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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission file number: 1-13762
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RECKSON OPERATING PARTNERSHIP, L. P.
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(Exact name of registrant as specified in its charter)
Delaware 11-3233647
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
225 Broadhollow Road, Melville, NY 11747
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(Address of principal executive office) (zip code)
(631) 694-6900
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No__, and (2) has been
subject to such filing requirements for the past 90 days.
Yes / X / No / /
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 126.2 of the Exchange Act).
Yes / X / No / /
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RECKSON OPERATING PARTNERSHIP, L.P.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
INDEX PAGE
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PART I. FINANCIAL INFORMATION 3
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Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002................................. 3
Consolidated Statements of Income for the three
and nine months ended September 30, 2003 and 2002 (unaudited) .... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 (unaudited) ...................... 5
Notes to the Consolidated Financial Statements (unaudited) ........ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 40
Item 4. Controls and Procedures............................................ 41
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PART II. OTHER INFORMATION 46
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Item 1. Legal Proceedings.................................................. 46
Item 2. Changes in Securities and Use of Proceeds.......................... 46
Item 3. Defaults Upon Senior Securities.................................... 46
Item 4. Submission of Matters to a Vote of Securities Holders.............. 46
Item 5. Other Information.................................................. 46
Item 6. Exhibits and Reports on Form 8-K................................... 46
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SIGNATURES 47
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2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT UNIT AMOUNTS)
SEPTEMBER 30,
2003 DECEMBER 31,
ASSETS (UNAUDITED) 2002
------------ ------------
Commercial real estate properties, at cost
Land ...................................................................... $ 386,512 $ 386,747
Buildings and improvements ................................................ 2,241,511 2,199,896
Developments in progress:
Land ...................................................................... 89,450 92,924
Development costs ......................................................... 61,372 28,311
Furniture, fixtures and equipment .............................................. 11,300 12,203
----------- -----------
2,790,145 2,720,081
Less accumulated depreciation .................................................. (446,522) (382,022)
----------- -----------
2,343,623 2,338,059
Properties and related assets held for sale, net of accumulated
depreciation .................................................................. 202,521 196,954
Investments in real estate joint ventures ...................................... 5,844 6,116
Investment in mortgage notes and notes receivable .............................. 70,425 54,547
Cash and cash equivalents ...................................................... 25,558 30,576
Tenant receivables ............................................................. 14,842 12,529
Investments in service companies and affiliate loans and joint ventures ........ 75,301 78,104
Deferred rents receivable ...................................................... 109,622 97,145
Prepaid expenses and other assets .............................................. 33,003 32,577
Contract and land deposits and pre-acquisition costs ........................... 128 240
Deferred lease and loan costs .................................................. 64,619 65,205
----------- -----------
TOTAL ASSETS .............................................................. $ 2,945,486 $ 2,912,052
=========== ===========
LIABILITIES
Mortgage notes payable ......................................................... $ 725,002 $ 733,761
Mortgage notes payable and other liabilities associated with properties
held for sale ................................................................. 9,107 10,722
Unsecured credit facility ...................................................... 374,000 267,000
Senior unsecured notes ......................................................... 499,409 499,305
Accrued expenses and other liabilities ......................................... 80,676 85,849
Distributions payable .......................................................... 31,606 31,575
----------- -----------
TOTAL LIABILITIES ......................................................... 1,719,800 1,628,212
----------- -----------
Minority partners' interests in consolidated partnerships ...................... 234,377 242,934
----------- -----------
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, 48,012,988 and 48,246,083 units issued and
outstanding, respectively .................................................. 443,502 478,121
Class B common units, 9,915,313 units issued and outstanding ................. 196,707 209,675
Limited Partners' Capital:
Class A common units, 7,275,224 and 7,276,224 units issued and
outstanding, respectively .................................................. 64,319 71,420
Class C common units, 465,845 and 0 units issued and outstanding,
respectively ............................................................... 5,091 --
----------- -----------
TOTAL PARTNERS' CAPITAL ..................................................... 991,309 1,040,906
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL ................................... $ 2,945,486 $ 2,912,052
=========== ===========
(see accompanying notes to financial statements)
3
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT UNIT DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------ ------------ -------------
REVENUES:
Property operating revenues:
Base rents ................................................ $ 95,239 $ 100,730 $ 288,202 $ 295,137
Tenant escalations and reimbursements ..................... 16,466 13,994 44,817 40,794
------------ ------------ ------------ ------------
Total property operating revenues .............................. 111,705 114,724 333,019 335,931
Interest income on mortgage notes and notes receivable
(including $1,100, $1,100, $3,100 and $3,200, respectively
from related parties) ........................................ 1,724 1,589 4,814 4,710
Investment and other income .................................... 4,676 550 13,769 1,012
------------ ------------ ------------ ------------
TOTAL REVENUES ............................................ 118,105 116,863 351,602 341,653
------------ ------------ ------------ ------------
EXPENSES:
Property operating expenses .................................... 47,210 43,089 134,787 120,603
Marketing, general and administrative .......................... 8,239 7,402 24,755 20,923
Interest ....................................................... 20,231 20,684 61,170 59,860
Depreciation and amortization .................................. 26,273 26,690 82,845 75,654
------------ ------------ ------------ ------------
TOTAL EXPENSES ............................................ 101,953 97,865 303,557 277,040
------------ ------------ ------------ ------------
Income before minority interests, distributions to preferred
unit holders, equity (loss) in earnings of
real estate joint ventures and service companies,
gain on sales of depreciable real estate assets and
discontinued operations....................................... 16,152 18,998 48,045 64,613
Minority partners' interests in consolidated partnerships ...... (4,379) (4,446) (13,404) (14,379)
Equity (loss) in earnings of real estate joint ventures and
service companies (including $0, $0, $0 and $465,
respectively from related parties) ............................ 134 104 (30) 598
Gain on sales of depreciable real estate assets ................ -- -- -- 537
------------ ------------ ------------ ------------
Income before discontinued operations and distributions to
preferred unitholders.......................................... 11,907 14,656 34,611 51,369
Discontinued operations:
Gain on sales of real estate .............................. -- 4,896 -- 4,896
Income from discontinued operations ....................... 4,893 4,282 11,488 12,664
------------ ------------ ------------ ------------
Net Income ..................................................... 16,800 23,834 46,099 68,929
Preferred unit distributions ................................... (5,589) (5,760) (16,770) (17,475)
------------ ------------ ------------ ------------
Net income allocable to common unit holders .................... $ 11,211 $ 18,074 $ 29,329 $ 51,454
============ ============ ============ ============
Net Income allocable to:
Class A common ............................................ $ 8,767 $ 14,275 $ 23,001 $ 40,576
Class B common ............................................ 2,396 3,799 6,280 10,878
Class C common ............................................ 48 -- 48 --
------------ ------------ ------------ ------------
Total .......................................................... $ 11,211 $ 18,074 $ 29,329 $ 51,454
============ ============ ============ ============
Net income per weighted average common units:
Class A common ............................................ $ .09 .20 $ .26 $ .55
Discontinued operations ................................... .07 .05 .16 .16
Gain on sales of depreciable real estate assets ........... -- -- -- --
------------ ------------ ------------ ------------
Class A common ............................................ $ .16 $ .25 $ .42 $ .71
============ ============ ============ ============
Class B common ............................................ $ .13 $ .30 $ .38 $ .83
Discontinued operations ................................... .11 .08 .25 .24
Gain on sales of depreciable real estate assets ........... -- -- -- --
------------ ------------ ------------ ------------
Class B common ............................................ $ .24 $ .38 $ .63 $ 1.07
============ ============ ============ ============
Class C common ............................................ $ .09 $ -- $ .29 $ --
Discontinued operations ................................... .08 -- .22 --
Gain on sales of depreciable real estate assets ........... -- -- -- --
------------ ------------ ------------ ------------
Class C common ............................................ $ .17 $ -- $ .51 $ --
============ ============ ============ ============
Weighted average common units outstanding:
Class A common ............................................ 55,285,500 56,802,000 55,346,000 57,530,000
Class B common ............................................ 9,915,000 10,010,000 9,915,000 10,191,000
Class C common ............................................ 278,000 -- 94,000 --
(see accompanying notes to financial statements)
4
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
Nine Months Ended
September 30,
----------------------
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................................... $ 46,099 $ 68,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization (including discontinued operations) ............ 89,959 82,913
Gain on sales of depreciable real estate assets .............................. -- (5,433)
Minority partners' interests in consolidated partnerships..................... 13,404 14,379
(Equity) loss in earnings of real estate
joint ventures and service companies.......................................... 30 (598)
Changes in operating assets and liabilities:
Prepaid expenses and other assets ............................................ 5,203 11,431
Tenant receivables ........................................................... (654) 312
Deferred rents receivable .................................................... (13,755) (19,666)
Accrued expenses and other liabilities ....................................... 3,917 (6,698)
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Net cash provided by operating activities ................................... 144,203 145,569
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgage notes receivable and proceeds from repayments ........... (15,000) 12
Additions to commercial real estate properties ............................... (36,080) (31,029)
Additions to developments in progress ........................................ (15,104) (37,304)
Purchase of commercial real estate ........................................... (40,500) --
Payment of leasing costs ..................................................... (13,185) (12,789)
Additions to furniture, fixtures and equipment ............................... (192) (71)
Distributions from investments in real estate joint ventures ............... 243 --
Proceeds from sales of real estate ........................................... -- 22,385
--------- ---------
Net cash used in investing activities ....................................... (119,818) (58,796)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on secured borrowings ..................................... (8,932) (7,930)
Payment of loan costs ........................................................ (164) (1,538)
Increase in investments in affiliate loans and service companies ............. -- 62
Proceeds from issuance of senior unsecured notes ............................. -- 49,432
Proceeds from of unsecured credit facility ................................... 112,000 115,000
Repayment of unsecured credit facility ....................................... (5,000) (162,600)
Distributions to minority partners in consolidated partnerships .............. (16,313) (14,572)
Purchases of general partner common units .................................... (4,538) (49,227)
Contributions ................................................................ 74 6,310
Distributions ................................................................ (106,530) (111,198)
--------- ---------
Net cash used in financing activities ..................................... (29,403) (176,261)
--------- ---------
Net (decrease) in cash and cash equivalents ..................................... (5,018) (89,488)
Cash and cash equivalents at beginning of period ................................ 30,576 121,773
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 25,558 $ 32,285
========= =========
(see accompanying notes to financial statements)
5
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 2003, the
Company's ownership percentage in the Operating Partnership was approximately
88.9%.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Operating Partnership and its subsidiaries at
September 30, 2003 and December 31, 2002 and the results of their operations for
the three and nine months ended September 30, 2003 and 2002, respectively, and,
their cash flows for the nine months ended September 30, 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 their
contracts. This method records amounts earned as revenue in the proportion that
actual costs incurred to date bear to the estimate of total costs at contract
completion.
The minority partners' interests in consolidated partnerships at June 30, 2003
represent a 49% non-affiliated interest in RT Tri-State LLC, owner of an eight
property suburban office portfolio, a 40% non-affiliated interest in Omni
Partners, L.P., owner of a 579,000 square foot suburban office property and a
49% non-affiliated interest in Metropolitan 919 Third Avenue, LLC, owner of the
property located at 919 Third Avenue, New York, NY.
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).
6
The accompanying interim unaudited financial statements have been prepared by
the Operating Partnership's management pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") may
have been condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate to make the information
presented not misleading. The unaudited financial statements as of September 30,
2003 and for the three and nine month periods ended September 30, 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.
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
September 30, 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 $1.1 million. Such amount also adjusted net income per
weighted average common unit by $(.02) and $(.03) with respect to the Class A
common and Class B common units, respectively.
In addition, the net income allocable to common unit holders for the nine month
period ended September 30, 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 $3.0 million. Such amount also adjusted net
income per weighted average common unit by $(.04) and $(.07) with respect to the
Class A common and Class B common units, respectively.
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 accordance with the provisions of
Statement No. 144, the Operating Partnership allocated approximately $2.3
million and $6.8 million of its unsecured interest expense to discontinued
operations for the three and nine months ended September 30, 2003, respectively.
On July 1, 2001 and January 1, 2002, the Operating Partnership adopted FASB
Statement No.141 "Business Combinations" and FASB Statement No. 142, "Goodwill
and Other Intangibles", respectively. As part of the acquisition of real estate
assets, the fair value of the real estate acquired is allocated to the acquired
tangible assets, consisting of land, building and building improvements, and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, other value of in-place leases, and value
of tenant relationships, based in each case on their fair values. The Operating
Partnership assesses fair value based on estimated cash flow projections that
utilize appropriate discount and capitalization rates and available market
information. Estimates of future cash flows are based on a number of factors
including the historical operating results, known trends, and market/economic
conditions that may affect the property. If the Operating Partnership
incorrectly estimates the values at acquisition or the undiscounted cash flows,
initial allocation of purchase price and future impairment charges may be
different.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes the current
practice in the accounting for, and disclosure of, guarantees. Guarantees and
indemnification agreements meeting the characteristics described in FIN 45 are
required to be initially recorded as a liability at fair value. FIN 45 also
requires a guarantor to make significant new disclosures for virtually all
guarantees even if the likelihood of the guarantor having to make payment under
the guarantee is remote. The disclosure requirements within FIN 45 are effective
for financial statements for annual or interim periods ending after December 15,
2002. The initial recognition and initial measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The Operating Partnership adopted FIN 45 on January 1, 2003. The adoption of
this interpretation did not have a material effect on the results of operations
or the financial position of the Operating Partnership.
7
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which explains how to identify variable
interest entities ("VIE") and how to assess whether to consolidate such
entities. The initial determination of whether an entity qualifies as a VIE
shall be made as of the date at which a primary beneficiary becomes involved
with the entity and reconsidered as of the date of a triggering event, as
defined. The provisions of this interpretation are immediately effective for
VIE's formed after January 31, 2003. On October 9, 2003, the FASB issued FIN
46-6, deferring the effective date until the first interim or annual period
ending after December 15, 2003 for interests held by public companies in
variable interest entities created before February 1, 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 Company's consolidation policy related to such entities.
8
3. MORTGAGE NOTES PAYABLE
As of September 30, 2003, the Operating Partnership had approximately $731.1
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 $44.3 million of the $731.1
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 September 30, 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 19,403 6.45% October, 2005 $34 per month
200 Summit Lake Drive, Valhalla, NY 19,050 9.25% January, 2006 25
1350 Avenue of the Americas, NY, NY 74,046 6.52% June, 2006 30
Landmark Square, Stamford, CT (a) 44,302 8.02% October, 2006 25
100 Summit Lake Drive, Valhalla, NY 18,075 8.50% April, 2007 15
333 Earle Ovington Blvd, Mitchel Field, NY (b) 53,125 7.72% August, 2007 25
810 Seventh Avenue, NY, NY 81,710 7.73% August, 2009 25
100 Wall Street, NY, NY 35,408 7.73% August, 2009 25
6900 Jericho Turnpike, Syosset, NY 7,259 8.07% July, 2010 25
6800 Jericho Turnpike, Syosset, NY 13,754 8.07% July, 2010 25
580 White Plains Road, Tarrytown, NY 12,530 7.86% September, 2010 25
919 Third Ave, NY, NY (c) 244,919 6.867% August, 2011 30
110 Bi-County Blvd., Farmingdale, NY 3,462 9.125% November, 2012 20
One Orlando Center, Orlando, FL (d) 37,914 6.82% November, 2027 28
120 West 45th Street, NY, NY (d) 63,507 6.82% November, 2027 28
--------------
Total/Weighted Average $ 731,080 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 $31.9 million
(c) The Operating Partnership has a 51% membership interest in this
property and its proportionate share of the aggregate principal amount
is approximately $124.9 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 share of the mortgage debt
at September 30, 2003 is approximately $8.0 million. This mortgage note payable
bears interest at 8.85% per annum and matures on September 1, 2005 at which time
the Operating Partnership's share of the mortgage debt will be approximately
$6.9 million.
4. SENIOR UNSECURED NOTES
As of September 30, 2003, the Operating Partnership had outstanding
approximately $499.4 million (net of issuance discounts) of senior unsecured
notes (the "Senior Unsecured Notes"). The following table sets forth the
Operating Partnership's Senior Unsecured Notes and other related disclosures by
scheduled maturity date (dollars in thousands):
FACE
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.
9
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. As of September 30, 2003, borrowings
under the Credit Facility were priced off LIBOR plus 90 basis points and the
Credit Facility carried a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's unsecured credit rating the
interest rates and facility fee are subject to change (see Note 12). The
outstanding borrowings under the Credit Facility were $374 million at
September 30, 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 September 30, 2003, the Operating Partnership had
availability under the Credit Facility to borrow approximately an additional
$126 million, subject to compliance with certain financial covenants.
6. COMMERCIAL REAL ESTATE INVESTMENTS
As of September 30, 2003, the Operating Partnership owned and operated 78 office
properties (inclusive of ten office properties owned through joint ventures)
comprising approximately 13.8 million square feet, 102 industrial / R&D
properties comprising approximately 6.8 million square feet and two retail
properties comprising approximately 20,000 square feet located in the Tri-State
Area. For information relating to events subsequent to September 30, 2003, see
footnote 12.
As of September 20, 3003, the Operating Partnership also owned approximately 313
acres of land in 12 separate parcels of which the Operating Partnership can
develop approximately 3.0 million square feet of office space 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 September 30, 2003, the Operating Partnership had invested approximately
$150.8 million in these development projects. Management has made subjective
assessments as to the value and recoverability of these investments based on
current and proposed development plans, market comparable land values and
alternative use values. As of September 30, 2003, the Operating Partnership has
capitalized approximately $7.1 million related to real estate taxes, interest
and other carrying costs related to these development projects. In October 2003,
the Operating Partnership entered into contracts to sell two land parcels
aggregating approximately 128 acres of its land holdings located in New Jersey.
The contracts provided for aggregate sales prices ranging from $23 million to
$43 million. These sales are contingent upon obtaining zoning for residential
use of the land and other customary approvals. The proceeds ultimately received
from such sales will be based upon the number of residential units permitted by
the rezoning. The closing is scheduled to occur upon the rezoning which is
anticipated to occur within 12 to 36 months.
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. 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. As described below, the Operating Partnership has since identified
and acquired certain qualified replacement properties and an interest in a
qualified joint venture property 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 $20.9
million of which $3.3 million and $13.4 million has been recognized during the
three and nine months ended September 30, 2003, respectively and is included in
investment and other income on the accompanying statements of income.
Approximately $7.5 million is estimated to be earned in future periods as the
development progresses.
On May 22, 2003, the Operating Partnership, through Reckson Construction Group,
Inc., acquired two industrial redevelopment properties in Hauppauge, Long Island
encompassing approximately 100,000 square feet for total consideration of
approximately $6.5 million. On August 27, 2003, the Operating Partnership,
through Reckson Construction Group, Inc., acquired the remaining 49% interest in
the property located at 275 Broadhollow Road, Melville, NY, from the Operating
Partnership's joint venture partner, Teachers Insurance and Annuity Association,
for approximately $12.4 million. These acquisitions were financed from the sales
proceeds being held by the previously referenced qualified intermediary and the
properties acquired were identified, qualified replacement properties. As a
result of these acquisitions, the Operating Partnership successfully completed
the exchange of real property pursuant to Section 1031 and thereby deferred the
taxes related to the gain recognized on the sale proceeds received from the land
sale to First Data Corp.
10
On August 7, 2003, the Operating Partnership acquired a ten story, 181,800
square foot Class A office property located in Stamford, Connecticut. This
acquisition was financed, in part, through an advance under the Credit Facility
of $21.6 million and the issuance of 465,845 Class C common units of limited
partnership interest valued at $24.00 per unit. In accordance with FASB
Statement No. 141 "Business Combinations", the Operating Partnership allocated
and recorded a net deferred intangible lease asset of approximately $1.5
million, representing the net value of acquired above and below market leases,
assumed lease origination costs and other value of in-place leases. The net
value of the above and below market leases is amortized over the remaining terms
of the respective leases to rental income and such amortization amounted to
approximately $133,000 during the third quarter of 2003. In addition,
amortization expense on the value of lease origination costs was approximately
$45,500 for the third quarter 2003. At acquisition, there were 16 in-place
leases aggregating approximately 136,000 square feet with a weighted average
remaining lease term of approximately 30 months.
On September 5, 2003, the Operating Partnership acquired a $15 million
participating interest in a $30 million junior mezzanine loan secured by, among
other things, a pledge of the ownership interest of an entity which owns the
ground leasehold estate under a 1.1 million square foot Class A office complex
located on Long Island, New York. The loan matures on September 9, 2005 and the
borrower has the right to extend the loan for three additional one year periods.
The loan is comprised of three tranches based upon priority: a $14 million A
tranche, a $14 million B tranche and a $2 million C tranche. The Operating
Partnership acquired a 25% interest in the A tranche, a 75% interest in the B
tranche and a 50% interest in the C tranche. Interest is payable on the tranches
at 9.5%, 12.5% and 12.5%, respectively, over the greater of one month LIBOR or
1.63%. As a result, the minimum weighted average interest rate accruing to the
Operating Partnership is 13.43%. In addition, as part of the Operating
Partnership's participation it received a 1% origination fee amounting to
$150,000. Such fee is being recognized over a three year period.
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 partnership interest in Omni
Partnership, L.P. and on March 14, 2007 may exercise an option to acquire the
remaining 40% interest for a price based on 90% of the fair market value of the
property. As of September 30, 2003, the Operating Partnership held three other
notes receivable aggregating $36.5 million bearing interest at rates ranging
from 10.5% to 12% per annum. On October 27, 2003, the Operating Partnership was
repaid in full on one of these notes totaling $20 million and issued a $5
million note receivable to the same minority partner under terms similar to the
repaid note. These notes are secured in part by a minority partner's preferred
unit interest in the Operating Partnership, certain interest in real property
and a personal guarantee (the "Other Notes" and collectively with the Omni Note,
the "Note Receivable Investments"). 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 $101.4 million mortgage note along with one of the
Operating Partnership's New York City buildings.
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV"), which it manages. The remaining 40% interest is owned by
JAH Realties, L.P. Jon Halpern, a director of HQ Global Workplaces, is a partner
in JAH Realties, L.P. As of September 30, 2003, the 520JV had total assets of
$19.8 million, a mortgage note payable of $12.1 million and other liabilities of
$135,000. The Operating Partnership's allocable share of the 520JV mortgage note
payable is approximately $8.0 million. This mortgage note payable bears interest
at 8.85% per annum and matures on September 1, 2005. During the second quarter
of 2003, HQ Global Workplaces, a tenant of the 520JV surrendered approximately
one-third of its premises. As a result, the 520JV incurred a write-off of
$633,000 relating to its deferred rents receivable and incurred a net loss of
approximately $181,000 for the nine months ended September 30, 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. In
accordance with the equity method of accounting the Operating Partnership's
proportionate share of the 520JV income (loss) was approximately $134,000 and
$(30,000) for the three and nine months ended September 30, 2003, respectively.
11
During September 2000, the Operating Partnership formed a joint venture (the
"Tri-State JV") with Teachers Insurance and Annuity Association ("TIAA") and
contributed nine Class A suburban office properties aggregating approximately
1.5 million square feet to the Tri-State JV for a 51% majority ownership
interest. TIAA contributed approximately $136 million for a 49% interest in the
Tri-State JV, which was then distributed to the Operating Partnership. In August
2003, the Operating Partnership acquired TIAA's 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, for approximately $12.4 million.
As a result, the Tri-State JV owns eight Class A suburban office properties
aggregating approximately 1.4 million square feet. The Operating Partnership is
responsible for managing the day-to-day operations and business affairs of the
Tri-State JV and has substantial rights in making decisions affecting the
properties such as leasing, marketing and financing. The minority member has
certain rights primarily intended to protect its investment. For purposes of its
financial statements the Operating Partnership consolidates the Tri-State JV.
On December 21, 2001, the Operating Partnership formed a joint venture with the
New York State Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby
NYSTRS acquired a 49% indirect interest in the property located at 919 Third
Avenue, New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Operating Partnership. The Operating
Partnership is responsible for managing the day-to-day 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 September 30, 2003, the Operating Partnership had issued and outstanding
9,915,313 Class B common units, all of which, are held by the Company. 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.
On October 24, 2003, the Company gave notice to its Class B common stockholders
that it will exercise its option to exchange all of its Class B common stock
outstanding on November 25, 2003 for an equal number of shares of Class A common
stock. The Board of Directors has declared a final cash dividend on the
Company's Class B common stock to holders of record on November 25, 2003 in the
amount of $.1758 per share, payable on January 12, 2004. This payment will cover
the period from November 1, 2003 through November 25, 2003 and is based on the
current quarterly Class B common stock dividend rate of $.6471 per share. In
order to align the regular quarterly dividend payment schedule of the former
holders of Class B common stock with the schedule of the holders of Class A
common stock for periods subsequent to the exchange date for the Class B common
stock, the Board of Directors has also declared a cash dividend with regard to
the Class A common stock to holders of record on October 14, 2003 in the amount
of $.2585 per share, payable on January 12, 2004. This payment will cover the
period from October 1, 2003 through November 25, 2003 and is based on the
current quarterly Class A common stock dividend rate of $.4246 per share. As a
result, the Company will have declared dividends through November 25, 2003 to
all holders of Class A common stock and Class B common stock. The Board of
Directors has also declared the Class A common stock cash dividend for the
portion of the fourth quarter subsequent to November 25, 2003. The holders of
record of Class A common stock on January 2, 2004, giving effect to the exchange
transaction, will receive a Class A common stock dividend in the amount of
$.1661 per share, payable on January 12, 2004. This payment will cover the
period from November 26, 2003 through December 31, 2003 and is based on the
current quarterly Class A common stock dividend rate of $.4246 per share. In
connection with the Company's exchange of its Class B common stock, the
Operating Partnership will exchange its Class B common units held by the Company
for an equal number of Class A common units. Further, with respect to the
foregoing declarations on dividends on the Company's Class A and Class B common
stock, the Operating Partnership will make distributions on its Class A and
Class B common units in like amounts on the same dates.
During September 2003, the Operating Partnership declared the following
distributions:
RECORD PAYMENT THREE MONTHS ANNUALIZED
SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION
-------- ------------ ---- ---- ----- ------------
Class A common unit $.4246 October 6, 2003 October 17, 2003 September 30, 2003 $1.6984
Class B common unit $.6471 October 15, 2003 October 31, 2003 October 31, 2003 $2.5884
Series A preferred unit $.476563 October 15, 2003 October 31, 2003 October 31, 2003 $1.9063
Series E preferred unit $.553125 October 15, 2003 October 31, 2003 October 31, 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 nine months
ended September 30, 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.
12
The following table sets forth the historical 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 commi to consider
purchases of up to $75 million of the Company's outstanding preferred
securities.
On September 30, 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.
On August 7, 2003, in conjunction with the Operating Partnership's acquisition
of a Class A office property located in Stamford, Connecticut (see Note 6), the
Operating Partnership issued 465,845 Class C common units of limited partnership
interest. The Class C units will receive an annual distribution of $1.87 per
unit, which amount will increase or decrease pro-rata based upon changes in the
dividend paid on the Company's Class A common stock. On October 17, 2003, the
Operating Partnership paid a distribution to the Class C unit holders of
approximately $130,000 for the period from August 7, 2003 through September 30,
2003.
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 $3.3 million
of compensation expense was recorded for each of the nine month periods ended
September 30, 2003 and 2002, respectively, related to these LTIP. Such amounts
have been included in marketing, general and administrative expenses on the
accompanying consolidated statements of income.
The outstanding stock loan balances due from the Company's executive and senior
officers aggregated approximately $13.0 million and $17.0 million at September
30, 2003 and December 31, 2002, respectively, and have been included as a
reduction of general partner's capital on the accompanying consolidated balance
sheets. Other outstanding loans to the Company's executive and senior officers
at September 30, 2003 amounted to approximately $1.0 million related to life
insurance contracts and approximately $2.0 million primarily related to tax
payment advances on 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. During the three
and nine months ended September 30, 2003, the Operating Partnership recorded
approximately $228,000 and $653,000 of compensation expense, respectively,
related to the Rights. Such amounts have been included in marketing, general and
administrative expenses on the accompanying consolidated statements of income.
13
In March 2003, the Company established a new LTIP for its executive and senior
officers. The four-year plan has a core award which provides for annual stock
based compensation based upon continued service and in part based on attaining
certain annual performance measures. The plan also has a special outperformance
award which provides for compensation to be earned at the end of a four year
period if the Company attains certain four year cumulative performance measures.
Amounts earned under the special outperformance award may be paid in cash or
stock at the discretion of the Compensation Committee of the Board. Performance
measures are based on total shareholder returns on a relative and absolute
basis. On March 13, 2003, the Company made available 1,384,102 shares of its
Class A common stock under its existing stock option plans in connection with
the core award of this LTIP for twelve of its executive and senior officers.
During May 2003, two of the Company's executive officers waived these awards
under this LTIP in their entirety, which aggregated 277,778 shares or 20% of the
core awards granted. In addition, the special outperformance awards of the LTIP
were amended to increase the per share base price above which the four year
cumulative return is measured from $18.00 to $22.40. With respect to the core
award of this LTIP, the Operating Partnership recorded approximately $403,000
and $2.0 million of compensation expense for the three and nine months ended
September 30, 2003, respectively. Such amounts have been included in marketing,
general and administrative expenses on the accompanying consolidated statements
of income. Further, no provision will be made for the special outperformance
award of this LTIP until such time as achieving the requisite performance
measures is determined to be probable.
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.
On May 29, 2003, the Board of Directors of the Company appointed Mr. Peter Quick
as Lead Director and Chairman of the Nominating/Governance Committee. The
Nominating/Governance Committee as well as the Company's Audit Committee and
Compensation Committee are comprised solely of independent directors.
In addition, in May 2003, the Company revised its policy with respect to
compensation of its independent directors to provide that a substantial portion
of the independent director's compensation shall be in the form of Class A
common stock of the Company. Such common stock may not be sold until such time
as the director is no longer a member of the Company's Board.
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 September 30, 2003, the Company had approximately 6.2 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
$22.43 per option. In addition, the Company has approximately 592,000 shares
of its Class A common stock reserved for future issuance under its stock option
plans.
14
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2003 2002
-------- -------
Cash paid during the period for interest................ $79,193 $79,456
======= =======
Interest capitalized during the period ................. $ 5,804 $ 6,354
======= =======
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 President 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.
The following table sets forth the components of the Operating Partnership's
revenues and expenses and other related disclosures for the three months ended
September 30, 2003 and 2002 (in thousands):
Three months ended
------------------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------------------------------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
--------- --------- ------------ ---------- --------- -----------
REVENUES:
Base rents, tenant
escalations and reimbursements.......... $ 110,167 $ 1,538 $ 111,705 $ 112,566 $ 2,158 $ 114,724
Other income.............................. 686 5,714 6,400 239 1,900 2,139
--------- --------- ---------- --------- --------- ---------
Total Revenues.......................... 110,853 7,252 118,105 112,805 4,058 116,863
--------- --------- ---------- --------- --------- ---------
EXPENSES:
Property operating expenses............... 46,376 834 47,210 41,965 1,124 43,089
Marketing, general and administrative..... 3,895 4,344 8,239 4,244 3,158 7,402
Interest.................................. 12,633 7,598 20,231 11,034 9,650 20,684
Depreciation and amortization............. 24,702 1,571 26,273 24,273 2,417 26,690
--------- --------- ---------- --------- --------- ---------
Total Expenses.......................... 87,606 14,347 101,953 81,516 16,349 97,865
--------- --------- ---------- --------- --------- ---------
Income (loss) before minority interests,
distributions to preferred unitholders,
equity (loss) in earnings of real estate
joint ventures and service companies,
gain on sales of depreciable real estate
assets and discontinued operations....... $ 23,247 $ (7,095) $ 16,152 $ 31,289 $ (12,291) $ 18,998
========= ========= ========= ========= ========= =========
Total Assets.............................. $2,495,844 $ 449,642 $2,945,486 $2,485,675 $ 420,405 $2,906,080
========= ========= ========= ========= ========= =========
15
The following table sets forth the components of the Operating Partnership's
revenues and expenses and other related disclosures for the nine months ended
September 30, 2003 and 2002 (in thousands):
Nine months ended
------------------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------------------------------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
--------- --------- ------------ ---------- --------- -----------
REVENUES:
Base rents, tenant
escalations and reimbursements.......... $327,874 $ 5,145 $ 333,019 $ 329,356 $ 6,575 $ 335,931
Other income.............................. 2,520 16,063 18,583 399 5,323 5,722
-------- --------- --------- --------- --------- ---------
Total Revenues.......................... 330,394 21,208 351,602 329,755 11,898 341,653
-------- --------- --------- --------- --------- ---------
EXPENSES:
Property operating expenses............... 132,051 2,736 134,787 117,138 3,465 120,603
Marketing, general and administrative 12,055 12,700 24,755 12,207 8,716 20,923
Interest.................................. 37,902 23,268 61,170 33,044 26,816 59,860
Depreciation and amortization............. 78,144 4,701 82,845 69,498 6,156 75,654
-------- --------- --------- --------- --------- ---------
Total Expenses.......................... 260,152 43,405 303,557 231,887 45,153 277,040
-------- --------- --------- --------- --------- ---------
Income (loss) before minority interests,
distributions to preferred unitholders,
equity (loss) in earnings of
real estate joint ventures and service
companies, gain on sales of depreciable
real estate assets and discontinued
operations............................... $ 70,242 $ (22,197) $ 48,045 $ 97,868 $ (33,255) $ 64,613
========= ========= ========= ========= ========= =========
16
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. In
connection with the Operating Partnership's disposition of the Long Island
industrial portfolio, four of the five remaining options (the "Remaining Option
Properties") granted to the Operating Partnership at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Operating Partnership received an aggregate payment
from the Rechler family members of $972,000. Rechler family members have also
agreed to extend the term of the remaining option on the property located at 225
Broadhollow Road, Melville, New York (the Operating Partnership's current
headquarters) for five years and to release the Operating Partnership from
approximately 15,500 square feet under its lease at this property. In connection
with the restructuring of the remaining option the Rechler family members paid
Reckson $1 million in return for Reckson's agreement not to exercise the option
during the next three years. As part of the agreement, the exercise price of the
option payable by Reckson was increased by $1million.
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 Operating Partnership 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
Operating Partnership approved the purchase by the Operating Partnership of the
remaining 3% interests in the Service Companies. On October 1, 2002, the
Operating Partnership acquired such 3% interests in the Service Companies for an
aggregate purchase price of approximately $122,000. Such amount was less than
the total amount of capital contributed by the Rechler family members. As a
result of the acquisition of the remaining interests in the Service Companies,
the Operating Partnership commenced consolidating the operations of the Service
Companies. During the nine months ended September 30, 2003, Reckson Construction
Group, Inc. billed approximately $317,000 of market rate services and Reckson
Management Group, Inc. billed approximately $207,000 of market rate management
fees to the Remaining Option Properties. In addition, for the nine months ended
September 30, 2003, Reckson Construction Group, Inc. performed market rate
services, aggregating approximately $178,500, for a property in which certain
executive officers of the Operating Partnership maintain an equity interest.
Reckson Management Group, Inc. leases approximately 28,200 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 $635,000. The Operating Partnership has also entered into a short
term license agreement at the property for 6,000 square feet of temporary office
space expiring in January 2004. Reckson Management Group, Inc. also leases
10,722 square feet of warehouse space used for equipment, materials and
inventory storage at a property owned by certain members of the Rechler family
at an annual base rent of approximately $75,000.
A company affiliated with an Independent Director of the Company leases 15,566
square feet in a property owned by the Operating Partnership at an annual base
rent of approximately $447,000. Reckson Strategic Venture Partners, LLC ("RSVP")
leased 5,144 square feet in one of the Operating Partnership's joint venture
properties at an annual base rent of approximately $176,000. On June 15, 2003,
this lease was mutually terminated and RSVP vacated the premises.
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine") and RSVP. RSVP is a real estate venture
capital fund which invested primarily in real estate and real estate operating
companies outside the Company's core office 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 September 30, 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 September 30, 2003, interest accrued (net of reserves) under the FrontLine
Facility and the RSVP Facility was approximately $19.6 million.
17
At June 30, 2001, the Company assessed the recoverability of the FrontLine Loans
and reserved approximately $3.5 million of the interest accrued during the
three-month period then ended. In addition, the Company formed a committee of
its Board of Directors, comprised solely of independent directors, to consider
any actions to be taken by the Company in connection with the FrontLine Loans
and its investments in joint ventures with RSVP. During the third quarter of
2001, the Company noted a significant deterioration in FrontLine's operations
and financial condition and, based on its assessment of value and recoverability
and considering the findings and recommendations of the committee and its
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The Company has discontinued the accrual of interest income with respect to the
FrontLine Loans. The Company has also reserved against its share of GAAP equity
in earnings from the RSVP controlled joint ventures funded through the RSVP
Commitment until such income is realized through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
In September 2003, RSVP completed the restructuring of its capital structure and
management arrangements. In connection with the restructuring, RSVP redeemed the
interest of the preferred equity holders of RSVP for an aggregate of
approximately $137 million in cash and the transfer to the preferred equity
holders of the assets that comprised RSVP's parking investment valued at
approximately $28.5 million. RSVP also restructured its management arrangements
whereby a management company formed by its former managing directors has been
retained to manage RSVP pursuant to a management agreement and the employment
contracts of the managing directors with RSVP have been terminated. The
management agreement provides for an annual base management fee, and disposition
fees equal to 2% of the net proceeds received by RSVP on asset sales. (The base
management fee and disposition fees are subject to a maximum over the term of
the agreement of $7.5 million.) In addition, the managing directors retained a
one-third residual interest in RSVP's assets which is subordinated to the
distribution of an aggregate amount of $75 million to RSVP and/or the Company in
respect of its joint ventures with RSVP. The management agreement has a
three-year term, subject to early termination in the event of the disposition of
all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of assets sales by RSVP.
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 September 30, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
Scott H. Rechler, who serves as 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.
18
11. COMMITMENTS AND CONTINGENCIES
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible
officing solutions in the world and which was formerly controlled by FrontLine,
previously operated eleven executive office centers comprising approximately
205,000 square feet at the Operating Partnership's properties, including two
operated at the Operating Partnership's joint venture properties. On March 13,
2002, as a result of experiencing financial difficulties, HQ voluntarily filed a
petition for relief under Chapter 11 of the U.S. Bankruptcy Code and
subsequently rejected three of its leases with the Operating Partnership and
surrendered approximately an additional 20,500 square feet from two other
leases. The Operating Partnership has since re-leased 100% of the rejected
space. In September 2003, the Bankruptcy Court approved the assumption and
amendment by HQ of its remaining eight leases with the Operating Partnership.
The assumed leases expire between 2007 and 2011, encompass approximately 150,000
square feet and provide for current annual base rents totaling approximately
$3.5 million. A committee designated by the Board and chaired by an independent
director conducted all negotiations with HQ.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company,
which leased approximately 527,000 square feet in thirteen of the Operating
Partnership's properties located throughout the Tri-State Area voluntarily filed
a petition for relief under Chapter 11 of the U.S. Bankruptcy Code on July 21,
2002. The Bankruptcy Court granted WorldCom's petition to reject four of its
leases with the Operating Partnership. The four rejected leases aggregated
approximately 282,000 square feet and were to provide for contractual base rents
of approximately $7.2 million for the 2003 calendar year. The Operating
Partnership has agreed to restructure five of the remaining leases. Pursuant to
WorldCom's Plan of Reorganization which has been confirmed by the Bankruptcy
Court, WorldCom must assume or reject the remaining leases prior to the
effective date of the Plan. The effective date of the Plan is estimated to occur
during the first quarter of 2004. All of WorldCom's leases are current on base
rental charges through November 30, 2003, other than under the four rejected
leases and the Operating Partnership currently holds approximately $195,000 in
security deposits relating to the non-rejected leases. There can be no assurance
as to whether WorldCom will affirm or reject any or all of its remaining leases
with the Operating Partnership.
As of September 30, 2003, WorldCom occupied approximately 245,000 square feet of
office space with aggregate annual base rental revenues of approximately $4.1
million, or 1.1% of the Operating Partnership's total 2003 annualized rental
revenue based on base rental revenue earned on a consolidated basis.
12. SUBSEQUENT EVENTS
On September 10, 2003, the Operating Partnership announced that it had entered
into agreements relating to the disposition of its Long Island industrial
building portfolio (the "Disposition") to members of the Rechler family for
approximately $315.5 million in cash and other consideration. The transactions
contemplated by the agreements were consummated on November 10 and November 12,
2003. As a result, the Operating Partnership has disposed of all but three of
its 95 property, 5.9 million square foot, Long Island industrial building
portfolio for approximately $225.1 million in cash and debt assumption and
3,932,111 Units valued at approximately $90.4 million. Approximately $210
million of cash sales proceeds from the Disposition were used to repay the
Credit Facility. The remaining three properties, two of which are subject to
transfer pursuant to Section 1031 of the Code, are anticipated to close within
three to six months.
In addition, four of the five remaining options granted to the Operating
Partnership at the time of the Company's IPO to purchase interests in properties
owned by Rechler family members (including three properties in which the Rechler
family members hold non-controlling interests and one industrial property) were
terminated along with the Operating Partnership's management contracts relating
to three of such properties. In return the Operating Partnership received an
aggregate payment from the Rechler family members of $972,000. Rechler family
members also extended the term of the remaining option on the property located
at 225 Broadhollow Road, Melville, New York (the Company's current headquarters)
for five years and released the Operating Partnership from approximately 15,500
square feet under its lease at this property. In connection with the
restructuring of the remaining option the Rechler family members paid the
Operating Partnership $1 million in return for the Operating Partnership's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Operating Partnership
was increased by $1 million. In addition, as part of the transaction, the
Rechler family entity was granted rights of first refusal with respect to five
vacant land parcels located near the industrial properties for a period of five
years.
19
In connection with the closing, each of Donald Rechler, Roger Rechler, Gregg
Rechler and Mitchell Rechler resigned as an officer of the Company. Mr. Donald
Rechler remains a member of the Board of Directors of the Company. In settlement
of their employment agreements, these four executives received accelerated
vesting of certain equity based awards and an assignment of certain loans owed
to the Company. Additionally, these exiting executives have agreed to provide
two-year commitments to assist the Company in the transition and entered into
specified non-compete arrangements.
In addition, the Company also announced certain other management changes and
corporate governance enhancements. The reconstituted Board consists of six
independent directors and Messrs. Scott and Donald Rechler. The Company has
filled the executive positions vacated by the departing Rechler family members
by promoting from within.
In conjunction with this transaction, the Company is also proposing to
de-stagger its Board of Directors at its next Annual Shareholders Meeting, to
opt out of state anti-takeover provisions and to authorize modification of the
ownership limit currently in its charter relating to the "five or fewer rule."
The Operating Partnership is also under contract to sell a 181,000 square foot
office property located on Long Island for approximately $24.4 million and is
scheduled to close during the fourth quarter. Net proceeds from the sale are
anticipated to be used to repay the Credit Facility.
In accordance with the provisions of FASB Statement No. 144, the Operating
Partnership has separately identified and classified the assets and liabilities
of the aforementioned 95 industrial properties and the office property located
on Long Island on its consolidated balance sheets as held for sale. In addition,
income from the operations of these properties has been reflected on the
Operating Partnership's consolidated statements of income as income from
discontinued operations.
On November 10, 2003, in connection with the Operating Partnership's sale of its
Long Island industrial building portfolio and the settlement of the employment
contracts of the departing Rechler family members, the Operating Partnership
incurred the following restructuring charges: (i) approximately $7.5 million
related to outstanding stock loans under the Company's historical LTIP program
were transferred to the purchaser and approximately $575,000 of loans related to
life insurance contracts were extinguished, (ii) approximately $2.9 million paid
to the departing Rechler family members in exchange for 127,689, or 100%, of
their 2002 Rights and their 2003 Rights were forfeited in their entirety and
(iii) with respect to two of the departing Rechler family members participating
in the Company's March 2003 LTIP, each received 8,681 shares of the Company's
Class A common stock related to the service component of their core award which
was valued at $399,000 in the aggregate. In addition, if the Company attains its
annual performance measure in March 2004, these individuals will also be
entitled to each receive 26,041 shares of Class A common stock representing the
balance of the annual core award as if they had remained in continuous
employment with the Company. The remainder of their core awards, aggregating
208,334 shares of Class A common stock, was forfeited.
On November 10, 2003, the Operating Partnership entered into a contract to
acquire 1185 Avenue of the Americas, a 42-story, 1.1 million square foot Class A
office tower, located between 46th and 47th Streets in New York City for $321
million. The building is presently encumbered by a $202 million mortgage and $48
million of mezzanine debt that the Operating Partnership would assume at
closing. The balance of the purchase price would be paid through an advance
under the Credit Facility. The floating rate mortgage and mezzanine debt both
mature in August 2004 and presently have a weighted average interest rate of
4.95%. The property is also encumbered by a ground lease which has a remaining
term of approximately 40 years with rent scheduled to be re-set at the end of
2005 and then remain constant for the balance of the term. The closing is
subject to customary consents and conditions.
As of September 30, 2003, the Credit Facility carried a facility fee of 20 basis
points per annum and outstanding borrowings were priced off LIBOR plus 90 basis
points. On November 12, 2003, as a result of one of the rating agencies changing
the Operating Partnership's unsecured credit rating, the facility fee was
increased to 30 basis points and the interest rate on outstanding borrowings was
re-set to LIBOR plus 120 basis points. Based on current outstanding borrowings
under the Credit Facility and giving effect to repayments under the Credit
Facility as part of the Long Island industrial building portfolio sale, the
change in the Operating Partnership's unsecured credit rating will increase
interest expense by approximately $1.1 million per annum. In the event the
Operating Partnership re-establishes its previous unsecured credit rating the
interest rates and facility fee will be re-set to their previous levels.
20
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; changes in the Operating
Partnership's credit ratings; changes in the Operating Partnership's cost and
access to capital; downturns in rental rate levels in our markets and our
ability to lease or re-lease space in a timely manner at current or anticipated
rental rate levels; the availability of financing to us or our tenants;
financial condition of our tenants; changes in operating costs, including
utility, security 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 and nine months ended September 30, 2003, the Operating
Partnership incurred approximately $373,000 and $3.7 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.
21
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 their
contracts. This method records amounts earned as revenue in the proportion that
actual costs incurred to date bear to the estimate of total costs at contract
completion.
Gain on sales of real estate are recorded when title is conveyed to the buyer,
subject to the buyer's financial commitment being sufficient to provide economic
substance to the sale and the Operating Partnership having no substantial
continuing involvement with the buyer.
The Operating Partnership follows the guidance provided for under the Financing
Accounting Standards Board ("FASB") Statement No. 66 "Accounting for Sales of
Real Estate" ("Statement No. 66"), which provides guidance on sales contracts
that are accompanied by agreements which require the seller to develop the
property in the future. Under Statement No. 66 profit is recognized and
allocated to the sale of the land and the later development or construction work
on the basis of estimated costs of each activity; the same rate of profit is
attributed to each activity. As a result, profits are recognized and reflected
over the improvement period on the basis of costs incurred (including land) as a
percentage of total costs estimated to be incurred. The Operating Partnership
uses the percentage of completion method, as the future costs of development and
profit 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.
On July 1, 2001 and January 1, 2002, the Operating Partnership adopted FASB
Statement No.141 "Business Combinations" and FASB Statement No. 142, "Goodwill
and Other Intangibles", respectively. As part of the acquisition of real estate
assets, the fair value of the real estate acquired is allocated to the acquired
tangible assets, consisting of land, building and building improvements, and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, other value of in-place leases, and value
of tenant relationships, based in each case on their fair values. The Operating
Partnership assesses fair value based on estimated cash flow projections that
utilize appropriate discount and capitalization rates and available market
information. Estimates of future cash flows are based on a number of factors
including the historical operating results, known trends, and market/economic
conditions that may affect the property. If the Operating Partnership
incorrectly estimates the values at acquisition or the undiscounted cash flows,
initial allocation of purchase price and future impairment charges may be
different.
Long Lived Assets
On a periodic basis, management assesses whether there are any indicators that
the value of the real estate properties may be impaired. A property's value is
impaired only if management's estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by the property are
less than the carrying value of the property. Such cash flows consider factors
such as expected future operating income, trends and prospects, as well as the
effects of demand, competition and other factors. To the extent impairment has
occurred, the loss will be measured as the excess of the carrying amount of the
property over the fair value of the property.
22
The Operating Partnership is required to make subjective assessments as to
whether there are impairments in the value of its real estate properties and
other investments. These assessments have a direct impact on the Operating
Partnership's net income, because recognizing an impairment results in an
immediate negative adjustment to net income. In determining impairment, if any,
the Operating Partnership has adopted FASB Statement No. 144, "Accounting for
the Impairment or Disposal of Long Lived Assets". In accordance with the
provisions of Statement No. 144, the Operating Partnership allocated
approximately $2.3 million and $6.8 million of its unsecured interest expense to
discontinued operations for the three and nine months ended September 30, 2003,
respectively.
23
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 September 30, 2003, the Operating Partnership owned and operated 78 office
properties (inclusive of ten office properties owned through joint ventures)
comprising approximately 13.8 million square feet, 102 industrial / R&D
properties comprising approximately 6.8 million square feet and two retail
properties comprising approximately 20,000 square feet located in the Tri-State
Area. For information relating to events subsequent to September 30, 2003, see
"Recent Developments".
As of September 20, 3003, the Operating Partnership also owned approximately 313
acres of land in 12 separate parcels of which the Operating Partnership can
develop approximately 3.0 million square feet of office space 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 September 30, 2003, the Operating Partnership had invested approximately
$150.8 million in these development projects. Management has made subjective
assessments as to the value and recoverability of these investments based on
current and proposed development plans, market comparable land values and
alternative use values. As of September 30, 2003, the Operating Partnership has
capitalized approximately $7.1 million related to real estate taxes, interest
and other carrying costs related to these development projects. In October 2003,
the Operating Partnership entered into contracts to sell two land parcels
aggregating approximately 128 acres of its land holdings located in New Jersey.
The contracts provided for aggregate sales prices ranging from $23 million to
$43 million. These sales are contingent upon obtaining zoning for residential
use of the land and other customary approvals. The proceeds ultimately received
from such sales will be based upon the number of residential units permitted by
the rezoning. The closing is scheduled to occur upon the rezoning which is
anticipated to occur within 12 to 36 months.
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. 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. As described below, the Operating Partnership has since identified
and acquired certain qualified replacement properties and an interest in a
qualified joint venture property 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 $20.9
million of which $3.3 million and $13.4 million has been recognized during the
three and nine months ended September 30, 2003, respectively and is included in
investment and other income on the Operating Partnership's statements of income.
Approximately $7.5 million is estimated to be earned in future periods as the
development progresses.
On May 22, 2003, the Operating Partnership, through Reckson Construction Group,
Inc., acquired two industrial redevelopment properties in Hauppauge, Long Island
encompassing approximately 100,000 square feet for total consideration of
approximately $6.5 million. On August 27, 2003, the Operating Partnership,
through Reckson Construction Group, Inc., acquired the remaining 49% interest in
the property located at 275 Broadhollow Road, Melville, NY, from the Operating
Partnership's joint venture partner, Teachers Insurance and Annuity Association,
for approximately $12.4 million. These acquisitions were financed from the sales
proceeds being held by the previously referenced qualified intermediary and the
properties acquired were identified, qualified replacement properties. As a
result of these acquisitions, the Operating Partnership successfully completed
the exchange of real property pursuant to Section 1031 and thereby deferred the
taxes related to the gain recognized on the sale proceeds received from the land
sale to First Data Corp.
On August 7, 2003, the Operating Partnership acquired a ten story, 181,800
square foot Class A office property located in Stamford, Connecticut. This
acquisition was financed, in part, through an advance under the Credit Facility
of $21.6 million and the issuance of 465,845 Class C common units of limited
partnership interest valued at $24.00 per unit. In accordance with FASB
Statement No. 141 "Business Combinations", the Operating Partnership allocated
and recorded a net deferred intangible lease asset of approximately $1.5
million, representing the net value of acquired above and below market leases,
assumed lease origination costs and other value of in-place leases. The net
value of the above and below market leases is amortized over the remaining terms
of the respective leases to rental income and such amortization amounted to
approximately $133,000 during the third quarter of 2003. In addition,
amortization expense on the value of lease origination costs was approximately
$45,500 for the third quarter 2003. At acquisition, there were 16 in-place
leases aggregating approximately 136,000 square feet with a weighted average
remaining lease term of approximately 30 months.
24
On September 5, 2003, the Operating Partnership acquired a $15 million
participating interest in a $30 million junior mezzanine loan secured by, among
other things, a pledge of the ownership interest of an entity which owns the
ground leasehold estate under a 1.1 million square foot Class A office complex
located on Long Island, New York. The loan matures on September 9, 2005 and the
borrower has the right to extend the loan for three additional one year periods.
The loan is comprised of three tranches based upon priority: a $14 million A
tranche, a $14 million B tranche and a $2 million C tranche. The Operating
Partnership acquired a 25% interest in the A tranche, a 75% interest in the B
tranche and a 50% interest in the C tranche. Interest is payable on the tranches
at 9.5%, 12.5% and 12.5%, respectively, over the greater of one month LIBOR or
1.63%. As a result, the minimum weighted average interest rate accruing to the
Operating Partnership is 13.43%. In addition, as part of the Operating
Partnership's participation it received a 1% origination fee amounting to
$150,000. Such fee is being recognized over a three year period.
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 partnership interest in Omni
Partnership, L.P. and on March 14, 2007 may exercise an option to acquire the
remaining 40% interest for a price based on 90% of the fair market value of the
property. As of September 30, 2003, the Operating Partnership held three other
notes receivable aggregating $36.5 million bearing interest at rates ranging
from 10.5% to 12% per annum. On October 27, 2003, the Operating Partnership was
repaid in full on one of these notes totaling $20 million and issued a $5
million note receivable to the same minority partner under terms similar to the
repaid note. These notes are secured in part by a minority partner's preferred
unit interest in the Operating Partnership, certain interest in real property
and a personal guarantee (the "Other Notes" and collectively with the Omni Note,
the "Note Receivable Investments"). 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 $101.4 million mortgage note along with one of the
Operating Partnership's New York City buildings.
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV"), which it manages. The remaining 40% interest is owned by
JAH Realties, L.P. Jon Halpern, a director of HQ Global Workplaces, is a partner
in JAH Realties, L.P. As of September 30, 2003, the 520JV had total assets of
$19.8 million, a mortgage note payable of $12.1 million and other liabilities of
$135,000. The Operating Partnership's allocable share of the 520JV mortgage note
payable is approximately $8.0 million. This mortgage note payable bears interest
at 8.85% per annum and matures on September 1, 2005. During the second quarter
of 2003, HQ Global Workplaces, a tenant of the 520JV surrendered approximately
one-third of its premises. As a result, the 520JV incurred a write-off of
$633,000 relating to its deferred rents receivable and incurred a net loss of
approximately $181,000 for the nine months ended September 30, 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. In
accordance with the equity method of accounting, the Operating Partnership's
proportionate share of the 520JV income (loss) was approximately $134,000 and
$(30,000) for the three and nine months ended September 30, 2003, respectively.
In connection with the IPO, the Operating Partnership was granted ten year
options to acquire ten properties (the "Option Properties") which were either
owned by certain Rechler family members who were also executive officers of the
Company, or in which the Rechler family members owned a non-controlling minority
interest at a price based upon an agreed upon formula. In years prior to 2001,
one Option Property was sold by the Rechler family members to a third party and
four of the Option Properties were acquired by the Operating Partnership for an
aggregate purchase price of approximately $35 million, which included the
issuance of approximately 475,000 OP Units valued at approximately $8.8 million.
In connection with the Operating Partnership's disposition of the Long Island
industrial portfolio, four of the five remaining options (the "Remaining Option
Properties") granted to the Operating Partnership at the time of the Company's
IPO to purchase interests in properties owned by Rechler family members were
terminated. In return the Operating Partnership received an aggregate payment
from the Rechler family members of $972,000. Rechler family members have also
agreed to extend the term of the remaining option on the property located at 225
Broadhollow Road, Melville, New York (the Company's current headquarters) for
five years and to release the Operating Partnership from approximately 15,500
square feet under its lease at this property. In connection with the
restructuring of the remaining option the Rechler family members paid Reckson $1
million in return for Reckson's agreement not to exercise the option during the
next three years. As part of the agreement, the exercise price of the option
payable by Reckson was increased by $1 million.
25
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%
interests in the Service Companies. On October 1, 2002, the Operating
Partnership acquired such 3% interests in the Service Companies for an aggregate
purchase price of approximately $122,000. Such amount was less than the total
amount of capital contributed by the Rechler family members. As a result of the
acquisition of the remaining interests in the Service Companies, the Operating
Partnership commenced consolidating the operations of the Service Companies.
During the nine months ended September 30, 2003, Reckson Construction Group,
Inc. billed approximately $317,000 of market rate services and Reckson
Management Group, Inc. billed approximately $207,000 of market rate management
fees to the Remaining Option Properties. In addition, for the nine months ended
September 30, 2003, Reckson Construction Group, Inc. performed market rate
services, aggregating approximately $178,500, for a property in which certain
executive officers of the Company maintain an equity interest.
Reckson Management Group, Inc. leases approximately 28,200 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 $635,000. The Operating Partnership has also entered into a short
term license agreement at the property for 6,000 square feet of temporary space
expiring in January 2004. Reckson Management Group, Inc. also leases 10,722
square feet of warehouse space used for equipment, materials and inventory
storage at a property owned by certain members of the Rechler family at an
annual base rent of approximately $75,000.
A company affiliated with an Independent Director of the Company leases 15,566
square feet in a property owned by the Operating Partnership at an annual base
rent of approximately $447,000. Reckson Strategic Venture Partners, LLC ("RSVP")
leased 5,144 square feet in one of the Operating Partnership's joint venture
properties at an annual base rent of approximately $176,000. On June 15, 2003,
this lease was mutually terminated and RSVP vacated the premises.
During July 1998, the Operating Partnership formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. Currently the Operating Partnership owns, through Metropolitan, five
Class A office properties aggregating approximately 3.5 million square feet.
During September 2000, the Operating Partnership formed a joint venture (the
"Tri-State JV") with Teachers Insurance and Annuity Association ("TIAA") and
contributed nine Class A suburban office properties aggregating approximately
1.5 million square feet to the Tri-State JV for a 51% majority ownership
interest. TIAA contributed approximately $136 million for a 49% interest in the
Tri-State JV, which was then distributed to the Operating Partnership. In August
2003, the Operating Partnership acquired TIAA's 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, for approximately $12.4 million.
As a result, the Tri-State JV owns eight Class A suburban office properties
aggregating approximately 1.4 million square feet. The Operating Partnership is
responsible for managing the day-to-day operations and business affairs of the
Tri-State JV and has substantial rights in making decisions affecting the
properties such as leasing, marketing and financing. The minority member has
certain rights primarily intended to protect its investment. For purposes of its
financial statements the Operating Partnership consolidates the Tri-State JV.
On December 21, 2001, the Operating Partnership formed a joint venture (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 September 30,
2003 was approximately $3.3 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 $1.5 billion (including its share of joint venture debt
and net of minority partners' interests share of joint venture debt) of debt
outstanding at September 30, 2003. As a result, the Operating Partnership's
total debt to total market capitalization ratio at September 30, 2003 equaled
approximately 44.9%.
26
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine") and RSVP. RSVP is a real estate venture
capital fund which invested primarily in real estate and real estate operating
companies outside the Company's core office 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 September 30, 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 September 30, 2003 interest accrued (net of reserves) under the FrontLine
Facility and the RSVP Facility was approximately $19.6 million.
27
The following table sets forth the Operating Partnership's original invested
capital (at cost and before valuation reserves) in RSVP controlled
(REIT-qualified) joint ventures and amounts which were advanced under the RSVP
Commitment to FrontLine, for its investment in RSVP controlled investments (in
thousands):
RSVP controlled Amounts
joint ventures advanced Total
------------------- ------------------- --------------------
Privatization $ 21,480 $ 3,520 $ 25,000
Student Housing 18,086 3,935 22,021
Medical Offices 20,185 --- 20,185
Parking --- 9,091 9,091
Resorts --- 8,057 8,057
Net leased retail --- 3,180 3,180
Other assets and overhead --- 21,598 21,598
------------------- ------------------- --------------------
$ 59,751 $ 49,381 $ 109,132
=================== =================== ====================
On July 1, 2003, the Company's aggregate invested capital (before valuation
reserves) in RSVP controlled (REIT-qualified) joint ventures totaled
approximately $59.8 million and amounts which were advanced under the RSVP
Commitment to FrontLine, for its investment in RSVP controlled investments
totaled approximately $49.4 million.
In September 2003, RSVP completed the restructuring of its capital structure. In
connection with the restructuring, RSVP redeemed the interest of the preferred
equity holders of RSVP for an aggregate of $137 million in cash and the transfer
to the preferred equity holders of the assets that comprised RSVP's parking
investments valued at approximately $28.5 million. As a result of this
transaction amounts formerly invested in the privatization, parking and medical
office platforms have been reinvested as part of the buyout transaction.
At June 30, 2001, the Company assessed the recoverability of the FrontLine Loans
and reserved approximately $3.5 million of the interest accrued during the
three-month period then ended. In addition, the Company formed a committee of
its Board of Directors, comprised solely of independent directors, to consider
any actions to be taken by the Company in connection with the FrontLine Loans
and its investments in joint ventures with RSVP. During the third quarter of
2001, the Company noted a significant deterioration in FrontLine's operations
and financial condition and, based on its assessment of value and recoverability
and considering the findings and recommendations of the committee and its
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The Company has discontinued the accrual of interest income with respect to the
FrontLine Loans. The Company has also reserved against its share of GAAP equity
in earnings from the RSVP controlled joint ventures funded through the RSVP
Commitment until such income is realized through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
RSVP also restructured its management arrangements whereby a management company
formed by its former managing directors has been retained to manage RSVP
pursuant to a management agreement and the employment contracts of the managing
directors with RSVP have been terminated. The management agreement provides for
an annual base management fee, and disposition fees equal to 2% of the net
proceeds received by RSVP on asset sales. (The base management fee and
disposition fees are subject to a maximum over the term of the agreement of $7.5
million.) In addition, the managing directors retained a one-third residual
interest in RSVP's assets which is subordinated to the distribution of an
aggregate amount of $75 million to RSVP and/or the Company in respect of its
joint ventures with RSVP. The management agreement has a three-year term,
subject to early termination in the event of the disposition of all of the
assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of assets sales by RSVP.
28
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 September 30, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
Scott H. Rechler, who serves as 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.
29
RESULTS OF OPERATIONS
Three months ended September 30, 2003 as compared to the three months ended
September 30, 2002:
Property operating revenues which include base rents and tenant escalations and
reimbursements ("Property Operating Revenues") decreased by approximately $3.0
million for the three months ended September 30, 2003 as compared to the 2002
period. The change in Property Operating Revenues is attributable to a weighted
average decrease in property occupancy rates in certain "same store" properties
amounting to approximately $3.3 million, a decrease in straight-line rental
income of approximately $1.5 million in certain of our "same store" properties,
a decrease in termination fees of approximately $3.0 million and approximately
$600,000 related to properties sold in 2002. These decreases were offset by
built-in rent increases and escalation increases in certain of our "same store"
property leases of approximately $5.5 million.
Investment and other income increased by $4.3 million. This increase is
primarily attributable to the gain recognized on the First Data land sale and
build-to-suit construction contract of approximately $3.3 million.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $4.1 million or 9.6% for the three months ended
September 30, 2003 as compared to the 2002 period. This increase includes a $1.5
million increase in property operating expenses and a $2.6 million increase in
real estate taxes. Included in the $1.5 million of property operating expense
increase is $275,000 attributable to increases in insurance costs. The insurance
cost increase is primarily attributable to generally higher cost for insurance
in the marketplace particularly liability insurance costs. Recently, we have
seen their costs moderate and expect to see reduced costs to take effect in
future periods. 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. Also included in the property operating expense increase is
approximately $240,000 of increased utility costs which was primarily
attributable to energy rate increases.
Gross Operating Margins (defined as Property Operating Revenues less Property
Expenses, taken as a percentage of Property Operating Revenues) for the three
months ended September 30, 2003 and 2002 were 57.7% and 62.4%, respectively. The
decrease in Gross Operating Margins is primarily attributable to decreases in
average occupancy of the portfolio and also as a result of increased Property
Expenses specifically relating to insurance costs, real estate taxes and
utilities.
Marketing, general and administrative expenses increased by approximately
$837,000 for the three months ended September 30, 2003 as compared to the 2002
period. The increase is in part attributable to increased compensation costs
including compensation costs associated with the Company's long term incentive
programs which commenced in March 2003 and amounted to approximately $447,000
for the three months ended September 30, 2003. The Company also incurred an
increase of property related marketing costs to lease space which amounted to
approximately $83,000 and increased costs related to director fees of $107,000.
Marketing, general and administrative expenses, as a percentage of total
revenues were, 7.0% for the three months ended September 30, 2003 as compared to
6.3% for the 2002 period. The Operating Partnership capitalized approximately
$1.1 million of marketing, general and administrative expenses for each of the
three-month periods ended September 30, 2003 and 2002. These costs relate to
leasing, construction and development activities, which are performed by the
Operating Partnership and its subsidiaries.
Nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2002:
Property Operating Revenues decreased by approximately $2.9 million for the nine
months ended September 30, 2003 as compared to the 2002 period. The change in
Property Operating Revenues is attributable to built-in rent increases and
escalation increases in certain of our leases of approximately $8.6 million and
$6.0 million attributable to lease up of newly developed and redeveloped
properties. These increases were offset by approximately 11.7 million related to
decreases in certain property occupancy rates and, decreases in rental rates.
Investment and other income increased by $12.9 million. This increase is
primarily attributable to the gain recognized on the First Data land sale and
build-to-suit construction contract of approximately $13.4 million. This
increase in investment and other income was offset by decreases in income
generated by the Service Companies. Property Operating Expenses increased by
$14.2 million or 11.8% for the nine months ended September 30, 2003 as compared
to the 2002 period. This increase includes a $8.2 million increase in property
operating expenses and a $6.0 million increase in real estate taxes. Included in
the $8.2 million of property operating expense increase is $2.7 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. Recently, we have seen insurance costs
particularly related to terrorism risk begin to moderate. We expect to see
reduced costs in future periods. 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. Also included in the property operating expense
increase is approximately $3.6 million of increased utility and snow removal
costs which resulted in part to rate increases and continued inclement weather
in Northeast during the Spring months. To a lesser extent, cleaning costs
increased by approximately $803,000 due to inflationary/contractual increases
and property related marketing costs increased by approximately $417,000
resulting from a decrease in overall occupancy.
30
Gross Operating Margins (defined as Property Operating Revenues less Property
Expenses, taken as a percentage of Property Operating Revenues) for the nine
months ended September 30, 2003 and 2002 were 59.5% and 64.1%, respectively. The
decrease in Gross Operating Margins is primarily attributable to decreases in
average occupancy of the portfolio and also as a result of 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 $3.8
million for the nine months ended September 30, 2003 as compared to the 2002
period. The increase is in part attributable to increased compensation costs
including compensation costs associated with the Company's long term incentive
programs which commenced in March 2003 and amounted to approximately $2.3
million for the nine months ended September 30, 2003. In addition, the Company
incurred increased costs, over the comparable 2002 period, of approximately
$500,000 related to abandoned acquisition and disposition transactions, and
approximately $400,000 related to director and officer's insurance and director
fees. Marketing, general and administrative expenses, as a percentage of total
revenues were, 7.0% for the nine months ended September 30, 2003 as compared to
6.1% for the 2002 period. The Operating Partnership capitalized approximately
$3.5 million of marketing, general and administrative expenses for the nine
months ended September 30, 2003 as compared to $3.6 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 $1.3 million for the nine months
ended September 30, 2003 as compared to the 2002 period. The increase includes
$1.4 million of interest on the Operating Partnership's $50 million, five-year
senior unsecured notes issued on June 17, 2002. The increase is also affected by
the reduction in capitalized interest expense of $547,000 attributable to a
decrease in the level of development projects. In addition, the increase
includes approximately $1.3 million 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 $319.7 million for
the nine months ended September 30, 2003 as compared to $213.6 million for the
nine months ended September 30, 2002. These increases were offset by a decrease
of approximately $657,000 in mortgage note payable interest expense and an
increase of approximately $1.3 million of corporate interest expense allocated
to discontinued operations.
Liquidity and Capital Resources
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and non-incremental capital expenditures,
excluding incremental capital expenditures of the Operating Partnership. The
Operating Partnership expects to meet its short-term liquidity requirements
generally through its net cash provided by operating activities along with its
unsecured credit facility described below. The credit facility contains several
financial covenants with which the Operating Partnership must be in compliance
in order to borrow funds thereunder. During certain quarterly periods, the
Operating Partnership may incur significant leasing costs as a result of
increased market demands from tenants and high levels of leasing transactions
that result from the re-tenanting of scheduled expirations or early terminations
of leases. The Operating Partnership is currently experiencing high tenanting
costs including tenant improvement costs, leasing commissions and free rent in
all of its markets. For the three and nine month periods ended September 30,
2003, the Operating Partnership paid $12.0 million and $40.1 million,
respectively for tenanting costs including tenant improvement costs and leasing
commissions. This compares to $12.8 million and $30.1 million paid for the
comparable periods ended September 30, 2002, respectively. As a result of these
and / or other operating factors, the Operating Partnership's cash flow from
operating activities may not be sufficient to pay 100% of the quarterly
distributions payable 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 periodically reviews its distribution policy to determine
the appropriateness of the Operating Partnership's distribution rate relative to
the Operating Partnership's cash flows. The Operating Partnership adjusts its
distribution rate based on forecasted increases and decreases in its cash flow
as well as required distributions of the Company's taxable income to maintain
REIT status. There can be no assurance that the Operating Partnership will
maintain the current quarterly distribution level on its common units. The
Operating Partnership expects to meet certain of its financing requirements
through long-term secured and unsecured borrowings and the issuance of debt and
equity securities of the Operating Partnership. There can be no assurance that
there will be adequate demand for the Operating Partnership's equity at the time
or at the price in which the Operating Partnership desires to raise capital
through the sale of additional equity. 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. The
Operating Partnership's senior debt is currently rated "Ba1" by Moody's and
"BBB-" by Standard & Poor's. The rating agencies review the ratings assigned to
an issuer such as the Operating Partnership on an ongoing basis. Negative
changes in the Operating Partnership's ratings would result in increases in the
Operating Partnership's borrowing costs, including borrowings under the
Operating Partnership's unsecured credit facility.
31
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.
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. As of September 30, 2003, borrowings
under the Credit Facility were priced off LIBOR plus 90 basis points and the
Credit Facility carried a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's unsecured credit rating the
interest rates and facility fee are subject to change (see "Recent
Developments"). The outstanding borrowings under the Credit Facility were $374
million at September 30, 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 September 30, 2003, the Operating Partnership had
availability under the Credit Facility to borrow approximately an additional
$126 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.
On September 30, 2003, the Operating Partnership had issued and outstanding
9,915,313 Class B common units, all of which, are held by the Company. The Class
B common units currently receive an annual distribution of $2.5884 per unit and
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.
32
On October 24, 2003, the Company gave notice to its Class B common stockholders
that it will exercise its option to exchange all of its Class B common stock
outstanding on November 25, 2003 for an equal number of shares of Class A common
stock. The Board of Directors has declared a final cash dividend on the
Company's Class B common stock to holders of record on November 25, 2003 in the
amount of $.1758 per share, payable on January 12, 2004. This payment will cover
the period from November 1, 2003 through November 25, 2003 and is based on the
current quarterly Class B common stock dividend rate of $.6471 per share. In
order to align the regular quarterly dividend payment schedule of the former
holders of Class B common stock with the schedule of the holders of Class A
common stock for periods subsequent to the exchange date for the Class B common
stock, the Board of Directors has also declared a cash dividend with regard to
the Class A common stock to holders of record on October 14, 2003 in the amount
of $.2585 per share, payable on January 12, 2004. This payment will cover the
period from October 1, 2003 through November 25, 2003 and is based on the
current quarterly Class A common stock dividend rate of $.4246 per share. As a
result, the Company will have declared dividends through November 25, 2003 to
all holders of Class A common stock and Class B common stock. The Board of
Directors has also declared the Class A common stock cash dividend for the
portion of the fourth quarter subsequent to November 25, 2003. The holders of
record of Class A common stock on January 2, 2004, giving effect to the exchange
transaction, will receive a Class A common stock dividend in the amount of
$.1661 per share, payable on January 12, 2004. This payment will cover the
period from November 26, 2003 through December 31, 2003 and is based on the
current quarterly Class A common stock dividend rate of $.4246 per share. In
connection with the Company's exchange of its Class B common stock, the
Operating Partnership will exchange its Class B common units held by the Company
for an equal number of Class A common units. Further, with respect to the
foregoing declarations on dividends on the Company's Class A and Class B common
stock, the Operating Partnership will make distributions on its Class A and
Class B common units in like amounts on the same dates.
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 nine months
ended September 30, 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 historical 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.
33
On September 30, 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.
On August 7, 2003, in conjunction with the Operating Partnership's acquisition
of a Class A office property located in Stamford, Connecticut the Operating
Partnership issued 465,845 Class C common units of limited partnership interest.
The Class C units will receive an initial annual distribution of $1.87 per unit,
which amount will increase or decrease pro-rata based upon changes in the
dividend paid on the Company's Class A common stock. On October 17, 2003, the OP
paid a distribution to the Class C unit holders of approximately $130,000 for
the period from August 7, 2003 through September 30, 2003.
The Operating Partnership's indebtedness at September 30, 2003 totaled
approximately $1.5 billion (including its share of joint venture debt and net of
the minority partners' interests share of joint venture debt) and was comprised
of $374 million outstanding under the Credit Facility, approximately $499.4
million of senior unsecured notes and approximately $597.9 million of mortgage
indebtedness. Based on the Operating Partnership's total market capitalization
of approximately $3.3 billion at September 30, 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 $1.5 billion of debt), the Operating Partnership's
debt represented approximately 44.9% of its total market capitalization.
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible
officing solutions in the world and which was formerly controlled by FrontLine,
previously operated eleven executive office centers comprising approximately
205,000 square feet at the Operating Partnership's properties, including two
operated at the Operating Partnership's joint venture properties. On March 13,
2002, as a result of experiencing financial difficulties, HQ voluntarily filed a
petition for relief under Chapter 11 of the U.S. Bankruptcy Code and
subsequently rejected three of its leases with the Operating Partnership and
surrendered approximately an additional 20,500 square feet from two other
leases. The Operating Partnership has since re-leased 100% of the rejected
space. In September 2003, the Bankruptcy Court approved the assumption and
amendment by HQ of its remaining eight leases with the Operating Partnership.
The assumed leases expire between 2007 and 2011, encompass approximately 150,000
square feet and provide for current annual base rents totaling approximately
$3.5 million. A committee designated by the Board and chaired by an independent
director conducted all negotiations with HQ.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company,
which leased approximately 527,000 square feet in thirteen of the Operating
Partnership's properties located throughout the Tri-State Area voluntarily filed
a petition for relief under Chapter 11 of the U.S. Bankruptcy Code on July 21,
2002. The Bankruptcy Court granted WorldCom's petition to reject four of its
leases with the Operating Partnership. The four rejected leases aggregated
approximately 282,000 square feet and were to provide for contractual base rents
of approximately $7.2 million for the 2003 calendar year. The Operating
Partnership has agreed to restructure five of the remaining leases. Pursuant to
WorldCom's Plan of Reorganization which has been confirmed by the Bankruptcy
Court, WorldCom must assume or reject the remaining leases prior to the
effective date of the Plan. The effective date of the Plan is estimated to occur
during the first quarter of 2004. All of WorldCom's leases are current on base
rental charges through November 30, 2003, other than under the four rejected
leases and the Operating Partnership currently holds approximately $195,000 in
security deposits relating to the non-rejected leases. There can be no assurance
as to whether WorldCom will affirm or reject any or all of its remaining leases
with the Operating Partnership.
As of September 30, 2003, WorldCom occupied approximately 245,000 square feet of
office space with aggregate annual base rental revenues of approximately $4.1
million, or 1.1% of the Operating Partnership's total 2003 annualized rental
revenue based on base rental revenue earned on a consolidated basis.
34
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the Operating Partnership's significant debt
obligations by scheduled principal cash flow payments and maturity date and its
commercial commitments by scheduled maturity at September 30, 2003 (in
thousands):
MATURITY DATE
---------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
--------- ---------- ---------- ---------- ---------- ----------- -----------
Mortgage notes payable (1) $ 3,367 $ 13,169 $ 14,167 $ 13,785 $ 11,305 $ 117,390 $ 173,183
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 -- -- 374,000 -- -- -- 374,000
Land lease obligations 848 3,425 3,429 3,410 3,350 94,286 108,748
Operating leases 350 1,313 1,359 1,407 1,455 683 6,567
Air rights lease obligations 95 379 379 379 379 4,280 5,891
--------- ---------- ---------- ---------- ---------- ----------- -----------
$ 4,660 $ 120,902 $ 411,887 $ 148,901 $ 277,028 $ 762,908 $1,726,286
========= ========== ========== ========== ========== =========== ===========
(1) Scheduled principal amortization payments
(2) Principal payments due at maturity
(3) In addition, the Operating Partnership has a 60% interest in an
unconsolidated joint venture property. The Operating Partnership's
share of the mortgage debt at September 30, 2003 is approximately $8.0
million. This mortgage note bears interest at 8.85% per annum and
matures on September 1, 2005 at which time the Operating Partnership's
share of the mortgage debt will be approximately $6.9 million.
Certain of the mortgage notes payable are guaranteed by certain limited partners
in the Operating Partnership and/or the Company. In addition, consistent with
customary practices in non-recourse lending, certain non-recourse mortgages may
be recourse to the Company under certain limited circumstances including
environmental issues and breaches of material representations.
In addition, at September 30, 2003, the Operating Partnership had approximately
$950,000 in outstanding undrawn standby letters of credit issued under the
Credit Facility. In addition, approximately $44.3 million, or 6.1%, of the
Operating Partnership's mortgage debt is recourse to the Operating Partnership.
Recent Developments
On September 10, 2003, the Operating Partnership announced that it had entered
into agreements relating to the disposition of its Long Island industrial
building portfolio (the "Disposition") to members of the Rechler family for
approximately $315.5 million in cash and other consideration. The transactions
contemplated by the agreements were consummated on November 10 and November 12,
2003. As a result, the Operating Partnership has disposed of all but three of
its 95 property, 5.9 million square foot, Long Island industrial building
portfolio for approximately $225.1 million in cash and debt assumption and
3,932,111 Units valued at approximately $90.4 million. Approximately $210
million of cash sales proceeds from the Disposition were used to repay the
Credit Facility. The remaining three properties, two of which are subject to
transfer pursuant to Section 1031 of the Code, are anticipated to close within
three to six months.
In addition, four of the five remaining options granted to the Operating
Partnership at the time of the Company's IPO to purchase interests in properties
owned by Rechler family members (including three properties in which the Rechler
family members hold non-controlling interests and one industrial property) were
terminated along with the Operating Partnership's management contracts relating
to three of such properties. In return the Operating Partnership received an
aggregate payment from the Rechler family members of $972,000. Rechler family
members also extended the term of the remaining option on the property located
at 225 Broadhollow Road, Melville, New York (the Company's current headquarters)
for five years and released the Operating Partnership from approximately 15,500
square feet under its lease at this property. In connection with the
restructuring of the remaining option the Rechler family members paid the
Operating Partnership $1 million in return for the Operating Partnership's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Operating Partnership
was increased by $1 million. In addition, as part of the transaction, the
Rechler family entity was granted rights of first refusal with respect to five
vacant land parcels located near the industrial properties for a period of five
years.
35
In connection with the closing, each of Donald Rechler, Roger Rechler, Gregg
Rechler and Mitchell Rechler resigned as an officer of the Company. Mr. Donald
Rechler remains a member of the Board of Directors of the Company. In settlement
of their employment agreements, these four executives received accelerated
vesting of certain equity based awards and an assignment of certain loans owed
to the Company. Additionally, these exiting executives have agreed to provide
two-year commitments to assist the Company in the transition and entered into
specified non-compete arrangements.
In addition, the Company also announced certain other management changes and
corporate governance enhancements. The reconstituted Board consists of six
independent directors and Messrs. Scott and Donald Rechler. The Company has
filled the executive positions vacated by the departing Rechler family members
by promoting from within.
In conjunction with this transaction, the Company is also proposing to
de-stagger its Board of Directors at its next Annual Shareholders Meeting, to
opt out of state anti-takeover provisions and to authorize modification of the
ownership limit currently in its charter relating to the "five or fewer rule."
For information concerning certain litigation matters pertaining to this
transaction see Part II-Other Information; Item 1. Legal Proceedings of this
Form 10-Q.
The description of the Disposition contained in the Operating Partnership's
current reports on Form 8-K filed with the Securities and Exchange Commission on
September 18, 2003, October 1, 2003 and October 22, 2003 are incorporated herein
by reference. The information in this quarterly report on Form 10-Q supplements
and amends the information contained in those previously filed current reports.
The Operating Partnership is also under contract to sell a 181,000 square foot
office property located on Long Island for approximately $24.4 million and is
scheduled to close during the fourth quarter. Net proceeds from the sale are
anticipated to be used to repay the Credit Facility.
In accordance with the provisions of FASB Statement No. 144, the Operating
Partnership has separately identified and classified the assets and liabilities
of the aforementioned 95 industrial properties and the office property located
on Long Island on its consolidated balance sheets as held for sale. In addition,
income from the operations of these properties has been reflected on the
Operating Partnership's consolidated statements of income as income from
discontinued operations.
On November 10, 2003, in connection with the Operating Partnership's sale of its
Long Island industrial building portfolio and the settlement of the employment
contracts of the departing Rechler family members, the Operating Partnership
incurred the following restructuring charges: (i) approximately $7.5 million
related to outstanding stock loans under the Company's historical LTIP program
were transferred to the purchaser and approximately $575,000 of loans related to
life insurance contracts were extinguished, (ii) approximately $2.9 million paid
to the departing Rechler family members in exchange for 127,689, or 100%, of
their 2002 Rights and their 2003 Rights were forfeited in their entirety and
(iii) with respect to two of the departing Rechler family members participating
in the Company's March 2003 LTIP, each received 8,681 shares of the Company's
Class A common stock related to the service component of their core award which
was valued at $399,000 in the aggregate. In addition, if the Company attains its
annual performance measure in March 2004, these individuals will also be
entitled to each receive 26,041 shares of Class A common stock representing the
balance of the annual core award as if they had remained in continuous
employment with the Company. The remainder of their core awards, aggregating
208,334 shares of Class A common stock, was forfeited.
On November 10, 2003, the Operating Partnership entered into a contract to
acquire 1185 Avenue of the Americas, a 42-story, 1.1 million square foot Class A
office tower, located between 46th and 47th Streets in New York City for $321
million. The building is presently encumbered by a $202 million mortgage and $48
million of mezzanine debt that the Operating Partnership would assume at
closing. The balance of the purchase price would be paid through an advance
under the Credit Facility. The floating rate mortgage and mezzanine debt both
mature in August 2004 and presently have a weighted average interest rate of
4.95%. The property is also encumbered by a ground lease which has a remaining
term of approximately 40 years with rent scheduled to be re-set at the end of
2005 and then remain constant for the balance of the term. The closing is
subject to customary consents and conditions.
As of September 30, 2003, the Credit Facility carried a facility fee of 20 basis
points per annum and outstanding borrowings were priced off LIBOR plus 90 basis
points. On November 12, 2003, as a result of one of the rating agencies changing
the Operating Partnership's unsecured credit rating, the facility fee was
increased to 30 basis points and the interest rate on outstanding borrowings was
re-set to LIBOR plus 120 basis points. Based on current outstanding borrowings
under the Credit Facility and giving effect to repayments under the Credit
Facility as part of the Long Island industrial building portfolio sale, the
change in the Operating Partnership's unsecured credit rating will increase
interest expense by approximately $1.1 million per annum. In the event the
Operating Partnership re-establishes its previous unsecured credit rating the
interest rates and facility fee will be re-set to their previous levels.
36
Other Matters
Seven 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. These limitations expire between of 2007 and 2013.
Nine 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.
On May 29, 2003, the Board of Directors of the Company appointed Mr. Peter Quick
as Lead Director and Chairman of the Nominating/Governance Committee. The
Nominating/Governance Committee as well as the Company's Audit Committee and
Compensation Committee are comprised solely of independent directors.
In addition, in May 2003, the Company revised its policy with respect to
compensation of its independent directors to provide that a substantial portion
of the independent director's compensation shall be in the form of Class A
common stock of the Company. Such common stock may not be sold until such time
as the director is no longer a member of the Company's Board.
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 $3.3 million
of compensation expense was recorded for each of the nine month periods ended
September 30, 2003 and 2002 related to these LTIP. Such amounts have been
included in marketing, general and administrative expenses on the Operating
Partnership's consolidated statements of income.
37
The outstanding stock loan balances due from the Company's executive and senior
officers aggregated approximately $13.0 million and $17.0 million at September
30, 2003 and December 31, 2002, respectively and have been included as a
reduction of general partner's capital on the Operating Partnership's
consolidated balance sheets. Other outstanding loans to the Company's executive
and senior officers amounting to approximately $1.0 million related to life
insurance contracts and approximately $2.0 million primarily related to tax
payment advances on 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. During the three
and nine months ended September 30, 2003, the Operating Partnership recorded
approximately $228,000 and $653,000 of compensation expense, respectively
related to the Rights. Such amounts have been included in marketing, general and
administrative expenses on the Operating Partnership's consolidated statements
of income.
In March 2003, the Company established a new LTIP for its executive and senior
officers. The four-year plan has a core award, which provides for annual stock
based compensation based upon continued service and in part based on attaining
certain annual performance measures. The plan also has a special outperformance
award which provides for compensation to be earned at the end of a four year
period if the Company attains certain four year cumulative performance measures.
Amounts earned under the special outperformance award may be paid in cash or
stock at the discretion of the Compensation Committee of the Board. Performance
measures are based on total shareholder returns on a relative and absolute
basis. On March 13, 2003, the Company made available 1,384,102 shares of its
Class A common stock under its existing stock option plans in connection with
the core award of this LTIP for twelve of its executive and senior officers.
During May 2003 two of the Company's executive officers waived these awards
under this LTIP in their entirety, which aggregated 277,778 shares or 20% of the
core awards granted. In addition, the special outperformance awards of the LTIP
were amended to increase the per share base price above which the four year
cumulative return is measured from $18.00 to $22.40. With respect to the core
award of this LTIP, the Operating Partnership recorded approximately $403,000
and $2.0 million of compensation expense for the three and nine months ended
September 30, 2003, respectively. Such amounts have been included in marketing,
general and administrative expenses on the Operating Partnership's consolidated
statements of income. Further, no provision will be made for the special
outperformance award of this LTIP until such time as achieving the requisite
performance measures is determined to be probable.
Under various Federal, state and local laws, ordinances and regulations, an
owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. These laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost of
any required remediation and the owner's liability 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 Operating Partnership may be considered an owner or operator of
such properties or as having arranged for the disposal or treatment of hazardous
or toxic substances and, therefore, potentially liable for removal or
remediation costs, as well as certain other related costs, including
governmental fines and injuries to persons and property.
All of the Operating Partnership's office and industrial / R&D properties have
been subjected to a Phase I or similar environmental audit after April 1, 1994
(which involved general inspections without soil sampling, ground water analysis
or radon testing and, for the Operating Partnership's properties constructed in
1978 or earlier, survey inspections to ascertain the existence of ACMs were
conducted) completed by independent environmental consultant companies (except
for 35 Pinelawn Road which was originally developed by Reckson, the Operating
Partnership's predecessor, and subjected to a Phase 1 in April 1992). These
environmental audits have not revealed any environmental liability that would
have a material adverse effect on the Operating Partnership's business.
38
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 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 and nine month periods ended September
30, 2003 includes gain from the sale of land in the amount of $867,000 and $8.5
million, respectively.
Since all companies and analysts do not calculate FFO in a similar fashion, the
Operating Partnership's calculation of FFO presented herein may not be
comparable to similarly titled measures as reported by other companies.
The following table presents the Operating Partnership's FFO calculation
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income available to common unit
holders................................. $ 11,211 $ 18,074 $ 29,329 $ 51,454
Adjustments for Funds From Operations:
Add:
Real estate depreciation and
amortization........................ 27,465 28,208 87,919 80,570
Minority partners' interests in
consolidated partnerships.......... 4,379 4,446 13,404 14,379
Less:
Gain on sales of depreciable
real estate assets................. -- 4,896 -- 5,433
Amounts distributable to minority
partners in consolidated
partnerships....................... 6,339 6,050 19,914 18,943
-------- -------- -------- --------
Funds From Operations.................... $ 36,716 $ 39,782 $110,738 $122,027
======== ======== ======== ========
Weighted average units outstanding....... 65,478 66,811 65,355 67,721
======== ======== ======== ========
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.
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Operating Partnership is interest rate risk
on its long-term debt, mortgage notes and notes receivable. The Operating
Partnership will, when advantageous, hedge its interest rate risk using
financial instruments. The Operating Partnership is not subject to foreign
currency risk.
The Operating Partnership manages its exposure to interest rate risk on its
variable rate indebtedness by borrowing on a short-term basis under its Credit
Facility until such time as it is able to retire the short-term variable rate
debt with either a long-term fixed rate debt offering, long term mortgage debt,
general partner contributions or through sales or partial sales of assets.
The Operating Partnership will recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges will be adjusted to fair value
through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability or firm commitment
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. As of September 30,
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 September 30, 2003 (dollars
in thousands):
For The Year Ended December 31,
------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total (1) FMV
-----------------------------------------------------------------------------------------------------------
Long term debt:
Fixed rate.......... $ 3,367 $ 115,785 $ 32,720 $ 143,705 $ 271,844 $ 663,659 $ 1,231,080 $1,251,768
Weighted average
interest rate...... 7.47% 7.47% 6.92% 7.38% 7.14% 7.32% 7.29%
Variable rate....... $ -- $ -- $ 374,000 $ -- $ -- $ -- $ 374,000 $ 374,000
Weighted average
interest rate...... -- -- 2.02% -- -- -- 2.02%
(1) Includes aggregate unamortized issuance discounts of approximately $591,000
on the senior unsecured notesissued 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
$3.7 million annual increase in interest expense based on $374 million of
variable rate debt outstanding at September 30, 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 September 30, 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 $ 54,510
Weighted average
interest rate....... -- 11.32% -- -- -- 12.00% 11.54%
Variable rate........ $ -- $ -- $ 15,000 $ -- $ -- $ -- $ 15,000 $ 15,000
Weighted average
interest rate....... -- -- 13.43% -- -- -- 13.43% --
(1) Excludes interest receivables aggregating approximately $1.9 million.
40
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is reported within the time periods specified in the SEC's
rules and forms. In this regard, the Operating Partnership has formed a
Disclosure Committee currently comprised of all of the Company's executive
officers as well as certain other employees with knowledge of information that
may be considered in the SEC reporting process. The Committee has responsibility
for the development and assessment of the financial and non-financial
information to be included in the reports filed by the Operating Partnership
with the SEC and assists the Company's Chief Executive Officer and Chief
Financial Officer in connection with their certifications contained in the
Operating Partnership's SEC reports. The Committee meets regularly and reports
to the Company's Audit Committee on a quarterly or more frequent basis. The
Company's principal executive and financial officers have evaluated, with the
participation of the Company's management, our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q. Based upon the evaluation, our principal executive and financial officers
concluded that such disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
41
The following table sets forth the Operating Partnership's schedule of its top
25 tenants based on base rental revenue as of September 30, 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%
VERIZON COMMUNICATIONS INC. Office 210,426 1.6% 1.3%
* SCHULTE ROTH & ZABEL Office 287,177 1.4% 2.4%
* FUJI PHOTO FILM USA Office 186,484 1.3% 1.2%
DUN & BRADSTREET CORP. Office 123,000 1.2% 1.0%
* WORLDCOM/MCI Office 245,030 1.1% 1.1%
UNITED DISTILLERS Office 137,918 1.1% 1.0%
T.D. WATERHOUSE Office 103,381 1.0% 0.8%
* BANQUE NATIONALE DE PARIS Office 145,834 0.9% 1.5%
D.E.SHAW Office 70,104 0.8% 0.7%
* KRAMER LEVIN NESSEN KAMIN Office 158,144 0.8% 1.4%
HELLER EHRMAN WHITE Office 64,526 0.8% 0.7%
* PRUDENTIAL Office 116,910 0.8% 0.8%
VYTRA HEALTHCARE Office 105,613 0.8% 0.7%
* HQ GLOBAL Office/Industrial 150,487 0.8% 0.8%
NORTH FORK BANK Office 124,064 0.8% 0.7%
* STATE FARM Office/Industrial 184,013 0.8% 1.1%
P.R. NEWSWIRE ASSOCIATES Office 67,000 0.8% 0.7%
HOFFMANN-LA ROCHE INC. Office 120,736 0.7% 0.6%
LABORATORY CORP OF AMERICA Office 108,000 0.7% 0.6%
EMI ENTERTAINMENT WORLD Office 65,844 0.7% 0.6%
ESTEE LAUDER Industrial 374,578 0.7% 0.6%
LOCKHEED MARTIN CORP. Office 123,554 0.7% 0.6%
* DRAFT WORLDWIDE INC. Office 124,008 0.7% 1.1%
PRACTICING LAW INSTITUTE Office 77,500 0.7% 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 nine month
period ended September 30, 2003 for the Operating Partnership's office and
industrial / R&D properties other than One Orlando Center in Orlando, FL:
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 $ 4,622,469
Per Square Foot $ 0.23 $ 0.33 $ 0.45 $ 0.53 $ 0.39 $ 0.45
NYC Office Properties
Total N/A $ 946,718 $ 1,584,501 $ 1,939,111 $ 1,490,110 $ 1,442,554
Per Square Foot N/A $ 0.38 $ 0.45 $ 0.56 $ 0.46 $ 0.41
Industrial Properties
Total $ 1,048,688 $ 813,431 $ 711,666 $ 1,881,627 $ 1,113,853 $ 1,059,820
Per Square Foot $ 0.11 $ 0.11 $ 0.11 $ 0.28 $ 0.15 $ 0.16
Total Portfolio
-----------------------------------------------------------------------------------
Total $ 3,347,587 $ 5,049,265 $ 6,902,236 $ 9,104,413 $ 7,124,843
Per Square Foot $ 0.17 $ 0.25 $ 0.34 $ 0.45 $ 0.35
42
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 nine month period ended September 30, 2003 for the Operating
Partnership's office and industrial / R&D properties other than One Orlando
Center in Orlando, FL:
Average YTD
1999 2000 2001 2002 1999-2002 2003(2) New Renewal
-----------------------------------------------------------------------------------------------------
Long Island Office
Properties
Tenant Improvements $1,009,357 $2,853,706 $2,722,457 $ 1,917,466 $2,125,747 $ 3,274,369 $ 2,350,515 $ 923,854
Per Square Foot Improved $ 4.73 $ 6.99 $ 8.47 $ 7.81 $ 7.00 $ 6.92 $ 9.85 $ 3.94
Leasing Commissions $ 551,762 $2,208,604 $1,444,412 $ 1,026,970 $1,307,937 $ 2,359,435 $ 1,880,400 $ 479,035
Per Square Foot Leased $ 2.59 $ 4.96 $ 4.49 $ 4.18 $ 4.06 $ 4.98 $ 7.88 $ 2.04
------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 7.32 $ 11.95 $ 12.96 $ 11.99 $ 11.06 $ 11.90 $ 17.73 $ 5.98
======================================================================================================
Westchester Office
Properties
Tenant Improvements $1,316,611 $1,860,027 $2,584,728 $ 6,391,589(1) $3,038,239 $ 1,156,389 $ 1,025,325 $ 131,064
Per Square Foot Improved $ 5.62 $ 5.72 $ 5.91 $ 15.05 $ 8.08 $ 11.27 $ 16.15 $ 3.35
Leasing Commissions $ 457,730 $ 412,226 $1,263,012 $ 1,975,850 $1,027,204 $ 276,630 $ 237,294 $ 39,336
Per Square Foot Leased $ 1.96 $ 3.00 $ 2.89 $ 4.65 $ 3.13 $ 2.70 $ 3.74 $ 1.01
------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 7.58 $ 8.72 $ 8.80 $ 19.70 $ 11.21 $ 13.97 $ 19.89 $ 4.36
======================================================================================================
Connecticut Office
Properties
Tenant Improvements $ 179,043 $ 385,531 $ 213,909 $ 491,435 $ 317,480 $ 504,422 $ 476,988 $ 27,434
Per Square Foot Improved $ 4.88 $ 4.19 $ 1.46 $ 3.81 $ 3.58 $ 9.38 $ 16.51 $ 1.10
Leasing Commissions $ 110,252 $ 453,435 $ 209,322 $ 307,023 $ 270,008 $ 423,758 $ 262,465 $ 161,293
Per Square Foot Leased $ 3.00 $ 4.92 $ 1.43 $ 2.38 $ 2.93 $ 7.88 $ 9.09 $ 6.48
------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 7.88 $ 9.11 $ 2.89 $ 6.19 $ 6.51 $ 17.26 $ 25.60 $ 7.58
======================================================================================================
New Jersey Office
Properties
Tenant Improvements $ 454,054 $1,580,323 $1,146,385 $ 2,842,521 $1,505,821 $ 3,887,607 $ 3,474,339 $ 413,268
Per Square Foot Improved $ 2.29 $ 6.71 $ 2.92 $ 10.76 $ 5.67 $ 13.34 $ 24.89 $ 2.72
Leasing Commissions $ 787,065 $1,031,950 $1,602,962 $ 1,037,012 $1,114,747 $ 1,857,889 $ 1,140,527 $ 717,362
Per Square Foot Leased $ 3.96 $ 4.44 $ 4.08 $ 3.92 $ 4.10 $ 6.38 $ 8.18 $ 4.73
------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 6.25 $ 11.15 $ 7.00 $ 14.68 $ 9.77 $ 19.72 $ 33.07 $ 7.45
======================================================================================================
New York City Office
Properties
Tenant Improvements N/A $ 65,267 788,930 $ 4,350,106 $1,734,768 $ 5,689,670(3) $ 5,406,410 $ 283,260
Per Square Foot Improved N/A $ 1.79 15.69 $ 18.39 $ 11.96 $ 34.48 $ 45.53 $ 6.12
Leasing Commissions N/A $ 418,185 1,098,829 $ 2,019,837 $1,178,950 $ 2,939,132(3) $ 2,648,485 $ 290,648
Per Square Foot Leased N/A $ 11.50 21.86 $ 8.54 $ 13.97 $ 17.81 $ 22.30 $ 6.28
------------------------------------------------------------------------------------------------------
Total Per Square Foot N/A $ 13.29 37.55 $ 26.93 $ 25.93 $ 52.29 $ 67.83 $ 12.40
======================================================================================================
Industrial Properties
Tenant Improvements $ 375,646 $ 650,216 1,366,488 $ 1,850,812 $1,060,791 $ 1,249,200 $ 998,972 $ 250,228
Per Square Foot Improved $ 0.25 $ 0.95 1.65 $ 1.97 $ 1.20 $ 2.42 $ 3.25 $ 1.19
Leasing Commissions $ 835,108 $ 436,506 354,572 $ 890,688 $ 629,218 $ 574,256 $ 500,654 $ 73,602
Per Square Foot Leased $ 0.56 $ 0.64 0.43 $ 0.95 $ 0.64 $ 1.11 $ 1.63 $ 0.35
------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 0.81 $ 1.59 2.08 $ 2.92 $ 1.84 $ 3.53 $ 4.88 $ 1.54
======================================================================================================
Total Portfolio
Tenant Improvements $3,334,711 $7,395,070 8,822,897 $17,843,929 $9,782,844 $15,761,657(3) $13,732,549 $2,029,108
Per Square Foot Improved $ 1.53 $ 4.15 4.05 $ 7.96 $ 4.75 $ 9.83 $ 15.31 $ 2.87
Leasing Commissions $2,741,917 $4,960,906 5,973,109 $ 7,257,379 $5,528,065 $ 8,431,101 $ 6,669,825 $1,761,276
Per Square Foot Leased $ 1.26 $ 3.05 2.75 $ 3.24 $ 2.66 $ 5.26 $ 7.44 $ 2.49
------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 2.79 $ 7.20 6.80 $ 11.20 $ 7.41 $ 15.09 $ 22.75 $ 5.36
======================================================================================================
NOTES:
- ------
(1) 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.
(2) Excludes $696,625 of deferred leasing costs attributable to space marketed
but not yet leased.
(3) Excludes $5.8 million of tenant improvements and $2.2 million of leasing
commissions related to a new 121,108 square foot lease to Debevoise with a
lease commencement date in 2005. Also excludes tenant improvements of $0.2
million for Sandler O'Neil & Partners (7,446 SF) for expansion space with a
lease commencement date in 2004.
43
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 nine months ended
September 30, 2003 as reported on its "Statements of Cash Flows - Investment
Activities" contained in its consolidated financial statements (in thousands):
September 30,
2003
--------------
Capital expenditures:
Non-incremental ......................... $ 7,523
Incremental ............................. 1,674
Tenant improvements:
Non-incremental ......................... 23,411
Incremental ............................. 3,473
----------
Additions to commercial real estate properties $ 36,081
----------
Leasing costs:
Non-incremental ......................... $ 9,952
Incremental ............................. 3,233
----------
Payment of deferred leasing costs ............ $ 13,185
==========
Acquisition and development costs ............ $ 55,604
==========
44
The following table sets forth the Operating Partnership's lease expiration
table at October 1, 2003 for its Total Portfolio of properties, its Office
Portfolio and its Industrial / R&D Portfolio.
LEASE EXPIRATION SCHEDULE
TOTAL PORTFOLIO
-----------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
-----------------------------------------------------------------------------------------
2003 51 320,905 1.6% 1.6%
2004 184 1,513,421 7.3% 8.9%
2005 221 2,306,451 11.2% 20.0%
2006 232 2,629,149 12.7% 32.8%
2007 137 1,456,481 7.0% 39.8%
2008 142 1,644,252 8.0% 47.8%
2009 and thereafter 351 9,027,294 43.8% 91.5%
-----------------------------------------------------------------------------------------
Total/Weighted Average 1,318 18,897,953 91.5% --
-----------------------------------------------------------------------------------------
Total Portfolio Square Feet 20,662,134
-----------------------------------------------------------------------------------------
OFFICE PORTFOLIO
-----------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Office % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
-----------------------------------------------------------------------------------------
2003 49 276,565 2.0% 2.0%
2004 152 996,042 7.2% 9.2%
2005 188 1,600,298 11.6% 20.8%
2006 178 1,585,835 11.5% 32.2%
2007 107 1,100,529 8.0% 40.2%
2008 106 934,284 6.7% 46.9%
2009 and thereafter 287 6,089,187 44.0% 91.0%
-----------------------------------------------------------------------------------------
Total/Weighted Average 1,067 12,582,740 91.0% --
-----------------------------------------------------------------------------------------
Total Office Portfolio Square Feet 13,842,643
-----------------------------------------------------------------------------------------
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 2 44,340 0.7% 0.7%
2004 32 517,379 7.6% 8.2%
2005 33 706,153 10.4% 18.6%
2006 54 1,043,314 15.3% 33.9%
2007 30 355,952 5.2% 39.1%
2008 36 709,968 10.4% 49.5%
2009 and thereafter 64 2,938,107 43.1% 92.6%
-----------------------------------------------------------------------------------------
Total/Weighted Average 251 6,315,213 92.6% --
-----------------------------------------------------------------------------------------
Total Industrial/R&D Portfolio Square 6,819,491 --
Feet
-----------------------------------------------------------------------------------------
(a) Excludes the 355,000 square foot office property located in Orlando,
Florida
45
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A number of shareholder derivative actions have been commenced
purportedly on behalf of the Company against the Board of Directors in
the Supreme Court of the State of New York, County of Nassau (Lowinger
v. Rechler et al., Index No. 01 4162/03 (9/16/03)), the Supreme Court
of the State of New York, County of Suffolk (Steiner v. Rechler et
al., Index No. 03 32545 (10/2/03) and Lighter v. Rechler et al., Index
No. 03 23593 (10/3/03)), the United States District Court, Eastern
District of New York (Tucker v. Rechler et al., Case No. cv 03 4917
(9/26/03), Clinton Charter Township Police and Fire Retirement System
v. Rechler et al., Case No. cv 03 5008 (10/1/03) and Teachers'
Retirement System of Louisiana v. Rechler et al., Case No. cv 03 5178
(10/14/03)) and the Circuit Court for Baltimore County (Sekuk Global
Enterprises Profit Sharing Plan v. Rechler et al., Civil No. 24-C-
03007496 (10/16/03), Hoffman v. Rechler et al., 24-C-03-007876
(10/27/03) and Chirko v. Rechler et al., 24-C-03-008010 (10/30/03)),
relating to the sale of the Long Island Industrial Portfolio to
certain members of the Rechler family. The complaints allege, among
other things, that the process by which the directors agreed to the
transaction was not sufficiently independent of the Rechler family and
did not involve a " market check" or third party auction process and
as a result was not for adequate consideration. The Plaintiffs seek
similar relief, including a declaration that the directors violated
their fiduciary duties, an injunction against the transaction and
damages. The Company believes that complaints are without merit.
Except as provided above, the Operating Partnership is not presently
subject to any material litigation nor, to the Operating Partnership's
knowledge, is any litigation threatened against the Operating
Partnership, other than routine actions for negligence or other claims
and administrative proceedings arising in the ordinary course of
business, some of which are expected to be covered by liability
insurance and all of which collectively are not expected to have a
material adverse effect on the liquidity, results of operations or
business or financial condition of the Operating Partnership.
Item 2. Changes in Securities and use of proceeds -
On August 7, 2003, the Operating Partnership issued 465,845 Class C
common units of limited partnership. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information - None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
31.1 Certification of Scott H. Rechler, Chief Executive Officer
and President of Reckson Associates Realty Corp., the sole
general partner of Reckson Operating Partnership, L.P.,
pursuant to Rule 13a - 14(a) or Rule 15(d) - 14(a)
31.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of Reckson Associates
Realty Corp., the sole general partner of Reckson Operating
Partnership, L.P., pursuant to Rule 13a - 14(a) or Rule
15(d) - 14(a)
32.1 Certification of Scott H. Rechler, Chief Executive Officer
and President of Reckson Associates Realty Corp., the sole
general partner of Reckson Operating Partnership, L.P.,
pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code
32.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of Reckson Associates
Realty Corp., the sole general partner of Reckson Operating
Partnership, L.P., pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code
b) During the three months ended September 30, 2003 the Registrant
filed the following reports on Form 8K:
On August 6, 2003, the Registrant submitted a report on Form 8-K
under Items 7 and 12 thereof in order to file a press release
announcing Reckson Associates Realty Corp.'s consolidated
financial results for the quarter ended June 30, 2003.
On September 18, 2003 the Registrant submitted a report on Form
8-K under Items 5 and 7 thereof in order to describe Reckson
Associates Realty Corp.'s disposition of its Long Island
industrial portfolio.
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECKSON OPERATING PARTNERSHIP, L. P.
BY: RECKSON ASSOCIATES REALTY CORP., its sole general partner
By: /s/ Scott H. Rechler By: /s/ Michael Maturo
-------------------------------- -------------------------------
Scott H. Rechler, Chief Executive Michael Maturo, Executive Vice
Officer and President President, Treasurer
and Chief Financial Officer
DATE: November 14, 2003
47
EXHIBIT 31.1
RECKSON OPERATING PARTNERSHIP, L.P.
CERTIFICATION OF SCOTT H. RECHLER, CHIEF EXECUTIVE OFFICER AND
PRESIDENT OF RECKSON ASSOCIATES REALTY CORP.,
THE SOLE GENERAL PARTNER OF RECKSON OPERATING PARTNERSHIP, L.P.,
PURSUANT TO RULE 13a - 14(a)/15(d) - 14(a)
I, Scott H. Rechler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson
Operating Partnership, L.P.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for, the
periods presented in this report
4. The Registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter (the Registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant's ability
to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: November 14, 2003 /s/ Scott H. Rechler
---------------------
Scott H. Rechler
Chief Executive Officer and President,
Reckson Associates Realty Corp.,
the sole general partner of
the Registrant
EXHIBIT 31.2
RECKSON OPERATING PARTNERSHIP, L.P.
CERTIFICATION OF MICHAEL MATURO, EXECUTIVE VICE PRESIDENT,
TREASURER AND CHIEF FINANCIAL OFFICER OF RECKSON ASSOCIATES REALTY CORP.,
THE SOLE GENERAL PARTNER OF RECKSON OPERATING PARTNERSHIP, L.P.,
PURSUANT TO RULE 13a - 14(a)/15(d) - 14(a)
I, Michael Maturo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson
Operating Partnership, L.P.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for,
the periods presented in this report;
4. The Registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the Registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred during
the Registrant's most recent fiscal quarter (the Registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial
reporting; and
5. The Registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant's auditors
and the audit committee of the Registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the Registrant's ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal control over financial reporting.
Date: November 14, 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
EXHIBIT 32.1
RECKSON OPERATING PARTNERSHIP, L.P.
CERTIFICATION OF SCOTT H. RECHLER, CHIEF EXECUTIVE OFFICER AND
PRESIDENT OF RECKSON ASSOCIATES REALTY CORP.,
THE SOLE GENERAL PARTNER OF RECKSON OPERATING PARTNERSHIP, L.P.,
PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
I, Scott H. Rechler, Chief Executive Officer and President of Reckson
Associates Realty Corp., the sole general partner of Reckson Operating
Partnership, L.P. (the "Company"), certify pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1) The Quarterly Report on Form 10-Q of the Company for the quarterly
period ended September 30, 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: November 14, 2003 RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp.,
its sole general partner
By: /s/ Scott H. Rechler
---------------------------------
Scott H. Rechler, Chief Executive
Officer and President
A signed original of this written statement required by Section 906 has been
provided to Reckson Operating Partnership, L.P. and will be furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
RECKSON OPERATING PARTNERSHIP, L.P.
CERTIFICATION OF MICHAEL MATURO, EXECUTIVE VICE PRESIDENT,
TREASURER AND CHIEF FINANCIAL OFFICER OF RECKSON ASSOCIATES REALTY CORP.,
THE SOLE GENERAL PARTNER OF RECKSON OPERATING PARTNERSHIP, L.P.,
PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE
I, Michael Maturo, Executive Vice President, Treasurer and Chief
Financial Officer of Reckson Associates Realty Corp., the sole general partner
of Reckson Operating Partnership, L.P. (the "Company"), certify pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1) The Quarterly Report on Form 10-Q of the Company for the quarterly
period ended September 30, 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: November 14, 2003 RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp.,
its sole general partner
By: /s/ Michael Maturo
-------------------------------
Michael Maturo, Executive Vice
President, Treasurer and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Reckson Operating Partnership, L.P. and will be furnished to the
Securities and Exchange Commission or its staff upon request.
