credit ratings the
interest rates and facility fee are subject to change. At March 31, 2004, the
outstanding borrowings under the Credit Facility aggregated $90 million and
carried a weighted average interest rate of 1.99%.
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 March 31, 2004, the Operating Partnership had availability
under the Credit Facility to borrow an additional $410 million, subject to
compliance with certain financial covenants.
25
In connection with the acquisition of certain properties, contributing partners
of such properties have provided guarantees on indebtedness of the Operating
Partnership. As a result, the Operating Partnership maintains certain
outstanding balances on its Credit Facility.
During the quarter ended March 31, 2004, the Operating Partnership issued $150
million of seven-year 5.15% (5.196% effective rate) senior unsecured notes.
Prior to the issuance of the senior unsecured notes the Operating Partnership
entered into several anticipatory interest rate hedge instruments to protect
itself against potentially rising interest rates. At the time the senior
unsecured notes were issued the Operating Partnership incurred a net cost of
approximately $980,000 to settle these instruments. Such costs will be amortized
over the term of the senior unsecured notes. The Company also completed an
equity offering of 5.5 million shares of its common stock raising approximately
$149.5 million, net of an underwriting discount, or $27.18 per share. Net
proceeds received from these transactions were used to repay outstanding
borrowings under the Credit Facility, repay $100 million of the Operating
Partnership's 7.4% senior unsecured notes and to invest in short-term liquid
investments.
The Operating Partnership continues to seek opportunities to acquire real estate
assets in its markets. The Operating Partnership has historically sought to
acquire properties where it could use its real estate expertise to create
additional value subsequent to acquisition. As a result of increased market
values for the Operating Partnership's commercial real estate assets, the
Operating Partnership has sold certain non-core assets or interests in assets
where significant value has been created. During 2003, the Operating Partnership
has sold assets or interests in assets with aggregate sales prices of
approximately $350.6 million. In addition, during the three months ended March
31, 2004, the Operating Partnership has sold assets or interests in assets with
aggregate sales prices of approximately $20.2 million. The Operating Partnership
has used the proceeds from these sales primarily to pay down borrowings under
the Credit Facility, for general corporate purposes and to invest in short-term
liquid investments until such time as alternative real estate investments can be
made.
An OP Unit and a share of common stock of the Company have essentially the same
economic characteristics as they effectively share equally in the net income or
loss and distributions of the Operating Partnership. Subject to certain holding
periods, OP Units may either be redeemed for cash or, at the election of the
Company, exchanged for shares of common stock of the Company on a one-for-one
basis. The OP Units currently receive a quarterly distribution of $.4246 per
unit. As of March 31, 2004, the Operating Partnership had issued and outstanding
3,084,708 Class A OP Units and 465,845 Class C OP Units. The Class C OP Units
were issued in August 2003 in connection with the contribution of real property
to the Operating Partnership and currently receive a quarterly distribution of
$.4664 per unit.
On November 25, 2003, the Company exchanged all of its 9,915,313 outstanding
shares of Class B common stock for an equal number of shares of its common
stock. The Board of Directors declared a final cash dividend on the Company's
Class B common stock to holders of record on November 25, 2003 in the amount of
$.1758 per share which was paid on January 12, 2004. This payment covered the
period from November 1, 2003 through November 25, 2003 and was based on the
previous quarterly Class B common stock dividend rate of $.6471 per share. In
order to align the regular quarterly dividend payment schedule of the former
holders of Class B common stock with the schedule of the holders of common stock
for periods subsequent to the exchange date for the Class B common stock, the
Board of Directors also declared a cash dividend with regard to the common stock
to holders of record on October 14, 2003 in the amount of $.2585 per share which
was paid on January 12, 2004. This payment covered the period from October 1,
2003 through November 25, 2003 and was based on the current quarterly common
stock dividend rate of $.4246 per share. As a result, the Company declared
dividends through November 25, 2003 to all holders of common stock and Class B
common stock. The Board of Directors also declared the common stock cash
dividend for the portion of the fourth quarter subsequent to November 25, 2003.
The holders of record of common stock on January 2, 2004, giving effect to the
exchange transaction, received a dividend on the common stock in the amount of
$.1661 per share on January 12, 2004. This payment covered the period from
November 26, 2003 through December 31, 2003 and was based on the current
quarterly common stock dividend rate of $.4246 per share. In connection with the
Company's exchange of its Class B common stock, the Operating Partnership
exchanged its Class B common units held by the Company for an equal number of OP
Units. Further, with respect to the foregoing declarations on dividends on the
Company's common and Class B common stock, the Operating Partnership made
distributions on its OP Units and Class B common units in like amounts on the
same dates.
During the three month period ended March 31, 2004, approximately 630,000 shares
of the Company's common stock were issued in connection with the exercise of
outstanding options to purchase stock under its stock option plans resulting in
proceeds to the Company of approximately $13.3 million. Such proceeds were then
contributed to the Operating Partnership in exchange for an equal number of OP
Units.
The Board of Directors of the Company authorized the purchase of up to five
million shares of the Company's common stock. Transactions conducted on the New
York Stock Exchange 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. Since the Board's authorization, the Company has purchased
3,318,600 shares of its common stock for an aggregate purchase price of
approximately $71.3 million. No purchases were made during the three months
ended March 31, 2004.
The Board of Directors of the Company also formed a pricing committee to
consider purchases of up to $75 million of the Company's outstanding preferred
securities.
26
On March 31, 2004, the Company had issued and outstanding 8,834,500 shares of
7.625% Series A Convertible Cumulative Preferred Stock (the "Series A preferred
stock"). The Series A preferred stock is redeemable by the Company on or after
April 13, 2004 at a price of approximately $25.7625 per share with such price
decreasing, at annual intervals, to $25.00 per share on April 13, 2008. In
addition, the Series A preferred stock, at the option of the holder, is
convertible at any time into the Company's common stock at a price of $28.51 per
share.
On January 1, 2004, the Company had issued and outstanding two million shares of
Series B Convertible Cumulative Preferred Stock (the "Series B preferred
stock"). The Series B preferred stock was redeemable by the Company as follows:
(i) on or after June 3, 2003 to and including June 2, 2004, at $25.50 per share
and (ii) on or after June 3, 2004 and thereafter, at $25.00 per share. The
Series B preferred stock, at the option of the holder, was convertible at any
time into the Company's common stock at a price of $26.05 per share. On January
16, 2004, the Company exercised its option to redeem the two million shares of
outstanding Series B preferred stock for approximately 1,958,000 shares of its
common stock. In connection with the Company exercising its option to redeem the
Series B Preferred Stock, the Operating Partnership redeemed it's Series B
preferred units with the Company for approximately 1,958,000 OP Units. As a
result of this redemption, based on current OP Unit distribution rates, annual
net distributions will decrease by approximately $1.1 million.
As of March 31, 2004, the Operating Partnership had issued and outstanding
approximately 19,662 preferred units of limited partnership interest with a
liquidation preference value of $1,000 per unit and a current annualized
distribution of $55.60 per unit. These units were issued in 1998 in connection
with the contribution of real property to the Operating Partnership. On April
12, 2004, the holder of these units gave notice to the Operating Partnership to
convert approximately 3,081 of these units. The Operating Partnership has
elected to redeem these units for approximately $3.1 million, including accrued
and unpaid dividends which will be applied to amounts owed from the unit holder
under the Other Notes.
The Operating Partnership's indebtedness at March 31, 2004 totaled approximately
$1.5 billion (including its share of consolidated joint venture debt and net of
minority partners' interests share of consolidated joint venture debt) and was
comprised of $90 million outstanding under the Credit Facility, approximately
$549.1 million of senior unsecured notes and approximately $836.1 million of
mortgage indebtedness. Based on the Operating Partnership's total market
capitalization of approximately $3.7 billion at March 31, 2004 (calculated based
on the sum of (i) the market value of the OP Units, assuming conversion (which
for this purpose is based on the closing price of the Company's common stock on
March 31, 2004), (ii) the liquidation preference value of the Operating
Partnership's preferred units and (iii) the $1.5 billion of debt), the Operating
Partnership's debt represented approximately 40.0% of its total market
capitalization.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the Operating Partnership's significant
consolidated debt obligations, by scheduled principal cash flow payments and
maturity date, and its commercial commitments by scheduled maturity at March 31,
2004 (in thousands):
MATURITY DATE
----------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
Mortgage notes payable (1) $ 9,944 $ 13,887 $ 13,478 $ 10,969 $ 9,989 $ 105,178 $ 163,445
Mortgage notes payable (2) (3) 250,000 18,553 129,920 60,539 -- 346,269 805,281
Senior unsecured notes -- -- -- 200,000 -- 350,000 550,000
Unsecured credit facility -- 90,000 -- -- -- -- 90,000
Land lease obligations (4) 3,702 3,729 3,786 3,713 3,713 75,423 94,066
Operating leases 760 787 816 844 359 -- 3,566
Air rights lease obligations 333 333 333 333 333 3,680 5,345
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 264,739 $ 127,289 $ 148,333 $ 276,398 $ 14,394 $ 880,550 $1,711,703
========== ========== ========== ========== ========== ========== ==========
(1) Scheduled principal amortization payments.
(2) Principal payments due at maturity.
(3) In addition, the Operating Partnership has a 60% interest in an
unconsolidated joint venture property. The Operating Partnership's share of
the mortgage debt at March 31, 2004 is approximately $7.8 million. This
mortgage note bears interest at 8.85% per annum and matures on September 1,
2005 at which time the Operating Partnership's share of the mortgage debt
will be approximately $6.9 million.
(4) The Operating Partnership leases, pursuant to noncancellable operating
leases, the land on which twelve of its buildings were constructed. The
leases, certain of which contain renewal options at the direction of the
Operating Partnership, expire between 2006 and 2090. The leases either
contain provisions for scheduled increases in the minimum rent at specified
intervals or for adjustments to rent based upon the fair market value of
the underlying land or other indices at specified intervals. Minimum ground
rent is recognized on a straight-line basis over the terms of the leases.
Certain of the mortgage notes payable are guaranteed by certain limited partners
in the Operating Partnership and/or the Company. In addition, consistent with
customary practices in non-recourse lending, certain non-recourse mortgages may
be recourse to the Operating Partnership under certain limited circumstances
including environmental issues and breaches of material representations.
During August 2004 the mortgage note payable and mezzanine debt, aggregating
$250 million, on the property located at 1185 Avenue of the Americas, New York,
NY, matures. On March 19, 2004, the Operating Partnership entered into two
anticipatory interest rate hedge instruments which are scheduled to coincide
with an August 2004 debt maturity, totaling approximately $100 million, to
protect itself against potentially rising interest rates. At March 31, 2004, the
fair value of these instruments reasonably approximate their carrying value.
27
At March 31, 2004, the Operating Partnership had approximately $950,000 in
outstanding undrawn standby letters of credit issued under the Credit Facility.
In addition, approximately $43.8 million, or 4.5%, of the Operating
Partnership's mortgage debt is recourse to the Operating Partnership.
Other Matters
Seven of the Operating Partnership's office properties which were acquired by
the issuance of OP Units are subject to agreements limiting the Operating
Partnership's ability to transfer them prior to agreed upon dates without the
consent of the limited partner who transferred the respective property to the
Operating Partnership. In the event the Operating Partnership transfers any of
these properties prior to the expiration of these limitations, the Operating
Partnership may be required to make a payment relating to taxes incurred by the
limited partner. These limitations expire between 2007 and 2013.
Three of the Operating Partnership's office properties are held in joint
ventures which contain certain limitations on transfer. These limitations
include requiring the consent of the joint venture partner to transfer a
property prior to various specified dates, rights of first offer, and buy / sell
provisions.
With the recent appointment of Messrs. Crocker, Steinberg, Ruffle and Ms. McCaul
as additional independent directors and the retirement of Mr. Kevenides, the
Company's Board of Directors currently consists of nine independent directors
and two insiders. Mr. Peter Quick serves as the Lead Director of the Board. In
addition, each of the Audit, Compensation and Nominating and Governance
Committees is comprised solely of independent directors.
In May 2003, the Company revised its policy with respect to compensation of its
independent directors to provide that a substantial portion of the independent
director's compensation shall be in the form of common stock of the Company.
Such common stock may not be sold until such time as the director is no longer a
member of the Company's Board.
Recently, the Company has taken certain additional actions to enhance its
corporate governance policies. These actions include opting out of the Maryland
Business Combination Statute, proposing to de-stagger the Board of Directors to
provide that each director is subject to election by shareholders on an annual
basis and proposing that the Company modify its "five or fewer" limitation on
the ownership of its common stock so that such limitation may only be used to
protect the Company's REIT status and not for anti-takeover purposes.
The Company has also adopted a policy which requires that each independent
director acquire $100,000 of common stock of the Company and a policy which
requires that at least one independent director be rotated off the Board every
three years.
The Company had historically structured long term incentive programs ("LTIP")
using restricted stock and stock loans. In July 2002, as a result of certain
provisions of the Sarbanes Oxley legislation, the 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 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 March 31, 2004, and
giving effect to the settlement of the employment contracts of certain former
executive officers, there remains 233,143 shares of common stock subject to the
original stock loans which are anticipated to vest between 2004 and 2011.
Approximately $308,000 and $1.1 million of compensation expense was recorded for
the three month periods ended March 31, 2004 and 2003, respectively, related to
these LTIP. Such amounts have been included in marketing, general and
administrative expenses on the Operating Partnership's consolidated statements
of income.
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $4.9 million at March 31, 2004, and have been included
as a reduction of additional paid in capital on the Operating Partnership's
consolidated balance sheets. Other outstanding loans to executive and senior
officers at March 31, 2004 amounted to approximately $2.3 million primarily
related to tax payment advances on stock compensation awards and life insurance
contracts made to certain executive and non-executive officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively, and collectively, the "Rights"). Each Right represents the right
to receive, upon vesting, one share of 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 common stock and the 2003
Rights aggregate 60,760 shares of common stock. As of March 31, 2004, and giving
effect to the settlement of the employment contracts of certain former executive
officers, there remains 47,126
28
shares of common stock related to the 2002 Rights and 26,040 shares of common
stock related to the 2003 Rights. During the three month periods ended March 31,
2004 and 2003, respectively, the Company recorded approximately $101,000 and
$216,000 of compensation expense related to the Rights. Such amounts have been
included in marketing, general and administrative expenses on the Operating
Partnership's consolidated statements of income.
In March 2003, the Company established a new LTIP for its executive and senior
officers. The four-year plan has a core award, which provides for annual stock
based compensation based upon continued service and in part based on attaining
certain annual performance measures. The plan also has a special outperformance
award, which provides for compensation to be earned at the end of a four-year
period if the Company attains certain four-year cumulative performance measures.
Amounts earned under the special outperformance award may be paid in cash or
stock at the discretion of the Compensation Committee of the Board. Performance
measures are based on total shareholder returns on a relative and absolute
basis. On March 13, 2003, the Company made available 1,106,324 shares of its
common stock under its existing stock option plans in connection with the core
award of this LTIP for ten of its executive and senior officers. On March 13,
2004, the Company met its annual performance measure with respect to the prior
annual period. As a result, the Company issued to the participants approximately
207,000 shares of its common stock related to the core component of this LTIP.
As of March 31, 2004, and giving effect to the settlement of the employment
contracts of certain former executive officers, there remains 620,832 shares of
common stock reserved for future issuance under the core award of this LTIP.
With respect to the core award of this LTIP, the Company recorded approximately
$699,000 and $268,000 of compensation expense for the three month periods ended
March 31, 2004 and 2003, respectively. Such amounts have been included in
marketing, general and administrative expenses on the Operating Partnership's
consolidated statements of income. Further, no provision will be made for the
special outperformance award of this LTIP until such time as achieving the
requisite performance measures is determined to be probable.
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 therefor as to any property
is generally not limited under such enactments and could exceed the value of the
property and/or the aggregate assets of the owner. The presence of such
substances, or the failure to properly remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at a disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACMs") when such materials are in poor condition, or in the event of
renovation or demolition. Such laws impose liability for release of ACMs into
the air and third parties may seek recovery from owners or operators of real
properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Operating Partnership may be considered an owner or operator of
such properties or as having arranged for the disposal or treatment of hazardous
or toxic substances and, therefore, potentially liable for removal or
remediation costs, as well as certain other related costs, including
governmental fines and injuries to persons and property.
All of the Operating Partnership's office and industrial / R&D properties have
been subjected to a Phase I or similar environmental audit after April 1, 1994
(which involved general inspections without soil sampling, ground water analysis
or radon testing and, for the Operating Partnership's properties constructed in
1978 or earlier, survey inspections to ascertain the existence of ACMs were
conducted) completed by independent environmental consultant companies (except
for 35 Pinelawn Road which was originally developed by Reckson Associates, the
predecessor of the Operating Partnership, and subjected to a Phase 1 in April
1992). These environmental audits have not revealed any environmental liability
that would have a material adverse effect on the Operating Partnership's
business.
Soil, sediment and groundwater contamination, consisting of volatile organic
compounds ("VOCs") and metals, has been identified at the property at 32 Windsor
Place, Central Islip, New York. The contamination is associated with industrial
activities conducted by a tenant at the property over a number of years. The
contamination, which was identified through an environmental investigation
conducted on behalf of the Operating Partnership, has been reported to the New
York State Department of Environmental Conservation. The Operating Partnership
has notified the tenant of the findings and has demanded that the tenant take
appropriate actions to fully investigate and remediate the contamination. Under
applicable environmental laws, both the tenant and the Operating Partnership are
liable for the cost of investigation and remediation. The Operating Partnership
does not believe that the cost of investigation and remediation will be material
and the Operating Partnership has recourse against the tenant. However, there
can be no assurance that the Operating Partnership will not incur liability that
would have a material adverse effect on the Operating Partnership's business.
In March 2004, the Operating Partnership received notification from the Internal
Revenue Service indicating that they have selected the 2001 tax return of the
Operating Partnership for examination. The examination process is currently on
going.
29
FUNDS FROM OPERATIONS
Management believes that Funds from Operations ("FFO") is a widely recognized
and appropriate measure of performance of an equity REIT. Although FFO is a
non-GAAP financial measure, the Operating Partnership believes it provides
useful information to the Company's shareholders, potential investors and
management. The Operating Partnership computes FFO in accordance with the
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT") as net income or loss, excluding gains or losses from sales of
depreciable assets plus real estate depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. FFO does not
represent cash generated from operating activities in accordance with GAAP and
is not indicative of cash available to fund cash needs. FFO should not be
considered as an alternative to net income as an indicator of the Operating
Partnership's operating performance or as an alternative to cash flow as a
measure of liquidity.
Since all companies and analysts do not calculate FFO in a similar fashion, the
Operating Partnership's calculation of FFO presented herein may not be
comparable to similarly titled measures as reported by other companies.
The following table presents the Operating Partnership's FFO calculation
(unaudited and in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2004 2003
------------- -------------
Net income allocable to common unit holders.................................... $ 16,900 $ 9,659
Adjustments for funds from operations:
Add:
Real estate depreciation and amortization................................ 28,557 31,327
Minority partners' interests in consolidated partnerships................ 6,325 4,690
Less:
Gain on sales of depreciable real estate................................. 5,156 --
Amounts distributable to minority partners in consolidated partnerships.. 8,504 6,807
------------- -------------
Funds From Operations ("FFO")............................................. $ 38,122 $ 38,869
============= =============
Weighted average units outstanding........................................ 64,914 65,392
============= =============
INFLATION
The office leases generally provide for fixed base rent increases or indexed
escalations. In addition, the office leases provide for separate escalations of
real estate taxes, operating expenses and electric costs over a base amount. The
industrial / R&D leases generally provide for fixed base rent increases, direct
pass through of certain operating expenses and separate real estate tax
escalations over a base amount. The Operating Partnership believes that
inflationary increases in expenses will be offset by contractual rent increases
and expense escalations described above. As a result of the impact of the events
of September 11, 2001, the Operating Partnership has realized increased
insurance costs, particularly relating to property and terrorism insurance, and
security costs. The Operating Partnership has included these costs as part of
its escalatable expenses. The Operating Partnership has billed these escalatable
expense items to its tenants consistent with the terms of the underlying leases
and believes they are collectible. To the extent the Operating Partnership's
properties contain vacant space, the Company will bear such inflationary
increases in expenses.
The Credit Facility, $250 million of the Operating Partnership's mortgage notes
payable and the Mezz Note, bear interest at variable rates, which will be
influenced by changes in short-term interest rates, and are sensitive to
inflation.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Operating Partnership is interest rate risk
on its long term debt, mortgage notes and notes receivable. The Operating
Partnership will, when advantageous, hedge its interest rate risk using
financial instruments. The Operating Partnership is not subject to foreign
currency risk.
The Operating Partnership manages its exposure to interest rate risk on its
variable rate indebtedness by borrowing on a short-term basis under its Credit
Facility until such time as it is able to retire the short-term variable rate
debt with either a long-term fixed rate debt offering, long term mortgage debt,
equity offerings or through sales or partial sales of assets.
The Operating Partnership will recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges will be adjusted to fair value
through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability, or firm commitment
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. On March 19, 2004, the
Operating Partnership entered into two anticipatory interest rate hedge
instruments which are scheduled to coincide with an August 2004 debt maturity,
totaling approximately $100 million, to protect itself against potentially
rising interest rates. At March 31, 2004, the fair value of these instruments
reasonably approximate 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 March 31, 2004 (dollars in
thousands):
For the Year Ended December 31,
--------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) FMV
----------------------------------------------------------------------------------------------------
Long term debt:
Fixed rate....... $ 9,944 $ 32,440 $ 143,398 $ 271,508 $ 9,989 $ 801,447 $ 1,268,726 $ 1,378,000
Weighted average
interest rate.. 7.48% 6.90% 7.37% 7.14% 7.23% 7.40% 7.33%
Variable rate.... $ 250,000 $ 90,000 $ -- $ -- $ -- $ -- $ 340,000 $ 340,000
Weighted average
interest rate.. 4.95% 1.99% -- -- -- -- 4.17%
(1) Includes aggregate unamortized issuance discounts of approximately
$1,231,000 on certain of the senior unsecured notes which are due
at maturity.
In addition, a one percent increase in the LIBOR rate would have a
$900,000 annual increase in interest expense on the $90 million of
variable rate debt due in 2005. A one percent increase in LIBOR would
have no impact to interest expense on the $250 million of variable rate
debt due in 2004, as interest reported in the current period is
calculated using a LIBOR rate in excess of one percent over the LIBOR
rate at March 31, 2004.
The following table sets forth the Operating Partnership's mortgage
notes and note receivables by scheduled maturity date, weighted average
interest rates and estimated FMV at March 31, 2004 (dollars in
thousands):
For the Year Ended December 31,
---------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) FMV
-------------------------------------------------------------------------------------------------------
Mortgage notes and
notes receivable:
Fixed rate........... $ 21,500 $ -- $ -- $ 16,990 $ -- $ -- $ 38,490 $ 39,905
Weighted average
interest rate...... 10.85% -- -- 12.00% -- -- 11.36%
Variable rate........ $ -- $ 15,000 $ -- $ -- $ -- $ -- $ 15,000 $ 15,000
Weighted average
interest rate...... -- 13.43% -- -- -- -- 13.43%
(1) Excludes interest receivables aggregating approximately
$2.0 million dollars.
31
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is reported within the time periods specified in the SEC's
rules and forms. In this regard, the Operating Partnership has formed a
Disclosure Committee currently comprised of all of the Company's executive
officers as well as certain other employees with knowledge of information that
may be considered in the SEC reporting process. The Committee has responsibility
for the development and assessment of the financial and non-financial
information to be included in the reports filed by the Operating Partnership
with the SEC and assists the Company's Chief Executive Officer and Chief
Financial Officer in connection with their certifications contained in the
Operating Partnership's SEC reports. The Committee meets regularly and reports
to the Audit Committee on a quarterly or more frequent basis. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated, with the
participation of the Operating Partnership's management, our disclosure controls
and procedures as of the end of the period covered by this Quarterly Report on
Form 10-Q. Based upon the evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that such disclosure controls and procedures
are effective.
There were no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
32
SELECTED PORTFOLIO INFORMATION
The following table sets forth the Operating Partnership's schedule of its top
25 tenants based on base rental revenue as of March 31, 2004:
WTD. AVG. PERCENT OF PRO-RATA PERCENT OF CONSOLIDATED
TERM REMAINING TOTAL SHARE OF ANNUALIZED ANNUALIZED BASE
TENANT NAME (1) (YEARS) SQUARE FEET BASE RENTAL REVENUE RENTAL REVENUE
- ------------------------------------ ---------------- ----------- ---------------------- -----------------------
* DEBEVOISE & PLIMPTON 17.8 465,420 3.4% 5.7%
KING & SPALDING 8.0 173,554 2.2% 1.9%
* AMERICAN EXPRESS 9.5 129,818 1.9% 1.7%
VERIZON COMMUNICATIONS INC. 2.8 210,425 1.6% 1.4%
* BANK OF AMERICA / FLEET BANK (2) 4.8 185,446 1.5% 1.5%
* SCHULTE ROTH & ZABEL 16.7 279,746 1.4% 2.4%
* FUJI PHOTO FILM USA 8.7 186,484 1.3% 1.2%
DUN & BRADSTREET CORP. 8.5 123,000 1.2% 1.1%
UNITED DISTILLERS 1.0 137,918 1.2% 1.0%
* WORLDCOM / MCI 2.8 244,730 1.2% 1.1%
ARROW ELECTRONICS 9.8 163,762 1.1% 1.0%
AMERADA HESS CORPORATION 8.8 127,300 1.1% 1.0%
T.D. WATERHOUSE 3.4 103,381 1.0% 0.9%
WESTDEUTSCHE LADESBANK 12.1 53,000 1.0% 0.9%
D.E. SHAW 11.8 79,515 1.0% 0.8%
PRACTICING LAW INSTITUTE 9.9 77,500 0.9% 0.8%
* BANQUE NATIONALE DE PARIS 12.3 145,834 0.9% 1.5%
NORTH FORK BANK 11.8 126,770 0.9% 0.8%
* KRAMER LEVIN NESSEN KAMIN 1.1 158,144 0.9% 1.5%
HELLER EHRMAN WHITE 1.2 64,526 0.9% 0.8%
VYTRA HEALTHCARE 3.8 105,613 0.9% 0.7%
P.R. NEWSWIRE ASSOCIATES 4.1 67,000 0.8% 0.7%
* DRAFT WORLDWIDE INC. 9.6 124,008 0.8% 1.3%
HOFFMAN-LA ROCHE INC. 7.6 120,736 0.8% 0.7%
LABORATORY CORP. OF AMERICA 3.2 108,000 0.7% 0.6%
(1) Ranked by pro-rata share of annualized base rental revenue adjusted
for pro rata share of joint venture interests.
(2) Adjusted to reflect Bank of America's merger with Fleet Bank which
was completed on April 1, 2004.
* Part or all of space occupied by tenant is in a 51% or more owned
joint venture building.
HISTORICAL NON-INCREMENTAL REVENUE-GENERATING CAPITAL EXPENDITURES, TENANT
IMPROVEMENT COSTS AND LEASING COMMISSIONS
The following table sets forth annual and per square foot non-incremental
revenue-generating capital expenditures in which the Operating Partnership paid
or accrued, during the respective periods, to retain revenues attributable to
existing leased space (at 100% of cost) for the years 2000 through 2003 and for
the three month period ended March 31, 2004 for the Operating Partnership's
office and industrial / R&D properties other than One Orlando Center in Orlando,
FL:
Average YTD
2000 2001 2002 2003 2000-2003 2004
----------------------------------------------------------------------------------------
Suburban Office Properties
Total $ 3,289,116 $ 4,606,069 $ 5,283,674 $ 6,791,336 $ 4,992,549 $ 1,434,002
Per Square Foot $ 0.33 $ 0.45 $ 0.53 $ 0.67 $ 0.49 $ 0.14
NYC Office Properties
Total $ 946,718 $ 1,584,501 $ 1,939,111 $ 1,922,209 $ 1,598,135 $ 580,643
Per Square Foot $ 0.38 $ 0.45 $ 0.56 $ 0.55 $ 0.48 $ 0.13
Industrial Properties
Total $ 813,431 $ 711,666 $ 1,881,627 $ 1,218,401(1) $ 1,156,281 $ 5,375
Per Square Foot $ 0.11 $ 0.11 $ 0.28 $ 0.23 $ 0.18 $ 0.01
TOTAL PORTFOLIO ----------------------------------------------------------------------------------------
Total $ 5,049,265 $ 6,902,236 $ 9,104,412 $ 9,931,946 $ 7,746,965 $ 2,020,020
Per Square Foot $ 0.25 $ 0.34 $ 0.45 $ 0.52 $ 0.39 $ 0.13
(1) Excludes non-incremental capital expenditures of $435,140 incurred during
the fourth quarter 2003 for the industrial properties which were sold
during the period.
33
The following table sets forth annual and per square foot non-incremental
revenue-generating tenant improvement costs and leasing commissions in which the
Operating Partnership committed to perform, during the respective periods, to
retain revenues attributable to existing leased space for the years 2000 through
2003 and for the three month period ended March 31, 2004 for the Operating
Partnership's office and industrial / R&D properties other than One Orlando
Center in Orlando, FL:
Average YTD
2000 2001 2002 2003 2000-2003 2004 (1) New Renewal
---------------------------------------------------------------------------------------------------
Long Island Office Properties
Tenant Improvements $ 2,853,706 $ 2,722,457 $ 1,917,466 $ 3,774,722 $ 2,817,088 $ 1,500,323 $ 921,051 $ 579,272
Per Square Foot Improved $ 6.99 $ 8.47 $ 7.81 $ 7.05 $ 7.58 $ 10.11 $ 16.02 $ 6.38
Leasing Commissions $ 2,208,604 $ 1,444,412 $ 1,026,970 $ 2,623,245 $ 1,825,808 $ 650,625 $ 304,594 $ 346,031
Per Square Foot Leased $ 4.96 $ 4.49 $ 4.18 $ 4.90 $ 4.63 $ 4.39 $ 5.30 $ 3.81
-----------------------------------------------------------------------------------------------------
Total Per Square Foot $ 11.95 $ 12.96 $ 11.99 $ 11.95 $ 12.21 $ 14.50 $ 21.32 $ 10.19
=====================================================================================================
Westchester Office Properties
Tenant Improvements $ 1,860,027 $ 2,584,728 $ 6,391,589(2) $ 3,732,370 $ 3,642,178 $ 2,110,696 $1,659,782 $ 450,914
Per Square Foot Improved $ 5.72 $ 5.91 $ 15.05 $ 15.98 $ 10.66 $ 17.17 $ 17.79 $ 15.22
Leasing Commissions $ 412,226 $ 1,263,012 $ 1,975,850(2) $ 917,487 $ 1,142,144 $ 852,377 $ 749,819 $ 102,558
Per Square Foot Leased $ 3.00 $ 2.89 $ 4.65 $ 3.93 $ 3.62 $ 6.93 $ 8.04 $ 3.47
-----------------------------------------------------------------------------------------------------
Total Per Square Foot $ 8.72 $ 8.80 $ 19.70 $ 19.91 $ 14.28 $ 24.10 $ 25.83 $ 18.69
=====================================================================================================
Connecticut Office Properties
Tenant Improvements $ 385,531 $ 213,909 $ 491,435 $ 588,087 $ 419,740 $ 106,088 $ 23,760 $ 82,328
Per Square Foot Improved $ 4.19 $ 1.46 $ 3.81 $ 8.44 $ 4.47 $ 5.31 $ 5.74 $ 5.20
Leasing Commissions $ 453,435 $ 209,322 $ 307,023 $ 511,360 $ 370,285 $ 83,473 $ 14,883 $ 68,590
Per Square Foot Leased $ 4.92 $ 1.43 $ 2.38 $ 7.34 $ 4.02 $ 4.18 $ 3.60 $ 4.33
-----------------------------------------------------------------------------------------------------
Total Per Square Foot $ 9.11 $ 2.89 $ 6.19 $ 15.78 $ 8.49 $ 9.49 $ 9.34 $ 9.53
=====================================================================================================
New Jersey Office Properties
Tenant Improvements $ 1,580,323 $ 1,146,385 $ 2,842,521 $ 4,327,295 $ 2,474,131 $ 230,927 $ 185,161 $ 45,766
Per Square Foot Improved $ 6.71 $ 2.92 $ 10.76 $ 11.57 $ 7.99 $ 4.26 $ 5.97 $ 1.97
Leasing Commissions $ 1,031,950 $ 1,602,962 $ 1,037,012 $ 1,892,635 $ 1,391,140 $ 156,937 $ 137,233 $ 19,704
Per Square Foot Leased $ 4.44 $ 4.08 $ 3.92 $ 5.06 $ 4.38 $ 2.90 $ 4.43 $ 0.85
----------------------------------------------------------------------------------------------------
Total Per Square Foot $ 11.15 $ 7.00 $ 14.68 $ 16.63 $ 12.37 $ 7.16 $ 10.40 $ 2.82
=====================================================================================================
New York City Office
Properties
Tenant Improvements $ 65,267 $ 788,930 $ 4,350,106 $ 5,810,017(3) $ 2,753,580 $ 2,542,592 $1,496,055 $1,046,537
Per Square Foot Improved $ 1.79 $ 15.69 $ 18.39 $ 32.84 $ 17.18 $ 22.66 $ 31.65 $ 16.11
Leasing Commissions $ 418,185 $ 1,098,829 $ 2,019,837 $ 2,950,330(3) $ 1,621,795 $ 744,213 $ 216,980 $ 527,233
Per Square Foot Leased $ 11.50 $ 21.86 $ 8.54 $ 16.68 $ 14.64 $ 6.63 $ 4.59 $ 8.12
-----------------------------------------------------------------------------------------------------
Total Per Square Foot $ 13.29 $ 37.55 $ 26.93 $ 49.52 $ 31.82 $ 29.29 $ 36.24 $ 24.23
=====================================================================================================
Industrial Properties
Tenant Improvements $ 650,216 $ 1,366,488 $ 1,850,812 $ 1,249,200 $ 1,279,179 $ 143,556 $ 143,556 $ 0
Per Square Foot Improved $ 0.95 $ 1.65 $ 1.97 $ 2.42 $ 1.75 $ 1.60 $ 1.60 $ 0.00
Leasing Commissions $ 436,506 $ 354,572 $ 890,688 $ 574,256 $ 564,005 $ 225,539 $ 225,539 $ 0
Per Square Foot Leased $ 0.64 $ 0.43 $ 0.95 $ 1.11 $ 0.78 $ 2.52 $ 2.52 $ 0.00
-----------------------------------------------------------------------------------------------------
Total Per Square Foot $ 1.59 $ 2.08 $ 2.92 $ 3.53 $ 2.53 $ 4.12 $ 4.12 $ 0.00
=====================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO
Tenant Improvements $ 7,395,070 $ 8,822,897 $17,843,929 $19,481,691 $13,385,896 $ 6,634,182 $4,429,365 $2,204,817
Per Square Foot Improved $ 4.15 $ 4.05 $ 7.96 $ 10.22 $ 6.66 $ 12.13 $ 13.73 $ 9.82
Leasing Commissions $ 4,960,906 $ 5,973,109 $ 7,257,380 $ 9,469,313 $ 6,915,177 $ 2,713,164 $1,649,048 $1,064,116
Per Square Foot Leased $ 3.05 $ 2.75 $ 3.24 $ 4.97 $ 3.54 $ 4.96 $ 5.11 $ 4.74
-----------------------------------------------------------------------------------------------------
Total Per Square Foot $ 7.20 $ 6.80 $ 11.20 $ 15.19 $ 10.20 $ 17.09 $ 18.84 $ 14.56
=====================================================================================================
(1) Excludes $2.5 million of deferred leasing costs attributable to space
marketed but not yet leased.
(2) Excludes tenant improvements and leasing commissions related to a 163,880
square foot leasing transaction with Fuji Photo Film U.S.A. Leasing
commissions on this transaction amounted to $5.33 per square foot and tenant
improvement allowance amounted to $40.88 per square foot.
(3) Excludes $5.8 million of tenant improvements and $2.2 million of leasing
commissions related to a new 121,108 square foot lease to Debevoise with a
lease commencement date in 2005. Also excludes tenant improvements of $0.2
million for Sandler O'Neil & Partners (7,446 SF) for expansion space with a
lease commencement date in 2004.
34
The following table sets forth the Operating Partnership's lease expiration
table, as adjusted for pre-leased space, at April 1, 2004 for its Total
Portfolio of properties, its Office Portfolio and its Industrial / R&D Portfolio
other than One Orlando Center in Orlando, FL:
TOTAL PORTFOLIO
- -------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- -------------------------------------------------------------------------------
2004 126 840,601 5.4% 5.4%
2005 191 1,664,052 10.7% 16.1%
2006 191 1,713,867 11.0% 27.1%
2007 110 1,151,012 7.4% 34.5%
2008 111 992,094 6.4% 40.9%
2009 92 1,157,063 7.4% 48.3%
2010 and thereafter 278 6,833,032 44.0% 92.3%
- -------------------------------------------------------------------------------
Total/Weighted
Average 1,099 14,351,721 92.3%
- -------------------------------------------------------------------------------
Total Portfolio Square
Feet 15,533,128
- -------------------------------------------------------------------------------
OFFICE PORTFOLIO
- -------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Office % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- -------------------------------------------------------------------------------
2004 122 796,781 5.5% 5.5%
2005 189 1,567,902 10.7% 16.2%
2006 187 1,616,901 11.1% 27.3%
2007 106 1,081,520 7.4% 34.7%
2008 108 949,281 6.5% 41.2%
2009 91 1,112,082 7.6% 48.8%
2010 and thereafter 273 6,485,735 44.4% 93.2%
- -------------------------------------------------------------------------------
Total/Weighted
Average 1,076 13,610,202 93.2%
- -------------------------------------------------------------------------------
Total Office Portfolio
Square Feet 14,611,422
- -------------------------------------------------------------------------------
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% 37.8%
2009 1 44,981 4.9% 42.7%
2010 and thereafter 5 347,297 37.7% 80.4%
- -------------------------------------------------------------------------------
Total/Weighted
Average 23 741,519 80.4%
- -------------------------------------------------------------------------------
Total Industrial/R&D
Portfolio Square Feet 921,706
- -------------------------------------------------------------------------------
35
The following table sets forth the Operating Partnership's components of its
paid or accrued non-incremental and incremental revenue-generating capital
expenditures, tenant improvements and leasing costs for the periods presented as
reported on its "Statements of Cash Flows - Investment Activities" contained in
its consolidated financial statements (in thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2004 2003
----------------- ------------
Capital expenditures:
Non-incremental.............................. $ 2,020 $ 2,272
Incremental.................................. 233 255
Tenant improvements:
Non-incremental.............................. 4,469 12,366
Incremental.................................. 905 23
----------------- ------------
Additions to commercial real estate properties.... $ 7,627 $ 14,916
================= ============
Leasing costs:
Non-incremental.............................. $ 3,239 $ 2,599
Incremental.................................. 1,345 2,188
----------------- ------------
Payment of deferred leasing costs................. $ 4,584 $ 4,787
================= ============
Acquisition and development costs................. $ 4,781 $ 5,888
================= ============
The following tables set forth certain information as of March 31, 2004 for each
of the Operating Partnership's properties (excluding One Orlando Centre, located
in Orlando, Florida). These tables update and supercede similar tables in the
Operating Partnership's 2003 Form 10-K which, in certain cases, understated the
amounts contained in the column captioned "Annual Base Rent per Leased Square
Foot" which used the "Rental Square Feet" as the denominator to calculate
"Annual Base Rent per Leased Square Foot" rather than the product of "Rentable
Square Feet" and "Percent Leased":
36
OWNERSHIP
INTEREST
(GROUND
LEASE LAND NUMBER
PERCENTAGE EXPIRATION YEAR AREA OF
OWNERSHIP DATE) (1) CONSTRUCTED (ACRES) FLOORS
-------------------------------------------------------------------------
SUBURBAN OFFICE PROPERTIES:
HUNTINGTON MELVILLE CORPORATE CENTER
395 North Service Rd, Melville, NY 100% Lease (2081) 1988 7.5 4
200 Broadhollow Rd,, Melville, NY 100% Fee 1981 4.6 4
48 South Service Rd, Melville, NY 100% Fee 1986 7.3 4
35 Pinelawn Rd, Melville, NY 100% Fee 1980 6.0 2
275 Broadhollow Rd, Melville, NY 100% Fee 1970 5.8 4
58 South Service Rd, Melville, NY 100% Fee 2000 16.5 4
1305 Old Walt Whitman Rd, Melville, NY 51% Fee 1998(3) 18.1 3
-----
TOTAL- HUNTINGTON MEVILLE CORPORATE CENTER 65.8
NORTH SHORE ATRIUM
6800 Jericho Turnpike, Syosset, NY 100% Fee 1977 13.0 2
6900 Jericho Turnpike, Syosset, NY 100% Fee 1982 5.0 4
-----
TOTAL-NORTH SHORE ATRIUM 18.0
NASSAU WEST CORPORATE CENTER
50 Charles Lindbergh Blvd., Mitchel Field, NY 100% Lease (2082) 1984 9.1 6
60 Charles Lindbergh Blvd., Mitchel Field, NY 100% Lease (2082) 1989 7.8 2
51 Charles Lindbergh Blvd., Mitchel Field, NY 100% Lease (2084) 1989 6.6 1
55 Charles Lindbergh Blvd., Mitchel Field, NY 100% Lease (2082) 1982 10.0 2
333 Earl Ovington Blvd., Mitchel Field, NY 60% Lease (2088) 1991 30.6 10
90 Merrick Ave., Mitchel Field, NY 51% Lease (2084) 1985 13.2 9
-----
TOTAL-NASSAU WEST CORPORATE CENTER 77.3
TARRYTOWN CORPORATE CENTER
505 White Plains Rd., Tarrytown, NY 100% Fee 1974 1.4 2
520 White Plains Rd., Tarrytown, NY 60% Fee(4) 1981 6.8 6
555 White Plains Rd., Tarrytown, NY 100% Fee 1972 4.2 5
560 White Plains Rd., Tarrytown, NY 100% Fee 1980 4.0 6
580 White Plains Rd., Tarrytown, NY 100% Fee 1977 6.1 6
660 White Plains Rd., Tarrytown, NY 100% Fee 1983 10.9 6
-----
TOTAL-TARRYTOWN CORPORATE CENTER 33.4
RECKSON EXECUTIVE PARK
1 International Dr., Ryebrook, NY 100% Fee 1983 N/A 3
2 International Dr., Ryebrook, NY 100% Fee 1983 N/A 3
3 International Dr., Ryebrook, NY 100% Fee 1983 N/A 3
4 International Dr., Ryebrook, NY 100% Fee 1986 N/A 3
5 International Dr., Ryebrook, NY 100% Fee 1986 N/A 3
6 International Dr., Ryebrook, NY 100% Fee 1986 N/A 3
-----
TOTAL-RECKSON EXECUTIVE PARK 44.4
SUMMIT AT VALHALLA
100 Summit Dr., Valhalla, NY 100% Fee 1988 11.3 4
200 Summit Dr., Valhalla, NY 100% Fee 1990 18.0 4
500 Summit Dr., Valhalla, NY 100% Fee 1986 29.1 4
-----
TOTAL-SUMMIT AT VALHALLA 58.4
MT. PLEASANT CORPORATE CENTER
115/117 Stevens Ave., Mt. Pleasant, NY 100% Fee 1984 5.0 3
-----
Total-Mt Pleasant Corporate Center 5.0
STAND-ALONE LONG ISLAND PROPERTIES
400 Garden City Plaza, Garden City, NY 51% Fee 1989 5.7 5
88 Duryea Rd., Melville, NY 100% Fee 1986 1.5 2
310 East Shore Rd., Great Neck, NY 100% Fee 1981 1.5 4
333 East Shore Rd., Great Neck, NY 100% Lease (2030) 1976 1.5 2
520 Broadhollow Rd., Melville, NY 100% Fee 1978 7.0 1
1660 Walt Whitman Rd., Melville, NY 100% Fee 1980 6.5 1
150 Motor Parkway, Hauppauge, NY 100% Fee 1984 11.3 4
300 Motor Parkway, Hauppauge, NY 100% Fee 1979 4.2 1
48 Harbor Pk Dr., Port Washington, NY 100% Fee 1976 2.7 1
50 Marcus Dr., Melville, NY 100% Fee 2000 12.9 2
-----
TOTAL-STAND-ALONE LONG ISLAND 54.8
STAND-ALONE WESTCHESTER
120 White Plains Rd., Tarrytown, NY 51% Fee 1984 9.7 6
80 Grasslands, Elmsford, NY 100% Fee 1989 4.9 3
-----
TOTAL-STAND-ALONE WESTCHESTER 14.6
EXECUTIVE HILL OFFICE PARK
100 Executive Dr., Rt. 280 Corridor, NJ 100% Fee 1978 10.1 3
200 Executive Dr., Rt. 208 Corridor, NJ 100% Fee 1980 8.2 4
300 Executive Dr., Rt. 280 Corridor, NJ 100% Fee 1984 8.7 4
10 Rooney Circle, Rt. 280 Corridor, NJ 100% Fee 1971 5.2 3
-----
TOTAL-EXECUTIVE HILL OFFICE PARK 32.2
UNIVERSITY SQUARE PRINCETON
100 Campus Dr., Princeton/Rt. 1 Corridor, NJ 100% Fee 1987 N/A 1
104 Campus Dr., Princeton/Rt. 1 Corridor, NJ 100% Fee 1987 N/A 1
115 Campus Dr., Princeton/Rt. 1 Corridor, NJ 100% Fee 1987 N/A 1
-----
TOTAL- UNIVERSITY SQUARE 11.0
SHORT HILLS OFFICE COMPLEX
101 John F. Kennedy Parkway, Short Hills, NJ 100% Fee 1981 9.0 6
103 John F. Kennedy Parkway, Short Hills, NJ (3) 100% Fee 1981 6.0 4
51 John F Kennedy Parkway, Short Hills, NJ 51% Fee 1988 11.0 5
-----
TOTAL- SHORT HILLS OFFICE 26.0
STAND-ALONE NEW JERSEY PROPERTIES
99 Cherry Hill Road, Parsippany, NJ 100% Fee 1982 8.8 3
119 Cherry Hill Rd, Parsippany, NJ 100% Fee 1982 9.3 3
One Eagle Rock, Hanover, NJ 100% Fee 1986 10.4 3
3 University Plaza, Hackensack, NJ 100% Fee 1985 10.6 6
1255 Broad St., Clifton, NJ 100% Fee 1968 11.1 2
492 River Rd., Nutley, NJ 100% Fee 1952 17.3 13
-----
TOTAL- STAND-ALONE NJ PROPERTIES 67.5
-----
TOTAL SUBURBAN OFFICE PROPERTIES 508.4
-----
37
ANNUAL
BASE
RENT NUMBER
RENTABLE PER OF
SQUARE PERCENT ANNUAL BASE LEASED TENANT
FEET LEASED RENT (2) SQ. FT. LEASES
---------------------------------------------------------------
SUBURBAN OFFICE PROPERTIES:
HUNTINGTON MELVILLE CORPORATE CENTER
395 North Service Rd, Melville, NY 187,374 100.0% $ 4,835,775 $25.81 5
200 Broadhollow Rd,, Melville, NY 68,053 95.8% $ 1,427,437 $21.89 12
48 South Service Rd, Melville, NY 128,304 94.2% $ 2,482,460 $20.54 10
35 Pinelawn Rd, Melville, NY 108,136 100.0% $ 2,203,548 $20.38 34
275 Broadhollow Rd, Melville, NY 126,770 100.0% $ 3,113,672 $24.56 1
58 South Service Rd, Melville, NY 279,886 90.8% $ 7,766,864 $30.58 10
1305 Old Walt Whitman Rd, Melville, NY 164,166 100.0% $ 4,363,408 $26.58 5
---------------------------------------------------------------
TOTAL- HUNTINGTON MEVILLE CORPORATE CENTER 1,062,689 96.6% $ 26,193,164 $25.52 77
NORTH SHORE ATRIUM
6800 Jericho Turnpike, Syosset, NY 205,690 93.5% $ 3,619,377 $18.83 40
6900 Jericho Turnpike, Syosset, NY 94,945 100.0% $ 1,906,608 $20.08 14
---------------------------------------------------------------
TOTAL-NORTH SHORE ATRIUM 300,635 95.5% $ 5,525,985 $19.24 54
NASSAU WEST CORPORATE CENTER
50 Charles Lindbergh Blvd., Mitchel Field, NY 216,735 89.8% $ 4,351,157 $22.35 19
60 Charles Lindbergh Blvd., Mitchel Field, NY 219,066 100.0% $ 2,672,283 $12.20 4
51 Charles Lindbergh Blvd., Mitchel Field, NY 108,000 100.0% $ 2,666,345 $24.69 1
55 Charles Lindbergh Blvd., Mitchel Field, NY 214,581 100.0% $ 2,857,515 $13.32 2
333 Earl Ovington Blvd., Mitchel Field, NY 583,337 92.0% $ 14,577,851 $27.16 24
90 Merrick Ave., Mitchel Field, NY 234,996 95.6% $ 6,053,421 $26.95 20
---------------------------------------------------------------
TOTAL-NASSAU WEST CORPORATE CENTER 1,576,715 95.0% $ 33,178,572 $22.15 70
TARRYTOWN CORPORATE CENTER
505 White Plains Rd., Tarrytown, NY 26,319 79.0% $ 326,439 $15.69 17
520 White Plains Rd., Tarrytown, NY 156,384 98.3% $ 3,274,395 $21.30 2
555 White Plains Rd., Tarrytown, NY 121,886 83.7% $ 2,154,146 $21.11 6
560 White Plains Rd., Tarrytown, NY 124,117 93.8% $ 2,419,492 $20.78 19
580 White Plains Rd., Tarrytown, NY 169,447 61.7% $ 2,242,645 $21.45 12
660 White Plains Rd., Tarrytown, NY 253,078 91.0% $ 5,313,411 $23.07 33
---------------------------------------------------------------
TOTAL-TARRYTOWN CORPORATE CENTER 851,231 85.5% $ 15,730,528 $21.61 89
RECKSON EXECUTIVE PARK
1 International Dr., Ryebrook, NY 90,000 100.0% $ 1,155,000 $12.83 1
2 International Dr., Ryebrook, NY 90,000 100.0% $ 1,155,000 $12.83 1
3 International Dr., Ryebrook, NY 91,193 50.9% $ 994,144 $21.40 2
4 International Dr., Ryebrook, NY 87,833 92.9% $ 2,049,988 $25.11 7
5 International Dr., Ryebrook, NY 90,000 51.1% $ 1,035,720 $22.50 1
6 International Dr., Ryebrook, NY 95,097 84.1% $ 1,843,870 $23.06 8
---------------------------------------------------------------
TOTAL-RECKSON EXECUTIVE PARK 544,123 79.8% $ 8,233,722 $18.97 20
SUMMIT AT VALHALLA
100 Summit Dr., Valhalla, NY 248,174 87.3% $ 5,532,257 $25.53 7
200 Summit Dr., Valhalla, NY 233,391 99.4% $ 5,898,230 $25.44 9
500 Summit Dr., Valhalla, NY 208,660 100.0% $ 5,581,655 $26.75 1
---------------------------------------------------------------
TOTAL-SUMMIT AT VALHALLA 690,225 95.2% $ 17,012,142 $25.88 17
MT. PLEASANT CORPORATE CENTER
115/117 Stevens Ave., Mt. Pleasant, NY 166,191 94.3% $ 3,552,680 $22.67 18
---------------------------------------------------------------
Total-Mt Pleasant Corporate Center 166,191 94.3% $ 3,552,680 $22.67 18
STAND-ALONE LONG ISLAND PROPERTIES
400 Garden City Plaza, Garden City, NY 174,408 84.5% $ 3,900,170 $26.45 20
88 Duryea Rd., Melville, NY 23,878 100.0% $ 563,687 $23.61 4
310 East Shore Rd., Great Neck, NY 50,108 98.1% $ 1,258,254 $25.59 17
333 East Shore Rd., Great Neck, NY 17,650 81.4% $ 369,164 $25.70 7
520 Broadhollow Rd., Melville, NY 85,784 100.0% $ 1,896,205 $22.10 3
1660 Walt Whitman Rd., Melville, NY 76,851 100.0% $ 1,459,964 $19.00 8
150 Motor Parkway, Hauppauge, NY 185,361 96.4% $ 4,169,312 $23.34 24
300 Motor Parkway, Hauppauge, NY 54,154 88.3% $ 866,318 $18.13 5
48 Harbor Pk Dr., Port Washington, NY 35,000 100.0% $ 835,562 $23.87 1
50 Marcus Dr., Melville, NY 163,762 100.0% $ 3,970,593 $24.25 1
---------------------------------------------------------------
TOTAL-STAND-ALONE LONG ISLAND 866,956 94.9% $ 19,289,229 $23.45 90
STAND-ALONE WESTCHESTER
120 White Plains Rd., Tarrytown, NY 208,311 99.7% $ 3,250,899 $15.65 11
80 Grasslands, Elmsford, NY 87,114 100.0% $ 1,959,656 $22.50 5
---------------------------------------------------------------
TOTAL-STAND-ALONE WESTCHESTER 295,425 99.8% $ 5,210,555 $17.67 16
EXECUTIVE HILL OFFICE PARK
100 Executive Dr., Rt. 280 Corridor, NJ 93,349 84.6% $ 1,713,331 $21.70 9
200 Executive Dr., Rt. 208 Corridor, NJ 105,628 98.2% $ 2,267,529 $21.86 10
300 Executive Dr., Rt. 280 Corridor, NJ 124,777 94.0% $ 2,560,800 $21.84 10
10 Rooney Circle, Rt. 280 Corridor, NJ 70,716 78.9% $ 1,381,563 $24.75 2
---------------------------------------------------------------
TOTAL-EXECUTIVE HILL OFFICE PARK 394,470 90.2% $ 7,923,223 $22.27 31
UNIVERSITY SQUARE PRINCETON
100 Campus Dr., Princeton/Rt. 1 Corridor, NJ 27,888 100.0% $ 648,433 $23.25 3
104 Campus Dr., Princeton/Rt. 1 Corridor, NJ 70,239 87.0% $ 1,396,638 $22.84 2
115 Campus Dr., Princeton/Rt. 1 Corridor, NJ 33,600 100.0% $ 834,759 $24.84 1
---------------------------------------------------------------
TOTAL- UNIVERSITY SQUARE 131,727 93.1% $ 2,879,830 $23.48 6
SHORT HILLS OFFICE COMPLEX
101 John F. Kennedy Parkway, Short Hills, NJ 191,267 71.4% $ 1,878,998 $13.76 3
103 John F. Kennedy Parkway, Short Hills, NJ (3) 123,000 100.0% $ 4,182,000 $34.00 1
51 John F Kennedy Parkway, Short Hills, NJ 250,713 100.0% $ 9,027,753 $36.01 19
---------------------------------------------------------------
TOTAL- SHORT HILLS OFFICE 564,980 90.3% $ 15,088,751 $29.57 23
STAND-ALONE NEW JERSEY PROPERTIES
99 Cherry Hill Road, Parsippany, NJ 93,396 100.0% $ 1,333,669 $14.28 11
119 Cherry Hill Rd, Parsippany, NJ 95,180 68.8% $ 1,380,519 $21.09 12
One Eagle Rock, Hanover, NJ 144,587 87.9% $ 2,632,939 $20.71 6
3 University Plaza, Hackensack, NJ 219,794 100.0% $ 4,910,064 $22.34 20
1255 Broad St., Clifton, NJ 193,574 100.0% $ 4,323,454 $22.33 2
492 River Rd., Nutley, NJ 130,009 100.0% $ 2,177,651 $16.75 1
---------------------------------------------------------------
TOTAL- STAND-ALONE NJ PROPERTIES 876,540 94.6% $ 16,758,296 $20.21 52
--------- ------------ ---
TOTAL SUBURBAN OFFICE PROPERTIES 8,321,907 92.8% $176,576,677 $22.86 563
--------- ------------ ---
38
OWNERSHIP
INTEREST
(GROUND
LEASE LAND NUMBER
PERCENTAGE EXPIRATION YEAR AREA OF
OWNERSHIP DATE) (1) CONSTRUCTED (ACRES) FLOORS
-------------------------------------------------------------------------
CBD OFFICE PROPERTIES:
LANDMARK SQUARE
One Landmark Sq., Stamford, CT 100% Fee 1973 N/A 22
Two Landmark Sq., Stamford, CT 100% Fee 1976 N/A 3
Three Landmark Sq., Stamford, CT 100% Fee 1978 N/A 6
Four Landmark Sq., Stamford, CT 100% Fee 1977 N/A 5
Five Landmark Sq., Stamford, CT 100% Fee 1976 N/A 3
Six Landmark Sq., Stamford, CT 100% Fee 1984 N/A 10
-----
TOTAL- LANDMARK SQUARE 7.2
OTHER STAMFORD PROPERTIES
1055 Washington Blvd., Stamford, CT 100% Fee 1987 1.5 10
680 Washington Blvd., Stamford, CT 51% Fee 1989 1.3 11
750 Washington Blvd., Stamford, CT 51% Fee 1989 2.4 11
-----
TOTAL-STAMFORD TOWERS 5.2
STAND-ALONE WESTCHESTER
360 Hamilton Ave., White Plains, NY 100% Fee 1977 1.5 12
140 Grand St., White Plains, NY 100% Fee 1991 2.2 9
-----
TOTAL-STAND-ALONE WESTCHESTER 3.7
NEW YORK CITY OFFICE PROPERTIES
120 W. 45th St., New York, NY 100% Fee 1989 0.4 40
100 Wall St., New York, NY 100% Fee 1969 0.5 29
810 Seventh Ave., New York, NY 100% Fee(5) 1970 0.6 42
919 Third Ave., New York, NY 51% Fee(6) 1971 1.5 47
1185 Ave. of the Americas, New York, NY 100% Lease (7) 1972 1.0 42
1350 Ave. of the Americas, New York, NY 100% Fee 1966 0.6 35
-----
TOTAL-NEW YORK CITY OFFICE PROPERTIES 4.6
-----
TOTAL CBD OFFICE PROPERTIES 20.7
-----
TOTAL-OFFICE PROPERTIES 529.1
=====
ANNUAL
BASE
RENT NUMBER
RENTABLE PER OF
SQUARE PERCENT ANNUAL BASE LEASED TENANT
FEET LEASED RENT (2) SQ. FT. LEASES
---------------------------------------------------------------
CBD OFFICE PROPERTIES:
LANDMARK SQUARE
One Landmark Sq., Stamford, CT 280,661 84.6% $6,194,671 $26.09 52
Two Landmark Sq., Stamford, CT 36,889 91.7% $835,761 $24.70 8
Three Landmark Sq., Stamford, CT 128,887 95.8% $3,246,188 $26.30 13
Four Landmark Sq., Stamford, CT 99,401 52.3% $1,291,111 $24.81 7
Five Landmark Sq., Stamford, CT 58,000 100.0% $284,627 $4.91 3
Six Landmark Sq., Stamford, CT 170,080 98.4% $4,442,216 $26.54 7
----------------------------------------------------------------
TOTAL- LANDMARK SQUARE 773,918 86.8% $16,294,574 $24.24 90
OTHER STAMFORD PROPERTIES
1055 Washington Blvd., Stamford, CT 178,855 76.6% $3,469,097 $25.32 15
680 Washington Blvd., Stamford, CT 132,759 100.0% $4,109,221 $30.95 7
750 Washington Blvd., Stamford, CT 185,671 98.2% $4,768,680 $26.16 9
----------------------------------------------------------------
TOTAL-STAMFORD TOWERS 497,285 90.9% $12,346,998 $27.31 31
STAND-ALONE WESTCHESTER
360 Hamilton Ave., White Plains, NY 381,257 89.1% $8,751,579 $25.77 13
140 Grand St., White Plains, NY 124,229 88.7% $2,384,708 $21.64 8
----------------------------------------------------------------
TOTAL-STAND-ALONE WESTCHESTER 505,486 89.0% $11,136,287 $24.76 21
NEW YORK CITY OFFICE PROPERTIES
120 W. 45th St., New York, NY 441,140 100.0% $17,926,531 $40.65 29
100 Wall St., New York, NY 461,883 87.8% $13,757,557 $33.93 24
810 Seventh Ave., New York, NY 690,977 89.7% $23,804,162 $38.40 28
919 Third Ave., New York, NY 1,363,158 99.6% $58,973,099 $43.45 15
1185 Ave. of the Americas, New York, NY 1,010,889 98.1% $37,866,632 $38.19 29
1350 Ave. of the Americas, New York, NY 544,779 96.5% $17,756,497 $33.76 67
----------------------------------------------------------------
TOTAL-NEW YORK CITY OFFICE PROPERTIES 4,512,826 96.2% $170,084,478 $39.18 192
---------- ------------ ---
TOTAL CBD OFFICE PROPERTIES 6,289,515 94.0% $209,862,337 $35.48 334
---------- ------------ ---
TOTAL-OFFICE PROPERTIES 14,611,422 93.3% $386,439,014 $28.34 897
========== ============ ===
(1) Ground lease expirations assume exercise of renewal options by the lessee.
(2) Represents Base Rent, net of electric reimbursement, of signed leases at
March 31, 2004 adjusted for scheduled contractual increases during the 12
months ending March 31, 2005. Total Base Rent for these purposes reflects
the effect of any lease expirations that occur during the 12-month period
ending March 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.
(7) 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.
39
OWNERSHIP
INTEREST
(GROUND RESEARCH
LEASE LAND CLEARANCE AND
PERCENTAGE EXPIRATION YEAR AREA HEIGHT DEVELOPMENT
OWNERSHIP DATE) CONSTRUCTED (ACRES) (FEET)(1) FINISH
-----------------------------------------------------------------------------------
LONG ISLAND INDUSTRIAL
ISLIP & HAUPPAUGE LONG ISLAND
32 Windsor Pl., Islip, NY 100.0% Fee 1971 2.5 18 10%
300 Kennedy Drive, Haupauge, NY 100.0% Fee 1969 4.1 12 100%
350 Kennedy Drive, Haupauge, NY 100.0% Fee 1970 4.5 26 50%
-----
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 46%
200 Forge Way, Rockaway, NJ 100.0% Fee 1989 12.7 28 53%
300 Forge Way, Rockaway, NJ 100.0% Fee 1989 4.2 24 63%
400 Forge Way, Rockaway, NJ 100.0% Fee 1989 12.8 28 20%
40 Cragwood Rd., South Plainfield, NJ 100.0% Fee 1965 13.5 16 30%
-----
W. MORRIS S. PLAINFIELD TOTAL 46.7
WESTCHESTER INDUSTRIAL
ELMSFORD WESTCHESTER
100 Grasslands Rd., Elmsford, NY 100.0% Fee 1964 3.6 16 100%
500 Saw Mill Rd., Elmsford, NY 100.0% Fee 1968 7.3 22 20%
-----
ELMSFORD WESTCHESTER TOTAL 10.9
CONNECTICUT INDUSTRIAL
SHELTON CONNECTICUT
710 Bridgeport, Shelton, CT 100.0% Fee 1971-1979 36.1 22 29%
-----
SHELTON CONNECTICUT TOTAL 36.1
-----
TOTAL INDUSTRIAL 104.8
=====
ANNUAL
BASE
RENT NUMBER
RENTABLE PER OF
SQUARE PERCENT ANNUAL BASE LEASED TENANT
FEET LEASED RENT (2) SQ. FT. LEASES
---------------------------------------------------------------
LONG ISLAND INDUSTRIAL
ISLIP & HAUPPAUGE LONG ISLAND
32 Windsor Pl., Islip, NY 43,000 100.0% $163,702 $3.81 1
300 Kennedy Drive, Haupauge, NY 50,000 100.0% $360,208 $7.20 1
350 Kennedy Drive, Haupauge, NY 50,489 100.0% $307,791 $6.10 1
---------------------------------------------------------------
ISLIP LONG ISLAND TOTAL 143,489 100.0% $831,701 $5.80 3
NEW JERSEY INDUSTRIAL
WESTERN MORRIS AND SOUTH PLAINFIELD
100 Forge Way, Rockaway, NJ 20,150 92.3% $141,962 $7.63 3
200 Forge Way, Rockaway, NJ 72,118 100.0% $634,638 $8.80 2
300 Forge Way, Rockaway, NJ 24,200 50.4% $20,842 $1.71 1
400 Forge Way, Rockaway, NJ 73,000 100.0% $547,768 $7.50 3
40 Cragwood Rd., South Plainfield, NJ 130,793 70.3% $1,369,348 $14.89 4
---------------------------------------------------------------
W. MORRIS S. PLAINFIELD TOTAL 320,261 83.7% $2,714,558 $10.13 13
WESTCHESTER INDUSTRIAL
ELMSFORD WESTCHESTER
100 Grasslands Rd., Elmsford, NY 47,690 100.0% $903,987 $18.96 3
500 Saw Mill Rd., Elmsford, NY 92,000 100.0% $1,002,800 $10.90 1
---------------------------------------------------------------
ELMSFORD WESTCHESTER TOTAL 139,690 100.0% $1,906,787 $13.65 4
CONNECTICUT INDUSTRIAL
SHELTON CONNECTICUT
710 Bridgeport, Shelton, CT 452,414 71.7% $2,375,946 $7.32 2
---------------------------------------------------------------
SHELTON CONNECTICUT TOTAL 452,414 71.7% $2,375,946 $7.32 2
--------- ---------- --
TOTAL INDUSTRIAL 1,055,854 82.9% $7,828,992 $8.94 22
========= ========== ==
(1) Calculated as the difference from the lowest beam to floor.
(2) Represents Base Rent, net of electric reimbursement, of signed leases at
March 31, 2004 adjusted for scheduled contractual increases during the 12
months ending March 31, 2005. Total Base Rent for these purposes reflects
the effect of any lease expirations that occur during the 12-month period
ending March 31, 2005. 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.
40
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A number of shareholder derivative actions have been commenced purportedly on
behalf of the Company against the Board of Directors in the Supreme Court of the
State of New York, County of Nassau (Lowinger v. Rechler et al., Index No. 01
4162/03 (9/16/03)), the Supreme Court of the State of New York, County of
Suffolk (Steiner v. Rechler et al., Index No. 03 32545 (10/2/03) and Lighter v.
Rechler et al., Index No. 03 23593 (10/3/03)), the United States District Court,
Eastern District of New York (Tucker v. Rechler et al., Case No. cv 03 4917
(9/26/03), Clinton Charter Township Police and Fire Retirement System v. Rechler
et al., Case No. cv 03 5008 (10/1/03) and Teachers' Retirement System of
Louisiana v. Rechler et al., Case No. cv 03 5178 (10/14/03)) and the Circuit
Court for Baltimore County (Sekuk Global Enterprises Profit Sharing Plan v.
Rechler et al., Civil No. 24-C- 03007496 (10/16/03), Hoffman v. Rechler et al.,
24-C-03-007876 (10/27/03) and Chirko v. Rechler et al., 24-C-03-008010
(10/30/03)), relating to the sale of the Long Island Industrial Portfolio to
certain members of the Rechler family. The complaints allege, among other
things, that the process by which the directors agreed to the transaction was
not sufficiently independent of the Rechler family and did not involve a "market
check" or third party auction process and as a result was not for adequate
consideration. The Plaintiffs seek similar relief, including a declaration that
the directors violated their fiduciary duties, an injunction against the
transaction and damages. The Company believes that complaints are without merit.
Kramer Levin Naftalis & Frankel commenced an action against Metropolitan 919 3rd
Avenue LLC in the Supreme Court of the State of New York, County of New York
(Kramer Levin Naftalis & Frankel LLP v. Metropolitan 919 3rd Avenue LLC, Index
No. 604512/2002 (12/16/02)) relating to alleged overcharges of approximately
$700,000 with respect to its lease at 919 3rd Avenue, New York, NY. Such
overcharges were primarily incurred during the period prior to the Company's
ownership of the property. Subsequent to the filing of the complaint, the
parties agreed to pursue private mediation. As of May 2004, the mediation effort
was discontinued and the parties have resumed litigation. The Company believes
that the complaint is without merit.
Except as provided above, the Operating Partnership is not presently subject to
any material litigation nor, to the Operating Partnership's knowledge, is any
litigation threatened against the Operating Partnership, other than routine
actions for negligence or other claims and administrative proceedings arising in
the ordinary course of business, some of which are expected to be covered by
liability insurance and all of which collectively are not expected to have a
material adverse effect on the liquidity, results of operations or business or
financial condition of the Operating Partnership.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information
a) None
b) There have been no material changes to the procedures by which
stockholders may recommend nominees to the Company's Board of Directors.
41
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
31.1 Certification of Scott H. Rechler, Chief Executive Officer and
President of Reckson Associates Realty Corp., the sole
general partner of the Registrant, 31.1 pursuant to Rule 13a -
14(a) or Rule 15(d) - 14(a).
31.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of Reckson Associates
Realty Corp., the sole general partner of the Registrant,
pursuant to Rule 13a - 14(a) or Rule 15(d) - 14(a).
32.1 Certification of Scott H. Rechler, Chief Executive Officer and
President of Reckson Associates Realty Corp., the sole
general partner of the Registrant, pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.
32.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of Reckson Associates
Realty Corp., the sole general partner of the Registrant,
pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code.
b) During the three months ended March 31, 2004, the Registrant filed the
following reports on Form 8-K:
On January 16, 2004, the Registrant submitted a report on Form 8-K under
Items 5 and 7 thereof in order to revise its historical financial
statements in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets".
On January 21, 2004, the Registrant submitted a report on Form 8-K under
Items 5 and 7 thereof in connection with a public offering of $150
million aggregate principal amount of its 5.15% senior unsecured notes
due 2011.
On February 27, 2004, the Registrant submitted a report on Form 8-K
under Items 7 and 12 thereof in order to file a press release announcing
the Company's consolidated financial results for the quarter and year
ended December 31, 2003.
On March 12, 2004, the Registrant submitted a report on Form 8-K under
Items 5 and 7 thereof in connection with a public offering of 5.5
million shares of the Company's common stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECKSON OPERATING PARTNERSHIP, L. P.
BY: RECKSON ASSOCIATES REALTY CORP., its sole general partner
By: /s/ Scott H. Rechler By: /s/ Michael Maturo
------------------------------ -----------------------------------
Scott H. Rechler, Chief Executive Michael Maturo, Executive Vice
Officer and President President, Treasurer and Chief
Financial Officer
DATE: May 7, 2004
42
EXHIBIT 31.1
RECKSON OPERATING PARTNERSHIP, L. P.
CERTIFICATION OF SCOTT H. RECHLER, CHIEF EXECUTIVE OFFICER AND
PRESIDENT OF RECKSON ASSOCIATES REALTY CORP.,
THE SOLE GENERAL PARTNER OF RECKSON OPERATING PARTNERSHIP, L. P.,
PURSUANT TO RULE 13A - 14(A)/15(D) - 14(A)
I, Scott H. Rechler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson Operating
Partnership, L. P.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter (the Registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant's ability
to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: May 7, 2004 /s/ Scott H. Rechler
----------------------------------------
Scott H. Rechler
Chief Executive Officer and President of
Reckson Associates Realty Corp.,
the sole general partner of
the Registrant
EXHIBIT 31.2
RECKSON OPERATING PARTNERSHIP, L. P.
CERTIFICATION OF MICHAEL MATURO, EXECUTIVE VICE PRESIDENT, TREASURER
AND CHIEF FINANCIAL OFFICER OF RECKSON ASSOCIATES REALTY CORP.,
THE SOLE GENERAL PARTNER OF RECKSON OPERATING PARTNERSHIP, L. P.,
PURSUANT TO RULE 13A - 14(A)/15(D) - 14(A)
I, Michael Maturo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson Operating
Partnership, L. P.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter (the Registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant's ability
to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: May 7, 2004 /s/ Michael Maturo
-----------------------------------
Michael Maturo
Executive Vice President, Treasurer
and Chief Financial Officer of
Reckson Associates Realty Corp.,
the sole general partner of
the Registrant
EXHIBIT 32.1
RECKSON OPERATING PARTNERSHIP, L.P.
CERTIFICATION OF SCOTT H. RECHLER, CHIEF EXECUTIVE OFFICER AND
PRESIDENT OF RECKSON ASSOCIATES REALTY CORP.,
THE SOLE GENERAL PARTNER OF RECKSON OPERATING PARTNERSHIP, L.P.,
PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
I, Scott H. Rechler, Chief Executive Officer and President of Reckson Associates
Realty Corp., the sole general partner of Reckson Operating Partnership, L.P.
(the "Company"), certify pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that:
1) The Quarterly Report on Form 10-Q of the Company for the quarterly
period ended March 31, 2004 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (15 U.S.C. 78m or 78o(d)); and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Dated: May 7, 2004
RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp., its sole general partner
By /s/ Scott H. Rechler
-------------------------------------------------------
Scott H. Rechler, Chief Executive Officer and President
A signed original of this written statement required by Section 906 has been
provided to Reckson Operating Partnership, L.P. and will be furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
RECKSON OPERATING PARTNERSHIP, L.P.
CERTIFICATION OF MICHAEL MATURO, EXECUTIVE VICE PRESIDENT,
TREASURER AND CHIEF FINANCIAL OFFICER OF RECKSON ASSOCIATES REALTY CORP.,
THE SOLE GENERAL PARTNER OF RECKSON OPERATING PARTNERSHIP, L.P.,
PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
I, Michael Maturo, Executive Vice President, Treasurer and Chief Financial
Officer of Reckson Associates Realty Corp., the sole general partner of Reckson
Operating Partnership, L.P. (the "Company"), certify pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1) The Quarterly Report on Form 10-Q of the Company for the quarterly
period ended March 31, 2004 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (15 U.S.C. 78m or 78o(d)); and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Dated: May 7, 2004
RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp., its sole general partner
By /s/ Michael Maturo
-----------------------------------------
Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Reckson Operating Partnership, L.P. and will be furnished to the
Securities and Exchange Commission or its staff upon request.