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, 1999
Commission file number: 1-13762
RECKSON ASSOCIATES REALTY CORP.
(Exact name of registrant as specified in its charter)
Maryland 11-3233650
- -------- ----------
(State other jurisdiction of (IRS. Employer
incorporation of organization) Identification Number)
225 Broadhollow Road, Melville, NY 11747
- ---------------------------------- -----
(Address of principal executive office) (zip code)
(516) 694-6900
(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) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The company has two class' of common stock, issued at $.01 par value per share
with 40,369,506 and 10,483,763 shares of common stock and Class B Common Stock
outstanding, respectively
as of November 11, 1999
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
INDEX PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30,
1999 (unaudited) and December 31, 1998
Consolidated Statements of Income for the three and
nine months ended Sepetember 30, 1999 and 1998
(unaudited)
Consolidated Statements of Cash Flows for the six
months ended September 30 1999 and 1998 (unaudited)
Notes to the Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
Item 2. Changes in Securities and use of proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on form 8-K
- --------------------------------------------------------------------------------
SIGNATURES
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<PAGE>
<TABLE>
Reckson Associates Realty Corp.
Consolidated Balance Sheets
(Dollars in thousands, except for share amounts)
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets:
Commercial real estate properties, at cost:
Land $ 264,326 $ 212,540
Building and improvements 1,764,826 1,372,549
Developments in progress:
Land 61,487 69,143
Development costs 78,955 82,901
Furniture, fixtures and equipment 6,378 6,090
-------------- --------------
2,175,972 1,743,223
Less accumulated depreciation (202,212) (159,049)
-------------- --------------
1,973,760 1,584,174
Investment in real estate joint ventures 27,774 15,104
Investment in mortgage notes and notes receivable 349,690 99,268
Cash and cash equivalents 39,292 2,349
Tenants receivables 3,260 5,159
Investments in and advances to affiliates 161,067 53,329
Deferred rent receivable 23,804 22,526
Prepaid expenses and other assets 62,804 46,372
Contract and land deposits and pre-acquisition costs 2,847 2,253
Deferred leasing and loan costs 36,866 24,282
-------------- --------------
Total Assets $ 2,681,164 $ 1,854,816
============== ==============
Liabilities:
Mortgage notes payable $ 460,725 $ 253,463
Unsecured credit facilities 253,600 465,850
Unsecured term loan 75,000 20,000
Senior unsecured notes 449,296 150,000
Accrued expenses and other liabilities 54,692 50,960
Dividends and distributions payable 27,241 19,663
-------------- --------------
Total Liabilities 1,320,554 959,936
-------------- --------------
Commitments and other comments --- ---
Minority interests' in consolidated partnerships 92,718 52,173
Preferred unit interest in the operating partnership 42,518 42,518
Limited partners' minority interest in the operating
partnership 91,517 94,125
-------------- --------------
226,753 188,816
-------------- --------------
Stockholders' Equity:
Preferred Stock, $.01 par value, 25,000,000 shares
authorized
Series A preferred stock, 9,192,000 shares issued
and outstanding 92 92
Perpetual convertible preferred stock, 6,000,000
and 0 shares issued and outstanding, respectively 60 ---
Common Stock, $01 par value, 100,000,000 shares
authorized
Common stock, 40,369,506 and 40,035,419 shares
issued and outstanding, respectively 404 400
Class B Common Stock, 10,913,763 and 0 shares
issued and outstanding, respectively 109 ---
Additional paid in capital 1,133,192 705,572
-------------- --------------
Total Stockholders' Equity 1,133,857 706,064
-------------- --------------
Total Liabilities and Stockholders' Equity $ 2,681,164 $ 1,854,816
============== ==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Reckson Associates Realty Corp.
Consolidated Statements of Income
(Unaudited and in thousands, except per share and share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Base rents $ 95,474 $ 60,275 $ 234,759 $ 162,846
Tenant escalations and reimbursements 15,395 7,663 32,524 20,776
Equity in earnings of real estate joint ventures
and service companies 483 536 1,372 1,201
Interest income on mortgage notes and notes
receivable 520 2,083 5,627 5,536
Gain on sales of real estate 10,052 --- 10,052 ---
Other 3,421 1,043 8,359 2,624
--------------- --------------- --------------- ---------------
Total Revenues 125,345 71,600 292,693 192,983
--------------- --------------- --------------- ---------------
Expenses:
Property operating expenses 40,679 22,202 91,125 61,774
Marketing, general and administrative 6,804 4,380 16,241 11,807
Interest 20,774 13,040 53,620 34,537
Depreciation and amortization 21,868 14,835 56,086 38,098
--------------- --------------- --------------- ---------------
Total Expenses 90,125 54,457 217,072 146,216
--------------- --------------- --------------- ---------------
Income before preferred dividends and distributions,
minority interests' and extraordinary items 35,220 17,143 75,621 46,767
Minority partners' interests in consolidated
partnerships (2,150) (665) (4,933) (1,882)
Distributions to preferred unit holders (660) (657) (1,981) (1,092)
Limited partners' interest in the operating
partnership (3,014) (1,209) (7,082) (5,962)
--------------- --------------- --------------- ---------------
Income before extraordinary items and dividends to
preferred shareholders 29,396 14,612 61,625 37,831
Extraordinary items - (loss) on extinguishment of
debt, net of limited partners share of $74, $323,
$74 and $323, respectively (555) (1,670) (555) (1,670)
Dividends to preferred shareholders (7,325) (4,377) (17,035) (8,110)
--------------- --------------- --------------- ---------------
Net income available to common shareholders $ 21,516 $ 8,565 $ 44,035 $ 28,051
=============== =============== =============== ===============
Net Income available to:
Common shareholders $ 15,066 $ 8,565 $ 35,854 $ 28,051
Class B common shareholders 6,450 --- 8,181 ---
--------------- --------------- --------------- ---------------
Total $ 21,516 $ 8,565 $ 44,035 $ 28,051
=============== =============== =============== ===============
Basic net income per weighted average common share
before extraordinary items:
Common shareholders $ 0.38 $ 0.25 $ 0.90 $ 0.75
Extraordinary items (loss) per common share (0.01) (0.04) (0.01) (0.04)
--------------- --------------- --------------- ---------------
Basic net income per weighted average common
share $ 0.37 $ 0.21 $ 0.89 $ 0.71
=============== =============== =============== ===============
Class B common shareholders $ 0.57 $ --- $ 1.52 $ ---
Extraordinary items (loss) per Class B common
share (0.01) --- (0.03) ---
--------------- --------------- --------------- ---------------
Basic net income per weighted average Class B
common share $ 0.56 $ --- 1.49 ---
=============== =============== =============== ===============
Weighted average common shares outstanding:
Common shareholders 40,367,161 40,011,627 40,234,749 39,283,706
Class B common shareholders 11,456,931 --- 5,488,759 ---
Diluted net income per weighted average common share:
Common shareholders $ 0.37 $ 0.21 $ 0.88 $ 0.70
Class B common shareholders $ 0.41 $ --- $ 0.95 $ ---
Diluted weighted average common shares outstanding:
Common shareholders 40,796,597 40,533,540 40,651,512 39,833,059
Class B common shareholders 11,456,931 --- 5,488,759 ---
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Reckson Associates Realty Corp.
Consolidated Statements of Cash Flows)
(Unaudited and in thousands)
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from Operating Activities:
Net Income available to common shareholders $ 44,035 $ 28,051
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56,086 38,098
Minority partners' interests in consolidated
partnerships 4,933 1,882
Extraordinary loss on extinguishment of debt 555 1,670
Gain on sale of interest in Reckson Executive
Centers, LLC --- (9)
Gain on sales of real estate, securities and
mortgage redemption (10,052) (43)
Limited partners' interest in the operating
partnership 7,082 5,962
Equity in earnings of real estate joint ventures
and service companies (1,372) (1,201)
Distributions from a real estate joint venture 337 379
Changes in operating assets and liabilities:
Tenant receivables 1,899 249
Real estate tax escrow (2,405) 236
Prepaid expenses and other assets (13,764) 4,984
Deferred rents receivable (3,473) (6,950)
Accrued expenses and other liabilities 21,852 13,275
------------ ------------
Net cash provided by operating activities 105,713 86,583
------------ ------------
Cash Flows from Investing Activities:
Increase in deposits and pre-acquisition costs (3,485) (245)
Increase in developments in progress (8,198) (89,648)
Purchase of commercial real estate properties (265,400) (466,959)
Investment in mortgage notes and notes
receivable (295,048) 12,257
Investments in real estate joint ventures (11,875) (7,760)
Additions to commercial real estate properties (21,612) (15,507)
Purchase of furniture, fixtures and equipment (396) (1,649)
Payment of leasing costs (11,851) (6,254)
Proceeds from sales of real estate, securities
and mortgage redemption 269,324 809
------------ ------------
Net cash used in investing activities (348,541) (574,956)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock net
of issuance costs 1,397 93,630
Proceeds from issuance of preferred stock net
of issuance costs 148,000 220,800
Repurchase of Class B Common Stock (17,389) ---
Principal payments on secured borrowings (3,163) (4,006)
Payment of loan and equity issuance costs (7,113) (3,557)
Proceeds from secured borrowings 125,547 ---
Investments in and advances to affiliates (107,768) (31,484)
Proceeds from issuance of senior unsecured
notes net of issuance costs 299,262 ---
Proceeds from unsecured credit facilities 353,500 345,000
Repayment of unsecured credit facilities (510,750) (112,000)
Contributions of minority partners' in consolidated
partnerships 75,000 ---
Distributions to minority partners' in consolidated
partnerships (4,573) (1,825)
Distributions to limited partners' in the operating
partnership (8,081) (4,929)
Distributions to preferred unit holders (1,981) (652)
Dividends to common shareholders (47,044) (25,646)
Dividends to preferred shareholders (15,073) (5,257)
------------ ------------
Net cash provided by financing activities 279,771 470,074
------------ ------------
Net (decrease) increase in cash and cash
equivalents 36,943 (18,299)
Cash and cash equivalents at beginning of period 2,349 21,828
------------ ------------
Cash and cash equivalents at end of period $ 39,292 $ 3,529
============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Reckson Associates Realty Corp. (the "Company") was incorporated in
Maryland in September 1994. In June, 1995 the Company completed an initial
public offering (the "IPO") and commenced operations. The aggregate proceeds to
the Company, net of underwriting discount, advisory fee and other offering
expenses, were approximately $162 million.
The Company became the sole general partner of Reckson Operating
Partnership L.P. (the "Operating Partnership") by contributing substantially all
of the net proceeds of the IPO, in exchange for an approximately 73% interest in
the Operating Partnership. All properties acquired by the Company are held by or
through the Operating Partnership. In conjunction with the IPO, the Operating
Partnership executed various option and purchase agreements whereby it issued
common units of limited partnership interest in the Operating Partnership ("OP
Units") to certain continuing investors in exchange for interests in certain
property partnerships, fee simple and leasehold interests in properties and
development land, certain business assets of executive center entities and 100%
of the non-voting preferred stock of the management and construction companies.
As of September 30, 1999, the Company owned and operated 77 office
properties comprising approximately 13.1 million square feet, 109 industrial
properties comprising approximately 8.0 million square feet and two retail
properties comprising approximately 20,000 square feet, located in the New York
Tri-State area (the "Tri-State Area"). The Company also owns and operates a
357,000 square foot office building located in Orlando, Florida. In addition,
the Company owned or had contracted to acquire approximately 377 acres of land
in 16 separate parcels of which the Company can develop approximately 2.8
million square feet of industrial and office space. The Company also has
invested approximately $312.9 million in mortgage notes encumbering three Class
A office properties encompassing approximately 1.6 million square feet,
approximately 472 acres of land located in New Jersey and in a note receivable
secured by a partnership interest in Omni Partner's, L.P., owner of the Omni, a
575,000 square foot Class A office property located in Uniondale, New York.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI")
and Reckson Strategic Venture Partners, LLC ("RSVP"). On June 11, 1998, the
Operating Partnership distributed its 95% common stock interest in RSI of
approximately $3 million to its owners, including the Company which, in turn,
distributed the common stock of RSI received from the Operating Partnership to
its stockholders. Additionally, during June 1998, the Operating Partnership
established a credit facility with RSI (the "RSI Facility") in the amount of
$100 million for RSI's service sector operations and other general corporate
purposes. As of September 30, 1999 the Company had advanced $83.6 million under
the RSI Facility. In addition, the Operating Partnership has approved the
funding of investments of up to $100 million with or in RSVP (the "RSVP
Commitment"), through RSVP-controlled joint venture Real Estate Investment Trust
("REIT")-qualified investments or advances made to RSI under terms similar to
the RSI Facility. As of September 30, 1999, approximately $54.8 million had been
invested through the RSVP Commitment, of which $21.8 million represents
RSVP-controlled joint venture REIT-qualified investments and $33.0 million
represents advances to RSI under the RSVP Commitment. RSI serves as the managing
member of RSVP. RSI invests in operating companies that generally provide
commercial services to properties owned by the Company and its tenants and third
parties nationwide. RSVP was formed to provide the Company with a research and
development vehicle to invest in alternative real estate sectors. RSVP invests
primarily in real estate and real estate related operating companies generally
outside of the Company's core office and industrial focus. RSVP's strategy is to
identify and acquire interests in established entrepreneurial enterprises with
experienced management teams in market sectors which are in the early stages of
their growth cycle or offer unique circumstances for attractive investments as
well as a platform for future growth.
On January 6, 1998, the Company made its initial investment in the Morris
Companies, a New Jersey developer and owner of "Big Box" warehouse facilities.
In connection with the transaction the Morris Companies contributed 100% of
their interests in certain industrial properties to Reckson Morris Operating
Partnership, L. P. ("RMI") in exchange for operating partnership units in RMI.
The Company has agreed to invest up to $150 million in RMI. On September 27,
1999, the Company sold its interest in RMI to Keystone Property Trust ("KTR")
(formerly American Real Estate Investment Corporation) (see note 6).
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Tower Realty Trust, Inc.
("Tower"). On May 24, 1999 the Company completed the merger with Tower and
acquired three Class A office properties located in New York City totaling 1.6
million square feet and one office property located on Long Island totaling
approximately 101,000 square feet. In addition, pursuant to the merger, the
Company also acquired certain office properties, a property under development
and land located outside of the Tri-State Area. All of the assets acquired in
the merger, other than a 357,000 square foot office property located in Orlando,
Florida, have been sold. (see note 6).
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Company and the Operating Partnership at September 30,
1999 and December 31, 1998 and the results of their operations for the three and
nine months ended September 30, 1999 and 1998 respectively, and, their cash
flows for the nine months ended September 30, 1999 and 1998, respectively. The
Operating Partnership's investments in Metropolitan and Omni Partner's, L. P.
("Omni") are reflected in the accompanying financial statements on a
consolidated basis with a reduction for minority partners' interest. The
Operating Partnership's investment in RMI was reflected in the accompanying
financial statements on a consolidated basis with a reduction for minority
partner's interest through September 26, 1999. On September 27, 1999, the
Operating Partnership sold its interest in RMI to KTR (see note 6). The
operating results of the service businesses currently conducted by Reckson
Management Group, Inc., and Reckson Construction Group, Inc., are reflected in
the accompanying financial statements on the equity method of accounting. The
Operating Partnership also invests in real estate joint ventures where it may
own less than a controlling interest, such investments are also reflected in the
accompanying financial statements on the equity method of accounting. All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.
The merger with Tower (see note 6) was accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16. Accordingly, the
fair value of the consideration given by the Company, in accordance with
generally accepted accounting principles ("GAAP"), was used as the valuation
basis for the merger. The assets acquired and liabilities assumed by the Company
were recorded at the fair value as of the closing date of the merger and the
excess of the purchase price over the historical basis of the net assets
acquired was allocated primarily to operating real estate properties and real
estate properties which have been sold.
The minority interests at September 30, 1999 represent an approximate 12%
limited partnership interest in the Operating Partnership, an approximate 28%
interest in certain industrial joint venture properties formerly owned by RMI, a
convertible preferred interest in Metropolitan and a 40% interest in Omni.
The accompanying interim unaudited financial statements have been prepared
by the Company's management pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosure
normally included in the financial statements prepared in accordance with 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, 1999 and for the nine month periods ended September 30, 1999 and
1998 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, 1999. These financial statements should be read in
conjunction with the Company's audited financial statements and the notes
thereto included in the Company's Form 10K for the year ended December 31, 1998.
The Company intends to qualify as a REIT under Section 856 through 869 of
the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the
Company will not generally be subject to corporate Federal income taxes as long
as it satisfies certain technical requirements of the Code relating to
composition of its income and assets and requirements relating to distributions
of taxable income to shareholders.
In June 1999, the Financial Accounting Standards Board issued Statement No.
137, amending Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which extended the required date of adoption to the years
beginning after June 15, 2000. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company expects to adopt
the new Statement effective January 1, 2001. The Company does not anticipate
that the adoption of this Statement will have any effect on its results of
operations or financial position.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. MORTGAGE NOTES PAYABLE
As of September 30, 1999, the Company had approximately $460.7 million of
fixed rate mortgage notes which mature at various times between June 2000 and
November 2027. The notes are secured by 23 properties and have a weighted
average interest rate of approximately 7.6%.
4. SENIOR UNSECURED NOTES
As of September 30, 1999, the Operating Partnership had outstanding
approximately $449.3 million (net of issuance discounts) of senior unsecured
notes (the "Senior Unsecured Notes"). The following table sets forth the
Operating Partnership's Senior Unsecured Notes and other related disclosures
(dollars in thousands):
Issuance Face Amount Coupon Rate Term Maturity
- ------------------ ------------ ------------ ----------- ---------------
August 27, 1997 $ 150,000 7.20% 10 years August 28, 2007
March 26, 1999 $ 100,000 7.40% 5 years March 15, 2004
March 26, 1999 $ 200,000 7.75% 10 years March 15, 2009
Interest on the Senior Unsecured Notes is payable semiannually with
principal and unpaid interest due on the scheduled maturity dates. In addition,
the five year and 10 year Senior Unsecured Notes issued on March 26, 1999 were
issued at a discount of $172,000 and $566,000, respectively.
Net proceeds of approximately $297.4 million received from the issuance of
the March 26, 1999 Senior Unsecured Notes were used to repay outstanding
borrowings under the Company's unsecured credit facility.
5. UNSECURED CREDIT FACILITIES AND UNSECURED TERM LOAN
As of September 30, 1999, the Company had a three year $500 million
unsecured revolving credit facility (the "Credit Facility") from Chase Manhattan
Bank, Union Bank of Switzerland and PNC Bank as co-managers of the credit
facility bank group. Interest rates on borrowings under the Credit Facility are
priced off of LIBOR plus a sliding scale ranging from 65 basis points to 90
basis points based on the Company's investment grade rating on its senior
unsecured debt. On March 16, 1999, the Company received its investment grade
rating on its senior unsecured debt. As a result, the pricing under the Credit
Facility was adjusted to LIBOR plus 90 basis points.
The Company utilizes the Credit Facility primarily to finance the
acquisitions of properties and other real estate investments, fund its
development activities and for working capital purposes. At September 30, 1999,
the Company had availability under the Credit Facility to borrow an additional
$196.2 million (net of $50.2 million of outstanding undrawn letters of credit).
As of September 30, 1999, the Company had a one year $75 million unsecured
term loan (the "Term Loan") from Chase Manhattan Bank. Interest rates on
borrowings under the Term Loan are currently priced off of LIBOR plus 175 basis
points. The Term Loan matures on December 3, 1999 and the Company is currently
in negotiations with the Chase Manhattan Bank to extend and refinance the Term
Loan. At September 30, 1999, the Company had $75 million outstanding under the
Term Loan.
On May 24, 1999, in conjunction with the acquisition of Tower (see Note 6),
the Company obtained a $130 million unsecured bridge facility (The "Bridge
Facility") from UBS AG. Interest rates on borrowings under the Bridge Facility
were priced off of LIBOR plus approximately 214 basis points. On July 23, 1999,
the Bridge Facility was repaid through a long term fixed rate secured borrowing.
As a result, certain deferred loan costs incurred in connection with the Bridge
Facility were written off. Such amount is reflected as an extraordinary loss in
the accompanying consolidated statements of income.
6. COMMERCIAL REAL ESTATE INVESTMENTS
During the three months ended March 31, 1999, the Company purchased
approximately 68.1 acres of vacant land in Northern New Jersey for approximately
$2.6 million. In addition, RMI purchased 74.6 acres of vacant land for
approximately $3.7 million and a 846,000 square foot industrial property located
in Cranbury, New Jersey for approximately $34 million. During the three months
ended September 30, 1999, these assets were sold to KTR and the Matrix
Development Group ("Matrix").
On April 13, 1999, the Company received approximately $25.8 million from
the redemption of a mortgage note receivable which secured three office
properties located in Garden City, Long Island, encompassing approximately
400,000 square feet. As a result, the Company recognized a gain of approximately
$4.3 million. Such gain has been included in gain on sales of real estate on the
accompanying consolidated statements of income.
On June 7, 1999 the Company sold a 24,000 square foot office property
located in Ossining, New York for approximately $1.5 million. As partial
consideration for the sale, the Company obtained a $1.2 million, three year
purchase money mortgage.
On June 15, 1999, the Company acquired the first mortgage note secured by a
42 story, 1.4 million square foot Class A office property located at 919 Third
Avenue in New York City for approximately $277.5 million. The first mortgage
note entitles the Company to all the net cash flow of the property and to
substantial rights regarding the operations of the property, with the Company
anticipating to ultimately obtain title to the property. This acquisition was
financed with proceeds from the issuance of six million shares of Series B
Convertible Cumulative Preferred Stock (see note 7) and through draws under the
Credit Facility. Current financial accounting guidelines provide that where a
lender has virtually the same risks and potential rewards as those of a real
estate owner it should recognize the full economics associated with the
operations of the property. As such, the Company has recognized the real estate
operations of the 919 Third Avenue in the accompanying consolidated statements
of income from the date of acquisition.
On August 9, 1999, the Company executed a contract, which is to take place
in three stages, for the sale of its interest in RMI which consisted of 28
properties, comprising approximately 6.1 million square feet and three other big
box industrial properties to KTR. In addition, the Company also entered into a
sale agreement with Matrix relating to a first mortgage note and certain
industrial land holdings (the "Matrix Sale"). The combined total sale price is
$310 million (approximately $42 million of which is payable to the Morris
Companies and its affiliates) and will consist of a combination of cash,
convertible preferred and common stock of KTR, preferred units of KTR's
operating partnership, relief of debt and a purchase money mortgage note secured
by certain land that is being sold to Matrix.
During September 1999, the Matrix Sale and the first stage of the RMI
closing occurred whereby the Company sold its interest in RMI to KTR for a
combined sales price of approximately $164.7 million (net of minority partner's
interest). The combined consideration consisted of approximately $86.3 million
in cash, $40 million of preferred stock of KTR, $1.5 million in common stock of
KTR, approximately $26.7 million of debt relief and approximately $10.2 million
in purchase money mortgages. As a result, the Company incurred a gain of
approximately $10.1 million. Cash proceeds from the sales were used primarily to
repay borrowings under the Credit Facility.
The second and third stages of the RMI closing are scheduled to be
completed in December 1999 and April 2000, respectively. Both of the remaining
stages each consist of three industrial buildings and are being sold for total
consideration of $50 million and $48 million, respectively.
In July 1998, the Company formed a joint venture, Metropolitan Partners
LLC, a Delaware limited liability company ("Metropolitan"), with Crescent Real
Estate Equities Company, a Texas real estate investment trust ("Crescent").
On December 8, 1998, the Company, Metropolitan and Tower Realty Trust, Inc.
("Tower") executed a merger agreement and on May 24, 1999 Tower was merged (the
"Merger") into Metropolitan, with Metropolitan surviving the Merger.
Concurrently with the Merger, Tower Realty Operating Partnership, L.P. ("Tower
OP") was merged with and into a subsidiary of Metropolitan. The consideration
issued in the mergers was comprised of (i) 25% cash (approximately $107.2
million) and (ii) 75% of shares of Class B Exchangeable Common Stock, par value
$.01 per share, of the Company (the "Class B Common Stock") (valued for GAAP
purposes at approximately $304.1 million).
Under the terms of the transaction, Metropolitan effectively paid for each
share of Tower common stock and each unit of limited partnership interest of
Tower OP the sum of (i) $5.75 in cash, and (ii) 0.6273 of a share of Class B
Common Stock. The shares of Class B Common Stock are entitled to receive an
initial annual dividend of $2.24 per share, which dividend is subject to
adjustment annually. The shares of Class B Common Stock are exchangeable at any
time, at the option of the holder, into an equal number of shares of common
stock, par value $.01 per share, of the Company subject to customary
antidilution adjustments. The Company, at its option, may redeem any or all of
the Class B Common Stock in exchange for an equal number of shares of the
Company's common stock at any time following the four year, six-month
anniversary of the issuance of the Class B Common Stock.
The Board of Directors of the Company has authorized a purchase buy back
program for the Company's Class B Common Stock (see note 7).
The Company controls Metropolitan and owns 100% of the common equity;
Crescent owns a $85 million preferred equity investment in Metropolitan.
Crescent's investment accrues distributions at a rate of 7.5% per annum for a
two-year period and may be redeemed by Metropolitan at any time during that
period for $85 million, plus an amount sufficient to provide a 9.5% internal
rate of return. If Metropolitan does not redeem the preferred interest, upon the
expiration of the two-year period, Crescent must convert its $85 million
preferred interest into either (i) a common membership interest in Metropolitan
or (ii) shares of the Company's common stock at a conversion price of $24.61 per
share.
The Tower portfolio acquired in the Merger consists of three office
properties comprising approximately 1.6 million square feet located in New York
City, one office property located on Long Island and certain office properties
and other real estate assets located outside the Tri-State Area.
Prior to the closing of the Merger, the Company arranged for the sale of
four of Tower's Class B New York City properties, comprising approximately
701,000 square feet for approximately $84.5 million. Subsequent to the closing
of the Merger, the Company has sold a real estate joint venture interest and all
of the property located outside the Tri State Area other than one office
property located in Orlando, Florida for approximately $171.1 million. The
combined consideration consisted of approximately $143.8 million in cash and
approximately $27.3 million of debt relief. Net cash proceeds from the sales
were used primarily to repay borrowings under the Credit Facility. As a result
of incurring certain sales and closing costs in connection with the sale of the
assets located outside the Tri State Area, the Company has incurred a loss of
approximately $4.4 million which has been included in gain on sales of real
estate on the accompanying consolidated statements of income.
7. STOCKHOLDERS' EQUITY
On May 24, 1999, in conjunction with the Tower acquisition, the Company
issued 11,694,567 shares of Class B Common Stock which were valued for GAAP
purposes at $26 per share for total consideration of approximately $304.1
million. The shares of Class B Common Stock are entitled to receive an initial
annual dividend of $2.24 per share, which dividend is subject to adjustment
annually. The shares of Class B Common Stock are exchangeable at any time, at
the option of the holder, into an equal number of shares of common stock, par
value $.01 per share, of the Company subject to customary antidilution
adjustments. The Company, at its option, may redeem any or all of the Class B
Common Stock in exchange for an equal number of shares of the Company's common
stock at any time following the four year, six-month anniversary of the issuance
of the Class B Common Stock.
On June 2, 1999, the Company issued six million shares of Series B
Convertible Cumulative Preferred Stock (the "Series B Preferred Stock") for
aggregate proceeds of $150 million. The Series B Preferred Stock is redeemable
by the Company on or after March 2, 2002 and is convertible into the Company's
common stock at a price of $26.05 per share. The Series B Preferred Stock
accumulate dividends at an initial rate of 7.85% per annum with such rate
increasing to 8.35% per annum on April 30, 2000 and to 8.85% per annum from and
after April 30, 2001. Proceeds from the Series B Preferred Stock offering were
used as partial consideration in the acquisition of the first mortgage note
secured by 919 Third Avenue located in New York City.
On September 22, 1999, the Board of Directors declared a dividend of
$.37125 per share of common stock payable on October 19, 1999 to its
shareholders of record as of October 7,1999. The dividend declared, which
related to the three months ended September 30, 1999, is based upon an annual
dividend of $1.485 per share.
On September 22, 1999, the Board of Directors declared a dividend on its
Series A Convertible Cumulative Preferred Stock of $.4766 per share payable on
November 1, 1999 to shareholders of record as of October 15, 1999. The dividend
declared, which relates to the three months ended October 31, 1999, is based on
an annual dividend of $1.906 per share.
On September 22, 1999, the Board of Directors declared a dividend of
$.49063 on its Series B Preferred Stock payable on November 1, 1999 to
shareholders of record as of October 15, 1999. The dividend declared , which
related to the three months ended October 31, 1999, is based upon an annual
dividend of $1.96 per share.
On September 22, 1999, the Board of Directors declared a dividend of $.56
per share of Class B Common Stock payable on November 1, 1999 to its
shareholders of record as of October 15, 1999. The dividend declared, which
related to the three months ended October 31, 1999, is based upon an annual
dividend of $2.24 per share.
The Board of Directors of the Company has authorized the purchase of up to
three million shares of the Company's Class B Common Stock. In addition, the
Board of Directors has also authorized the purchase of up to an additional three
million shares of the Company's Class B Common Stock and/or its common stock.
The buy-back program 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. As of September 30, 1999, the Company purchased and retired
780,804 shares of Class B Common Stock for approximately $17.4 million.
Basic net income per share on the Company's common stock was calculated
using the weighted average number of shares outstanding of 40,367,161 and
40,011,627 for the three months ended September 30, 1999 and 1998, respectively
and 40,234,749 and 39,283,706 for the nine months ended September 30, 1999 and
1998, respectively.
Basic net income per share on the Company's Class B common Stock was
calculated using the weighted average number of shares outstanding of 11,456,931
and 5,488,759 for the three and nine months ended September 30, 1999,
respectively.
The following table sets forth the Company's reconciliation of numerators
and denominators of the basic and diluted earnings per weighted average common
share and the computation of basic and diluted earnings per share for the
Company's common stock (in thousands except for earnings per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item, dividends to
preferred shareholders and income allocated
to Class B shareholders $ 29,396 $ 14,612 $ 61,625 $ 37,831
Dividends to preferred shareholders (7,325) (4,377) (17,035) (8,110)
Extraordinary loss (net of share applicable to
limited partners and Class B Common
shareholders ) (389) (1,670) (389) (1,670)
Income allocated to Class B shareholders (6,616) --- (8,347) ---
--------------- --------------- --------------- ---------------
Numerator for basic and diluted earnings per
share $ 15,066 $ 8,565 $ 35,854 $ 28,051
=============== =============== =============== ===============
Denominator:
Denominator for basic earnings per share-
weighted-average common shares 40,367 40,012 40,235 39,284
Effect of dilutive securities:
Employee stock options 430 522 417 549
--------------- --------------- --------------- ---------------
Denominator for diluted earnings per common
share- adjusted weighted-average shares and
assumed conversions 40,797 40,534 40,652 39,833
=============== =============== =============== ===============
Basic earnings per common share:
Income before extraordinary item $ 0.38 $ 0.25 $ 0.90 $ 0.75
Extraordinary item (0.01) (0.04) (0.01) (0.04)
--------------- --------------- --------------- ---------------
Net income per common share $ 0.37 $ 0.21 $ 0.89 $ 0.71
=============== =============== =============== ===============
Diluted earnings per common share:
Income before extraordinary item $ 0.38 $ 0.25 $ 0.89 $ 0.75
Extraordinary item (0.01) (0.04) (0.01) (0.05)
--------------- --------------- --------------- ---------------
Diluted net income per common share $ 0.37 $ 0.21 $ 0.88 $ 0.70
=============== =============== =============== ===============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
The following table sets forth the Company's reconciliation of numerators
and denominators of the basic and diluted earnings per weighted average common
share and the computation of basic and diluted earnings per share for the
Company's Class B Common Stock (in thousands except for earnings per share
data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Numerator:
Income before extraordinary item, dividends to
preferred shareholders and income allocated
to common shareholders $ 29,396 $ 61,625
Dividends to preferred shareholders (7,325) (17,035)
Extraordinary loss (net of share applicable to
limited partners and common shareholders) (166) (166)
Income allocated to common shareholders (15,455) (36,243)
----------------- -----------------
Numerator for basic earnings per share 6,450 8,181
Add back:
Income allocated to common shareholders 15,066 35,854
Limited partners' interest in the operating
partnership 3,014 7,082
----------------- -----------------
Numerator for diluted earnings per share $ 24,530 $ 51,117
================= =================
Denominator:
Denominator for basic earnings per share-
weighted-average Class B common shares 11,457 5,489
Effect of dilutive securities:
Weighted average common shares outstanding 40,367 40,235
Weighted average OP Units outstanding 7,702 7,706
Employee stock options 430 417
----------------- -----------------
Denominator for diluted earnings per Class B
common share-adjusted weighted-average
shares and assumed conversions 59,956 53,847
================= =================
Basic earnings per Class B common share:
Income before extraordinary item $ 0.57 $ 1.52
Extraordinary item (0.01) (0.03)
----------------- -----------------
Net income per Class B common share $ 0.56 $ 1.49
================= =================
Diluted earnings per Class B common share:
Income before extraordinary item $ 0.41 $ 0.95
Extraordinary item ---- ---
----------------- -----------------
Diluted net income per Class B common share $ 0.41 $ 0.95
================= =================
</TABLE>
8. Non Cash Investing and Financing Acitivties (in thousands)
Nine Months Ended September 30,
---------- -----------
1999 1998
---------- -----------
Cash paid during the period for interest $ 40,341 $ 29,411
========== ===========
Interest capitalized during the period $ 7,281 $ 5,140
========== ===========
On May 24, 1999, in conjunction with the Tower acquisition, the Company
issued 11,694,567 shares of Class B Common Stock which were valued for GAAP
purposes at approximately $304.1 million and assumed approximately $133.4
million of indebtedness for a total non cash investment of approximately $437.5
million.
9. Segment Disclosure
The Company owns all of the interests in its real estate properties by or
through the Operating Partnership. The Company's portfolio consists of Class A
office properties located within the New York City metropolitan area and Class A
suburban office and industrial properties located and operated within the
Tri-State Area (the "Core Portfolio"). In addition, the Company's portfolio also
includes one office property located in Orlando, Florida and for the period
commencing January 6, 1998 and ending September 26, 1999, industrial properties
which were owned by RMI. The Company has managing directors who report directly
to the Chief Operating Officer and Chief Financial Officer who have been
identified as the Chief Operating Decision Makers because of their final
authority over resource allocation, decisions and performance assessment.
In addition, as the Company expects to meet its short term liquidity
requirements in part through the Credit Facility and Term Loan, interest
incurred on borrowings under the Credit Facility and Term Loan is not considered
as part of property operating performance. Further, the Company does not
consider the property operating performance of the office property located in
Orlando, Florida as a part of its Core Portfolio.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
The following tables set forth the components of the Company's revenues and
expenses and other related disclosures for the three months ended September 30,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, 1999
-----------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and
reimbursements $ 97,787 $ 5,480 $ 7,602 $ 110,869
Equity in earnings of real estate joint ventures
and service companies --- --- 483 483
Other income 209 --- 13,784 13,993
----------- ----------- ----------- --------------
Total Revenues 97,996 5,480 21,869 125,345
----------- ----------- ----------- --------------
Expenses:
Property expenses 37,202 823 2,654 40,679
Marketing, general and administrative 4,384 158 2,262 6,804
Interest 7,428 128 13,218 20,774
Depreciation and amortization 18,684 1,343 1,841 21,868
----------- ----------- ----------- --------------
Total Expenses 67,698 2,452 19,975 90,125
----------- ----------- ----------- --------------
Income before preferred dividends and distributions,
minority interests' and extraordinary items $ 30,298 $ 3,028 $ 1,894 $ 35,220
=========== =========== =========== ==============
Total assets $2,104,169 $ 0 $ 576,995 $ 2,681,164
=========== =========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1998
-----------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and
reimbursements $ 63,820 $ 3,967 $ 151 $ 67,938
Equity in earnings of real estate joint ventures
and service companies --- --- 536 536
Other income 107 --- 3,019 3,126
----------- ----------- ----------- --------------
Total Revenues 63,927 3,967 3,706 71,600
----------- ----------- ----------- --------------
Expenses:
Property expenses 21,032 677 493 22,202
Marketing, general and administrative 3,349 158 873 4,380
Interest 4,427 278 8,335 13,040
Depreciation and amortization 12,560 934 1,341 14,835
----------- ----------- ----------- --------------
Total Expenses 41,368 2,047 11,042 54,457
----------- ----------- ----------- --------------
Income before preferred dividends and distributions,
minority interests' and extraordinary items $ 22,559 $ 1,920 $ (7,336) $ 17,143
=========== =========== =========== ==============
Total assets $1,557,066 $ 142,863 $ 72,888 $ 1,772,817
=========== =========== =========== ==============
</TABLE>
The following tables set forth the components of the Company's revenues and
expenses and other related disclosures for the nine months ended September 30,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
-----------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and
reimbursements $ 240,753 $ 15,380 $ 11,150 $ 267,283
Equity in earnings of real estate joint ventures
and service companies --- --- 1,372 1,372
Other income 422 2 23,614 24,038
----------- ----------- ----------- --------------
Total Revenues 241,175 15,382 36,136 292,693
----------- ----------- ----------- --------------
Expenses:
Property expenses 84,912 2,390 3,823 91,125
Marketing, general and administrative 12,184 456 3,601 16,241
Interest 17,179 671 35,770 53,620
Depreciation and amortization 47,677 3,710 4,699 56,086
----------- ----------- ----------- --------------
Total Expenses 161,952 7,227 47,893 217,072
----------- ----------- ----------- --------------
Income before preferred dividends and distributions,
minority interests' and extraordinary items $ 79,223 $ 8,155 $ (11,757) $ 75,621
=========== =========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
-----------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and
reimbursements $ 172,868 $ 10,603 $ 151 $ 183,622
Equity in earnings of real estate joint ventures
and service companies --- --- 1,201 1,201
Other income 329 --- 7,831 8,160
----------- ----------- ----------- --------------
Total Revenues 173,197 10,603 9,183 192,983
----------- ----------- ----------- --------------
Expenses:
Property expenses 59,488 1,793 493 61,774
Marketing, general and administrative 8,587 364 2,856 11,807
Interest 12,110 814 21,613 34,537
Depreciation and amortization 32,804 2,469 2,825 38,098
----------- ----------- ----------- --------------
Total Expenses 112,989 5,440 27,787 146,216
----------- ----------- ----------- --------------
Income before preferred dividends and distributions,
minority interests' and extraordinary items $ 60,208 $ 5,163 $ (18,604) $ 46,767
=========== =========== =========== ==============
</TABLE>
10. Subsequent Events
On October 15, 1999 the Company entered into a contract to purchase 1350
Avenue of the Americas, a 540,000 square foot, Class A office property located
in New York City for approximately $126.5 million. The closing is anticipated to
occur in December,1999.
As of October 25, 1999, the Company has purchased and retired an additional
430,000 shares of its Class B Common Stock for approximately $8.6 million.
During November 1999, the Boards of Directors of RSI and the Company have
approved amendments to the RSI Facility and the RSVP Commitment which are
necessary for RSI to proceed with certain proposed acquisition financing. As
consideration for such approvals, RSI will pay a fee to the Operating
Partnership in the form of approximately 176,000 shares of RSI common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements of Reckson Associates Realty
Corp. (the "Company") and related notes thereto.
The Company considers certain statements set forth herein to be
forward-looking statements within the meaning of Section 27A or the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, with respect to the Company's expectations for future periods.
Certain forward-looking statements, including, without limitation, statements
relating to the timing and success of acquisitions, the financing of the
Company's operations, the ability to lease vacant space and the ability to renew
or relet space under expiring leases, involve certain risks and uncertainties.
Although the Company 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 Company can give no assurance that its expectation will be
achieved. Certain factors that might cause the results of the Company to differ
materially from those indicated by such forward-looking statements include,
among other factors, general economic conditions, general real estate industry
risks, tenant default and bankruptcies, loss of major tenants, the impact of
competition and acquisition, redevelopment and development risks, the ability to
finance business opportunities and local real estate risks such as an oversupply
of space or a reduction in demand for real estate in the Company's real estate
markets. Consequently, such forward-looking statements should be regarded solely
as reflections of the Company'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.
OVERVIEW AND BACKGROUND
The Company is a self-administered and self managed real estate investment
trust ("REIT") specializing in the acquisition, leasing, financing, management
and development of office and industrial properties. The Company's growth
strategy is focused on the real estate markets in and around the New York City
metropolitan area (the "Tri-State Area").
The Company owns all of the interests in its real properties through
Reckson Operating Partnership, L. P. (the "Operating Partnership"). As of
September 30, 1999, the Company owned and operated 77 office properties
comprising approximately 13.1 million square feet, 109 industrial properties
comprising approximately 8.0 million square feet and two retail properties
comprising approximately 20,000 square feet, located in the Tri-State Area. The
Company also owns and operates a 357,000 square foot office building located on
Orlando Florida. In addition, the Company owned or had contracted to acquire
approximately 377 acres of land in 16 separate parcels of which the Company can
develop approximately 2.8 million square feet of industrial and office space.
The Company also has invested approximately $312.9 million in mortgage notes
encumbering three Class A office properties encompassing approximately 1.6
million square feet, approximately 472 acres of land located in New Jersey and
in a note receivable secured by a partnership interest in Omni Partner's, L.P.,
owner of the Omni, a 575,000 square foot Class A office property located in
Uniondale, New York.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI")
and Reckson Strategic Venture Partners, LLC ("RSVP"). On June 11, 1998, the
Operating Partnership distributed its 95% common stock interest in RSI of
approximately $3 million to its owners, including the Company which, in turn,
distributed the common stock of RSI received from the Operating Partnership to
its stockholders. Additionally, during June 1998, the Operating Partnership
established a credit facility with RSI (the"RSI Facility") in the amount of $100
million for RSI's service sector operations and other general corporate
purposes. As of September 30, 1999, the Company had advanced $83.6 million under
the RSI Facility. In addition, the Operating Partnership has approved the
funding of investments of up to $100 million with or in RSVP (the "RSVP
Commitment"), through RSVP-controlled joint venture REIT-qualified investments
or advances made to RSI under terms similar to the RSI Facility. As of September
30, 1999, approximately $54.8 million had been invested through the RSVP
Commitment, of which $21.8 million represents RSVP-controlled joint venture
REIT-qualified investments and $33 million represents advances to RSI under the
RSVP Commitment.
During November 1999, the Boards of Directors of RSI and the Company have
approved amendments to the RSI Facility and the RSVP Commitment which are
necessary for RSI to proceed with certain proposed acquisition financing. As
consideration for such approvals, RSI will pay a fee to the Operating
Partnership in the form of approximately 176,000 shares of RSI common stock.
RSI serves as the managing member of RSVP. RSI invests in operating
companies that generally provide commercial services to properties owned by the
Company and its tenants and third parties nationwide . RSVP was formed to
provide the Company with a research and development vehicle to invest in
alternative real estate sectors. RSVP invests primarily in real estate and real
estate related operating companies generally outside of the Company's core
office and industrial focus. RSVP's strategy is to identify and acquire
interests in established entrepreneurial enterprises with experienced management
teams in market sectors which are in the early stages of their growth cycle or
offer unique circumstances for attractive investments as well as a platform for
future growth.
On January 6, 1998, the Company made its initial investment in the Morris
Companies, a New Jersey developer and owner of "Big Box" warehouse facilities.
In connection with the transaction the Morris Companies contributed 100% of
their interests in certain industrial properties to Reckson Morris Operating
Partnership, L. P. ("RMI") in exchange for operating partnership units in RMI.
The Company has agreed to invest up to $150 million in RMI.
On August 9, 1999, the Company executed a contract, which will take place
in three stages, for the sale of its interest in RMI which consisted of 28
properties, comprising approximately 6.1 million square feet and three other big
box industrial properties to KTR. In addition, the Company also entered into a
sale agreement with Matrix relating to a first mortgage note and certain
industrial land holdings (the "Matrix Sale"). The combined total sale price is
$310 million (approximately $42 million of which is payable to the Morris
Companies and its affiliates) and will consist of a combination of cash,
convertible preferred and common stock of KTR, preferred units of KTR's
operating partnership, relief of debt and a purchase money mortgage note secured
by certain land that is being sold to Matrix.
During September 1999, the Matrix Sale and the first stage of the RMI
closing occurred whereby the Company sold its interest in RMI to KTR for a
combined sales price of approximately $164.7 million (net of minority partner's
interest). The combined consideration consisted of approximately $86.3 million
in cash, $40 million of preferred stock of KTR, $1.5 million in common stock of
KTR, approximately $26.7 million of debt relief and approximately $10.2 million
in purchase money mortgages. As a result, the Company incurred a gain of
approximately $10.1 million. Cash proceeds from the sales were used primarily to
repay borrowings under the Credit Facility.
The second and third stages of the RMI closing are scheduled to be
completed in December 1999 and April 2000, respectively. Both of the remaining
stages each consist of three industrial buildings and are being sold for total
consideration of $50 million and $48 million, respectively.
In July 1998, the Company formed a joint venture, Metropolitan Partners
LLC, a Delaware limited liability company ("Metropolitan"), with Crescent Real
Estate Equities Company, a Texas real estate investment trust ("Crescent").
On December 8, 1998, the Company, Metropolitan and Tower Realty Trust, Inc.
("Tower") executed a merger agreement and on May 24, 1999 Tower was merged (the
"Merger") into Metropolitan, with Metropolitan surviving the Merger.
Concurrently with the Merger, Tower Realty Operating Partnership, L.P. ("Tower
OP") was merged with and into a subsidiary of Metropolitan. The consideration
issued in the mergers was comprised of (i) 25% cash (approximately $107.2
million) and (ii) 75% of shares of Class B Exchangeable Common Stock, par value
$.01 per share, of the Company (the "Class B Common Stock") (valued for general
accepted accounting principles ("GAAP") purposes at approximately $304.1
million).
Under the terms of the transaction, Metropolitan effectively paid for each
share of Tower common stock and each unit of limited partnership interest of
Tower OP the sum of (i) $5.75 in cash, and (ii) 0.6273 of a share of Class B
Common Stock. The shares of Class B Common Stock are entitled to receive an
initial annual dividend of $2.24 per share, which dividend is subject to
adjustment annually. The shares of Class B Common Stock are exchangeable at any
time, at the option of the holder, into an equal number of shares of common
stock, par value $.01 per share, of the Company subject to customary
antidilution adjustments. The Company, at its option, may redeem any or all of
the Class B Common Stock in exchange for an equal number of shares of the
Company's common stock at any time following the four year, six-month
anniversary of the issuance of the Class B Common Stock.
The Board of Directors of the Company has authorized a purchase buy back
program for the Company's Class B Common Stock (see liquidity and capital
resources).
The Company controls Metropolitan and owns 100% of the common equity;
Crescent owns a $85 million preferred equity investment in Metropolitan.
Crescent's investment accrues distributions at a rate of 7.5% per annum for a
two-year period and may be redeemed by Metropolitan at any time during that
period for $85 million, plus an amount sufficient to provide a 9.5% internal
rate of return. If Metropolitan does not redeem the preferred interest, upon the
expiration of the two-year period, Crescent must convert its $85 million
preferred interest into either (i) a common membership interest in Metropolitan
or (ii) shares of the Company's common stock at a conversion price of $24.61 per
share.
The Tower portfolio acquired in the Merger consisted of three office
properties comprising approximately 1.6 million square feet located in New York
City, one office property located on Long Island and certain office properties
and other real estate assets located outside the Tri-State Area.
Prior to the closing of the Merger, the Company arranged for the sale of
four of Tower's Class B New York City properties, comprising approximately
701,000 square feet for approximately $84.5 million. Subsequent to the closing
of the Merger, the Company has sold a real estate joint venture interest and all
of the property located outside the Tri State Area other than one office
property located in Orlando, Florida for approximately $171.1 million. The
combined consideration consisted of approximately $143.8 million in cash and
approximately $27.3 million of debt relief. Net cash proceeds from the sales
were used primarily to repay borrowings under the Credit Facility. As a result
of incurring certain sales and closing costs in connection with the sale of the
assets located outside the Tri State Area, the Company has incurred a loss of
approximately $4.4 million which has been included in gain on sales of real
estate on the accompanying consolidated statements of income.
The market capitalization of the Company at September 30, 1999 was
approximately $2.9 billion. The Company's market capitalization is based on the
market value of the Company's common stock and common units of limited
partnership interest in the Operating Partnership ("OP Units") (assuming
conversion) of $20.81 per share/unit (based on the closing price of the
Company's common stock on September 30, 1999), the market value of the Company's
Class B Common Stock of $21.88 per share (based on the closing price of the
Company's Class B Common Stock on September 30, 1999) ,the liquidation
preference value of the Company's preferred stock of $25 per share, the
liquidation preference value of the Operating Partnership's preferred units and
the $1.2 billion (including its share of joint venture debt and net of minority
partners' interests) of debt outstanding at September 30, 1999. As a result, the
Company's total debt to total market capitalization ratio at September 30, 1999
equaled approximately 42.4%.
RESULTS OF OPERATIONS
The Company's total revenues increased by $53.7 million or 75.1% for the
three months ended September 30, 1999 as compared to the 1998 period. The growth
in total revenues is primarily attributable to the gain on sales of real estate
($10.1 million or 18.7%), the Company's acquisition of the Tower portfolio on
May 24, 1999 (including $4.8 million attributable to properties sold during the
quarter) and the acquisition of the first mortgage note secured by 919 Third
Avenue. Property operating revenues, which include base rents and tenant
escalations and reimbursements ("Property Operating Revenues") increased by
$42.9 million or 63.2% for the three months ended September 30, 1999 as compared
to the 1998 period. The 1999 increase in Property Operating Revenues is
comprised of approximately $3.9 million attributable to increases in rental
rates and changes in occupancies and approximately $39.0 million attributable to
the acquisitions and development of properties. The Company's base rent was
increased by the impact of the straight-line rent adjustment by $2.1 million for
the three months ended September 30, 1999 as compared to $2.0 million for the
1998 period.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $18.5 million or 83.2% for the three months ended
September 30, 1999 as compared to the 1998 period. These increases are primarily
due to the acquisition of the Tower portfolio on May 24, 1999 (including $2.2
million attributable to properties sold during the quarter) and the acquisition
of the first mortgage note secured by 919 Third Avenue, which operations were
reflected in Property Expenses. 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, 1999 and 1998 were
63.3% and 67.3% respectively. The decrease in gross operating margins is
primarily attributable to the Company's acquisitions of full service office
buildings which generally operate on lower gross operating margins .
Marketing, general and administrative expenses increased by $2.4 million
for the three months ended September 30, 1999 as compared to the 1998 period.
The increase is due to the increased costs of managing the acquisition
properties and the increase in corporate management and administrative costs
associated with the growth of the Company including the opening of its New York
City division. Marketing, general and administrative expenses as a percentage of
total revenues were 5.4% for the three months ended September 30, 1999 as
compared to 6.1% for the 1998 period.
Interest expense increased by $7.7 million for the three months ended
September 30, 1999 as compared to the 1998 period. The increase is attributable
to an increased cost attributable to an increased average balance on the
Company's credit facilities and Term Loan, interest on the Company's senior
unsecured notes issued on March 26, 1999 and an increase in secured borrowings
primarily attributable to the assumption of debt (including $26.9 million
relating to properties sold during the quarter) and incurrence of new debt in
conjunction with the Tower acquisition. The weighted average balance outstanding
on the Company's credit facilities and Term Loan was $479.7 million for the
three months ended September 30, 1999 as compared to $419.8 million for the 1998
period.
The Company's total revenues increased by $99.7 million or 51.7% for the
nine months ended September 30 1999 as compared to the 1998 period. The growth
in total revenues is primarily attributable to the gain on sales of real estate
($10.1 million or 10.1%), the Company's acquisition of the Tower portfolio on
May 24, 1999 (including $7.3 million attributable to properties that were sold)
and the acquisition of the first mortgage note secured by 919 Third Avenue.
Property Operating Revenues increased by $83.7 million or 45.6% for the nine
months ended September 30, 1999 as compared to the 1998 period. The 1999
increase in Property Operating Revenues is comprised of $7.9 million
attributable to increases in rental rates and changes in occupancies and $75.8
million attributable to acquisitions and development of properties. The
Company's base rent was increased by the impact of the straight-line rent
adjustment by $6.8 million for the nine months ended September 30, 1999 as
compared to $5.7 million for the 1998 period.
Property Expenses increased by $29.4 million or 47.5% for the nine months
ended September 30, 1999 as compared to the 1998 period. These increases are
primarily due to the acquisition of the Tower portfolio (including $3.1 million
attributable to properties sold during the third quarter) and the acquisition of
the first mortgage note secured by 919 Third Avenue, which operations are
reflected in Property Expenses. Gross operating margins for the nine months
ended September 30, 1999 and 1998 were 65.9% and 66.4%, respectively. The
decrease in gross operating margins reflects the Company's acquisition of full
service office buildings which generally operate on lower gross operating
margins.
Marketing, general and administrative expenses increased by $4.4 million
for the nine months ended September 30, 1999 as compared to the 1998 period. The
increase is due to increased costs of managing the acquisition properties and
the increase in corporate management and administrative costs associated with
the growth of the Company including the opening of its New York City division.
Marketing, general and administrative expenses as a percentage of total revenues
were 5.6% for the nine months ended September 30, 1999 as compared to 6.1% for
the 1998 period.
Interest expense increased by $19.1 million for the nine months ended
September 30, 1999 as compared to the 1998 period. The increase is attributable
to an increased cost attributable to an increased average balance on the
Company's credit facilities and Term Loan, interest on the Company's senior
unsecured notes issued on March 26, 1999 and an increase in secured borrowings
primarily attributable to the assumption of debt (including $26.9 million
relating to properties sold during the third quarter) and incurrence of new debt
in conjunction with the Tower acquisition. The weighted average balance
outstanding on the Company's credit facilities was $446.1million for the nine
months ended September 30, 1999 as compared to $348.0 million for the 1998
period.
LIQUIDITY AND CAPITAL RESOURCES
During April 1998, the Company completed a preferred stock offering and
sold 9,200,000 shares of 7.625% Series A Convertible Cumulative Preferred Stock
at a price of $25.00 per share. Net proceeds from the offering were
approximately $220.8 million and were used to repay borrowings under the credit
facilities. The preferred stock is convertible to the Company's common stock at
a conversion rate of .8769 shares of common stock for each share of preferred
stock. Additionally, in connection with the acquisition of six office properties
and the remaining 50% interest in a 365,000 square foot vacant office building
located in the Westchester County, the Company issued series B, C and D
preferred operating units in the amount of approximately $42.5 million. The
series B, C and D preferred units have a current distribution rate of 6.25% and
are convertible to common units at conversion prices of approximately $32.51,
$29.39 and $29.12, respectively for each preferred unit.
On March 26, 1999, the Operating Partnership issued $100 million of 7.4%
senior unsecured notes due March 15, 2004 and $200 million of 7.75% senior
unsecured notes due March 15, 2009. Net proceeds of approximately $297.4 million
were used to repay outstanding borrowings under the Company's unsecured credit
facility.
On May 24, 1999, in conjunction with the Tower acquisition, the Company
issued 11,694,567 shares of Class B Common Stock which were valued for GAAP
purposes at $26 per share for total consideration of approximately $304.1
million. The shares of Class B Common Stock are entitled to receive an initial
annual dividend of $2.24 per share, which dividend is subject to adjustment
annually. The shares of Class B Common Stock are exchangeable at any time, at
the option of the holder, into an equal number of shares of common stock, par
value $.01 per share, of the Company subject to customary antidilution
adjustments. The Company, at its option, may redeem any or all of the Class B
Common Stock in exchange for an equal number of shares of the Company's common
stock at any time following the four year, six-month anniversary of the issuance
of the Class B Common Stock.
The Board of Directors of the Company has authorized the purchase of up to
three million shares of the Company's Class B Common Stock. In addition, the
Board of Directors has also authorized the purchase of up to an additional three
million shares of the Company's Class B Common Stock and/or its common stock.
The buy-back program 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. As of September 30, 1999, the Company purchased and retired
780,804 shares of Class B Common Stock for approximately $17.4 million.
On June 2, 1999, the Company issued six million shares of Series B
Convertible Cumulative Preferred Stock (the "Series B Preferred Stock") for
aggregate proceeds of $150 million. The Series B Preferred Stock is redeemable
by the Company on or after March 2, 2002 and is convertible into the Company's
common stock at a price of $26.05 per share. The Series B Preferred Stock
accumulate dividends at an initial rate of 7.85% per annum with such rate
increasing to 8.35% per annum on April 30, 2000 and to 8.85% per annum from and
after April 30, 2001. Proceeds from the Series B Preferred Stock offering were
used as partial consideration in the acquisition of the first mortgage note
secured by 919 Third Avenue located in New York City.
As of September 30, 1999 the Company had a three year $500 million
unsecured revolving credit facility (the "Credit Facility") with Chase Manhattan
Bank, Union Bank of Switzerland and PNC Bank as co-managers of the credit
facility bank group. Interest rates on borrowings under the Credit Facility are
priced off of LIBOR plus a sliding scale ranging from 65 basis points to 90
basis points based on the Company's investment grade rating on its senior
unsecured debt. On March 16, 1999, the Company received its investment grade
rating on its senior unsecured debt. As a result, the pricing under the Credit
Facility was adjusted to LIBOR plus 90 basis points.
The Company utilizes the Credit Facility primarily to finance the
acquisitions of properties and other real estate investments, fund its
development activities and for working capital purposes. At September 30, 1999,
the Company had availability under the Credit Facility to borrow an additional
$196.2 million (net of $50.2 million of outstanding undrawn letters of credit).
As of September 30, 1999, the Company had a one year $75 million unsecured
term loan (the "Term Loan") from Chase Manhattan Bank. Interest rates on
borrowings under the Term Loan are currently priced off of LIBOR plus 175 basis
points. The Term Loan matures on December 3, 1999 and the Company is currently
in negotiations with the Chase Manhattan Bank to extend and refinance the Term
Loan. At September 30, 1999, the Company had $75 million outstanding under the
Term Loan.
On May 24, 1999, in conjunction with the acquisition of Tower, the Company
obtained a $130 million unsecured bridge facility (The "Bridge Facility") from
UBS AG. Interest rates on borrowings under the Bridge Facility were priced off
of LIBOR plus approximately 214 basis points. On July 23, 1999, the Bridge
Facility was repaid through a long term fixed rate secured borrowing. As a
result, certain deferred loan costs incurred in connection with the Bridge
Facility were written off. Such amount is reflected as an extraordinary loss in
the Company's consolidated statements of income.
The Company's indebtedness at September 30, 1999 totaled $1.2 billion
(including its share of joint venture debt and net of minority partners'
interests) and was comprised of $253.6 million outstanding under the credit
facilities, $75 million outstanding under the Term Loan, approximately $449.3
million of senior unsecured notes and approximately $460.7 million of mortgage
indebtedness. Based on the Company's total market capitalization of
approximately $2.9 billion at September 30, 1999 (calculated based on the market
value of the Company's common stock and OP Units, assuming conversion, the
market value of the Company's Class B Common Stock, the liquidation preference
value of the Company's preferred stock and the liquidation preference value of
the Operating Partnership's preferred units), the Company's debt represented
approximately 42.4% of its total market capitalization.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures of the Company. The Company expects to meet
its short term liquidity requirements generally through its net cash provided by
operating activities along with the Credit Facility previously discussed. The
Company expects to meet certain of its financing requirements through long-term
secured and unsecured borrowings and the issuance of debt securities and
additional equity securities of the Company. The Company will refinance existing
mortgage indebtedness or indebtedness under the Credit Facility at maturity or
retire such debt through the issuance of additional debt securities or
additional equity securities. The Company anticipates that the current balance
of cash and cash equivalents and cash flows from operating activities, together
with cash available from borrowings and equity offerings, will be adequate to
meet the capital and liquidity requirements of the Company in both the short and
long-term.
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 95% of REIT
taxable income. The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of recurring,
non-incremental revenue-generating expenditures. The Company intends to invest
amounts accumulated for distribution in short-term investments.
SUPPLEMENTAL INFORMATION ON CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING
COMMISSIONS
The following table summarizes the expenditures incurred for
non-incremental capital expenditures, tenant improvements and leasing
commissions for the Company's office and industrial properties for the nine
month period ended September 30, 1999 and the historical average of such
non-incremental capital expenditures, tenant improvements and leasing
commissions for the years 1995 through 1998.
<TABLE>
Non-Incremental Revenue Generating Capital Expenditures
<CAPTION>
Nine
Months
Ended
1995 -1998 Sept. 30,
1995 1996 1997 1998 Average 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office Properties
Total $364,545 $375,026 $1,108,675 $2,004,976 $963,305 $1,513,209
Per Square Foot 0.19 0.13 0.22 0.23 0.19 0.16
Industrial Properties
Total $290,457 $670,751 $733,233 $1,205,266 $724,927 $791,704
Per Square Foot 0.08 0.18 0.15 0.12 0.13 0.09
</TABLE>
<TABLE>
Non-Incremental Revenue Generating Tenant Improvements and Leasing Commissions
<CAPTION>
Nine
Months
Ended
1995 -1998 Sept. 30,
1995 1996 1997 1998 Average 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long Island Office Properties
Tenant Improvements $452,057 $523,574 $784,044 $1,140,251 $724,982 $542,538
Per Square Foot Improved 4.44 4.28 7.00 3.98 4.92 4.15
Leasing Commissions $144,925 $119,047 $415,822 $418,191 $274,496 $190,105
Per Square Foot Leased 1.42 0.97 4.83 1.46 2.17 0.88
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot $5.86 $5.25 $11.83 $5.44 $7.09 $5.03
============ ============ ============ ============ ============ =============
Westchester Office Properties
Tenant Improvements N/A $834,764 $1,211,665 $711,160 $961,413 $865,536
Per Square Foot Improved N/A 6.33 8.90 4.45 6.67 6.25
Leasing Commissions N/A $264,388 $366,257 $286,150 $326,204 $334,783
Per Square Foot Leased N/A 2.00 2.69 1.79 2.24 2.42
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot N/A $8.33 $11.59 $6.24 $8.91 $8.67
============ ============ ============ ============ ============ =============
Connecticut Office Properties <F1>
Tenant Improvements N/A $58,000 $1,022,421 $202,880 $570,356 $108,881
Per Square Foot Improved N/A 12.45 13.39 5.92 9.66 4.89
Leasing Commissions N/A $0.00 $256,615 $151,063 $181,190 $89,142
Per Square Foot Leased N/A 0.00 3.36 4.41 3.89 4.00
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot N/A $12.45 $16.75 $10.33 $13.55 $8.89
============ ============ ============ ============ ============ =============
New Jersey Office Properties
Tenant Improvements N/A N/A N/A $654,877 $654,877 $190,958
Per Square Foot Improved N/A N/A N/A 3.78 3.78 2.10
Leasing Commissions N/A N/A N/A $396,127 $396,127 $346,831
Per Square Foot Leased N/A N/A N/A 2.08 2.08 3.81
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot N/A N/A N/A $5.86 $5.86 $5.91
============ ============ ============ ============ ============ =============
Industrial Properties
Tenant Improvements $210,496 $380,334 $230,466 $283,842 $276,285 $249,807
Per Square Foot Improved 0.90 0.72 0.55 0.76 0.73 0.20
Leasing Commissions $107,351 $436,213 $81,013 $200,154 $206,183 $753,855
Per Square Foot Leased 0.46 0.82 0.19 0.44 0.48 0.61
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot $1.36 $1.54 $0.75 $1.20 $1.21 $0.81
============ ============ ============ ============ ============ =============
<FN>
<F1>
1995 - 1998 average weighted to reflect October 1996 acquisition date
</FN>
</TABLE>
LEASE EXPIRATIONS
The following table sets forth scheduled lease expirations for executed leases
as of September 30, 1999:
<TABLE>
Long Island Office Properties (excluding Omni):
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 10 41,860 1.4% $20.65 $21.28
2000 43 254,282 8.6% $21.86 $21.11
2001 40 187,022 6.3% $22.15 $24.16
2002 32 253,748 8.6% $22.31 $24.37
2003 52 345,662 11.7% $21.81 $24.60
2004 43 259,947 8.8% $22.83 $25.29
2005 and thereafter 94 1,623,174 54.7% --- ---
------- ------------ ------------
Total 314 2,965,695 100.0%
======= ============ ============
<FN>
<F1> Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2> Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Omni:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 ---
2000 3 56,211 9.5% $32.15 $36.99
2001 4 32,680 5.6% $27.36 $33.63
2002 4 129,351 22.0% $30.00 $33.26
2003 5 72,530 12.3% $29.56 $34.29
2004 4 112,414 19.1% $26.03 $33.16
2005 and thereafter 9 185,607 31.5% --- ---
------- ------------ ------------
Total 29 588,793 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Industrial Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 13 145,928 3.1% $5.11 $5.98
2000 32 491,504 10.6% $4.97 $5.63
2001 31 732,183 15.8% $5.69 $7.02
2002 26 221,744 4.8% $6.25 $6.96
2003 30 724,434 15.6% $5.26 $5.98
2004 27 522,242 11.3% $6.65 $7.18
2005 and thereafter 44 1,799,267 38.8% --- ---
------- ------------ ------------
Total 203 4,637,302 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Research and Development Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 3 14,039 1.1% $11.71 $12.87
2000 6 101,419 8.0% $7.77 $8.01
2001 8 150,120 11.8% $10.75 $11.31
2002 3 67,967 5.3% $10.54 $12.51
2003 4 271,042 21.3% $5.38 $6.41
2004 7 107,344 8.4% $11.87 $13.13
2005 and thereafter 13 560,554 44.1% --- ---
------- ------------ ------------
Total 44 1,272,485 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Westchester Office Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 13 30,593 1.1% $22.77 $20.40
2000 51 366,033 13.4% $22.42 $22.74
2001 44 322,090 11.8% $22.03 $22.34
2002 48 457,396 16.7% $20.47 $20.70
2003 35 246,705 9.0% $21.75 $22.98
2004 25 134,039 4.9% $20.42 $21.41
2005 and thereafter 38 1,176,001 43.0% --- ---
------- ------------ ------------
Total 254 2,732,857 100.0%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Stamford Office Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 7 16,966 1.7% $22.58 $21.84
2000 26 106,290 10.4% $22.41 $22.78
2001 25 103,383 10.1% $24.14 $25.22
2002 16 91,088 8.9% $27.20 $28.43
2003 14 93,385 9.1% $31.89 $32.69
2004 19 213,768 20.9% $21.23 $22.20
2005 and thereafter 23 399,020 39.0% --- ---
------- ------------ ------------
Total 130 1,023,900 100.0%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
New Jersey Office Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 --- --- 0.0% --- ---
2000 30 285,661 15.8% $23.30 $23.72
2001 22 261,036 14.5% $18.09 $18.29
2002 21 182,636 10.1% $19.82 $20.02
2003 18 327,593 18.1% $17.90 $18.01
2004 31 217,955 12.1% $22.32 $22.87
2005 and thereafter 23 530,546 29.4% --- ---
------- ------------ ------------
Total 145 1,805,427 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
New York City
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 2 8,010 0.3% $36.46 $36.47
2000 10 267,904 9.3% $28.53 $31.91
2001 17 138,472 4.8% $35.10 $32.75
2002 14 176,539 6.1% $32.37 $33.18
2003 6 93,752 3.3% $31.16 $31.64
2004 8 108,110 3.8% $34.31 $33.76
2005 and thereafter 76 2,081,702 72.4% --- ---
------- ------------ ------------
Total 133 2,874,489 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
INFLATION
The office leases generally provided for fixed base rent increases or
indexed escalations. In addition, the office leases provide for separate
escalations of real estate taxes and electric costs over a base amount. The
industrial leases generally provide for fixed base rent increases, direct pass
through of certain operating expenses and separate real estate tax escalations
over a base amount. The Company believes that inflationary increases in expenses
will be offset by contractual rent increases and expense escalations described
above.
The credit facilities and Term Loan bear interest at a variable rate, which
will be influenced by changes in short-term interest rates, and is sensitive to
inflation.
Impact of Year 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time--sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions, or engage in similar normal
business activities.
The Company has completed an assessment to modify or replace portions of
its software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. Currently, the entire property management
system is year 2000 compliant and has been thoroughly tested. Since the
Company's accounting software is maintained and supported by an unaffiliated
third party, the total year 2000 project cost as it relates to the accounting
software is estimated to be minimal.
The year 2000 project has been completed, which is prior to any anticipated
impact on its operating systems. Additionally, the Company has received
assurances from its contractors that all of the Company's building management
and mechanical systems are currently year 2000 compliant or will be made
compliant prior to any impact on those systems. However, the Company cannot
guarantee that all contractors will comply with their assurances and therefore,
the Company may not be able to determine year 2000 compliance of those
contractors. At that time, the Company will determine the extent to which the
Company will be able to replace non compliant contractors. The Company believes
that with modifications to existing software and conversions to new software,
the year 2000 issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not made,
or are not completed timely, the year 2000 issue could have a material impact on
the operations of the Company.
To date, the Company has expended approximately one million dollars in
connection with upgrading building management, mechanical and computer systems.
The costs and completion of the project on which the Company believes it has
completed the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and costs of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
In a "worst case scenario", the Company believes that failure of the
building management and mechanical systems to operate properly would result in
inconveniences to the building tenants which might include no elevator service,
lighting or entry and egress. In this case, the management of the Company would
manually override such systems in order for normal operations to resume.
Additionally, in a "worst case scenario" of the failure of the upgrades to the
accounting software, the Company would be required to process transactions, such
as the issuance of disbursements, manually until an alternative system was
implemented. If the Company was not successful in implementing their year 2000
compliance plan, the Company may suffer a material adverse impact on their
consolidated results of operations and financial condition.
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") is an appropriate
measure of performance of an equity REIT. FFO is defined by the National
Association of Real Estate Investment Trusts (NAREIT) as net income or loss,
excluding gains or losses from debt restructuring and sales of properties plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash generated from
operating activities in accordance with generally accepted accounting principals
and is not indicative of cash available to fund cash needs. FFO should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity. In March, 1995, NAREIT issued a "White Paper" analysis to address
certain interpretive issues under its definition of FFO. The White Paper
provides that amortization of deferred financing costs and depreciation of
nonrental real estate assets are no longer to be added back to net income to
arrive at FFO.
Since all companies and analysts do not calculate FFO in a similar
fashion, the Company's calculation of FFO presented herein may not be comparable
to similarly titled measures as reported by other companies.
The following table presents the Company's FFO calculation (unaudited and
in thousands, except per share/unit data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income available to common shareholders $ 21,516 $ 8,565 $ 44,035 $ 28,051
Adjustments for Funds From Operations:
Add:
Real estate depreciation and amortization 21,312 14,036 54,406 36,822
Minority partners' interests in consolidated
partnerships 2,150 665 4,933 1,882
Limited partners' interest in the operating
partnerships 3,014 1,209 7,082 5,962
Extraordinary item - loss on extinguishment of debt,
net of limited partners' share of $74, $323, $74
and $323, respectively 555 1,670 555 1,670
Dividends and distributions on dilutive shares/units 9,579 --- 21,283 ---
Less:
Gain on sales of real estate 10,052 --- 10,052 ---
Amount distributable to minority partners' in
consolidated partnerships 2,607 1,189 6,031 2,965
--------------- --------------- --------------- ---------------
Funds From Operations (FFO) - diluted 45,467 24,956 116,211 71,422
Less:
Straight line rents 2,086 1,966 6,600 5,454
Non-Incremental capitalized tenant improvements
and leasing commissions 1,618 762 3,673 3,577
Non-Incremental capitalized improvements 833 917 2,312 2,390
--------------- --------------- --------------- ---------------
Cash available for distribution (CAD) - diluted $ 40,930 $ 21,311 $ 103,626 $ 60,001
=============== =============== =============== ===============
Diluted FFO and CAD calculations:
Basic GAAP weighted average shares outstanding 51,824 40,012 45,724 39,284
Add GAAP weighted average dilutive securities
outstanding 430 522 417 549
--------------- --------------- --------------- ---------------
Dilutive GAAP weighted average shares outstanding 52,254 40,534 46,141 39,833
Adjustments for dilutive FFO and CAD weighted
average shares/units:
Add:
Weighted average units of limited partnership 7,702 7,741 7,706 7,715
Weighted average shares of Series A Preferred
Stock 8,060 --- 8,060 ---
Weighted average shares of Series B Preferred
Stock 5,758 --- 2,552 ---
Weighted average shares of minority partner's
preferred interest 3,454 --- 1,645 ---
Weighted average shares of preferred units of
limited partnership 1,366 --- 1,366 ---
--------------- --------------- --------------- ---------------
Dilutive FFO and CAD weighted average shares/units
outstanding 78,594 48,275 67,470 47,548
=============== =============== =============== ===============
FFO per weighted average share/unit $ 0.58 $ 0.52 $ 1.72 $ 1.50
=============== =============== =============== ===============
CAD per weighted average share/unit $ 0.52 $ 0.44 $ 1.54 $ 1.26
=============== =============== =============== ===============
Weighted average dividends per share/unit $ 0.41 $ 0.34 $ 1.14 $ 0.99
=============== =============== =============== ===============
FFO payout ratio 70.5% 64.9% 66.3% 65.8%
=============== =============== =============== ===============
CAD payout ratio 78.3% 76.7% 74.3% 78.4%
=============== =============== =============== ===============
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing the Company is interest rate risk on its
long term debt, mortgage notes and notes receivable. The Company does not hedge
interest rate risk using financial instruments nor is the Company subject to
foreign currency risk.
The Company manages its exposure to interest rate risk on its variable rate
indebtedness by borrowing on a short-term basis under its Credit Facility or
Term Loan until such time as it is able to retire the short-term variable rate
debt with a long-term fixed rate debt offering or an equity offering through
accessing the capital markets on terms that are advantageous to the Company.
The following table sets forth the Company's long term debt obligations by
scheduled principal cash flow payments and maturity date, weighted average
interest rates and estimated fair market value ("FMV") at September 30, 1999
(dollars in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total<F1> F.M.V
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long term debt:
Fixed rate $ 1,347 $33,883 $ 21,332 $ 14,980 $ 6,724 $ 832,459 $ 910,725 $ 910,725
Weighted average
interest rate 7.96% 7.40% 7.45% 7.89% 8.00% 7.52% 7.53%
Variable rate $75,000 $ --- $253,600 $ --- $ --- $ --- $ 328,600 $ 328,600
Weighted average
interest rate 7.13% --- 6.28% --- --- --- 6.47%
<FN>
<F1>
Includes unamortized issuance discounts of $704,000 on the 5 and 10 year senior
unsecured notes issued on March 26, 1999 which are due at maturity.
</FN>
</TABLE>
In addition, the Company has assessed the market risk for its variable rate
debt, which is based upon LIBOR, and believes that a one percent increase in the
LIBOR rate would have an approximate $3.3 million annual increase in interest
expense based on approximately $328.6 million outstanding at September 30, 1999.
The following table sets forth the Company's mortgage notes and note
receivables by scheduled maturity date, weighted average interest rates and
estimated FMV at September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total F.M.V
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage notes and
notes receivable:
Fixed rate $ 685 $282,727 $ 15 $ 10,624 $ --- $ 53,490 $ 347,541 $ 347,541
Weighted average
interest rate 10.49% 9.42% 9.00% 10.34% --- 10.68% 9.64%
</TABLE>
The fair value of the Company's long term debt, mortgage notes and notes
receivable is estimated based on discounting future cash flows at interest rates
that management believes reflects the risks associated with long term debt,
mortgage notes and notes receivable of similar risk and duration.
21
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and use of proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information
The Board of Directors of the Company has approved certain amendments
to the governance provisions of the Company.
The Board of Directors has approved an amendment to the Company's
charter to opt into a provision of the Maryland General Corporation Law
(the "MGCL") requiring a vote of two-thirds of the common stock to
remove one or more directors. Previously the entire board of directors
could be removed, at any time, with or without cause, by the
affirmative vote of a majority of the votes entitled to be cast for the
election of directors.
Under Section 3-805 of the MGCL (a recent amendment) a corporation may
raise the threshold amount of shares that must be held by stockholders
calling a special stockholder meeting to a majority of all votes to be
cast at such meeting. In accordance the with MGCL, the Board of
Directors has approved an amendment to the Company's by laws providing
that a special meeting of stockholders need only be called if requested
by holders of the majority of votes eligible to be cast at such
meeting. The Company's previous bylaws provided that special meetings
of stockholders could be called by the secretary upon the written
request of holders of shares entitled to cast not less than 25% of all
votes entitled to be cast at such meeting. Raising the threshold allows
the Company to avoid calling special meetings, unless the purpose of
the meeting has substantial support among stockholders.
The Board of Directors has also approved the Company's opting into the
Maryland Business Combination Statute. A business combination statue
provides substantial defensive protection to a company, by preventing
an unsolicited acquiror seeking a post-offer merger from acquiring a
substantial stock position without first obtaining approval of the
Company's board. Maryland's business combination law imposes a 5-year
time limitation and supermajority stockholder approval requirements on
business combinations with persons who acquire 10% or more of a
company's voting power before the company's board of directors has
approved the proposed business combination.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 Financial Data Schedule
b) During the three months ended September 30, 1999, the registrant filed
the following reports:
On August 25, 1999, the Company filed Form 8-K announcing its entering
into a Contribution and Exchange agreement with respect to the
disposition of RMI. In addition, the Company announced its entering
into an agreement with Matrix relating to the disposition of certain
industrial land holdings and a mortgage note.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECKSON ASSOCIATES REALTY CORP.
Registrant
November 11, 1999 /s/ Scott H. Rechler
Date Scott H. Rechler, Co-Chief Executive Officer
and President
November 11, 1999 /s/ Michael Maturo
Date Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000930548
<NAME> RECKSON ASSOCIATES REALTY CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> sep-30-1999
<CASH> 39,292
<SECURITIES> 0
<RECEIVABLES> 188,131
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 227,423
<PP&E> 2,175,972
<DEPRECIATION> (202,212)
<TOTAL-ASSETS> 2,681,164
<CURRENT-LIABILITIES> 81,933
<BONDS> 1,238,621
0
152
<COMMON> 513
<OTHER-SE> 1,133,192
<TOTAL-LIABILITY-AND-EQUITY> 2,681,164
<SALES> 267,283
<TOTAL-REVENUES> 292,693
<CGS> 0
<TOTAL-COSTS> 107,366
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,620
<INCOME-PRETAX> 61,625
<INCOME-TAX> 0
<INCOME-CONTINUING> 61,625
<DISCONTINUED> 0
<EXTRAORDINARY> (389)
<CHANGES> 0
<NET-INCOME> 35,854
<EPS-BASIC> .89
<EPS-DILUTED> .88
</TABLE>
