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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, 2003
COMMISSION FILE NUMBER: 1-13762
RECKSON OPERATING PARTNERSHIP, L. P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3233647
- -------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
225 BROADHOLLOW ROAD, MELVILLE, NY 11747
- ---------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(631) 694-6900
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) YES X NO__, AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 126.2 OF THE EXCHANGE ACT).
YES X NO _
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RECKSON OPERATING PARTNERSHIP, L.P.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED MARCH 31, 2003
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, 2003 (unaudited) and December 31, 2002........... 2
Consolidated Statements of Income for the three months ended
March 31, 2003 and 2002 (unaudited) ...................................................... 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 (unaudited) ...................................................... 4
Notes to the Consolidated Financial Statements (unaudited) .................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................... 29
Item 4. Controls and Procedures...................................................................... 30
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings............................................................................ 36
Item 2. Changes in Securities and Use of Proceeds.................................................... 36
Item 3. Defaults Upon Senior Securities.............................................................. 36
Item 4. Submission of Matters to a Vote of Securities Holders........................................ 36
Item 5. Other Information............................................................................ 36
Item 6. Exhibits and Reports on Form 8-K............................................................. 36
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SIGNATURES 36
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i
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT UNIT AMOUNTS)
MARCH 31, 2003
(UNAUDITED) DECEMBER 31, 2002
--------------- -----------------
ASSETS
Commercial real estate properties, at cost
Land ............................................................. $ 417,996 $ 418,040
Buildings and improvements ....................................... 2,426,832 2,415,252
Developments in progress:
Land ............................................................. 84,851 92,924
Development costs ................................................ 30,563 28,311
Furniture, fixtures and equipment ..................................... 12,569 13,595
----------- -----------
2,972,811 2,968,122
Less accumulated depreciation .................................... (476,368) (454,018)
----------- -----------
2,496,443 2,514,104
Investments in real estate joint ventures ............................. 6,106 6,116
Investment in mortgage notes and notes receivable ..................... 54,727 54,547
Cash and cash equivalents ............................................. 30,876 30,576
Tenant receivables .................................................... 11,579 14,050
Investments in service companies and affiliate loans and joint ventures 79,611 78,104
Deferred rents receivable ............................................. 111,467 107,366
Prepaid expenses and other assets ..................................... 52,180 36,846
Contract and land deposits and pre-acquisition costs .................. 227 240
Deferred lease and loan costs ......................................... 65,248 70,103
----------- -----------
TOTAL ASSETS ..................................................... $ 2,908,464 $ 2,912,052
=========== ===========
LIABILITIES
Mortgage notes payable ................................................ $ 737,131 $ 740,012
Unsecured credit facility ............................................. 302,000 267,000
Senior unsecured notes ................................................ 499,339 499,305
Accrued expenses and other liabilities ................................ 77,058 90,320
Distributions payable ................................................. 31,472 31,575
----------- -----------
TOTAL LIABILITIES ................................................ 1,647,000 1,628,212
----------- -----------
Minority partners' interests in consolidated partnerships ............. 241,932 242,934
----------- -----------
Commitments and contingencies.......................................... -- --
PARTNERS' CAPITAL
Preferred Capital, 10,854,162 units issued and outstanding ............ 281,690 281,690
General Partners' Capital:
Class A common units, 48,000,995 and 48,246,083 units issued and
outstanding, respectively ......................................... 464,131 478,121
Class B common units, 9,915,313 units issued and outstanding ........ 205,326 209,675
Limited Partners' Capital:
Class A common units, 7,276,224 units issued and outstanding ....... 68,385 71,420
----------- -----------
TOTAL PARTNERS' CAPITAL ............................................ 1,019,532 1,040,906
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL .......................... $ 2,908,464 $ 2,912,052
=========== ===========
(see accompanying notes to financial statements)
2
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT UNIT DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2003 2002
------------ ------------
REVENUES:
Property operating revenues:
Base rents ................................................................ $ 107,478 $ 106,383
Tenant escalations and reimbursements ..................................... 15,963 15,321
------------ ------------
Total property operating revenues .............................................. 123,441 121,704
Interest income on mortgage notes and notes receivable (including $1,033 and
$1,059, respectively from related parties) .................................. 1,531 1,556
Investment and other income .................................................... 5,788 534
------------ ------------
TOTAL REVENUES ............................................................ 130,760 123,794
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EXPENSES:
Property operating expenses .................................................... 47,834 41,895
Marketing, general and administrative .......................................... 8,259 7,095
Interest ....................................................................... 22,850 20,996
Depreciation and amortization .................................................. 31,984 25,930
------------ ------------
TOTAL EXPENSES ............................................................ 110,927 95,916
------------ ------------
Income before minority interests, distributions to preferred unit
holders, equity in earnings of real estate joint ventures and service
companies, gain on sales of depreciable real estate assets and discontinued
operations ................................................................... 19,833 27,878
Minority partners' interests in consolidated partnerships ...................... (4,690) (5,120)
Equity in earnings of real estate joint ventures and service companies
(including $0 and $407, respectively from related parties) ................... 106 335
Gain on sales of depreciable real estate assets ................................ -- 537
------------ ------------
Income before discontinued operations and distributions to preferred unitholders 15,249 23,630
Discontinued operations:
Income from discontinued operations ....................................... -- 234
------------ ------------
Net Income ..................................................................... 15,249 23,864
Preferred unit distributions ................................................... (5,590) (5,948)
------------ ------------
Net income allocable to common unit holders .................................... $ 9,659 $ 17,916
============ ============
Net Income allocable to:
Class A common ............................................................ $ 7,591 $ 14,093
Class B common ............................................................ 2,068 3,823
------------ ------------
Total .......................................................................... $ 9,659 $ 17,916
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Net income per weighted average common units:
Class A common ............................................................ $ .14 $ .24
Discontinued operations ................................................... -- --
Gain on sales of depreciable real estate assets ........................... -- .01
------------ ------------
Class A common ............................................................ $ .14 $ .25
============ ============
Class B common ............................................................ $ .21 $ .36
Discontinued operations ................................................... -- --
Gain on sales of depreciable real estate assets ........................... -- .01
------------ ------------
Class B common ............................................................ $ .21 $ .37
============ ============
Weighted average common units outstanding:
Class A common ............................................................ 55,477,170 57,520,435
Class B common ............................................................ 9,915,313 10,283,513
(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,
--------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 15,249 $ 23,864
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................................ 31,984 26,136
Gain on sales of depreciable real estate assets .............................. -- (537)
Minority partners' interests in consolidated partnerships .................... 4,690 5,120
Equity in earnings of real estate joint ventures and service companies ....... (106) (335)
Changes in operating assets and liabilities:
Prepaid expenses and other assets ............................................ 1,314 11,569
Tenant receivables ........................................................... 2,471 (984)
Deferred rents receivable .................................................... (4,101) (8,749)
Accrued expenses and other liabilities ....................................... (11,917) (22,498)
--------- ---------
Net cash provided by operating activities ................................... 39,584 33,586
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CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in contract deposits and pre-acquisition costs ...................... -- (9,134)
Proceeds from mortgage note receivable repayments ............................ -- 4
Additions to commercial real estate properties ............................... (14,916) (4,931)
Additions to developments in progress ........................................ (5,888) (3,621)
Payment of leasing costs ..................................................... (4,787) (2,987)
Additions to furniture, fixtures and equipment ............................... (89) (6)
Distributions from investments in real estate joint ventures ................. 117 --
Proceeds from sales of real estate ........................................... -- 600
--------- ---------
Net cash used in investing activities ....................................... (25,563) (20,075)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on secured borrowings ..................................... (2,881) (2,486)
Payment of loan costs ........................................................ (29) (322)
(Decrease) in investments in affiliate loans and service companies ........... -- (5,236)
Proceeds from of unsecured credit facility ................................... 35,000 30,000
Repayment of unsecured credit facility ....................................... -- (84,600)
Distributions to minority partners in consolidated partnerships .............. (5,693) (4,096)
Purchases of general partner common units .................................... (4,538) --
Contributions ................................................................ -- 4,492
Distributions ................................................................ (35,580) (37,045)
--------- ---------
Net cash used in financing activities ..................................... (13,721) (99,293)
--------- ---------
Net (decrease) increase in cash and cash equivalents ............................ 300 (85,782)
Cash and cash equivalents at beginning of period ................................ 30,576 121,773
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 30,876 $ 35,991
========= =========
(see accompanying notes to financial statements)
4
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
Reckson Operating Partnership, L.P. (the "Operating Partnership") commenced
operations on June 2, 1995. The sole general partner in the Operating
Partnership, Reckson Associates Realty Corp. (the "Company") is a
self-administered and self-managed real estate investment trust ("REIT").
The Operating Partnership is engaged in the ownership, management, operation,
leasing and development of commercial real estate properties, principally office
and industrial buildings and also owns certain undeveloped land (collectively,
the "Properties") located in the New York tri-state area (the "Tri-State Area").
During June 1995, the Company contributed approximately $162 million in cash to
the Operating Partnership in exchange for an approximate 73% general partnership
interest. All Properties acquired by the Company are held by or through the
Operating Partnership. In addition, in connection with the formation of the
Operating Partnership, the Operating Partnership executed various option and
purchase agreements whereby it issued common units of limited partnership
interest in the Operating Partnership ("Units") to the continuing investors and
assumed certain indebtedness in exchange for interests in certain property
partnerships, fee simple and leasehold interests in properties and development
land, certain other business assets and 100% of the non-voting preferred stock
of the management and construction companies. At March 31, 2003, the Company's
ownership percentage in the Operating Partnership was approximately 89.5%.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Operating Partnership and its subsidiaries at March
31, 2003 and December 31, 2002 and the results of their operations and their
cash flows for the three months ended March 31, 2003 and 2002, respectively. The
Operating Partnership's investments in majority owned and controlled real estate
joint ventures are reflected in the accompanying financial statements on a
consolidated basis with a reduction for 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 also reflected in the
accompanying financial statements on the equity method of accounting. For the
periods presented prior to October 1, 2002, the operating results of Reckson
Management Group, Inc., RANY Management Group, Inc., Reckson Construction Group
New York, Inc. and Reckson Construction Group, Inc. (the "Service Companies"),
in which the Operating Partnership owned a 97% non-controlling interest, were
reflected in the accompanying financial statements on the equity method of
accounting. On October 1, 2002, the Operating Partnership acquired the remaining
3% interests in the Service Companies for an aggregate purchase price of
approximately $122,000. As a result, the Operating Partnership commenced
consolidating the operations of the Service Companies (see Note 10). All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.
Reckson Construction Group, Inc. and Reckson Construction Group New York, Inc.
use the percentage-of-completion method for recording amounts earned on its
contracts. This method records amounts earned as revenue in the proportion that
actual costs incurred to date bear to the estimate of total costs at contract
completion.
The minority partners' interests in consolidated partnerships at March 31, 2003
represent a 49% non-affiliated interest in RT Tri-State LLC, owner of a nine
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 were reliably estimated (see Note 6).
5
The accompanying interim unaudited financial statements have been prepared by
the Operating Partnership's management pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") may
have been condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate to make the information
presented not misleading. The unaudited financial statements as of March 31,
2003 and for the three month periods ended March 31, 2003 and 2002 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,
2003. These financial statements should be read in conjunction with the
Operating Partnership's audited financial statements and notes thereto included
in the Operating Partnership's Form 10-K for the year ended December 31, 2002.
Recent Accounting Pronouncements
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. Statement No. 144 only impacts the
presentation of the results of operations and gain on sales of depreciable real
estate assets for those properties sold during the period within the
consolidated statements of income.
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 ("VIE") and how to assess whether to consolidate such
entities. The provisions of this interpretation are immediately effective for
VIE's formed after January 31, 2003. For VIE's formed prior to January 31, 2003,
the provisions of this interpretation apply to the first fiscal year or interim
period beginning after June 15, 2003. Management has not yet determined whether
any of its consolidated or unconsolidated subsidiaries represent VIE's pursuant
to such interpretation. Such determination could result in a change in the
Operating Partnership's consolidation policy related to such entities.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
The net income allocable to common unit holders for the three month period ended
March 31, 2002 has been adjusted to record the amortization of stock loans to
certain executive and senior officers of the Company and other costs incurred by
the Company on behalf of the Operating Partnership which aggregated, in total,
approximately $950,000. Such amount also adjusted net income per weighted
average common unit by $(.01) and $(.02) with respect to the Class A common and
Class B common units, respectively.
6
3. MORTGAGE NOTES PAYABLE
As of March 31, 2003, the Operating Partnership had approximately $737.1 million
of fixed rate mortgage notes which mature at various times between 2004 and
2027. The notes are secured by 21 properties with an aggregate carrying value of
approximately $1.5 billion, which are pledged as collateral against the mortgage
notes payable. In addition, approximately $44.8 million of the $737.1 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, 2003, by scheduled maturity date (dollars in thousands):
Principal Interest Maturity Amortization
Property Outstanding Rate Date Term (Years)
- ----------------------------------------------- -------------- ----------- --------------- --------------
80 Orville Dr, Islip, NY 2,616 10.10% February, 2004 Interest only
395 North Service Road, Melville, NY 19,607 6.45% October, 2005 $34 per month
200 Summit Lake Drive, Valhalla, NY 19,268 9.25% January, 2006 25
1350 Avenue of the Americas, NY, NY 74,421 6.52% June, 2006 30
Landmark Square, Stamford, CT (a) 44,832 8.02% October, 2006 25
100 Summit Lake Drive, Valhalla, NY 18,766 8.50% April, 2007 15
333 Earle Ovington Blvd, Mitchel Field, NY (b) 53,622 7.72% August, 2007 25
810 Seventh Avenue, NY, NY 82,480 7.73% August, 2009 25
100 Wall Street, NY, NY 35,742 7.73% August, 2009 25
6900 Jericho Turnpike, Syosset, NY 7,319 8.07% July, 2010 25
6800 Jericho Turnpike, Syosset, NY 13,867 8.07% July, 2010 25
580 White Plains Road, Tarrytown, NY 12,635 7.86% September, 2010 25
919 Third Ave, NY, NY (c) 246,144 6.867% August, 2011 30
110 Bi-County Blvd., Farmingdale, NY 3,579 9.125% November, 2012 20
One Orlando Center, Orlando, FL (d) 38,218 6.82% November, 2027 28
120 West 45th Street, NY, NY (d) 64,015 6.82% November, 2027 28
-------------
Total/Weighted Average $ 737,131 7.26%
=============
- ------------------------
(a) Encompasses six Class A office properties
(b) The Operating Partnership has a 60% general partnership interest in
this property and its proportionate share of the aggregate principal
amount is approximately $32.2 million
(c) The Operating Partnership has a 51% membership interest in this property
and its proportionate share of the aggregate principal amount is
approximately $125.5 million
(d) Subject to interest rate adjustment on November 1, 2004 to the greater
of 8.82% per annum or the yield on non-callable U.S. Treasury
obligations with a term of fifteen years plus 2% per annum.
In addition, the Operating Partnership has a 60% interest in an unconsolidated
joint venture property. The Operating Partnership's pro rata share of the
mortgage debt at March 31, 2003 is approximately $7.5 million. This mortgage
note payable bears interest at 8.85% per annum and matures on September 1, 2005.
4. SENIOR UNSECURED NOTES
As of March 31, 2003, the Operating Partnership had outstanding approximately
$499.3 million (net of issuance discounts) of senior unsecured notes (the
"Senior Unsecured Notes"). The following table sets forth the Operating
Partnership's Senior Unsecured Notes and other related disclosures by scheduled
maturity date (dollars in thousands):
FACE
ISSUANCE AMOUNT COUPON RATE TERM MATURITY
- ----------------------------- --------------------- ------------------- ----------------- -------------------
March 26, 1999 $100,000 7.40% 5 years March 15, 2004
June 17, 2002 $ 50,000 6.00% 5 years June 15, 2007
August 27, 1997 $150,000 7.20% 10 years August 28, 2007
March 26, 1999 $200,000 7.75% 10 years March 15, 2009
Interest on the Senior Unsecured Notes is payable semi-annually with principal
and unpaid interest due on the scheduled maturity dates. In addition, the Senior
Unsecured Notes issued on March 26, 1999 and June 17, 2002 were issued at
aggregate discounts of $738,000 and $267,500, respectively. Such discounts are
being amortized over the term of the Senior Unsecured Notes to which they
relate.
7
5. UNSECURED CREDIT FACILITY
The Operating Partnership currently has a three year $500 million unsecured
revolving credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association, as syndication
agent, and Citicorp North America, Inc. and Wachovia Bank, National Association,
as co-documentation agents. The Credit Facility matures in December 2005,
contains options for a one year extension subject to a fee of 25 basis points
and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. In addition, borrowings under the
Credit Facility are currently priced off LIBOR plus 90 basis points and the
Credit Facility carries a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's unsecured credit rating the
interest rates and facility fee are subject to change. The outstanding
borrowings under the Credit Facility were $302.0 million at March 31, 2003.
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, 2003, the Operating Partnership had availability
under the Credit Facility to borrow approximately an additional $198.0 million,
subject to compliance with certain financial covenants.
6. COMMERCIAL REAL ESTATE INVESTMENTS
As of March 31, 2003, the Operating Partnership owned and operated 75 office
properties (inclusive of eleven office properties owned through joint ventures)
comprising approximately 13.6 million square feet, 101 industrial properties
comprising approximately 6.7 million square feet and two retail properties
comprising approximately 20,000 square feet located in the Tri-State Area.
The Operating Partnership also owns approximately 313 acres of land in 12
separate parcels of which the Operating Partnership can develop approximately
3.1 million square feet of office space and approximately 400,000 square feet of
industrial / R&D 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, 2003,
the Operating Partnership had invested approximately $115.4 million in these
development projects. Management has made subjective assessments as to the value
and recoverability of these investments based on current and proposed
development plans market comparable land values and alternative use values. The
Operating Partnership has capitalized approximately $2.3 million and $3.3
million for the three months ended March 31, 2003 and 2002, respectively,
related to real estate taxes, interest and other carrying costs related to these
development projects.
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 has commenced. Net proceeds from the land sale of approximately
$18.3 million were used to establish an escrow account with a qualified
intermediary for a future exchange of real property pursuant to Section 1031 of
the Code and is included in prepaid expenses and other assets on the
accompanying balance sheet. The Code allows for the deferral of taxes related to
the gain attributable to the sale of property if such qualified identified
replacement property is identified within 45 days and acquired within 180 days
from the initial sale. The Operating Partnership has identified certain
properties and interests in properties for purposes of this exchange. In
accordance with Statement No. 66, the Operating Partnership has estimated its
pre-tax gain on this land sale and build-to-suit transaction to be approximately
$16.6 million of which $5.8 million has been recognized in the current period
and is included in investment and other income on the accompanying statement of
income. Approximately $10.8 million has been deferred to future periods which
will be recognized as the development progresses.
The Operating Partnership holds a $17.0 million interest in a note receivable
which bears interest at 12% per annum and is secured by a minority partnership
interest in Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class
A office property located in Uniondale, NY (the "Omni Note"). The Operating
Partnership currently owns a 60% majority interest in Omni Partnership, L.P. and
on March 14, 2007 may exercise an option to acquire the remaining 40% interest
for a price based on 90% of the fair market value of the property. The Operating
Partnership also holds three other notes receivable aggregating $36.5 million
which bear interest at rates ranging from 10.5% to 12% per annum and are secured
in part by a minority partner's preferred unit interest in the Operating
Partnership, certain real property and a personal guarantee (the "Other Notes"
and collectively with the Omni Note, the "Note Receivable Investments"). As of
March 31, 2003, management has made subjective assessments as to the underlying
security value on the Operating Partnership's Note Receivable Investments. These
assessments indicated an excess of market value over carrying value related to
the Operating Partnership's Note Receivable Investments. 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
$102 million mortgage note along with one of the Operating Partnership's New
York City buildings.
8
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV"), which it manages. The remaining 40% interest is owned by
JAH Realties, L.P. Jon Halpern, the CEO and a director of HQ Global Workplaces,
is a partner in JAH Realties, L.P. As of March 31, 2003, the 520JV had total
assets of $20.7 million, a mortgage note payable of $12.4 million and other
liabilities of $217,000. The Operating Partnership's allocable share of the
520JV mortgage note payable is approximately $7.5 million. This mortgage note
payable bears interest at 8.85% per annum and matures on September 1, 2005. In
addition, the 520JV had total revenues of $979,000 and total expenses of
$844,000 for the three months ended March 31, 2003. 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. The 520JV contributed
approximately $106,000 to the Operating Partnership's equity in earnings of real
estate joint ventures for the three months ended March 31, 2003. For the three
months ended March 31, 2002, the Operating Partnership recorded its allocable
share of a loss from the 520JV of approximately $72,000.
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. 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 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
On March 31, 2003, the Operating Partnership had issued and outstanding
9,915,313 Class B common units, all of which are held by the Company. The
distribution on the Class B units is subject to adjustment annually based on a
formula which measures increases or decreases in the Company's Funds From
Operations, as defined, over a base year.
The Class B common units are exchangeable at any time, at the option of the
holder, into an equal number of Class A common units subject to customary
antidilution adjustments. The Operating Partnership, at its option, may redeem
any or all of the Class B common units in exchange for an equal number of Class
A common units at any time following November 23, 2003 at which time the
Operating Partnership anticipates that it will exercise its option to redeem all
of its Class B common units outstanding.
During March 2003, the Operating Partnership declared the following
distributions:
RECORD PAYMENT THREE MONTHS ANNUALIZED
SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION
-------- ------------ ------ ------- ------------ ------------
Class A common unit $.4246 April 4, 2003 April 17, 2003 March 31, 2003 $1.6984
Class B common unit $.6471 April 14, 2003 April 30, 2003 April 30, 2003 $2.5884
Series A preferred unit $.476563 April 14, 2003 April 30, 2003 April 30, 2003 $1.9063
Series E preferred unit $.553125 April 14, 2003 April 30, 2003 April 30, 2003 $2.2125
The Board of Directors of the Company has authorized the purchase of up to five
million shares of the Company's Class A common stock and / or its Class B common
stock. Transactions conducted on the New York Stock Exchange will be effected in
accordance with the safe harbor provisions of the Securities Exchange Act of
1934 and may be terminated by the Company at any time. During the three months
ended March 31, 2003, under this buy-back program, the Operating Partnership
purchased 252,000 Class A common units at an average price of $18.01 per Class A
unit for an aggregate purchase price of approximately $4.5 million.
9
The following table sets forth the activity under the current buy-back program
(dollars in thousands except per unit data):
UNITS AVERAGE AGGREGATE
PURCHASED PRICE PER UNIT PURCHASE PRICE
-------------------- ---------------------- --------------------
Current program:
Class A common 2,950,400 $ 21.30 $ 62,830
Class B Common 368,200 $ 22.90 8,432
-------------------- --------------------
3,318,600 $ 71,262
==================== ====================
The Board of Directors of the Company has formed a pricing committee to consider
purchases of up to $75 million of the Company's outstanding preferred
securities.
On March 31, 2003, the Company had 8,834,500 shares of its Class A preferred
stock issued and outstanding. During the fourth quarter of 2002, the Company
purchased and retired 357,500 shares of its Class A preferred stock at $22.29
per share for approximately $8.0 million. As a result, the Operating Partnership
purchased and retired an equal number of preferred units of general partnership
interest from the Company and reduced annual preferred distributions by
approximately $682,000.
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 Company had historically structured long term incentive programs ("LTIP")
using restricted stock and stock loans. In July 2002, as a result of certain
provisions of the Sarbanes Oxley legislation, the Company discontinued the use
of stock loans in its LTIP. In connection with LTIP grants made prior to the
enactment of the Sarbanes Oxley legislation the Company made stock loans to
certain executive and senior officers to purchase 1,372,393 shares of its Class
A common stock at market prices ranging from $18.44 per share to $27.13 per
share. The stock loans were set to bear interest at the mid-term Applicable
Federal Rate and were secured by the shares purchased. Such stock loans
(including accrued interest) vest and are 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. Approximately $1.1 million
of compensation expense was recorded for the three month periods ended March 31,
2003 and 2002 related to these LTIP. Such amount has been included in marketing,
general and administrative expenses on the accompanying consolidated statements
of income.
The outstanding stock loan balances due from the Company's executive and senior
officers aggregated approximately $14.5 million and $17.0 million at March 31,
2003 and December 31, 2002, respectively, and have been included as a reduction
of additional paid in capital on the accompanying consolidated balance sheets.
Other outstanding loans to the Company's executive and senior officers amounting
to approximately $1.0 million at March 31, 2003 and December 31, 2002, related
to life insurance contracts and approximately $2.1 million and $1.0 million at
March 31, 2003 and December 31, 2002, respectively, primarily related to tax
payment advances on a stock compensation awards made to certain of the Company's
non-executive officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively and collectively, the "Rights"). Each Right represents the right to
receive, upon vesting, one share of Class A common stock if shares are then
available for grant under one of the Company's stock option plans or, if shares
are not so available, an amount of cash equivalent to the value of such stock on
the vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 190,524 shares of the Company's Class A common stock and the
2003 Rights aggregate 60,760 shares of Class A common stock. In addition, during
the three months ended March 31, 2003, the Operating Partnership recorded
approximately $216,000 of compensation expense related to the Rights. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statement of income.
10
In March 2003, the Company established a new LTIP for its executive and senior
officers. The four-year plan has a core award which provides for annual stock
based compensation based upon continued service and in part based on attaining
certain annual performance measures. The plan also has a special outperformance
award which provides for compensation to be earned at the end of a four year
period if the Company attains certain four year cumulative performance measures.
Amounts earned under the special outperformance award may be paid in cash or
stock at the discretion of the Compensation Committee of the Board. Performance
measures are based on total shareholder returns on a relative and absolute
basis. On March 13, 2003, the Company made available 1,384,102 shares of its
Class A common stock under its existing stock option plans in connection with
the core award of this LTIP for twelve of its executive and senior officers. In
addition, with respect to the core award of this LTIP, the Operating Partnership
recorded approximately $268,000 of compensation expense for the period March 13,
2003 through March 31, 2003. Such amount is included in marketing, general and
administrative expenses on the accompanying consolidated statement of income.
Further, no provision will be made for the special outperformance award of this
LTIP until such time as achieving the requisite performance measures is
determined to be probable.
The 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.
As of March 31, 2003, the Company had approximately 6.6 million shares of its
Class A common stock reserved for issuance under its stock option plans, in
certain cases subject to vesting terms, at a weighted average exercise price of
$22.27 per option. In addition, the Company has approximately 295,000 shares of
its Class A common stock reserved for future issuance under its stock option
plans.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (in thousands)
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------- -------
Cash paid during the period for interest ............. $30,076 $31,219
======= =======
Interest capitalized during the period ............... $ 1,854 $ 2,607
======= =======
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 / R&D 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 Operating Partnership has
managing directors who report directly to the Co-Presidents and Chief Financial
Officer of the Company who have been identified as the Chief Operating Decision
Makers due to their final authority over resource allocation decisions and
performance assessment.
The Operating Partnership does not consider (i) interest incurred on its Credit
Facility and Senior Unsecured Notes, (ii) the operating performance of the
office property located in Orlando, Florida (iii) the operating performance of
those properties reflected as discontinued operations on the Operating
Partnership's consolidated statements of operations 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.
11
The following table sets forth the components of the Operating Partnership's
revenues and expenses and other related disclosures for the three months ended
March 31, 2003 and 2002 (in thousands):
Three months ended
-------------------------------------------------------------------------------------------
March 31, 2003 March 31, 2002
----------------------------------------------- ----------------------------------------
CONSOLIDATED Core CONSOLIDATED
Core Portfolio Other TOTALS Portfolio Other TOTALS
---------------- ---------- ------------- ---------- ---------- ------------
REVENUES:
Base rents, tenant
escalations and
reimbursements ........ $ 121,640 $ 1,801 $ 123,441 $ 119,397 $ 2,307 $ 121,704
Other income (loss) ..... 761 6,558 7,319 415 1,675 2,090
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues ........ 122,401 8,359 130,760 119,812 3,982 123,794
---------- ---------- ---------- ---------- ---------- ----------
EXPENSES:
Property operating
expenses ............. 46,990 844 47,834 41,103 792 41,895
Marketing, general
and administrative .... 4,666 3,593 8,259 4,560 2,535 7,095
Interest ................ 12,760 10,090 22,850 12,964 8,032 20,996
Depreciation and
amortization .......... 30,384 1,600 31,984 24,391 1,539 25,930
---------- ---------- ---------- ---------- ---------- ----------
Total Expenses ........ 94,800 16,127 110,927 83,018 12,898 95,916
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
minority interests,
distributions to
preferred unitholders,
equity in earnings of
real estate joint
ventures and service
companies, gain on
sales of depreciable
real estate assets and
discontinued operations $ 27,601 $ (7,768) $ 19,833 $ 36,794 (8,916) $ 27,878
========== ========== ========== ========== ========== ==========
Total Assets ............ $2,665,982 $ 242,482 $2,908,464 $2,660,419 $ 260,572 $2,920,991
========== ========== ========== ========== ========== ==========
10. RELATED PARTY TRANSACTIONS
In connection with the IPO, the Operating Partnership was granted ten year
options to acquire ten properties (the "Option Properties") which are either
owned by certain Rechler family members who are also executive officers of the
Company, or in which the Rechler family members own a non-controlling minority
interest at a price based upon an agreed upon formula. In years prior to 2001,
one Option Property was sold by the Rechler family members to a third party and
four of the Option Properties were acquired by the Operating Partnership for an
aggregate purchase price of approximately $35 million, which included the
issuance of approximately 475,000 Units valued at approximately $8.8 million.
Currently, certain Rechler family members retain their equity interests in the
five remaining Option Properties (the "Remaining Option Properties") which were
not contributed to the Company as part of the IPO. Such options provide the
Operating Partnership the right to acquire fee interest in two of the Remaining
Option Properties and the Rechler's minority interests in three Remaining Option
Properties. During May 2003, the Independent Directors approved the exercise by
the Company of its option to acquire the Rechler's fee interest in two of the
Remaining Option Properties (225 Broad Hollow Road and 593 Acorn Street) and to
provide customary tax protection from the sale or disposition of these
properties by the Company for a five-year period. In addition, the Rechler
family members agreed to extend the term of the three remaining unexercised
options for an additional two years. Both of these properties are located on
Long Island and aggregate approximately 228,000 square feet. Aggregate
consideration to acquire the two Remaining Option Properties is approximately
$22.1 million which includes the assumption of approximately $19.0 million of
mortgage notes payable and the issuance of approximately 145,000 Units. The
Operating Partnership anticipates that it will acquire these two Remaining
Option Properties in July 2003 and prepay or retire approximately $6.1 million
of the assumed debt.
12
As part of the Company's REIT structure it is provided management, leasing and
construction related services through taxable REIT subsidiaries as defined by
the Internal Revenue Code of 1986 as amended (the "Code"). These services are
currently provided by the Service Companies in which, as of September 30, 2002,
the Operating Partnership owned a 97% non-controlling interest. An entity which
is substantially owned by certain Rechler family members who are also executive
officers of the Company owned a 3% controlling interest in the Service
Companies. In order to minimize the potential for corporate conflicts of
interests, which became possible as a result of changes to the Code that permit
REITs to own 100% of taxable REIT subsidiaries the Independent Directors of the
Company approved the purchase by the Operating Partnership of the remaining 3%
interest in the Service Companies. On October 1, 2002, the Operating Partnership
acquired such 3% interests in the Service Companies for an aggregate purchase
price of approximately $122,000. Such amount was less than the total amount of
capital contributed by the Rechler family members. As a result of the
acquisition of the remaining interests in the Service Companies, the Operating
Partnership commenced consolidating the operations of the Service Companies.
During the nine months ended March 31, 2003, Reckson Construction Group, Inc.
billed approximately $125,100 of market rate services and Reckson Management
Group, Inc. billed approximately $71,000 of market rate management fees to the
Remaining Option Properties. In addition, for the three months ended March 31,
2003, Reckson Construction Group, Inc. performed market rate services,
aggregating approximately $20,000, for a property in which certain executive
officers of the Company maintain an equity interest.
Reckson Management Group, Inc. leases 43,713 square feet of office and storage
space at a Remaining Option Property located at 225 Broad Hollow Road, Melville,
New York for its corporate offices at an annual base rent of approximately $1.2
million. Reckson Management Group, Inc. also leases 10,722 square feet of
warehouse space used for equipment, materials and inventory storage at a
Remaining Option Property located at 593 Acorn Street, Deer Park, New York at an
annual base rent of approximately $72,000.
A company affiliated with an Independent Director of the Company leases 15,566
square feet in a property owned by the Company at an annual base rent of
approximately $431,500. Reckson Strategic Venture Partners, LLC ("RSVP") leases
5,144 square feet in one of the Operating Partnership's joint venture properties
at an annual base rent of approximately $176,000.
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine") and RSVP. RSVP is a real estate venture
capital fund which invests primarily in real estate and real estate operating
companies outside the 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, 2003 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, 2003
interest accrued (net of reserves) under the FrontLine Facility and the RSVP
Facility was approximately $19.6 million. RSVP retained the services of two
managing directors to manage RSVP's day-to-day operations. Prior to the spin off
of FrontLine, the Company guaranteed certain salary provisions of their
employment agreements with RSVP Holdings, LLC, RSVP's common member. The term of
these employment agreements is seven years commencing March 5, 1998 provided
however, the term may be earlier terminated after five years upon certain
circumstances. The salary for each managing director is $1 million in the first
five years and $1.6 million in years six and seven.
At June 30, 2001, the Company assessed the recoverability of the FrontLine Loans
and reserved approximately $3.5 million of the interest accrued during the
three-month period then ended. In addition, the Company formed a committee of
its Board of Directors, comprised solely of independent directors, to consider
any actions to be taken by the Company in connection with the FrontLine Loans
and its investments in joint ventures with RSVP. During the third quarter of
2001, the Company noted a significant deterioration in FrontLine's operations
and financial condition and, based on its assessment of value and recoverability
and considering the findings and recommendations of the committee and its
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The 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.
13
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
As a result of the foregoing, the net carrying value of the 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, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
On or about April 29, 2003, RSVP entered into agreements regarding the
restructuring of its capital structure and arrangements with its management. In
connection with such restructuring, RSVP transferred $41 million in cash, and
the assets that comprised its parking investments valued at approximately $28.5
million to the preferred equity holders in RSVP. In addition, RSVP agreed to
redeem the preferred equity holders' interests for an additional $95.8 million
in cash, subject to a financing contingency. RSVP also agreed to restructure its
relationship with its current managing directors, conditioned upon the
redemption of the preferred equity interests, whereby a management company
formed by the managing directors will be retained to manage RSVP. RSVP will
enter into a management agreement that will provide for an annual base
management fee, and disposition fees equal to 2% of the net proceeds received by
RSVP on asset sales. (The base fee and disposition fees together being subject
to a maximum amount over the term of the agreement, of $7.5 million.) In
addition, the managing directors will retain a subordinate residual interest in
RSVP's assets. The management agreement will have a three-year term, subject to
early termination in the event of the disposition of all of the assets of RSVP.
As a result of this new arrangement, the employment contracts of the managing
directors will be terminated. There can be no assurance that any of the
foregoing pending transactions will be completed. In the event that the
redemption of the preferred does not close, all parties rights shall remain
unaffected, including the rights relating to a dispute between common and
preferred members over certain provisions of the RSVP operating agreement.
Both the FrontLine Facility and the RSVP Facility terminate on June 15, 2003,
are unsecured and advances thereunder are recourse obligations of FrontLine.
Notwithstanding the valuation reserve, under the terms of the credit facilities,
interest accrues on the FrontLine Loans at a rate equal to the greater of (a)
the prime rate plus two percent and (b) 12% per annum, with the rate on amounts
that are outstanding for more than one year increasing annually at a rate of
four percent of the prior year's rate. In March 2001, the credit facilities were
amended to provide that (i) interest is payable only at maturity and (ii) the
Company may transfer all or any portion of its rights or obligations under the
credit facilities to its affiliates. The Company requested these changes as a
result of changes in REIT tax laws. As a result of FrontLine's default under the
FrontLine Loans, interest on borrowings thereunder accrue at default rates
ranging between 13% and 14.5% per annum.
Scott H. Rechler, who serves as Co-Chief Executive Officer and a director of the
Company, serves as CEO and Chairman of the Board of Directors of FrontLine and
is its sole board member. Scott H. Rechler also serves as a member of the
management committee of RSVP.
11. COMMITMENTS AND CONTINGENCIES
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible
officing solutions in the world and which is controlled by FrontLine, currently
operates eight (formerly eleven) executive office centers in the Operating
Partnership's properties, two of which are held through joint ventures. The
leases under which these office centers operate expire between 2008 and 2011,
encompass approximately 171,000 square feet and have current contractual annual
base rents of approximately $4.2 million. On March 13, 2002, as a result of
experiencing financial difficulties, HQ voluntarily filed a petition for relief
under Chapter 11 of the U.S. Bankruptcy Code. As of June 30, 2002, HQ's leases
with the Operating Partnership were in default. Further, the Bankruptcy Court
has granted HQ's petition to reject three of its leases with the Operating
Partnership, one of which is held through the 919JV. The two rejected leases,
held through wholly owned entities, aggregated approximately 23,700 square feet
and were to provide for contractual base rents of approximately $600,000 for the
2003 calendar year. The third rejected lease held through the 919JV aggregated
approximately 31,000 square feet and provided for contractual base rents of
approximately $1.9 million for the 2003 calendar year. Pursuant to the
bankruptcy filing, HQ has been paying current rental charges under its leases
with the Operating Partnership, other than under the three rejected leases. The
Operating Partnership is in negotiation to restructure three of the leases and
leave the terms of the remaining five leases unchanged. All negotiations with HQ
are conducted by a committee designated by the Board and chaired by an
independent director. There can be no assurance as to whether any deal will be
consummated with HQ or if HQ will affirm or reject any or all of its remaining
leases with the Operating Partnership. As a result of the foregoing, the
Operating Partnership has currently established reserves of approximately
$360,000 (net of minority partners' interests and including the Operating
Partnership's share of unconsolidated joint venture interest), or 50%, of the
amounts due from HQ as of March 31, 2003. Scott H. Rechler serves as the
non-Executive Chairman of the Board and Jon Halpern is the Chief Executive
Officer and a director of HQ.
14
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company,
which leased approximately 527,000 square feet in thirteen of the Operating
Partnership's properties located throughout the Tri-State Area voluntarily filed
a petition for relief under Chapter 11 of the U.S. Bankruptcy Code on July 21,
2002. During February 2003, the Bankruptcy Court granted WorldCom's petition to
reject three of its leases with the Operating Partnership. The three rejected
leases aggregated approximately 192,000 square feet and provided for contractual
base rents of approximately $4.8 million for the 2003 calendar year. All of
WorldCom's leases are current on base rental charges through May 31, 2003, other
than under the three rejected leases and the Operating Partnership currently
holds approximately $300,000 in security deposits relating to the non-rejected
leases. The Operating Partnership is currently in negotiations to restructure
the remaining WorldCom leases. There can be no assurance as to whether any deal
will be consummated with WorldCom or if WorldCom will affirm or reject any or
all of its remaining leases with the Operating Partnership.
As of March 31, 2003, WorldCom occupied approximately 335,000 square feet of
office space with aggregate annual base rental revenues of approximately $6.7
million, or 1.8% of the Operating Partnership's total 2003 annualized rental
revenue, making it the Operating Partnership's third largest tenant based on
base rental revenue earned on a consolidated basis.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of Reckson Operating Partnership, L. P. (the "Operating
Partnership") and related notes.
The Operating Partnership considers certain statements set forth herein to be
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, with respect to the Operating Partnership's expectations for future
periods. Certain forward-looking statements, including, without limitation,
statements relating to the timing and success of acquisitions and the completion
of development or redevelopment of properties, the financing of the Operating
Partnership's operations, the ability to lease vacant space and the ability to
renew or relet space under expiring leases, involve risks and uncertainties.
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 and industrial / R&D properties in the New York
Tri-State area; changes in interest rate levels; downturns in rental rate levels
in our markets and our ability to lease or 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 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
Rental revenue is recognized on a straight line basis, which averages minimum
rents over the terms of the leases. The excess of rents recognized over amounts
contractually due are included in deferred rents receivable on the Operating
Partnership's balance sheets. The leases also typically provide for tenant
reimbursements of common area maintenance and other operating expenses and real
estate taxes. Ancillary and other property related income is recognized in the
period earned.
The Operating Partnership makes estimates of the collectibility of its tenant
receivables related to base rents, tenant escalations and reimbursements and
other revenue or income. The Operating Partnership specifically analyzes tenant
receivables and analyzes historical bad debts, customer credit worthiness,
current economic trends, changes in customer payment terms, publicly available
information and, to the extent available, guidance provided by the tenant when
evaluating the adequacy of its allowance for doubtful accounts. In addition,
when tenants are in bankruptcy the Operating Partnership makes estimates of the
expected recovery of pre-petition administrative and damage claims. In some
cases, the ultimate resolution of those claims can exceed a year. These
estimates have a direct impact on the Operating Partnership's net income,
because a higher bad debt reserve results in less net income.
During the three months ended March 31, 2003, the Operating Partnership incurred
approximately $2.0 million of bad debt expense related to tenant receivables and
deferred rents receivable which accordingly reduced total revenues and reported
net income during the period.
16
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. and Reckson Construction Group New York, Inc.
use the percentage-of-completion method for recording amounts earned on its
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 were 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.
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".
17
OVERVIEW AND BACKGROUND
The Operating Partnership, which commenced operations on June 2, 1995, is
engaged in the acquisition, financing, ownership, management, operation, leasing
and development of commercial real estate properties, principally office and
industrial / R&D properties, and also owns certain undeveloped land located in
the New York tri-state area (the "Tri-State Area"). Reckson Associates Realty
Corp. (the "Company"), is a self-administered and self-managed real estate
investment trust ("REIT"), and serves as the sole general partner in the
Operating Partnership.
As of March 31, 2003, the Operating Partnership owned and operated 75 office
properties (inclusive of eleven office properties owned through joint ventures)
comprising approximately 13.6 million square feet, 101 industrial properties
comprising approximately 6.7 million square feet and two retail properties
comprising approximately 20,000 square feet located in the Tri-State Area.
The Operating Partnership also owns approximately 313 acres of land in 12
separate parcels of which the Operating Partnership can develop approximately
3.1 million square feet of office space and approximately 400,000 square feet of
industrial / R&D 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, 2003,
the Operating Partnership had invested approximately $115.4 million in these
development projects. Management has made subjective assessments as to the value
and recoverability of these investments based on current and proposed
development plans market comparable land values and alternative use values. The
Operating Partnership has capitalized approximately $2.3 million and $3.3
million for the three months ended March 31, 2003 and 2002, respectively,
related to real estate taxes, interest and other carrying costs related to these
development projects.
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 has commenced. Net proceeds from the land sale of approximately
$18.3 million were used to establish an escrow account with a qualified
intermediary for a future exchange of real property pursuant to Section 1031 of
the Code and is included in prepaid expenses and other assets on the
accompanying balance sheet. The Code allows for the deferral of taxes related to
the gain attributable to the sale of property if such qualified identified
replacement property is identified within 45 days and acquired within 180 days
from the initial sale. The Operating Partnership has identified certain
properties and interests in properties for purposes of this exchange. In
accordance with Statement No. 66, the Operating Partnership has estimated its
pre-tax gain on this land sale and build-to-suit transaction to be approximately
$16.6 million of which $5.8 million has been recognized in the current period
and is included in investment and other income on the accompanying statement of
income. Approximately $10.8 million has been deferred to future periods which
will be recognized as the development progresses.
The Operating Partnership holds a $17.0 million interest in a note receivable
which bears interest at 12% per annum and is secured by a minority partnership
interest in Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class
A office property located in Uniondale, NY (the "Omni Note"). The Operating
Partnership currently owns a 60% majority interest in Omni Partnership, L.P. and
on March 14, 2007 may exercise an option to acquire the remaining 40% interest
for a price based on 90% of the fair market value of the property. The Operating
Partnership also holds three other notes receivable aggregating $36.5 million
which bear interest at rates ranging from 10.5% to 12% per annum and are secured
in part by a minority partner's preferred unit interest in the Operating
Partnership, certain real property and a personal guarantee (the "Other Notes"
and collectively with the Omni Note, the "Note Receivable Investments"). As of
March 31, 2003, management has made subjective assessments as to the underlying
security value on the Operating Partnership's Note Receivable Investments. These
assessments indicated an excess of market value over carrying value related to
the Operating Partnership's Note Receivable Investments. 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
$102 million mortgage note along with one of the Operating Partnership's New
York City buildings.
18
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV"), which it manages. The remaining 40% interest is owned by
JAH Realties, L.P. Jon Halpern, the CEO and a director of HQ Global Workplaces,
is a partner in JAH Realties, L.P. As of March 31, 2003, the 520JV had total
assets of $20.7 million, a mortgage note payable of $12.4 million and other
liabilities of $217,000. The Operating Partnership's allocable share of the
520JV mortgage note payable is approximately $7.5 million. This mortgage note
payable bears interest at 8.85% per annum and matures on September 1, 2005. In
addition, the 520JV had total revenues of $979,000 and total expenses of
$844,000 for the three months ended March 31, 2003. 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. The 520JV contributed
approximately $106,000 to the Operating Partnership's equity in earnings of real
estate joint ventures for the three months ended March 31, 2003. For the three
months ended March 31, 2002, the Operating Partnership recorded its allocable
share of a loss from the 520JV of approximately $72,000.
In connection with the IPO, the Operating Partnership was granted ten year
options to acquire ten properties (the "Option Properties") which are either
owned by certain Rechler family members who are also executive officers of the
Company, or in which the Rechler family members own a non-controlling minority
interest at a price based upon an agreed upon formula. In years prior to 2001,
one Option Property was sold by the Rechler family members to a third party and
four of the Option Properties were acquired by the Operating Partnership for an
aggregate purchase price of approximately $35 million, which included the
issuance of approximately 475,000 Units valued at approximately $8.8 million.
Currently, certain Rechler family members retain their equity interests in the
five remaining Option Properties (the "Remaining Option Properties") which were
not contributed to the Company as part of the IPO. Such options provide the
Operating Partnership the right to acquire fee interest in two of the Remaining
Option Properties and the Rechler's minority interests in three Remaining Option
Properties. During May 2003, the Independent Directors approved the exercise by
the Company of its option to acquire the Rechler's fee interest in two of the
Remaining Option Properties (225 Broad Hollow Road and 593 Acorn Street) and to
provide customary tax protection from the sale or disposition of these
properties by the Company for a five-year period. In addition, the Rechler
family members agreed to extend the term of the three remaining unexercised
options for an additional two years. Both of these properties are located on
Long Island and aggregate approximately 228,000 square feet. Aggregate
consideration to acquire the two Remaining Option Properties is approximately
$22.1 million which includes the assumption of approximately $19.0 million of
mortgage notes payable and the issuance of approximately 145,000 Units. The
Operating Partnership anticipates that it will acquire these two Remaining
Option Properties in July 2003 and prepay or retire approximately $6.1 million
of the assumed debt.
As part of the Company's REIT structure it is provided management, leasing and
construction related services through taxable REIT subsidiaries as defined by
the Internal Revenue Code of 1986 as amended (the "Code"). These services are
currently provided by the Service Companies in which, as of September 30, 2002,
the Operating Partnership owned a 97% non-controlling interest. An entity which
is substantially owned by certain Rechler family members who are also executive
officers of the Company owned a 3% controlling interest in the Service
Companies. In order to minimize the potential for corporate conflicts of
interests, which became possible as a result of changes to the Code that permit
REITs to own 100% of taxable REIT subsidiaries the Independent Directors of the
Company approved the purchase by the Operating Partnership of the remaining 3%
interest in the Service Companies. On October 1, 2002, the Operating Partnership
acquired such 3% interests in the Service Companies for an aggregate purchase
price of approximately $122,000. Such amount was less than the total amount of
capital contributed by the Rechler family members. As a result of the
acquisition of the remaining interests in the Service Companies, the Operating
Partnership commenced consolidating the operations of the Service Companies.
During the nine months ended March 31, 2003, Reckson Construction Group, Inc.
billed approximately $125,100 of market rate services and Reckson Management
Group, Inc. billed approximately $71,000 of market rate management fees to the
Remaining Option Properties. In addition, for the three months ended March 31,
2003, Reckson Construction Group, Inc. performed market rate services,
aggregating approximately $20,000, for a property in which certain executive
officers of the Company maintain an equity interest.
Reckson Management Group, Inc. leases 43,713 square feet of office and storage
space at a Remaining Option Property located at 225 Broad Hollow Road, Melville,
New York for its corporate offices at an annual base rent of approximately $1.2
million. Reckson Management Group, Inc. also leases 10,722 square feet of
warehouse space used for equipment, materials and inventory storage at a
Remaining Option Property located at 593 Acorn Street, Deer Park, New York at an
annual base rent of approximately $72,000.
A company affiliated with an Independent Director of the Company leases 15,566
square feet in a property owned by the Company at an annual base rent of
approximately $431,500. Reckson Strategic Venture Partners, LLC ("RSVP") leases
5,144 square feet in one of the Operating Partnership's joint venture properties
at an annual base rent of approximately $176,000.
During July 1998, the Operating Partnership formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. Currently the Operating Partnership owns, through Metropolitan, five
Class A office properties aggregating approximately 3.5 million square feet.
19
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. 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 (the
"919JV") with the New York State Teachers' Retirement System ("NYSTRS") whereby
NYSTRS acquired a 49% indirect interest in the property located at 919 Third
Avenue, New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Operating Partnership. 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, 2003
was approximately $2.9 billion. The Operating Partnership's total market
capitalization is calculated based on the sum of (i) the value of the Operating
Partnership's Class A common units and Class B common units (which, for this
purpose, is assumed to be the same per unit as the market value of a share of
the Company's Class A common stock and Class B common stock), (ii) the
liquidation preference values of the Operating Partnership's preferred units and
(iii) the approximately $1.4 billion (including its share of joint venture debt
and net of minority partners' interests share of joint venture debt) of debt
outstanding at March 31, 2003. As a result, the Operating Partnership's total
debt to total market capitalization ratio at March 31, 2003 equaled
approximately 48.0%.
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine") and RSVP. RSVP is a real estate venture
capital fund which invests primarily in real estate and real estate operating
companies outside the 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, 2003 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, 2003
interest accrued (net of reserves) under the FrontLine Facility and the RSVP
Facility was approximately $19.6 million. RSVP retained the services of two
managing directors to manage RSVP's day-to-day operations. Prior to the spin off
of FrontLine, the Company guaranteed certain salary provisions of their
employment agreements with RSVP Holdings, LLC, RSVP's common member. The term of
these employment agreements is seven years commencing March 5, 1998 provided
however, the term may be earlier terminated after five years upon certain
circumstances. The salary for each managing director is $1 million in the first
five years and $1.6 million in years six and seven.
At June 30, 2001, the Company assessed the recoverability of the FrontLine Loans
and reserved approximately $3.5 million of the interest accrued during the
three-month period then ended. In addition, the Company formed a committee of
its Board of Directors, comprised solely of independent directors, to consider
any actions to be taken by the Company in connection with the FrontLine Loans
and its investments in joint ventures with RSVP. During the third quarter of
2001, the Company noted a significant deterioration in FrontLine's operations
and financial condition and, based on its assessment of value and recoverability
and considering the findings and recommendations of the committee and its
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The 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.
20
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
As a result of the foregoing, the net carrying value of the 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, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
On or about April 29, 2003, RSVP entered into agreements regarding the
restructuring of its capital structure and arrangements with its management. In
connection with such restructuring, RSVP transferred $41 million in cash, and
the assets that comprised its parking investments valued at approximately $28.5
million to the preferred equity holders in RSVP. In addition, RSVP agreed to
redeem the preferred equity holders' interests for an additional $95.8 million
in cash, subject to a financing contingency. RSVP also agreed to restructure its
relationship with its current managing directors, conditioned upon the
redemption of the preferred equity interests, whereby a management company
formed by the managing directors will be retained to manage RSVP. RSVP will
enter into a management agreement that will provide for an annual base
management fee, and disposition fees equal to 2% of the net proceeds received by
RSVP on asset sales. (The base fee and disposition fees together being subject
to a maximum amount over the term of the agreement, of $7.5 million.) In
addition, the managing directors will retain a subordinate residual interest in
RSVP's assets. The management agreement will have a three-year term, subject to
early termination in the event of the disposition of all of the assets of RSVP.
As a result of this new arrangement, the employment contracts of the managing
directors will be terminated. There can be no assurance that any of the
foregoing pending transactions will be completed. In the event that the
redemption of the preferred does not close, all parties rights shall remain
unaffected, including the rights relating to a dispute between common and
preferred members over certain provisions of the RSVP operating agreement.
Both the FrontLine Facility and the RSVP Facility terminate on June 15, 2003,
are unsecured and advances thereunder are recourse obligations of FrontLine.
Notwithstanding the valuation reserve, under the terms of the credit facilities,
interest accrues on the FrontLine Loans at a rate equal to the greater of (a)
the prime rate plus two percent and (b) 12% per annum, with the rate on amounts
that are outstanding for more than one year increasing annually at a rate of
four percent of the prior year's rate. In March 2001, the credit facilities were
amended to provide that (i) interest is payable only at maturity and (ii) the
Company may transfer all or any portion of its rights or obligations under the
credit facilities to its affiliates. The Company requested these changes as a
result of changes in REIT tax laws. As a result of FrontLine's default under the
FrontLine Loans, interest on borrowings thereunder accrue at default rates
ranging between 13% and 14.5% per annum.
Scott H. Rechler, who serves as Co-Chief Executive Officer and a director of the
Company, serves as CEO and Chairman of the Board of Directors of FrontLine and
is its sole board member. Scott H. Rechler also serves as a member of the
management committee of RSVP.
21
RESULTS OF OPERATIONS
Three months ended March 31, 2003 as compared to the three months ended March
31, 2002.
Property operating revenues which include base rents and tenant escalations and
reimbursements ("Property Operating Revenues") increased by approximately $1.7
million for the three months ended March 31, 2003 as compared to the 2002
period. The change in Property Operating Revenues is attributable to increases
in rental rates in our "same store" properties amounting to approximately
$700,000 and $2.2 million attributable to lease up of newly developed and
redeveloped properties. These increases were offset by approximately $1.2
million in bad debt expense related to tenant receivables and deferred rents
receivable.
Investment and other income increased by $5.3 million. This increase is
primarily attributable to the gain recognized on the First Data land sale and
build-to-suit transaction of approximately $5.8 million. This increase in
investment and other income was offset by a loss of approximately $817,000 from
the operations of Reckson Construction Group, Inc.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $5.9 million or 14.2% for the three months ended March
31, 2003 as compared to the 2002 period. This increase includes a $4.3 million
increase in property operating expenses and a $1.6 million increase in real
estate taxes and are primarily attributable to our "same-store" properties. The
increase in property operating expenses includes a $2.2 million increase in
utilities and snow removal costs which is attributable to the severe winter
weather conditions encountered in the Northeast. Also included in the $4.3
million of property operating expense increase is $1.3 million attributable to
increases in insurance costs. The insurance cost increase is primarily
attributable to the added cost of terrorism insurance for our properties and a
significant increase in our liability insurance costs. The increase in insurance
costs were caused by implications of the events which occurred on September 11,
2001. The increase in real estate taxes are attributable to the significant
increase levied by certain municipalities, particularly in New York City and
Nassau County, New York which are experiencing severe fiscal budget issues.
Gross Operating Margins (defined as Property Operating Revenues less Property
Expenses, taken as a percentage of Property Operating Revenues) for the three
months ended March 31, 2003 and 2002 were 61.2% and 65.6%, respectively. The
decrease in Gross Operating Margins is primarily attributable to decreases in
average occupancy of the portfolio and also as a result of increased Property
Expenses specifically relating to insurance costs, real estate taxes and
utilities and snow removal costs.
Marketing, general and administrative expenses increased by approximately $1.2
million or 16.4% for the three months ended March 31, 2003 as compared to the
2002 period. The increase is in part attributable to compensation costs
associated with the Company's long term incentive programs as well as an
increase in overall compensation costs which commenced in January 2003. In
addition, during the three months ended March 31, 2003, the Company incurred
additional legal and professional fees resulting from increased Board of
Directors activities to comply with the provisions of the Sarbanes Oxley
legislation. Marketing, general and administrative expenses, as a percentage of
total revenues were, 6.3% for the three months ended March 31, 2003 as compared
to 5.7% for the 2002 period. The Operating Partnership capitalized approximately
$1.1 million of marketing, general and administrative expenses for the three
months ended March 31, 2003 as compared to $1.3 million for the 2002 period.
These costs relate to leasing, construction and development activities, which
are performed by the Operating Partnership and its subsidiaries.
Interest expense increased by approximately $1.9 million for the three months
ended March 31, 2003 as compared to the 2002 period. The increase includes
$750,000 of interest on the Operating Partnership's $50 million, five-year
senior unsecured notes issued in June 2002. The increase is also affected by the
reduction in capitalized interest expense of $753,000 attributable to a decrease
in the level of development projects. In addition, the increase includes
approximately $533,000 which is attributable to an increase in the weighted
average balance outstanding on the Operating Partnership's unsecured credit
facility. The weighted average balance outstanding was $285.6 million for the
three months ended March 31, 2003 as compared to $205.5 million for the three
months ended March 31, 2002. These increases were offset by a decrease of
approximately $210,000 in mortgage note payable interest expense.
22
Liquidity and Capital Resources
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and non-incremental capital expenditures,
excluding incremental capital expenditures of the Operating Partnership. The
Operating Partnership expects to meet its short-term liquidity requirements
generally through its net cash provided by operating activities along with its
unsecured credit facility described below. The credit facility contains several
financial covenants with which the Operating Partnership must be in compliance
in order to borrow funds thereunder. During certain quarterly periods, the
Operating Partnership may incur significant leasing costs as a result of
increased market demands from tenants and high levels of leasing transactions
that result from the re-tenanting of scheduled expirations of early terminations
of leases. As a result, during these periods the Operating Partnership's cash
flow from operating activities may not be sufficient to pay 100% of the
quarterly distributions due on its common units. To meet the short-term funding
requirements relating to these leasing costs, the Operating Partnership may use
proceeds of property sales or borrowings under its credit facility. The
Operating Partnership expects to meet certain of its financing requirements
through long-term secured and unsecured borrowings and the issuance of debt and
equity securities of the Operating Partnership. 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. 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, as well as pursue its equity
repurchase program. 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, will be adequate to meet the capital and liquidity
requirements of the Operating Partnership in both the short and long-term.
As a result of current economic conditions, certain tenants have either not
renewed their leases upon expiration or have paid the Operating Partnership to
terminate their leases. In addition, a number of U.S. companies have filed for
protection under federal bankruptcy laws. Certain of these companies are tenants
of the Operating Partnership. The Operating Partnership is subject to the risk
that other companies that are tenants of the Operating Partnership may file for
bankruptcy protection. This may have an adverse impact on the financial results
and condition of the Operating Partnership. In addition, vacancy rates in our
markets have been trending higher and in some instances our asking rents in our
markets have been trending lower and landlords are being required to grant
greater concessions such as free rent and tenant improvements. Additionally, the
Operating Partnership carries comprehensive liability, fire, extended coverage
and rental loss insurance on all of its properties. Five of the Operating
Partnership's properties are located in New York City. As a result of the events
of September 11, 2001, insurance companies are limiting 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, except that the coverage
for acts of terrorism on its properties covers losses in an amount up to $300
million per occurrence. As a result, the Operating Partnership may suffer losses
from acts of terrorism that are not covered by insurance. In addition, the
mortgage loans which are secured by certain of the Operating Partnership's
properties contain customary covenants, including covenants that require the
Operating Partnership to maintain property insurance in an amount equal to
replacement cost of the properties. There can be no assurance that the lenders
under these mortgage loans will not take the position that exclusions from the
Operating Partnership's coverage for losses due to terrorist acts is a breach of
a covenant which, if uncured, could allow the lenders to declare an event of
default and accelerate repayment of the mortgage loans. Other outstanding debt
instruments contain standard cross default provisions that would be triggered in
the event of an acceleration of the mortgage loans. This matter could adversely
affect the Operating Partnership's financial results, its ability to finance and
/ or refinance its properties or to buy or sell properties.
The terrorist attacks of September 11, 2001, in New York City may adversely
effect 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 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 to unit holders and for payment of recurring, non-incremental
revenue-generating expenditures. The Operating Partnership intends to invest
amounts accumulated for distribution in short-term investments.
23
The Operating Partnership currently has a three year $500 million unsecured
revolving credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association, as syndication
agent, and Citicorp North America, Inc. and Wachovia Bank, National Association,
as co-documentation agents. The Credit Facility matures in December 2005,
contains options for a one year extension subject to a fee of 25 basis points
and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. In addition, borrowings under the
Credit Facility are currently priced off LIBOR plus 90 basis points and the
Credit Facility carries a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's unsecured credit rating the
interest rates and facility fee are subject to change. The outstanding
borrowings under the Credit Facility were $302.0 million at March 31, 2003.
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, 2003, the Operating Partnership had availability
under the Credit Facility to borrow approximately an additional $198.0 million,
subject to compliance with certain financial covenants.
The Operating Partnership continues to seek opportunities to acquire real estate
assets in its markets. The Operating Partnership has historically sought to
acquire properties where it could use its real estate expertise to create
additional value subsequent to acquisition. As a result of increased market
values for the Operating Partnership's commercial real estate assets the
Operating Partnership has sold certain non-core assets or interests in assets
where significant value has been created. During 2000, 2001 and 2002, the
Operating Partnership has sold assets or interests in assets with aggregate
sales prices of approximately $499.8 million. The Operating Partnership has used
the proceeds from these sales primarily to pay down borrowings under the Credit
Facility, repurchase units of general partnership interest as a result of the
Company's common stock buy-back program and for general operating purposes. In
addition, during the quarterly period ended March 31, 2003, the Operating
Partnership through Reckson Construction Group, Inc. entered into a sale of a
19.3 acre land parcel and build-to-suit 195,000 square foot office building for
aggregate consideration of approximately $47.0 million.
The following table sets forth the Operating Partnership's invested capital
(before valuation reserves) in RSVP controlled (REIT-qualified) joint ventures
and amounts which were advanced under the RSVP Commitment to FrontLine, for its
investment in RSVP controlled investments (in thousands):
RSVP controlled
joint ventures Amounts advanced Total
--------------- ---------------- --------
Privatization $ 21,480 $ 3,520 $ 25,000
Student Housing 18,086 3,935 22,021
Medical Offices 20,185 -- 20,185
Parking -- 9,091 9,091
Resorts -- 8,057 8,057
Net leased retail -- 3,180 3,180
Other assets and overhead -- 21,598 21,598
-------- -------- --------
$ 59,751 $ 49,381 $109,132
======== ======== ========
Included in these investments is approximately $15.9 million of cash that has
been contributed to the respective RSVP controlled joint ventures or advanced
under the RSVP Commitment to FrontLine and is being held, along with cash from
the preferred investors.
In connection with the proposed restructuring of RSVP, the Company and the
second largest creditor of FrontLine, have agreed to adjust certain allocations
to account for the overhead expenses incurred by RSVP. Such adjustment is not
expected to have a material effect on the Company's potential recovery as a
creditor of FrontLine.
On March 31, 2003, the Operating Partnership had issued and outstanding
9,915,313 Class B common units, all of which are held by the Company. The
distribution on the Class B units is subject to adjustment annually based on a
formula which measures increases or decreases in the Company's Funds From
Operations, as defined, over a base year. The Class B common units currently
receive an annual distribution of $2.5884 per unit.
The Class B common units are exchangeable at any time, at the option of the
holder, into an equal number of Class A common units subject to customary
antidilution adjustments. The Operating Partnership, at its option, may redeem
any or all of the Class B common units in exchange for an equal number of Class
A common units at any time following November 23, 2003 at which time the
Operating Partnership anticipates that it will exercise its option to redeem all
of its Class B common units outstanding.
24
The Board of Directors of the Company has authorized the purchase of up to five
million shares of the Company's Class A common stock and / or its Class B common
stock. Transactions conducted on the New York Stock Exchange will be effected in
accordance with the safe harbor provisions of the Securities Exchange Act of
1934 and may be terminated by the Company at any time. During the three months
ended March 31, 2003, under this buy-back program, the Operating Partnership
purchased 252,000 Class A common units at an average price of $18.01 per Class A
unit for an aggregate purchase price of approximately $4.5 million.
The following table sets forth the activity under the current buy-back program
(dollars in thousands except per unit data):
UNITS AVERAGE AGGREGATE
PURCHASED PRICE PER UNIT PURCHASE PRICE
--------- -------------- --------------
Current program:
Class A common 2,950,400 $ 21.30 $ 62,830
Class B Common 368,200 $ 22.90 8,432
--------- ----------
3,318,600 $ 71,262
========= ==========
The Board of Directors of the Company has formed a pricing committee to consider
purchases of up to $75 million of the Company's outstanding preferred
securities.
On March 31, 2003, the Company had 8,834,500 shares of its Class A preferred
stock issued and outstanding. During the fourth quarter of 2002, the Company
purchased and retired 357,500 shares of its Class A preferred stock at $22.29
per share for approximately $8.0 million. As a result, the Operating Partnership
purchased and retired an equal number of preferred units of general partnership
interest from the Company and reduced annual preferred distributions by
approximately $682,000.
The Operating Partnership's indebtedness at March 31, 2003 totaled approximately
$1.4 billion (including its share of joint venture debt and net of the minority
partners' interests share of joint venture debt) and was comprised of $302.0
million outstanding under the Credit Facility, approximately $499.3 million of
senior unsecured notes and approximately $602.5 million of mortgage
indebtedness. Based on the Operating Partnership's total market capitalization
of approximately $2.9 billion at March 31, 2003 (calculated based on the sum of
(i) the value of the Operating Partnership's Class A common units and Class B
common units (which, for this purpose, is assumed to be the same per unit as the
market value of a share of the Company's Class A common stock and Class B common
stock), (ii) the liquidation preference value of the Operating Partnership's
preferred units and (iii) the $1.4 billion of debt), the Operating Partnership's
debt represented approximately 48.0% of its total market capitalization.
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible
officing solutions in the world and which is controlled by FrontLine, currently
operates eight (formerly eleven) executive office centers in the Operating
Partnership's properties, two of which are held through joint ventures. The
leases under which these office centers operate expire between 2008 and 2011,
encompass approximately 171,000 square feet and have current contractual annual
base rents of approximately $4.2 million. On March 13, 2002, as a result of
experiencing financial difficulties, HQ voluntarily filed a petition for relief
under Chapter 11 of the U.S. Bankruptcy Code. As of June 30, 2002, HQ's leases
with the Operating Partnership were in default. Further, the Bankruptcy Court
has granted HQ's petition to reject three of its leases with the Operating
Partnership, one of which is held through the 919JV. The two rejected leases,
held through wholly owned entities, aggregated approximately 23,700 square feet
and were to provide for contractual base rents of approximately $600,000 for the
2003 calendar year. The third rejected lease held through the 919JV aggregated
approximately 31,000 square feet and provided for contractual base rents of
approximately $1.9 million for the 2003 calendar year. Pursuant to the
bankruptcy filing, HQ has been paying current rental charges under its leases
with the Operating Partnership, other than under the three rejected leases. The
Operating Partnership is in negotiation to restructure three of the leases and
leave the terms of the remaining five leases unchanged. All negotiations with HQ
are conducted by a committee designated by the Board and chaired by an
independent director. There can be no assurance as to whether any deal will be
consummated with HQ or if HQ will affirm or reject any or all of its remaining
leases with the Operating Partnership. As a result of the foregoing, the
Operating Partnership has currently established reserves of approximately
$360,000 (net of minority partners' interests and including the Operating
Partnership's share of unconsolidated joint venture interest), or 50%, of the
amounts due from HQ as of March 31, 2003. Scott H. Rechler serves as the
non-Executive Chairman of the Board and Jon Halpern is the Chief Executive
Officer and a director of HQ.
25
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company,
which leased approximately 527,000 square feet in thirteen of the Operating
Partnership's properties located throughout the Tri-State Area voluntarily filed
a petition for relief under Chapter 11 of the U.S. Bankruptcy Code on July 21,
2002. During February 2003, the Bankruptcy Court granted WorldCom's petition to
reject three of its leases with the Operating Partnership. The three rejected
leases aggregated approximately 192,000 square feet and provided for contractual
base rents of approximately $4.8 million for the 2003 calendar year. All of
WorldCom's leases are current on base rental charges through May 31, 2003, other
than under the three rejected leases and the Operating Partnership currently
holds approximately $300,000 in security deposits relating to the non-rejected
leases. The Operating Partnership is currently in negotiations to restructure
the remaining WorldCom leases. There can be no assurance as to whether any deal
will be consummated with WorldCom or if WorldCom will affirm or reject any or
all of its remaining leases with the Operating Partnership.
As of March 31, 2003, WorldCom occupied approximately 335,000 square feet of
office space with aggregate annual base rental revenues of approximately $6.7
million, or 1.8% of the Operating Partnership's total 2003 annualized rental
revenue, making it the Operating Partnership's third largest tenant based on
base rental revenue earned on a consolidated basis.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the Operating Partnership's significant debt
obligations by scheduled principal cash flow payments and maturity date and its
commercial commitments by scheduled maturity at March 31, 2003 (in thousands):
MATURITY DATE
---------------------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
Mortgage notes payable (1) $ 9,419 $ 13,169 $ 14,167 $ 13,785 $ 11,305 $ 117,389 $ 179,234
Mortgage notes payable (2) (3) -- 2,616 18,553 129,920 60,539 346,269 557,897
Senior unsecured notes -- 100,000 -- -- 200,000 200,000 500,000
Unsecured credit facility -- -- 302,000 -- -- -- 302,000
Land lease obligations 2,031 2,811 2,814 2,795 2,735 43,276 56,462
Operating leases 1,028 1,313 1,359 1,407 1,455 683 7,245
Air rights lease obligations 278 379 379 379 379 4,280 6,074
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 12,756 $ 120,288 $ 339,272 $ 148,286 $ 276,413 $ 711,897 $1,608,912
========== ========== ========== ========== ========== ========== ==========
(1) Scheduled principal amortization payments
(2) Principal payments due at maturity
(3) In addition, the Operating Partnership has a 60% interest in an
unconsolidated joint venture property. The Operating Partnership's pro
rata share of the mortgage debt at March 31, 2003 is approximately $7.5
million. This mortgage note bears interest at 8.85% per annum and matures
on September 1, 2005.
Certain of the mortgage notes payable are guaranteed by certain limited partners
in the Operating Partnership and/or the Company. In addition, consistent with
customary practices in non-recourse lending, certain non-recourse mortgages may
be recourse to the Company under certain limited circumstances including
environmental issues and breaches of material representations.
In addition, at March 31, 2003, the Operating Partnership had approximately $1.0
million in outstanding undrawn standby letters of credit issued under the Credit
Facility. In addition, approximately $44.8 million, or 6.1%, of the Operating
Partnership's mortgage debt is recourse to the Operating Partnership.
Other Matters
Ten of the Operating Partnership's office properties which were acquired by the
issuance of Units are subject to agreements limiting the Operating Partnership's
ability to transfer them prior to agreed upon dates without the consent of the
limited partner who transferred the respective property to the Operating
Partnership. In the event the Operating Partnership transfers any of these
properties prior to the expiration of these limitations, the Operating
Partnership may be required to make a payment relating to taxes incurred by the
limited partner. The limitations on five of the properties expire during the
remainder of 2003 with the limitations on the remaining properties expire in
2013.
Eleven of the Operating Partnership's office properties are held in joint
ventures which contain certain limitations on transfer. These limitations
include requiring the consent of the joint venture partner to transfer a
property prior to various specified dates ranging from 2003 to 2005, rights of
first offer, and buy / sell provisions.
26
The Company had historically structured long term incentive programs ("LTIP")
using restricted stock and stock loans. In July 2002, as a result of certain
provisions of the Sarbanes Oxley legislation, the Company discontinued the use
of stock loans in its LTIP. In connection with LTIP grants made prior to the
enactment of the Sarbanes Oxley legislation the Company made stock loans to
certain executive and senior officers to purchase 1,372,393 shares of its Class
A common stock at market prices ranging from $18.44 per share to $27.13 per
share. The stock loans were set to bear interest at the mid-term Applicable
Federal Rate and were secured by the shares purchased. Such stock loans
(including accrued interest) vest and are 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. Approximately $1.1 million
of compensation expense was recorded for the three month periods ended March 31,
2003 and 2002 related to these LTIP. Such amount has been included in marketing,
general and administrative expenses on the accompanying consolidated statements
of income.
The outstanding stock loan balances due from the Company's executive and senior
officers aggregated approximately $14.5 million and $17.0 million at March 31,
2003 and December 31, 2002, respectively, and have been included as a reduction
of additional paid in capital on the accompanying consolidated balance sheets.
Other outstanding loans to the Company's executive and senior officers amounting
to approximately $1.0 million at March 31, 2003 and December 31, 2002, related
to life insurance contracts and approximately $2.1 million and $1.0 million at
March 31, 2003 and December 31, 2002, respectively, primarily related to tax
payment advances on a stock compensation awards made to certain of the Company's
non-executive officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively and collectively, the "Rights"). Each Right represents the right to
receive, upon vesting, one share of Class A common stock if shares are then
available for grant under one of the Company's stock option plans or, if shares
are not so available, an amount of cash equivalent to the value of such stock on
the vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 190,524 shares of the Company's Class A common stock and the
2003 Rights aggregate 60,760 shares of Class A common stock. In addition, during
the three months ended March 31, 2003, the Operating Partnership recorded
approximately $216,000 of compensation expense related to the Rights. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statement 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 1,384,102 shares of its
Class A common stock under its existing stock option plans in connection with
the core award of this LTIP for twelve of its executive and senior officers. In
addition, with respect to the core award of this LTIP, the Operating Partnership
recorded approximately $268,000 of compensation expense for the period March 13,
2003 through March 31, 2003. Such amount is included in marketing, general and
administrative expenses on the accompanying consolidated statement 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 therefore as to any property
is generally not limited under such enactments and could exceed the value of the
property and/or the aggregate assets of the owner. The presence of such
substances, or the failure to properly remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at a disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACMs") when such materials are in poor condition, or in the event of
renovation or demolition. Such laws impose liability for release of ACMs into
the air and third parties may seek recovery from owners or operators of real
properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Company may be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, potentially liable for removal or remediation
costs, as well as certain other related costs, including governmental fines and
injuries to persons and property.
27
All of the Company's office and industrial / R&D properties have been subjected
to a Phase I or similar environmental audit after April 1, 1994 (which involved
general inspections without soil sampling, ground water analysis or radon
testing and, for the Company's properties constructed in 1978 or earlier, survey
inspections to ascertain the existence of ACMs were conducted) completed by
independent environmental consultant companies (except for 35 Pinelawn Road
which was originally developed by Reckson and subjected to a Phase 1 in April
1992). These environmental audits have not revealed any environmental liability
that would have a material adverse effect on the Company's business.
Funds from Operations
Management believes that funds from operations ("FFO") is a widely recognized
and appropriate measure of performance of an operating partnership whose general
partner is 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 standards established by the National
Association of Real Estate Investment Trusts ("NAREIT"). FFO is defined by
NAREIT as net income or loss, excluding gains or losses from debt restructurings
and sales of depreciable properties, plus real estate depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. FFO does not represent cash generated from operating activities in
accordance with GAAP and is not indicative of cash available to fund cash needs.
FFO should not be considered as an alternative to net income as an indicator of
the Operating Partnership's operating performance or as an alternative to cash
flow as a measure of liquidity. FFO for the three months ended March 31, 2003
includes gain from the sale of land in the amount of $5.5 million.
Since all companies and analysts do not calculate FFO in a similar fashion, the
Operating Partnership's calculation of FFO presented herein may not be
comparable to similarly titled measures as reported by other companies.
The following table presents the Operating Partnership's FFO calculation
(in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------- -------
Net income available to common unit holders ................................ $ 9,659 $17,916
Adjustments for Funds From Operations:
Add:
Real estate depreciation and amortization ............................. 31,327 25,321
Minority partners' interests in consolidated partnerships ............. 4,690 5,120
Less:
Gain on sales of depreciable real estate assets ....................... -- 537
Amounts distributable to minority partners in consolidated partnerships 6,807 6,563
------- -------
Funds From Operations ...................................................... $38,869 $41,257
======= =======
Weighted average units outstanding ......................................... 65,392 67,804
======= =======
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 also generally provide for fixed base rent increases,
direct pass through of certain operating expenses and separate real estate tax
escalations over a base amount. The Operating Partnership believes that
inflationary increases in expenses will be offset by contractual rent increases
and expense escalations described above. As a result of the impact of the events
of September 11, 2001, the Operating Partnership has realized increased
insurance costs, particularly relating to property and terrorism insurance, and
security costs. The Operating Partnership has included these costs as part of
its escalatable expenses. The Operating Partnership has billed these escalatable
expense items to its tenants consistent with the terms of the underlying leases
and believes they are collectible. To the extent the Operating Partnership's
properties contain vacant space, the Operating Partnership will bear such
inflationary increases in expenses.
The Credit Facility bears interest at a variable rate, which will be influenced
by changes in short-term interest rates, and is sensitive to inflation.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Operating Partnership is interest rate risk
on its long-term debt, mortgage notes and notes receivable. The Operating
Partnership will, when advantageous, hedge its interest rate risk using
financial instruments. The Operating Partnership is not subject to foreign
currency risk.
The Operating Partnership manages its exposure to interest rate risk on its
variable rate indebtedness by borrowing on a short-term basis under its Credit
Facility until such time as it is able to retire the short-term variable rate
debt with either a long-term fixed rate debt offering, long term mortgage debt,
general partner contributions or through sales or partial sales of assets.
The Operating Partnership will recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges will be adjusted to fair value
through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability or firm commitment
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. As of March 31, 2003,
the Operating Partnership had no derivatives outstanding.
The fair market value ("FMV") of the Operating Partnership's long term debt,
mortgage notes and notes receivable is estimated based on discounting future
cash flows at interest rates that management believes reflects the risks
associated with long term debt, mortgage notes and notes receivable of similar
risk and duration.
The following table sets forth the Operating Partnership's long term debt
obligations by scheduled principal cash flow payments and maturity date,
weighted average interest rates and estimated FMV at March 31, 2003 (dollars in
thousands):
For The Year Ended December 31,
---------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total(1) FMV
------------------------------------------------------------------------------------------------------------
Long term debt:
Fixed rate........... $ 9,419 $115,785 $ 32,720 $143,705 $271,844 $663,658 $1,237,131 $1,258,000
Weighted average
interest rate..... 7.50% 7.95% 6.92% 7.38% 7.80% 7.14% 7.26%
Variable rate........ $ -- $ -- $302,000 $ -- $ -- $ -- $ 302,000 $ 302,000
Weighted average
interest rate..... -- -- 2.17% -- -- -- 2.17%
(1) Includes aggregate unamortized issuance discounts of approximately
$661,000 on the senior unsecured notes issued during March 1999 and
June 2002, which are due at maturity.
In addition, a one percent increase in the LIBOR rate would have an approximate
$3.0 million annual increase in interest expense based on $302.0 million of
variable rate debt outstanding at March 31, 2003.
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, 2003 (dollars in thousands):
For the Year Ended December 31,
---------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total (1) FMV
-------------------------------------------------------------------------------------------------------
Mortgage notes and notes
receivable:
Fixed rate........... $ -- $ -- $ 36,500 $ -- $ -- $ 16,990 $ 53,490 $ 54,625
Weighted average
interest rate...... -- -- 11.32% -- -- 12.00% 11.54%
(1) Excludes interest receivables aggregating approximately $1.2 million.
29
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures and internal controls designed to
ensure that information required to be disclosed in our filings under the
Securities Exchange Act of 1934 is reported within the time periods specified in
the Securities and Exchange Commission's rules and forms. 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 Co-Chief
Executive Officers and Chief Financial Officer in connection with their
certifications contained in the Operating Partnership's SEC reports. The
Committee meets regularly and reports to the Company's Audit Committee on a
quarterly or more frequent basis. The Company's principal executive and
financial officers have evaluated our disclosure controls and procedures within
90 days prior to the filing of this Quarterly Report on Form 10-Q and have
determined that such disclosure controls and procedures are effective.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
30
The following table sets forth the Operating Partnership's schedule of its top
25 tenants based on base rental revenue as of March 31, 2003:
- ------------------------------------------------------------------------------------------------------------------
PERCENT OF PRO-RATA PERCENT OF CONSOLIDATED
TOTAL SHARE OF ANNUALIZED ANNUALIZED BASE
TENANT NAME (1) TENANT TYPE SQUARE FEET BASE RENTAL REVENUE RENTAL REVENUE
- ------------------------------------------------------------------------------------------------------------------
* DEBEVOISE & PLIMPTON Office 465,420 3.3% 5.5%
* AMERICAN EXPRESS Office 238,342 2.0% 1.8%
* WORLDCOM/MCI Office 335,242 1.8% 1.7%
BELL ATLANTIC Office 210,426 1.6% 1.3%
* SCHULTE ROTH & ZABEL Office 238,052 1.4% 2.4%
DUN & BRADSTREET CORP. Office 123,000 1.2% 1.0%
FUJI PHOTO FILM USA Office 163,880 1.2% 1.0%
UNITED DISTILLERS Office 137,918 1.1% 1.0%
* HQ GLOBAL Office/Industrial 171,099 0.9% 1.0%
* PRUDENTIAL Office 127,153 0.9% 0.9%
* BANQUE NATIONALE DE PARIS Office 145,834 0.9% 1.5%
* KRAMER LEVIN NESSEN KAMIN Office 158,144 0.8% 1.4%
VYTRA HEALTHCARE Office 105,613 0.8% 0.7%
T.D. WATERHOUSE Office 104,981 0.8% 0.7%
P.R. NEWSWIRE ASSOCIATES Office 67,000 0.8% 0.7%
HOFFMANN-LA ROCHE INC. Office 120,736 0.7% 0.6%
HELLER EHRMAN WHITE Office 64,526 0.7% 0.6%
* STATE FARM Office/Industrial 164,175 0.7% 1.0%
EMI ENTERTAINMENT WORLD Office 65,844 0.7% 0.6%
LABORATORY CORP OF AMERICA Office 108,000 0.7% 0.6%
ESTEE LAUDER Industrial 374,578 0.7% 0.6%
* DRAFT WORLDWIDE INC. Office 124,008 0.7% 1.1%
PRACTICING LAW INSTITUTE Office 62,000 0.7% 0.6%
LOCKHEED MARTIN CORP. Office 123,554 0.7% 0.6%
D.E.SHAW Office 70,104 0.6% 0.6%
- ----------------------------------------------------------------------------------------------------------------
(1) Ranked by pro-rata share of annualized based rental revenue adjusted for
pro rata share of joint venture interests and to reflect
WorldCom/MCI and HQ Global leases rejected to date.
* 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 for the years 1999 through 2002 and for the three month
period ended March 31, 2003 for the Operating Partnership's office and
industrial / R&D properties other than One Orlando Center in Orlando, FL:
- ----------------------------------------------------------------------------------------------------------------------------
NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES (1)
- ----------------------------------------------------------------------------------------------------------------------------
Average YTD
1999 2000 2001 2002 1999-2002 2003
----------- ----------- ----------- ----------- --------- -----------
Suburban Office Properties
Total $ 2,298,899 $ 3,289,116 $ 4,606,069 $ 5,283,674 $ 3,869,440 $ 1,271,421
Per Square Foot $ 0.23 $ 0.33 $ 0.45 $ 0.53 $ 0.39 $ 0.13
NYC Office Properties
Total N/A $ 946,718 $ 1,584,501 $ 1,939,111 $ 1,490,110 $ 549,081
Per Square Foot N/A 0.38 0.45 $ 0.56 0.46 $ 0.37
Industrial Properties
Total $ 1,048,688 $ 813,431 $ 711,666 $ 1,881,627 $ 1,113,853 $ 290,184
Per Square Foot $ 0.11 $ 0.11 $ 0.11 $ 0.28 $ 0.15 $ 0.04
----------- ----------- ----------- ----------- -----------
Total Portfolio
Total $ 3,347,587 $ 5,049,265 $ 6,902,236 $ 9,104,413 $ 2,110,686
Per Square Foot $ 0.17 $ 0.25 $ 0.34 $ 0.45 $ 0.10
31
The following table sets forth annual and per square foot non-incremental
revenue-generating tenant improvement costs and leasing commissions in which the
Operating Partnership committed to perform, during the respective periods, to
retain revenues attributable to existing leased space for the years 1999 through
2002 and for the three month period ended March 31, 2003 for the Operating
Partnership's office and industrial / R&D properties other than One Orlando
Center in Orlando, FL:
- --------------------------------------------------------------------------------------------------------------------
NON-INCREMENTAL REVENUE GENERATING TENANT IMPROVEMENTS AND LEASING COMMISSIONS (1), (3) and (4)
- --------------------------------------------------------------------------------------------------------------------
1999 2000 2001 2002
----------- ----------- ----------- -----------
Long Island Office Properties
Tenant Improvements $ 1,009,357 $ 2,853,706 $ 2,722,457 $ 1,917,466
Per Square Foot Improved $ 4.73 $ 6.99 $ 8.47 $ 7.81
Leasing Commissions $ 551,762 $ 2,208,604 $ 1,444,412 $ 1,026,970
Per Square Foot Leased $ 2.59 $ 4.96 $ 4.49 $ 4.18
----------- ----------- ----------- -----------
Total Per Square Foot $ 7.32 $ 11.95 $ 12.96 $ 11.99
=========== =========== =========== ===========
Westchester Office Properties
Tenant Improvements $ 1,316,611 $ 1,860,027 $ 2,584,728 $ 6,391,589 (2)
Per Square Foot Improved $ 5.62 $ 5.72 $ 5.91 $ 15.05
Leasing Commissions $ 457,730 $ 412,226 $ 1,263,012 $ 1,975,850 (2)
Per Square Foot Leased $ 1.96 $ 3.00 $ 2.89 $ 4.65
----------- ----------- ----------- -----------
Total Per Square Foot $ 7.58 $ 8.72 $ 8.80 $ 19.70
=========== =========== =========== ===========
Connecticut Office Properties
Tenant Improvements $ 179,043 $ 385,531 $ 213,909 $ 491,435
Per Square Foot Improved $ 4.88 $ 4.19 $ 1.46 $ 3.81
Leasing Commissions $ 110,252 $ 453,435 $ 209,322 $ 307,023
Per Square Foot Leased $ 3.00 $ 4.92 $ 1.43 $ 2.38
----------- ----------- ----------- -----------
Total Per Square Foot $ 7.88 $ 9.11 $ 2.89 $ 6.19
=========== =========== =========== ===========
New Jersey Office Properties
Tenant Improvements $ 454,054 $ 1,580,323 $ 1,146,385 $ 2,842,521
Per Square Foot Improved $ 2.29 $ 6.71 $ 2.92 $ 10.76
Leasing Commissions $ 787,065 $ 1,031,950 $ 1,602,962 $ 1,037,012
Per Square Foot Leased $ 3.96 $ 4.44 $ 4.08 $ 3.92
----------- ----------- ----------- -----------
Total Per Square Foot $ 6.25 $ 11.15 $ 7.00 $ 14.68
=========== =========== =========== ===========
New York City Office Properties
Tenant Improvements N/A $ 65,267 $ 788,930 $ 4,350,106
Per Square Foot Improved N/A $ 1.79 $ 15.69 $ 18.39
Leasing Commissions N/A $ 418,185 $ 1,098,829 $ 2,019,837
Per Square Foot Leased N/A $ 11.50 $ 21.86 $ 8.54
----------- ----------- ----------- -----------
Total Per Square Foot N/A $ 13.29 $ 37.55 $ 26.93
=========== =========== =========== ===========
Industrial Properties
Tenant Improvements $ 375,646 $ 650,216 $ 1,366,488 $ 1,850,812
Per Square Foot Improved $ 0.25 $ 0.95 $ 1.65 $ 1.97
Leasing Commissions $ 835,108 $ 436,506 $ 354,572 $ 890,688
Per Square Foot Leased $ 0.56 $ 0.64 $ 0.43 $ 0.95
----------- ----------- ----------- -----------
Total Per Square Foot $ 0.81 $ 1.59 $ 2.08 $ 2.92
=========== =========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO
Tenant Improvements $ 3,334,711 $ 7,395,070 $ 8,822,897 $17,843,929
Per Square Foot Improved $ 1.53 $ 4.15 $ 4.05 $ 7.96
Leasing Commissions $ 2,741,917 $ 4,960,906 $ 5,973,109 $ 7,257,379
Per Square Foot Leased $ 1.26 $ 3.05 $ 2.75 $ 3.24
----------- ----------- ----------- -----------
Total Per Square Foot $ 2.79 $ 7.20 $ 6.80 $ 11.20
=========== =========== =========== ===========
32
Average YTD
1999-2002 2003 New Renewal
----------- ----------- ----------- -----------
Long Island Office Properties
Tenant Improvements $ 2,125,747 $ 376,436 $ 354,129 $ 22,307
Per Square Foot Improved $ 7.00 $ 7.12 $ 8.11 $ 2.42
Leasing Commissions $ 1,307,937 $ 238,590 $ 215,997 $ 22,593
Per Square Foot Leased $ 4.06 $ 4.51 $ 4.95 $ 2.45
----------- ----------- ----------- -----------
Total Per Square Foot $ 11.06 $ 11.63 $ 13.06 $ 4.87
=========== =========== =========== ===========
Westchester Office Properties
Tenant Improvements $ 3,038,239 $ 96,001 $ 96,001 $ 0
Per Square Foot Improved $ 8.08 $ 4.64 $ 8.72 $ 0.00
Leasing Commissions $ 1,027,204 $ 42,666 $ 18,667 $ 23,999
Per Square Foot Leased $ 3.13 $ 2.06 $ 1.70 $ 2.49
----------- ----------- ----------- -----------
Total Per Square Foot $ 11.20 $ 6.70 $ 10.42 $ 2.49
=========== =========== =========== ===========
Connecticut Office Properties
Tenant Improvements $ 317,480 $ 8,036 $ 8,036 $ 0
Per Square Foot Improved $ 3.58 $ 1.28 $ 1.28 $ 0
Leasing Commissions $ 270,008 $ 38,525 $ 38,525 $ 0
Per Square Foot Leased $ 2.93 $ 6.15 $ 6.15 $ 0
----------- ----------- ----------- -----------
Total Per Square Foot $ 6.52 $ 7.43 $ 7.43 $ 0.00
=========== =========== =========== ===========
New Jersey Office Properties
Tenant Improvements $ 1,505,821 $ 2,271,806 $ 1,947,868 $ 323,938
Per Square Foot Improved $ 5.67 $ 11.80 $ 35.87 $ 2.34
Leasing Commissions $ 1,114,747 $ 1,312,207 $ 609,040 $ 703,167
Per Square Foot Leased $ 4.10 $ 6.82 $ 11.22 $ 5.09
----------- ----------- ----------- -----------
Total Per Square Foot $ 9.77 $ 18.62 $ 47.09 $ 7.43
=========== =========== =========== ===========
New York City Office Properties
Tenant Improvements $ 1,734,768 $ 1,624,190 $ 1,509,190 $ 115,000
Per Square Foot Improved $ 11.96 $ 40.61 $ 59.94 $ 7.76
Leasing Commissions $ 1,178,950 $ 569,370 $ 569,370 $ 0
Per Square Foot Leased $ 13.97 $ 14.24 $ 18.80 $ 0.00
----------- ----------- ----------- -----------
Total Per Square Foot $ 25.92 $ 54.85 $ 78.74 $ 7.76
=========== =========== =========== ===========
Industrial Properties
Tenant Improvements $ 1,060,791 $ 283,635 $ 252,501 $ 31,134
Per Square Foot Improved $ 1.20 $ 1.14 $ 1.48 $ 0.39
Leasing Commissions $ 629,218 $ 259,535 $ 239,357 $ 20,178
Per Square Foot Leased $ 0.64 $ 1.04 $ 1.40 $ 0.26
----------- ----------- ----------- -----------
Total Per Square Foot $ 1.85 $ 2.18 $ 2.88 $ 0.65
=========== =========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO
Tenant Improvements $ 9,782,844 $ 4,660,104 $ 4,167,725 $ 492,379
Per Square Foot Improved $ 4.75 $ 8.30 $ 9.66 $ 3.78
Leasing Commissions $ 5,528,065 $ 2,460,892 $ 1,690,955 $ 769,937
Per Square Foot Leased $ 2.66 $ 4.38 $ 3.92 $ 5.92
----------- ----------- ----------- -----------
Total Per Square Foot $ 7.41 $ 12.68 $ 13.58 $ 9.70
=========== =========== =========== ===========
33
As noted, incremental revenue-generating tenant improvement costs and
leasing commissions are excluded from the tables set forth above. The historical
capital expenditures, tenant improvement costs and leasing commissions set forth
above are not necessarily indicative of future non-incremental revenue-
generating capital expenditures or non-incremental revenue-generating tenant
improvement costs and leasing commissions that may be incurred to retain
revenues on leased space.
NOTES:
- ------
(1) Excludes non-incremental capital expenditures, tenant improvements and
leasing commissions for One Orlando Center in Orlando, Florida. Paid or
accrued capital expenses, tenant improvements and leasing commissions for
the three month period ended March 31, 2003 were $160,935, $414,336 and
$422,007 respectively. Committed tenant improvements and leasing
commissions for One Orlando were $1,286,881 and $510,740 respectively.
(2) Excludes tenant improvements and leasing commissions related to a 163,880
square foot leasing transaction with Fuji Photo Film U.S.A. Leasing
commissions on this transaction amounted to $5.33 per square foot and
tenant improvement allowance amounted to $40.88 per square foot.
(3) All amounts represent tenant improvements and leasing costs committed on
leases signed during the period.
(4) Excludes $746,827 of deferred leasing costs in YTD 2003 attributable to
space marketed but not yet leased.
34
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 three months ended
March 31, 2003 as reported on its "Statements of Cash Flows - Investment
Activities" contained in its consolidated financial statements (in thousands):
March 31,
2003
-----------
Capital expenditures:
Non-incremental ................................. $ 2,272
Incremental ..................................... 255
Tenant improvements:
Non-incremental ................................. 12,366
Incremental ..................................... 23
-------
Additions to commercial real estate properties........ $14,916
=======
Leasing costs:
Non-incremental ................................. $ 2,599
Incremental ..................................... 2,188
-------
Payment of deferred leasing costs .................... $ 4,787
=======
Acquisition and development costs .................... $ 5,888
=======
The following table sets forth the Operating Partnership's lease expiration
table at April 1, 2003 for its Total Portfolio of properties, its Office
Portfolio and its Industrial / R&D Portfolio:
TOTAL PORTFOLIO (a)
- ---------------------------------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- ---------------------------------------------------------------------------------------------------------------
2003 118 1,136,247 5.6% 5.6%
2004 187 1,541,706 7.6% 13.2%
2005 243 2,479,052 12.2% 25.4%
2006 222 2,567,226 12.7% 38.1%
2007 144 1,625,535 8.0% 46.1%
2008 111 1,533,788 7.6% 53.6%
2009 and thereafter 291 8,007,433 39.6% 93.1%
- ---------------------------------------------------------------------------------------------------------------
Total/Weighted Average 1,316 18,890,987 93.1% --
===============================================================================================================
Total Portfolio Square Feet 20,294,055
===============================================================================================================
OFFICE PORTFOLIO (a)
- ---------------------------------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Office % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- ---------------------------------------------------------------------------------------------------------------
2003 105 829,574 6.1% 6.1%
2004 149 975,820 7.2% 13.3%
2005 209 1,792,499 13.2% 26.5%
2006 172 1,560,167 11.5% 38.0%
2007 112 1,261,583 9.3% 47.3%
2008 78 807,556 6.0% 53.3%
2009 and thereafter 239 5,343,909 39.4% 92.8%
- ---------------------------------------------------------------------------------------------------------------
Total/Weighted Average 1,064 12,571,108 92.8% --
===============================================================================================================
Total Office Portfolio Square Feet 13,559,025
===============================================================================================================
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
- ---------------------------------------------------------------------------------------------------------------
2003 13 306,673 4.6% 4.6%
2004 38 565,886 8.4% 13.0%
2005 34 686,553 10.2% 23.1%
2006 50 1,007,059 15.0% 38.1%
2007 32 363,952 5.4% 43.5%
2008 33 726,232 10.8% 54.3%
2009 and thereafter 52 2,663,524 39.5% 93.8%
- ---------------------------------------------------------------------------------------------------------------
Total/Weighted Average 252 6,319,879 93.8% --
===============================================================================================================
Total Industrial/R&D Portfolio Square Feet 6,735,030
===============================================================================================================
(a) Excludes the 355,000 square foot office property located in Orlando,
Florida.
35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Operating Partnership is not presently subject to any material
litigation nor, to the Operating Partnership's knowledge, is any
litigation threatened against the Operating Partnership, other than
routine actions for negligence or other claims and administrative
proceedings arising in the ordinary course of business, some of which
are expected to be covered by liability insurance and all of which
collectively are not expected to have a material adverse effect on the
liquidity, results of operations or business or financial condition of
the Operating Partnership.
Item 2. Changes in Securities and use of proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information - None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Amended and Restated Long-Term Incentive Award Agreement,
dated as of March 13, 2003, between the Company and Scott
H. Rechler*
99.1 Certification of Donald Rechler, Co-CEO of Reckson
Associates Realty Corp., the sole general partner of
Reckson Operating Partnership, L.P., pursuant to Section
1350 of Chapter 63 of title 18 of the United States Code
99.1 Certification of Scott H. Rechler, Co-CEO of Reckson
Associates Realty Corp., the sole general partner of
Reckson Operating Partnership, L.P., pursuant to Section
1350 of Chapter 63 of title 18 of the United States Code
99.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and CFO of Reckson Associates Realty Corp., the
sole general partner of Reckson Operating Partnership,
L.P., pursuant to Section 1350 of Chapter 63 of title 18 of
the United States Code
* Each of Donald J. Rechler, Mitchell D. Rechler, Gregg M.
Rechler, Michael Maturo, Roger M. Rechler and Jason M.
Barnett has entered into a Long-Term Incentive Award
Agreement with the Company, dated March 13, 2003. These
Agreements are identical in all material respects to the
Amended and Restated Long-Term Incentive Award Agreement
for Scott H. Rechler filed herewith.
b) During the three months ended March 31, 2003 the Registrant filed
the following reports on Form 8K:
On January 27, 2003, the Registrant submitted a report on Form 8-K
under Item 5 with respect to the refinancing of its Credit
Facility.
On March 5, 2003 the Registrant submitted a report on Form 8-K
under Item 9 thereof in order to submit its fourth quarter
presentation in satisfaction of the requirements of Regulation FD.
On March 5, 2003 the Registrant submitted a report on Form 8-K
under Item 9 thereof in order to submit supplemental operating and
financial data for the quarter ended December 31, 2002 in
satisfaction of the requirements of Regulation FD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECKSON OPERATING PARTNERSHIP, L. P.
BY: RECKSON ASSOCIATES REALTY CORP., its sole general partner
By: /s/ Scott H. Rechler By: /s/ Michael Maturo
- ------------------------------ -----------------------------------------
Scott H. Rechler, Co-Chief Michael Maturo, Executive Vice President,
Executive Officer Treasurer and Chief Financial Officer
By: /s/ Donald Rechler
- ------------------------------
Donald Rechler, Co-Chief
Executive Officer
DATE: May 9, 2003
36
CERTIFICATION
I, Donald J. Rechler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson Operating
Partnership, L.P.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Donald J. Rechler
---------------------------
Donald J. Rechler
Co-Chief Executive Officer,
Reckson Associates Realty Corp.,
the sole general partner of
the Registrant
37
CERTIFICATION
I, Scott H. Rechler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson Operating
Partnership, L.P.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Scott H. Rechler
-------------------------
Scott H. Rechler
Co-Chief Executive Officer,
Reckson Associates Realty Corp.,
the sole general partner of
the Registrant
38
CERTIFICATION
I, Michael Maturo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson Operating
Partnership, L.P.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Michael Maturo
-----------------------------------
Michael Maturo
Executive Vice President, Treasurer
and Chief Financial Officer,
Reckson Associates Realty Corp.,
the sole general partner of
the Registrant
39
EXHIBIT 10.1
RECKSON ASSOCIATES REALTY CORP.
LONG-TERM INCENTIVE AWARD AGREEMENT
RECITALS
--------
A. Scott Rechler (the "Grantee") is an executive officer of Reckson
Associates Realty Corp. (the "Company") or one of its Affiliates.
B. The Company's Board of Directors has adopted a long-term incentive
plan ("LTIP") designed to provide the Company's Executive Officers and certain
other key senior employees with their incentive compensation through March 2007.
C. The Grantee has been selected by the Compensation Committee of the
Board of Directors of the Company (the "Committee") to receive an award under
the LTIP comprised of a grant of a core annual long-term incentive award (the
"Core Award") and a special long-term incentive award (the "Special
Outperformance Award"), effective as of March 13, 2003 (the "Date of Grant").
NOW, THEREFORE, the Company hereby grants to the Grantee,
effective as of the Date of Grant, the Core Award in the form of 138,889
restricted shares of the Class A Common Stock ($0.01 par value per share) of the
Company (the "Common Stock") and the Special Outperformance Award in the Target
Amount, in each case subject to the terms and conditions of this Long-Term
Incentive Award Agreement (this "Agreement").
1. Nature of Core Award; Restrictions on Transfer: The restricted shares of
Common Stock that comprise the Core Award (the "Core Shares") will be granted to
the Grantee under the Company's 2002 Stock Option Plan (the "Plan"), the terms
and conditions of which are hereby incorporated by reference. The Core Shares
will not be transferable by the Grantee until such shares become vested in
accordance with Section 3.
2. Nature of Special Outperformance Award; Restrictions on Transfer: The
Special Outperformance Award represents a potential cash bonus (with a stated
Target Amount) that may become vested and earned based upon the Grantee's
continued employment and the achievement of the performance goals set forth in
Section 4 hereof. The Grantee's actual Special Outperformance Award amount, if
any, will be based on the Grantee's vested interest in a portion of the Special
Outperformance Pool and, to the extent this amount as determined under Section
4(a) is less than 25% of the Target Amount, may be based on the Grantee's Target
Amount as provided in Section 4(b). The Grantee's right in the Special
Outperformance Award represents a mere unfunded and unsecured contingent promise
to pay by the Company. The Grantee will have no rights as a shareholder of the
Company based on or attributable to the Grantee's Special Outperformance Award
or Target Amount, and neither such Special Outperformance Award, nor such Target
Amount, nor any interest therein may be transferred, assigned, alienated or
anticipated other than by will or the laws of descent and distribution.
3. Vesting of the Core Shares: The Core Shares generally will become vested
and transferable as follows:
(a) 6.25% of the Core Shares will become cumulatively vested and
transferable on each of the first four anniversaries of the Date of Grant (each
such anniversary hereinafter referred to as an "Annual Vesting Date"); in each
case provided that the Grantee remains in continuous employment with the Company
or any of its Affiliates until such date.
(b) 18.75% of the Core Shares will become cumulatively vested and
transferable on each of the Annual Vesting Dates; in each case provided that the
Grantee remains in continuous employment with the Company or any of its
Affiliates until such date; and provided, further, that any shares which
otherwise would become vested on such Annual Vesting Date will not become so
vested unless the Company has achieved, during the last year completed before
the applicable Annual Vesting Date, a cumulative and compounded total return to
shareholders based on the Base Price (including all dividends and stock
appreciation) that either (i) is at or above the 50th percentile of the
cumulative and compounded total return to shareholders achieved by members of
the Peer Group during the same period, or (ii) subject to the provisions of
Section 3(f), equals a cumulative and compounded total return of at least 9% per
annum. If the vesting performance requirement is not satisfied for a given
period, the Core Shares from such year or years will not be forfeited and will
be eligible to become vested if the vesting performance requirement applicable
to such Core Shares is satisfied on a cumulative and compounded basis for an
extended performance period that includes the year ended prior to the original
Annual Vesting Date and the and the year ended on the following Annual Vesting
Date. If necessary, this cumulative and compounded method of satisfying the
vesting performance requirement also will be applied on a look-back basis at the
end of the four-year vesting performance period. For purposes of this Section,
(i) the performance of the Company relative to the performance of members of the
Peer Group will be determined using the actual closing prices per share on the
New York Stock Exchange of the Common Stock and the securities of the members of
the Peer Group on the applicable anniversary of the Date of Grant (or the last
trading day preceding such anniversary if the anniversary does not fall on a
trading day), and (ii) the per annum percentage performance of the Company will
be determined using the 45-day VWAP for the period ending on the applicable
anniversary of the Date of Grant (or the last trading day preceding such
anniversary if the anniversary does not fall on a trading day).
(c) Notwithstanding the foregoing, if a Change-in-Control occurs prior
to the fourth Annual Vesting Date and the Grantee remains in continuous
employment with the Company or any of its Affiliates until such occurrence, all
non-vested Core Shares will thereupon become fully vested and transferable.
(d) Notwithstanding the foregoing, if the Grantee's employment with the
Company and all Affiliates is terminated prior to the fourth Annual Vesting Date
by reason of the Grantee's death or Disability, by the Grantee for Good Reason,
or by the Company or any Affiliate for any reason other than Cause or transfer
to another Affiliate, all non-vested Core Shares will thereupon become fully
vested and transferable. If the Grantee's employment with the Company and all
Affiliates is terminated prior to the fourth Annual Vesting Date for any other
reason, any Core Shares that have not yet become vested will thereupon be
forfeited.
2
(e) Notwithstanding the foregoing, if the Grantee remains in continuous
employment with the Company or any of its Affiliates until an applicable Annual
Vesting Date but the vesting performance requirement is not satisfied for the
year ending on such date (or any extended performance period as contemplated in
Section 3(b) above), and if the Committee determines that it nevertheless would
be consistent with the spirit and intent of this Agreement to vest some or all
of the Core Shares that otherwise would have become vested and transferable on
that Annual Vesting Date, then the Committee, in its sole and absolute
discretion, may elect to vest some or all of such Core Shares.
(f) Notwithstanding the foregoing, in the event that (i) the Core Shares
would become vested as a result of the Company achieving a cumulative and
compounded total return of at least 9% per annum in accordance with the terms of
Section 3(b), (ii) the appreciation in the share price of the Common Stock alone
has not resulted in the Company achieving such a 9% per annum total return
(i.e., without taking into account any dividends paid to holders of Common
Stock), and (iii) the Company's Dividend Payout Ratio with regard to its Cash
Available for Distribution exceeds 100% for any relevant annual period or
periods, the Compensation Committee may, in its sole discretion, review whether
it is appropriate for the Core Shares to vest for such period or periods, and
may determine that the Core Shares shall not vest, in whole or in part, based
upon such facts as it deems appropriate including, but not limited to, the
effect on the Dividend Payout Ratio of rent concessions, tenant improvements,
capital expenditures by the Company and similar matters.
4. Vesting of the Special Outperformance Award: The Special Outperformance
Award generally will become vested as follows:
(a) The Special Outperformance Award (determined as set forth below)
will become vested on the fourth Annual Vesting Date; provided that the Grantee
remains in continuous employment with the Company or any of its Affiliates until
the fourth Annual Vesting Date; and provided, further, that the Company has
achieved, during the four years completed before the fourth Annual Vesting Date,
a cumulative and compounded total return to shareholders based on the Base Price
(including all dividends and stock appreciation) that (i) is at or above the
60th percentile of the cumulative and compounded total return to shareholders
achieved by members of the Peer Group during the same period, and (ii) equals a
cumulative and compounded total return of at least 9% per annum. The dollar
amount of Grantee's Special Outperformance Award that becomes vested on such
fourth Annual Vesting Date will equal (i) the Special Outperformance Pool,
multiplied by (ii) the Grantee's Special Outperformance Award Percentage. The
value of the portion of the Special Outperformance Award that becomes vested by
operation of the preceding sentence may exceed the Grantee's Target Amount. The
Committee will determine the levels of the Company's shareholder return in good
faith as soon as practicable after the fourth Annual Vesting Date. For purposes
of this Section, (i) the performance of the Company relative to the performance
of members of the Peer Group will be determined using the actual closing prices
3
per share on the New York Stock Exchange of the Common Stock and the securities
of the members of the Peer Group on the applicable anniversary of the Date of
Grant (or the last trading day preceding such anniversary if the anniversary
does not fall on a trading day), and (ii) the per annum percentage performance
of the Company will be determined using the 45-day VWAP for the period ending on
the applicable anniversary of the Date of Grant (or the last trading day
preceding such anniversary if the anniversary does not fall on a trading day).
(b) To the extent that the amount of the Special Outperformance Award
that becomes vested to the Grantee on the fourth Annual Vesting Date pursuant to
Section 4(a) above equals less than 25% of the Target Amount, the Committee, in
its sole and absolute discretion, may provide for the vesting and payment of an
amount equal to not more than 25% of the Grantee's Target Amount; provided that
the Grantee remains in continuous employment with the Company or any of its
Affiliates until the fourth Annual Vesting Date; and provided, further, that the
Company has achieved, during the four years completed before the fourth Annual
Vesting Date, a cumulative and compounded total return to shareholders based on
the Base Price (including all dividends and stock appreciation) that either (i)
is at or above the 60th percentile of the cumulative and compounded total return
to shareholders achieved by members of the Peer Group during the same period, or
(ii) equals a cumulative and compounded total return of at least 9% per annum.
The Committee will determine the levels of the Company's shareholder return in
good faith and the extent to which such award becomes vested as soon as
practicable after the applicable anniversary date.
(c) Notwithstanding the foregoing, if a Change-in-Control occurs prior
to the fourth Annual Vesting Date and the Grantee remains in continuous
employment with the Company or any of its Affiliates until such occurrence, the
Grantee's Target Amount will thereupon become fully vested, and all obligations
to the Grantee in respect of the Special Outperformance Award shall be satisfied
in full upon payment thereof.
(d) Notwithstanding the foregoing, if the Grantee's employment with the
Company and all Affiliates is terminated prior to the fourth Annual Vesting Date
by the Grantee for Good Reason, or by the Company or any Affiliate for any
reason other than death, Disability, Cause or transfer to another Affiliate, the
Grantee's Target Amount will thereupon become fully vested, and all obligations
to the Grantee in respect of the Special Outperformance Award shall be satisfied
in full upon payment thereof. If the Grantee's employment with the Company and
all Affiliates is terminated prior to the fourth Annual Vesting Date by reason
of the Grantee's retirement at or after age 65, then a pro rata portion (if any)
of the Special Outperformance Award (calculated at the end of the four-year
performance period) will become vested as of the date of the Grantee's
retirement, and all obligations to the Grantee in respect of the Special
Outperformance Award shall be satisfied in full upon payment thereof. Such pro
rata portion will equal (i) the portion of the Special Outperformance Award that
otherwise would have become vested under Sections 4(a) or (b) (as applicable) if
the Grantee had remained employed with the Company or any Affiliate until the
fourth Annual Vesting Date, multiplied by (ii) the number of years from the Date
of Grant to the date of death or Disability (rounded to the next whole year),
4
and divided by (iii) four. If the Grantee's employment with the Company and all
Affiliates is terminated prior to the fourth Annual Vesting Date by reason of
the Grantee's death or Disability, then the portion (if any) of the Special
Outperformance Award that otherwise would have become vested under Sections 4(a)
or (b) (as applicable) if the Grantee had remained employed with the Company or
any Affiliate until the fourth Annual Vesting Date (calculated at the end of the
four-year performance period) will become vested. If the Grantee's employment
with the Company and all Affiliates is terminated prior to the fourth Annual
Vesting Date for any other reason, to the extent the Special Outperformance
Award (or a portion thereof) has not yet become vested under Section 4(a) or
(b), the Grantee's right to receive any portion of the Special Outperformance
Award will thereupon be forfeited by the Grantee, and the Company will have no
obligations to the Grantee in respect thereof.
(e) Notwithstanding the foregoing (including, without limitation,
Section 4(b)), if the Grantee remains in continuous employment with the Company
or any of its Affiliates until the fourth Annual Vesting Date but the vesting
performance requirement set forth in Section 4(a) or 4(b) is not satisfied for
the period ending on such date, and if the Committee determines that it
nevertheless would be consistent with the spirit and intent of this Agreement to
vest some or all of the Special Award that otherwise would have become vested on
that anniversary date, then the Committee, in its sole and absolute discretion,
may elect to vest some or all of such Special Award.
5. Delivery of Core Shares and Payment of Special Outperformance Award.
Subject to Section 12, as soon as practicable after any portion of the Grantee's
Core Shares become vested and transferable (as determined under Section 3), the
Company will instruct its stock transfer agent (i) to issue certificates to the
Grantee representing such vested Core Shares without the legends contemplated
under Section 1 and (ii) to process any applicable transfers of such vested Core
Shares. As soon as reasonably practicable after any portion of the Grantee's
Special Outperformance Award is determined to have become vested, the Company
will distribute the amount or value of such vested Special Outperformance Award
(as determined under Section 4) to the Grantee in cash (less applicable
withholding in accordance with Section 12); provided, however, that the
Committee, in its sole and absolute discretion, may elect to distribute some or
all of such vested Special Outperformance Award in the form of shares of Common
Stock, provided further that sufficient shares of Common Stock are available for
such distribution under the Plan or any other Company plan or program that
provides for the issuance of equity to employees. If any portion of the Special
Outperformance Award is satisfied by the distribution of shares of Common Stock,
the value of such shares will be determined using the 45-day VWAP on the date
such Special Outperformance Award is vested. Notwithstanding any provision of
any employment, severance or change of control agreement between the Grantee and
the Company to the contrary, the Grantee shall not be entitled to receive any
payment or benefit from the Company intended to defray or offset some or all of
the Grantee's income tax liability with respect to benefits under this
Agreement.
5
6. Payment of Dividends: The Core Shares will accrue on a cumulative basis
all dividends paid on such shares from the date of actual issuance through the
date of vesting. Subject to Section 12, as soon as practicable after any Core
Shares become vested, the Company will pay to the Grantee in cash or in kind (as
applicable) the dividends accrued with respect to such shares. No dividends will
accrue with respect to the Special Outperformance Award.
7. Adjustment. The Committee will make or provide for such adjustments in
the number of shares of Common Stock underlying the Core Shares and the vesting
performance requirements applicable to Core Shares and the Special
Outperformance Award covered by this Agreement, as the Committee may in good
faith determine to be equitably required in order to prevent any dilution or
expansion of the rights of the Grantee that otherwise would result from (i) any
stock dividend, stock split, combination of shares, recapitalization or similar
change in the capital structure of the Company or (ii) any merger,
consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial
or complete liquidation or other distribution of assets, issuance of warrants or
other rights to purchase securities or any other transaction or event having an
effect similar to any of the foregoing.
8. Compliance With Law. The Company and the Grantee will make reasonable
efforts to comply with all applicable securities laws. In addition,
notwithstanding any provision of this Agreement to the contrary, no Core Shares
or Special Outperformance Award will become vested or be paid at a time that
such vesting or payment would result in a violation of any such law.
9. Investment Representation; Registration.
(a) In order to comply with Section 8 hereof and any applicable
securities law, the Company may require the Grantee (i) to furnish evidence
satisfactory to the Company (including, without limitation, a written and signed
representation letter) to the effect that any shares of Common Stock acquired
pursuant to this Agreement were acquired for investment only and not for resale
or distribution and (ii) to agree that all such shares will only be sold
following registration under the Securities Act of 1933 (the "Securities Act")
or pursuant to an exemption therefrom.
(b) The Company may affix a legend to the certificates representing
unregistered shares of Common Stock issued pursuant to this Agreement, if any,
to the effect that such shares have not been registered under the Securities Act
and may only be sold or transferred upon registration or pursuant to an
exemption therefrom.
(c) The Company will have no obligation to register under the Securities
Act any shares of Common Stock or any other securities issued pursuant to this
Agreement.
10. Severability. In the event that one or more of the provisions of this
Agreement may be invalidated for any reason by a court, any provision so
invalidated will be deemed to be separable from the other provisions hereof, and
the remaining provisions hereof will continue to be valid and fully enforceable.
6
11. Governing Law. This Agreement is made under, and will be construed in
accordance with, the laws of the State of New York, without giving effect to the
principle of conflict of laws of such State.
12. Withholding and Taxes. No later than the date as of which an amount
first becomes includible in the gross income of the Grantee for income tax
purposes or subject to Federal Insurance Contributions Act withholding with
respect to any award under this Agreement, such Grantee will pay to the Company
or, if appropriate, any of its Affiliates, or make arrangements satisfactory to
the Committee regarding the payment of, any United States federal, state or
local or foreign taxes of any kind required by law to be withheld with respect
to such amount. The Committee may permit or require that withholding obligations
be settled with Common Stock, including Common Stock that is part of the award
that gives rise to the withholding requirement. The obligations of the Company
under this Agreement will be conditional on such payment or arrangements, and
the Company and its Affiliates shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment otherwise due to the Grantee.
The Committee may establish such procedures as it deems appropriate for the
settlement of withholding obligations with Common Stock.
13. Certain Definitions.
(a) "Affiliate" means any person or entity that, at the time of
reference, is controlled by, controlling of or under common control with the
Company.
(b) "Base Price" means the closing price per share of the Common Stock
on the New York Stock Exchange on the Date of Grant.
(c) "Cause" means a finding by the Company's Board of Directors that the
Grantee has (i) acted with gross negligence or willful misconduct in connection
with the performance of his material duties to the Company or any Affiliate;
(ii) defaulted in the performance of his material duties to the Company or any
Affiliate and has not corrected such action within 15 days of receipt of written
notice thereof; (iii) willfully acted against the best interests of the Company
or any Affiliate, which act has had a material and adverse impact on the
financial affairs of the Company or such Affiliate; or (iv) been convicted of a
felony or committed a material act of common law fraud against the Company, any
Affiliate or any of their employees and such act or conviction has had, or the
Company's Board of Directors reasonably determines will have, a material adverse
effect on the interests of the Company or such Affiliate; provided, however,
that a finding of Cause will not become effective unless and until the Board of
Directors provides the Grantee notice that it is considering making such finding
and a reasonable opportunity to be heard by the Board of Directors.
(d) "Cash Available for Distribution" means the Company's cash available
for distribution to holders of Common Stock on an "as committed" basis as
announced by the Company for the relevant period.
7
(e) A "Change-in-Control" will be deemed to have occurred if following
the Date of Grant:
(i) any Person, together with all "affiliates" and "associates" (as
such terms are defined in Rule 12b-2 under the Securities Exchange Act
of 1934 (the "Exchange Act")) of such Person, shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of (A) the combined voting power of the
Company's then outstanding securities having the right to vote in an
election of the Company's Board of Directors ("Voting Securities"), (B)
the combined voting power of the Company's then outstanding Voting
Securities and any securities convertible into Voting Securities, or (C)
the then outstanding shares of all classes of stock of the Company; or
(ii) individuals who, as of the effective date of this Agreement,
constitute the Company's Board of Directors (the "Incumbent Directors")
cease for any reason, including, without limitation, as a result of a
tender offer, proxy contest, merger or similar transaction, to
constitute at least a majority of the Company's Board of Directors,
provided that any person becoming a director of the Company subsequent
to the effective date of this Agreement whose election or nomination for
election was approved by a vote of at least a majority of the Incumbent
Directors (other than an election or nomination of an individual whose
initial assumption of office is in connection with an actual or
threatened election contest relating to the election of the directors of
the Company, as such terms are used in Rule 14a-11 of Regulation 14A
under the Exchange Act) shall, for purposes of this Agreement, be
considered an Incumbent Director; or
(iii) consummation of (1) any consolidation or merger of the Company
or any subsidiary where the stockholders of the Company, immediately
prior to the consolidation or merger, would not, immediately after the
consolidation or merger, beneficially own (as such term is defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, but based
solely on their prior ownership of shares of the Company, shares
representing in the aggregate more than 60% of the voting shares of the
corporation issuing cash or securities in the consolidation or merger
(or of its ultimate parent corporation, if any), or (2) any sale, lease,
exchange or other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a single plan) of
all or substantially all of the assets of the Company; or
(iv) stockholder approval of any plan or proposal for the
liquidation or dissolution of the Company.
8
Notwithstanding the foregoing, a "Change-in-Control" shall not be
deemed to have occurred for purposes of the foregoing clause (i) (A)
solely as the result of an acquisition of securities by the Company
which, by reducing the number of shares of stock or other Voting
Securities outstanding, increases (x) the proportionate number of shares
of stock of the Company beneficially owned by any Person to 30% or more
of the shares of stock then outstanding or (y) the proportionate voting
power represented by the Voting Securities beneficially owned by any
Person to 30% or more of the combined voting power of all then
outstanding Voting Securities; provided, however, that if any Person
referred to in clause (x) or (y) of this sentence shall thereafter
become the beneficial owner of any additional stock of the Company or
other Voting Securities (other than pursuant to a share split, stock
dividend, or similar transaction), then a "Change-in-Control" shall be
deemed to have occurred for purposes of the foregoing clause (i), and
(B) solely as a result of the direct or indirect acquisition of
beneficial ownership of Voting Securities by any executive officers of
the Company on the date hereof and/or the Company, any of its
subsidiaries, or any trustee, fiduciary or other person or entity
holding securities under any employee benefit plan of the Company or any
of its subsidiaries if the Grantee is one of the executive officers
participating in such acquisition.
(f) "Disability" means that the Grantee has been unable to efficiently
perform his duties to the Company and all Affiliates because of any physical or
mental injury or illness until the earlier of such time when (i) the period of
injury or illness (whether or not the same injury or illness) exceeds 180
consecutive days or (ii) the Grantee becomes eligible to receive benefits under
a comprehensive disability insurance policy maintained or sponsored by the
Company.
(g) "Dividend Payout Ratio" means the quotient, expressed as a
percentage, derived by dividing the aggregate dividends paid on shares of Common
Stock during a relevant period by the Cash Available for Distribution for such
period.
(h) "Good Reason" means the occurrence of any of the following events or
conditions, which event or condition is not corrected by the Company within 30
days of written notice from the Grantee: (i) any failure of the Board of
Directors of the Company to elect the Grantee to offices with the same or
substantially the same duties and responsibilities as in effect on the Date of
Grant, (ii) any material failure by the Company or any Affiliate to timely pay
or provide to the Grantee any compensation or benefits required to be paid or
provided under the terms of any employment or similar agreement in effect during
the term of this Agreement between the Grantee and the Company or such
Affiliate, (iii) any material breach by the Company or any Affiliate of any
other provision of any employment or similar agreement in effect during the term
of this Agreement between the Grantee and the Company or such Affiliate, and
(iv) any failure by the Company or any Affiliate to timely offer to renew (and
to hold such offer to renew open for acceptance for a reasonable period of time)
on substantially identical terms until at least the fourth anniversary of the
Date of Grant any employment agreement in effect on the Date of Grant between
the Grantee and the Company or such Affiliate.
9
(i) "Peer Group" means the business entities set forth on Exhibit A to
this Agreement, and any successors to the businesses or assets of such entities
as determined by the Committee in its sole and absolute discretion. If an entity
listed on such Exhibit ceases to exist during the term of this Agreement and the
Committee determines that there is no successor to the business or assets of
such entity, then such entity will cease to be treated as a member of the Peer
Group to the extent and for the periods determined by the Committee in its sole
and absolute discretion.
(j) "Person" has the meaning used in Sections 13(d) and 14(d) of the
Exchange Act.
(k) "Special Outperformance Award Percentage" means 10.04%.
(l) "Special Outperformance Pool" means the dollar value, if any, of 10%
of the cumulative and compounded return to holders of common equity of the
Company and Reckson Operating Partnership, L.P. ("ROP") (collectively, "Common
Equity") based on the Base Price (including all dividends and stock
appreciation) in excess of a cumulative and compounded return of 9% per annum
during the four years completed before the fourth anniversary of the Date of
Grant. For this purpose, such return shall be calculated as the product of (i)
the sum of (A) the increase in market value of the per share price of the Common
Stock over the Base Price as of the fourth anniversary of the Date of Grant and
(B) the total amount of the dividends paid per share of Common Stock during such
four-year period; less the amount equal to a cumulative and compounded return of
9% per annum on the Base Price, and (ii) the average annual weighted average
shares (units) of Common Equity outstanding for such four-year period.
(m) "Target Amount" means $2,500,000.00.
(n) "VWAP" means the volume weighted average closing price per share of
the Common Stock on the New York Stock Exchange during the period ending on the
last trading day before the date of determination.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the ___ day of March, 2003.
RECKSON ASSOCIATES REALTY CORP.
By:
---------------------------------------
Name:
Title:
10
-----------------------------------------
The Grantee
11
Exhibit A - Peer Group Companies
--------------------------------
Arden Realty Group, Inc.
Boston Properties, Inc.
Brandywine Realty Trust
CarrAmerica Realty Corporation
CenterPoint Properties Trust
Cousins Properties Incorporated
Crescent Real Estate Equities, Inc.
Duke Realty Corporation
Equity Office Properties Trust
First Industrial Realty Trust
Highwoods Properties, Inc.
Liberty Property Trust
Mack-Cali Realty Corporation
Prentiss Properties Trust
SL Green Realty Corporation
Vornado Realty Trust
RECKSON OPERATING PARTNERSHIP, L.P.
EXHIBIT 99.1
CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED
STATES CODE
I, Donald Rechler, CO-CEO 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, 2003 (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 9, 2003
RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp., its sole general partner
By /s/ Donald Rechler
------------------------------------------------------
Donald Rechler, Co-Chief Executive 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.
RECKSON OPERATING PARTNERSHIP, L.P.
EXHIBIT 99.2
CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED
STATES CODE
I, Scott H. Rechler, CO-CEO 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, 2003 (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 9, 2003
RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp., its sole general partner
By /s/ Scott H. Rechler
-----------------------------------------------------
Scott H. Rechler, Co-Chief Executive 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.
RECKSON OPERATING PARTNERSHIP, L.P.
EXHIBIT 99.3
CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF
TITLE 18 OF THE UNITED STATES CODE
I, Michael Maturo, Executive Vice President, Treasurer and CFO 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, 2003 (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 9, 2003
RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp., its sole general partner
By /s/ Michael Maturo
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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.
