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 June 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 40,366,172 and 11,694,567 shares of common stock and Class B Common Stock
outstanding, respectively
as of August 11, 1999
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED JUNE 30, 1999
TABLE OF CONTENTS
INDEX PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of June 30,
1999 (unaudited) and December 31, 1998 2
Consolidated Statements of Income for the
three and six months ended June 30, 1999 and
1998 (unaudited) 3
Consolidated Statements of Cash Flows for
the six months ended June 30, 1999 and
1998 (unaudited) 4
Notes to the Consolidated Financial
Statements (unaudited) 5
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
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SIGNATURES
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Commercial real estate properties, at cost:
Land $ 289,191 $ 212,540
Building and improvements 1,835,625 1,372,549
Developments in progress:
Land 75,354 69,143
Development costs 71,613 82,901
Real estate held for sale 221,703 ---
Furniture, fixtures and equipment 6,486 6,090
----------- -----------
2,499,972 1,743,223
Less accumulated depreciation (189,482) (159,049)
----------- -----------
2,310,490 1,584,174
Investment in real estate joint ventures 21,803 15,104
Investment in mortgage notes and notes
receivable 341,666 99,268
Cash and cash equivalents 42,029 2,349
Tenants receivables 2,978 5,159
Investments in and advances to affiliates 94,113 53,329
Deferred rent receivable 24,955 22,526
Prepaid expenses and other assets 20,392 46,372
Contract and land deposits and pre-acquisition
costs 2,118 2,253
Deferred leasing and loan costs 33,324 24,282
----------- -----------
Total Assets 2,893,868 1,854,816
=========== ===========
Liabilities:
Mortgage notes payable $ 387,014 $ 253,463
Unsecured credit facilities 479,100 465,850
Unsecured term loan 75,000 20,000
Senior unsecured notes 449,279 150,000
Accrued expenses and other liabilities. 65,270 48,565
Affiliate payables. 1,157 2,395
Dividends and distributions payable 24,915 19,663
----------- -----------
Total Liabilities 1,481,735 959,936
----------- -----------
Commitments and other comments --- ---
Minority and interests' in consolidated
partnerships 127,506 52,173
Preferred unit interest in the operating
partnership 42,518 42,518
Limited partners' minority interest in the
operating partnership 91,440 94,125
----------- -----------
261,464 188,816
----------- -----------
Stockholders' Equity:
Preferred Stock, $.01 par value, 25,000,000
shares authorized
Series A preferred stock, 9,192,000 shares
issued and outstanding, respectively 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, 40,364,588 and 40,035,419
shares issued and outstanding, respectively 404 400
Class B Common Stock, 11,694,567 and 0
shares issued and outstanding, respectively 117 ---
Additional paid in capital 1,149,996 705,572
----------- -----------
Total Stockholders' Equity 1,150,669 706,064
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,893,868 $ 1,854,816
=========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Associates Realty Corp.
Consolidated Statements of Income
(Unaudited and in thousands, except per share and share amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Base rents $ 77,192 $ 55,536 $ 139,285 $ 102,571
Tenant escalations and reimbursements 8,586 7,061 17,129 13,113
Equity in earnings of real estate joint ventures 438 173 649 273
Equity in earnings of service companies 74 651 240 392
Interest income on mortgage notes and notes
receivable 2,299 1,773 5,107 3,453
Other 2,650 1,125 4,938 1,581
-------------- ------------- -------------- --------------
Total Revenues 91,239 66,319 167,348 121,383
-------------- ------------- -------------- --------------
Expenses:
Property operating expenses 15,038 12,073 27,436 21,693
Real estate taxes 12,011 9,032 22,112 17,036
Ground rents 490 432 898 845
Marketing, general and administrative 5,045 3,831 9,437 7,427
Interest 18,902 10,970 32,846 21,497
Depreciation and amortization 19,127 12,457 34,218 23,264
-------------- ------------- -------------- --------------
Total Expenses 70,613 48,795 126,947 91,762
-------------- ------------- -------------- --------------
Income before preferred dividends and
distributions and minority interests' 20,626 17,524 40,401 29,621
Minority partners' and interests in
consolidated partnerships (1,615) (683) (2,783) (1,216)
Distributions to preferred unit holders (660) (435) (1,321) (435)
Limited partners' interest in the operating
partnership (1,827) (2,762) (4,068) (4,753)
-------------- ------------- -------------- --------------
Income before dividends to preferred
shareholders 16,524 13,644 32,229 23,217
Dividends to preferred shareholders (5,329) (3,733) (9,710) (3,733)
-------------- ------------- -------------- --------------
Net income available to common shareholders $ 11,195 $ 9,911 $ 22,519 $ 19,484
============== ============= ============== ==============
Net Income:
Common shareholders $ 9,464 $ 9,911 $ 20,788 $ 19,484
Class B common shareholders 1,731 --- 1,731 ---
-------------- ------------- -------------- --------------
Total $ 11,195 $ 9,911 $ 22,519 $ 19,484
============== ============= ============== ==============
Basic net income per weighted average common share:
Common shareholders $ 0.23 $ 0.25 $ 0.52 $ 0.50
Class B common shareholders $ 0.35 $ --- $ 0.71 $ ---
Weighted average common shares outstanding:
Common shareholders 40,284,511 39,636,815 40,167,445 38,913,713
Class B common shareholders 4,883,446 --- 2,455,213 ---
Diluted net income per weighted average common share:
Common shareholders $ 0.23 $ 0.25 $ 0.51 $ 0.49
Class B common shareholders $ 0.24 $ --- $ 0.52 $ ---
Diluted weighted average common shares outstanding:
Common shareholders 40,704,147 40,178,083 40,577,871 39,476,786
Class B common shareholders 4,883,446 --- 2,455,213 ---
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Associates Realty Corp.
Consolidated Statement of Cash Flows
(Unaudited and in thousands)
<CAPTION>
Six Months Ended June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from Operating Activities:
Net Income available to common shareholders $ 22,519 $ 19,484
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 34,218 23,264
Minority partners' interests in consolidated partnerships 2,783 1,216
Loss reserve on real estate held for sale 4,450 ---
Gain on sale of interest in Reckson Executive Centers, LLC --- (9)
Limited partners' interest in the operating partnership 4,068 4,753
Gain on sale of securities and mortgage redemption (4,492) (43)
Equity in earnings of service companies (240) (392)
Equity in earnings of real estate joint ventures (649) (273)
Distributions from a real estate joint venture 173 217
Changes in operating assets and liabilities:
Tenant receivables 2,181 913
Real estate tax escrow (618) 115
Prepaid expenses and other assets (15,593) (10,728)
Deferred rents receivable (2,429) (3,614)
Accrued expenses and other liabilities 22,848 8,961
------------ ------------
Net cash provided by operating activities 69,219 43,864
------------ ------------
Cash Flows from Investing Activities:
(Increase) decrease in deposits pre-acquisitions (1,889) 4,187
Increase in developments in progress (8,073) (43,330)
Purchase of commercial real estate properties (194,871) (383,366)
Increase in real estate held for sale (57,095) ---
Investment in mortgage notes and notes receivable (262,643) 20,097
Investment in real estate joint ventures (6,223) (2,970)
Additions to commercial real estate properties (16,389) (9,754)
Purchase of furniture, fixtures and equipment (447) (776)
Payment of leasing costs (7,377) (3,768)
Proceeds from sales of property, securities
and mortgage redemption 25,929 809
------------ ------------
Net cash used in investing activities (529,078) (418,871)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock net of issuance costs 1,300 93,515
Proceeds from issuance of preferred stock net of issuance costs 148,000 220,800
Principal payments on secured borrowings (1,495) (3,118)
Payment of loan and equity issuance costs (5,368) (69)
Investments in and advances to affiliates (40,544) (25,712)
Proceeds from issuance of senior unsecured notes net of issuance costs 299,262 ---
Proceeds from unsecured credit facilities 299,000 180,996
Repayment of unsecured credit facilities (230,750) (94,000)
Contributions of minority partners' in consolidated partnerships 75,000 ---
Distributions to minority partners' in consolidated partnerships (2,450) (1,289)
Distributions to limited partners' in the operating partnership (5,222) (2,352)
Distributions to preferred unit holders (1,321) ---
Dividends to common shareholders (27,111) (12,146)
Dividends to preferred shareholders (8,762) ---
------------ ------------
Net cash provided by financing activities 499,539 356,625
------------ ------------
Net (decrease) increase in cash and cash equivalents 39,680 (18,382)
Cash and cash equivalents at beginning of period 2,349 21,828
------------ ------------
Cash and cash equivalents at end of period $ 42,029 $ 3,446
============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
RECKSON ASSOCIATES REALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Reckson Associates Realty Corp. (the "Company") was incorporated in
Maryland in September 1994 and is the successor to the operations of the Reckson
Group. In June, 1995 the Company completed an initial public offering of
7,038,000 shares (pre-split) of $.01 par value common stock (the "IPO"). The IPO
price of $24.25 per common share (pre-split) resulted in gross offering proceeds
of approximately $170,671,500. The Company also issued 400,000 shares
(pre-split) in a concurrent offering to the Rechler family resulting in
$9,700,000 in additional proceeds. The aggregate proceeds to the Company, net of
underwriting discount, advisory fee and other offering expenses, were
approximately $162,000,000.
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. The Operating Partnership executed various
option and purchase agreements whereby it issued 2,758,960 common units
(pre-split) of limited partnership interest in the Operating Partnership ("OP
Units") to certain continuing investors and assumed approximately $163,438,000
of indebtedness (net of a minority interest mortgage) 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 June 30, 1999, the Company owned and operated 92 office properties
comprising approximately 14.9 million square feet, 130 industrial properties
comprising approximately 11.1 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"). In addition, the Company owned or had contracted to
acquire approximately 1,013 acres of land (including approximately 306 acres
under option) in 20 separate parcels of which the Company can develop
approximately 9.8 million square feet of industrial and office space. The
Company also has invested approximately $306.1 million in mortgage notes
encumbering three Class A office properties encompassing approximately 1.6
million square feet, a 306 acre parcel 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 June 30, 1999 the Company had advanced $46.4 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 June 30, 1999, approximately $36.9 million had been
invested through the RSVP Commitment, of which $16.3 million represents
RSVP-controlled joint venture REIT-qualified investments and $20.6 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. As of June 30, 1999,
the Company has invested approximately $95.5 million for an approximate 72%
controlling interest. In addition, at June 30, 1999, the Company had advanced
approximately $34 million to RMI to acquire a 846,000 square foot industrial
property (see note 10).
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 (see note
6) 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 which have either
been sold, are under contract to sell or are being held for sale. The assets
currently being held for sale have been included in real estate held for sale on
the accompanying consolidated balance sheet.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Company and the Operating Partnership at June 30, 1999
and December 31, 1998 and the results of their operations for the three and six
months ended June 30, 1999 and 1998 respectively, and, their cash flows for the
six months ended June 30, 1999 and 1998 respectively. The Operating
Partnership's investments in Metropolitan, RMI 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 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 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
commercial real estate properties and real estate held for sale.
The minority interests at June 30, 1999 represent an approximate 16%
limited partnership interest in the Operating Partnership, an approximate 28%
interest in 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
generally accepted accounting principles ("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 June 30, 1999 and for the
six month periods ended June 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 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging activities", which is
required to be adopted in years beginning after June 15, 1999. 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 ths 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 June 30, 1999, the Company had approximately $387 million of fixed
rate mortgage notes which mature at various times between August 1999 and
November 2027. The notes are secured by 25 properties and two parcels of land
and have a weighted average interest rate of approximately 7.5%. In addition, as
of June 30, 1999, the Company had a construction loan payable secured by a
development property held for sale in the amount of approximately $5.4 million
which was satisfied during July 1999.
4. SENIOR UNSECURED NOTES
As of June 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 June 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 second 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 June 30, 1999, the Company had availability under the Credit
Facility to borrow an additional $123 million (net of $28 million of outstanding
undrawn letters of credit).
As of June 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 priced off of LIBOR plus 150 basis points for
the first nine months and 175 basis points for the remaining three months. At
June 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.
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 which allows for approximately 1.1 million square feet of future
development opportunities. In addition, RMI purchased 74.6 acres of vacant land
for approximately $3.7 million which allows for approximately 1,000,000 square
feet of future development opportunities and a 846,000 square foot industrial
property located in Cranbury, New Jersey for approximately $34 million which was
advanced by the Company.
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
$4.5 million. Such gain has been included in other income on the accompanying
consolidated statement 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 ultimately obtaining 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 statement of
income for the period from the date of acquisitions through June 30, 1999.
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 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, one
office property and one development property all located outside the Tri State
Area for approximately $58 million. In addition, the remaining properties
located outside of the Tri-State Area are under contract to sell or are being
held for sale. The Company currently anticipates that it will incur certain
sales and closing costs in connection with the sale of several of the assets
located outside the Tri State Area. As a result, the Company has recorded a loss
reserve of approximately $4.4 million which has been included in other income on
the Company's consolidated statement 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 May 26, 1999 the Board of Directors declared a dividend of $.37125 per
share of common stock payable on July 16, 1999 to its shareholders of record as
of July 8, 1999. The dividend declared, which related to the three months ended
June 30, 1999, is based upon an annual dividend of $1.485 per share.
On May 26, 1999 the Board of Directors declared a dividend on its Series A
Convertible Cumulative Preferred Stock of $.4766 per share payable on August 2,
1999 to shareholders of record on July 15, 1999. The dividend declared, which
relates to the three months ended July 31, 1999 is based on an annual dividend
of $1.906 per share.
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 1st mortgage note
secured by 919 Third Avenue located in New York City.
On July 9, 1999 the Board of Directors declared a dividend of $.4231 per
share of Class B Common Stock payable on August 2, 1999 to its shareholders of
record as of July 21, 1999. The dividend declared, which related to the period
from May 24, 1999 through July 31, 1999, is based upon an annual dividend of
$2.24 per share.
Basic net income per share on the Company's common stock was calculated
using the weighted average number of shares outstanding of 40,284,511 and
39,636,815 for the three months ended June 30, 1999 and 1998, respectively and
40,167,445 and 38,913,713 for the six months ended June 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 4,883,446
and 2,455,213 for the three and six months ended June 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 June 30, Six Months Ended June 30,
------------------------- ------------------------
1999 1998 1999 1998
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Numerator:
Income before dividends to preferred shareholders and
income allocated to Class B shareholders $ 16,524 $ 13,644 $ 32,229 $ 23,217
Dividends to preferred shareholders (5,329) (3,733) (9,710) (3,733)
Income allocated to Class B shareholders (1,731) --- (1,731) ---
----------- ---------- --------- ----------
Numerator for basic and diluted earnings per share $ 9,464 $ 9,911 $ 20,788 $ 19,484
=========== ========== ========= ==========
Denominator:
Denominator for basic earnings per share-weighted-average
common shares 40,285 39,637 40,167 38,914
Effect of dilutive securities:
Employee stock options 419 541 411 563
----------- ---------- --------- ----------
Denominator for diluted earnings per common share-
adjusted weighted-average shares and assumed conversions 40,704 40,178 40,578 39,477
=========== ========== ========= ==========
Basic earnings per common share:
Net income per Class B common share $ 0.23 $ 0.25 $ 0.52 $ 0.50
=========== ========== ========= ==========
Diluted earnings per common share:
Diluted net income per Class B common share $ 0.23 $ 0.25 $ 0.51 $ 0.49
=========== ========== ========= ==========
</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 Six Months Ended
June 30, 1999 June 30, 1999
--------- ---------
<S> <C> <C>
Numerator:
Income before dividends to preferred shareholders and
income allocated to common shareholders $ 16,524 $ 32,229
Dividends to preferred shareholders (5,329) (9,710)
Income allocated to common shareholders (9,464) (20,788)
--------- ---------
Numerator for basic earnings per share 1,731 1,731
Add back:
Income allocated to common shareholders 9,464 20,788
Limited partners' interest in the operating partnership 1,827 4,068
--------- ---------
Numerator for diluted earnings per share $ 13,022 $ 26,587
========= =========
Denominator:
Denominator for basic earnings per share- weighted-average
Class B common shares 4,883 2,455
Effect of dilutive securities:
Weighted average common shares outstanding 40,285 40,167
Weighted average OP Units outstanding 7,705 7,708
Employee stock options 419 411
--------- ---------
Denominator for diluted earnings per common share- adjusted
weighted-average shares and assumed conversions 53,292 50,741
========= =========
Basic earnings per common share:
Net income per Class B commonn share $ 0.35 $ 0.71
========= =========
Diluted earnings per common share:
Diluted net income per Class B common share $ 0.24 $ 0.52
========= =========
</TABLE>
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in thousands)
Six Months Ended June 30,
------------------------
1999 1998
----------- -----------
Cash paid during the period for interest $ 24,662 $ 17,869
========= =========
Interest capitalized during the period $ 4,400 $ 3,263
========= =========
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 22 industrial properties owned by RMI. The Company and RMI have
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 unsecured credit facilities and Term Loan,
interest incurred on borrowings under the unsecured credit facilities and Term
Loan is not considered as part of property operating performance. Further, the
Company does not consider the property operating performance of real estate held
for sale as a reportable segment.
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 June 30, 1999
and 1998 (in thousands):
9. Segment Disclosure
<TABLE>
<CAPTION>
Three months ended June 30, 1999
----------------------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and reimbursements $ 76,943 $ 5,287 $ 3,548 $ 85,778
Equity in earnings of real estate joint ventures
and service companies ---- ---- 512 512
Other income 144 ---- 4,805 4,949
------------- ----------- ------------- -------------
Total Revenues 77,087 5,287 8,865 91,239
------------- ----------- ------------- -------------
Expenses:
Property expenses 25,554 816 1,169 27,539
Marketing, general and administrative 3,858 167 1,020 5,045
Interest 5,191 940 12,771 18,902
Depreciation and amortization 16,212 1,287 1,628 19,127
------------- ----------- ------------- -------------
Total Expenses 50,815 3,210 16,588 70,613
------------- ----------- ------------- -------------
Income before preferred dividends and distributions
and minority interests' $ 26,272 $ 2,077 $ (7,723) $ 20,626
============= =========== ============= =============
Total Assets $ 2,082,784 $ 194,898 $ 616,186 $ 2,893,868
============= =========== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1998
----------------------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and reimbursements $ 59,186 $ 3,411 $ ---- $ 62,597
Equity in earnings of real estate joint ventures
and service companies ---- ---- 824 824
Other income 189 ---- 2,709 2,898
------------- ----------- ------------- -------------
Total Revenues 59,375 3,411 3,533 66,319
------------- ----------- ------------- -------------
Expenses:
Property expenses 20,963 574 ---- 21,537
Marketing, general and administrative 2,508 106 1,217 3,831
Interest 4,211 281 6,478 10,970
Depreciation and amortization 10,899 778 780 12,457
------------- ----------- ------------- -------------
Total Expenses 38,581 1,739 8,475 48,795
------------- ----------- ------------- -------------
Income before preferred dividends and distributions
and minority interests' $ 20,794 $ 1,672 $ (4,942) $ 17,524
============= =========== ============= =============
Total Assets $ 1,425,924 $ 113,937 $ 85,106 $ 1,624,967
============= =========== ============= =============
</TABLE>
The following tables set forth the components of the Company's revenues and
expenses and other related disclosures for the six months ended June 30, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
Six months ended June 30, 1999
----------------------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:Revenues:
Base rents, tenant escalations and reimbursements $ 142,966 $ 9,900 $ 3,548 $ 156,414
Equity in earnings of real estate joint ventures
and service companies --- --- 889 889
Other income 213 2 9,830 10,045
------------- ----------- ------------- -------------
Total Revenues 143,179 9,902 14,267 167,348
------------- ----------- ------------- -------------
Expenses:
Property expenses 47,710 1,567 1,169 50,446
Marketing, general and administrative 7,800 298 1,339 9,437
Interest 9,751 1,217 21,878 32,846
Depreciation and amortization 28,993 2,367 2,858 34,218
------------- ----------- ------------- -------------
Total Expenses 94,254 5,449 27,244 126,947
------------- ----------- ------------- -------------
Income before preferred dividends and distributions
and minority interests' $ 48,925 $ 4,453 $ (12,977) $ 40,401
============= =========== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998
----------------------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and reimbursements $ 109,048 $ 6,636 $ --- $ 115,684
Equity in earnings of real estate joint ventures
and service companies --- --- 665 665
Other income 222 --- 4,812 5,034
------------- ----------- ------------- -------------
Total Revenues 109,270 6,636 5,477 121,383
------------- ----------- ------------- -------------
Expenses:
Property expenses 38,458 1,116 --- 39,574
Marketing, general and administrative 5,238 206 1,983 7,427
Interest 7,683 536 13,278 21,497
Depreciation and amortization 20,245 1,535 1,484 23,264
------------- ----------- ------------- -------------
Total Expenses 71,624 3,393 16,745 91,762
------------- ----------- ------------- -------------
Income before preferred dividends and distributions
and minority interests' $ 37,646 $ 3,243 $ (11,268) $ 29,621
============= =========== ============= =============
</TABLE>
10. Subsequent Event
On August 9, 1999, the Company executed a contract for the sale of RMI and
three other big box industrial properties to American Real Estate Investment
Corporation ("REA"). In addition, the Company also entered into a sale agreement
with Matrix Development Group ("Matrix") relating to a first mortgage note and
certain industrial land holdings. 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 REA, preferred units of REA's operating partnership, relief of
debt and a purchase money mortgage note secured by certain land that is being
sold to Matrix. The closing will take place in three stages which are
anticipated to be completed during August 1999, December 1999, and April 2000.
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 June
30, 1999, the Company owned and operated 92 office properties comprising
approximately 14.9 million square feet, 130 industrial properties comprising
approximately 11.1 million square feet and two retail properties comprising
approximately 20,000 square feet, located in the Tri-State Area. In addition,
the Company owned or had contracted to acquire approximately 1,013 acres of land
(including approximately 306 acres under option) in 20 separate parcels of which
the Company can develop approximately 9.8 million square feet of industrial and
office space. The Company also has invested approximately $306.1 million in
mortgage notes encumbering three Class A office properties encompassing
approximately 1.6 million square feet, a 306 acre parcel 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 June 30, 1999, the Company had advanced $46.4 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 June 30, 1999,
approximately $36.9 million had been invested through the RSVP Commitment, of
which $16.3 million represents RSVP-controlled joint venture REIT-qualified
investments and $20.6 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. As of June 30, 1999,
the Company has invested approximately $95.5 million for an approximate 72%
controlling interest. In addition, at June 30, 1999, the Company had advanced
approximately $34 million to RMI to acquire a 846,000 square foot industrial
property.
On August 9, 1999, the Company executed a contract for the sale of RMI and
three other big box industrial properties to American Real Estate Investment
Corporation ("REA"). In addition, the Company also entered into a sale agreement
with Matrix Development Group ("Matrix") relating to a first mortgage note and
certain industrial land holdings. 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 REA, preferred units of REA's operating partnership, relief of
debt and a purchase money mortgage note secured by certain land that is being
sold to Matrix. The closing will take place in three stages which are
anticipated to be completed during August 1999, December 1999, and April 2000.
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 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, one
office property and one development property all located outside the Tri State
Area for approximately $58 million. In addition, the remaining properties
located outside of the Tri-State Area are under contract to sell or are being
held for sale. The Company currently anticipates that it will incur certain
sales and closing costs in connection with the sale of several of the assets
located outside the Tri State Area. As a result, the Company has recorded a loss
reserve of approximately $4.4 million which has been included in other income on
the Company's consolidated statement of income.
The market capitalization of the Company at June 30, 1999 was approximately
$3.2 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 $23.56 per
share/unit (based on the closing price of the Company's common stock on June 30,
1999), the market value of the Company's Class B Common Stock of $23.88 per
share (based on the closing price of the Company's Class B Common Stock on June
30, 1999) ,the Company's preferred stock of $25 per share, the Operating
Partnership's preferred units of $1,000 per unit and the $1.4 billion (including
its share of joint venture debt and net of minority partners' interests) of debt
outstanding at June 30, 1999. As a result, the Company's total debt to total
market capitalization ratio at June 30, 1999 equaled approximately 42.7%.
RESULTS OF OPERATIONS
The Company's total revenues increased by $24.9 million or 37.6% for the
three months ended June 30, 1999 as compared to the 1998 period. The growth in
total revenues is substantially attributable to the Company's acquisition of 42
properties comprising approximately 8.0 million square feet and the development
of three properties comprising approximately 412,000 square feet. Property
operating revenues, which include base rents and tenant escalations and
reimbursements ("Property Operating Revenues") increased by $23.2 million or 37%
for the three months ended June 30, 1999 as compared to the 1998 period. The
1999 increase in Property Operating Revenues is comprised of approximately $2.4
million attributable to increases in rental rates and changes in occupancies and
approximately $20.8 million attributable to the acquisitions and development of
properties. The remaining balance of the increase in total revenues in 1999 is
primarily attributable to interest income on the Company's investments in
mortgage notes and notes receivable. The Company's base rent was increased by
the impact of the straight-line rent adjustment by $3.2 million for the three
months ended June 30, 1999 as compared to $2.1 million for the 1998 period.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $6 million or 27.9% for the three months ended June 30,
1999 as compared to the 1998 period. These increases are primarily due to the
acquisition of properties. Gross operating margins (defined as Property
Operating Revenues less Property Expenses, taken as a percentage of Property
Operating Revenues) for the three months ended June 30, 1999 and 1998 were 67.9%
and 65.6% respectively. The increase in gross operating margins reflects
increases realized in rental rates and the Company's ability to realize certain
operating efficiencies as a result of operating a larger portfolio of properties
with concentrations of properties in office and industrial parks or in its
established sub-markets.
Marketing, general and administrative expenses increased by $1.2 million
for the three months ended June 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 5.53% for the three months ended June 30, 1999 as compared
to 5.78% for the 1998 period.
Interest expense increased by $7.9 million for the three months ended June
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 in conjunction with the Tower
acquisition. The weighted average balance outstanding on the Company's credit
facilities and Term Loan was $352.1 million for the three months ended June 30,
1999 as compared to $306.9 million for the 1998 period.
The Company's total revenues increased by $46 million or 37.9% for the six
months ended June 30 1999 as compared to the 1998 period. The growth in total
revenues is substantially attributable to the Company's acquisition of 70
properties comprising approximately 12.4 million square feet. Property Operating
Revenues increased by $40.7 million or 35.2% for the six months ended June 30,
1999. As compared to the 1998 period. The 1999 increase in Property Operating
Revenues is comprised of $5.5 million attributable to increases in rental rates
and changes in occupancies and $35.2 million attributable to acquisitions and
development of properties. The remaining balance of the increase in total
revenues in 1999 is primarily attributable to interest income on the Company's
investments in mortgage notes and notes receivable. The Company's base rent was
increased by the impact of the straight-line rent adjustment by $4.6 million for
the six months ended June 30 1999 as compared to $3.6 million for the 1998
period.
Property Expenses increased by $10.9 million for the six months ended June
30, 1999 as compared to the 1998 period. These increases are primarily due to
the acquisition of properties. Gross operating margins for the six months ended
June 30, 1999 and 1998 were 67.8% and 65.8%, respectively. The increase in gross
operating margins reflects increases realized in rental rates and the Company's
ability to realize certain operating efficiencies as a result of operating a
larger portfolio of properties with concentration of properties in office and
industrial parks or in its established sub-markets.
Marketing, general and administrative increased by $2 million for the six
months ended June 30, 1999 as comparable 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 5.64% for the
six months ended June 30, 1999 as compared to 6.12% for the 1999 period.
Interest expense increased by $11.3 million for the six months ended June
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 in conjunction with the Tower
acquisition. The weighted average balance outstanding on the Company's credit
facilities was $429 million for the six months ended June 30, 1999 as compared
to $311.5 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.
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 June 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 second 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 June 30, 1999, the
Company had availability under the Credit Facility to borrow an additional $123
million (net of $28 million of outstanding undrawn letters of credit).
As of June 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 priced off of LIBOR plus 150 basis points for the first
nine months and 175 basis points for the remaining three months. At June 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.
The Company's indebtedness at June 30, 1999 totaled $1.4 billion (including
its share of joint venture debt and net of minority partners' interests) and was
comprised of $473.3 million outstanding under the credit facilities (of which
$125 million has been subsequently refinanced with a long term fixed rate
secured borrowing), $75 million outstanding under the Term Loan, $449.3 million
of senior unsecured notes and approximately $366.3 million of mortgage
indebtedness. Based on the Company's total market capitalization of
approximately $3.2 billion at June 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 stated value of the
Company's preferred stock and the stated value of the Operating Partnership's
preferred units), the Company's debt represented approximately 42.7% 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 six
month period ended June 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 Tenant Improvements and Leasing Commissions
<CAPTION>
Six
Months
Ended
1995 -1998 June 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 $141,292
Per Square Foot Improved 4.44 4.28 7.00 3.98 4.92 2.33
Leasing Commissions $144,925 $119,047 $415,822 $418,191 $274,496 $90,216
Per Square Foot Leased 1.42 0.97 4.83 1.46 2.17 1.18
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot $5.86 $5.25 $11.83 $5.44 $7.09 $3.51
========= ========= ========== =========== ========= =========
Westchester Office Properties
Tenant Improvements N/A $834,764 $1,211,665 $711,160 $961,413 $376,574
Per Square Foot Improved N/A 6.33 8.90 4.45 6.67 4.12
Leasing Commissions N/A $264,388 $366,257 $286,150 $326,204 $165,254
Per Square Foot Leased N/A 2.00 2.69 1.79 2.24 1.81
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot N/A $8.33 $11.59 $6.24 $8.91 $5.93
========= ========= ========== =========== ========= =========
Connecticut Office Properties<F1>
Tenant Improvements N/A $58,000 $1,022,421 $202,880 $570,356 $45,445
Per Square Foot Improved N/A 12.45 13.39 5.92 9.66 6.47
Leasing Commissions N/A $0.00 $256,615 $151,063 $181,190 $14,550
Per Square Foot Leased N/A 0.00 3.36 4.41 3.89 2.07
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot N/A $12.45 $16.75 $10.33 $13.55 $8.54
========= ========= ========== =========== ========= =========
New Jersey Office Properties
Tenant Improvements N/A N/A N/A $654,877 $654,877 $119,323
Per Square Foot Improved N/A N/A N/A 3.78 3.78 2.20
Leasing Commissions N/A N/A N/A $396,127 $396,127 $193,570
Per Square Foot Leased N/A N/A N/A 2.08 2.08 3.18
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot N/A N/A N/A $5.86 $5.86 $5.38
========= ========= ========== =========== ========= =========
Industrial Properties
Tenant Improvements $210,496 $380,334 $230,466 $283,842 $276,285 $150,222
Per Square Foot Improved 0.90 0.72 0.55 0.76 0.73 0.15
Leasing Commissions $107,351 $436,213 $81,013 $200,154 $206,183 $681,474
Per Square Foot Leased 0.46 0.82 0.19 0.44 0.48 0.67
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot $1.36 $1.54 $0.75 $1.20 $1.21 $0.82
========= ========= ========== =========== ========= =========
<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 June 30, 1999:
<TABLE>
Long Island Office Properties (excluding Omni):
<CAPTION>
Percent
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 19 79,657 2.7% $21.31 $21.54
2000 45 268,683 9.1% $21.71 $23.29
2001 40 187,022 6.3% $22.15 $24.02
2002 33 255,550 8.6% $22.30 $23.71
2003 52 342,577 11.6% $21.81 $23.10
2004 38 246,753 8.4% $22.69 $25.17
2005 and thereafter 89 1,576,056 53.3% --- ---
------ ---------- --------
Total 316 2,956,298 100.0%
====== ========== ========
<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>
Percent
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 4 60,316 10.2% $31.71 $36.63
2001 4 32,680 5.6% $27.36 $33.63
2002 4 129,351 22.0% $24.78 $27.14
2003 5 72,530 12.3% $29.56 $29.71
2004 4 112,414 19.1% $25.98 $33.12
2005 and thereafter 8 181,502 30.8% --- ---
------ ---------- --------
Total 29 588,793 100.0%
====== ========== ========
<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>
Industrial Properties:
<CAPTION>
Percent
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 22 296,298 5.2% $5.12 $5.68
2000 30 1,105,940 19.3% $4.84 $5.19
2001 28 676,925 11.8% $5.70 $7.16
2002 26 207,544 3.6% $6.42 $7.09
2003 30 724,434 12.7% $5.26 $6.06
2004 24 509,372 8.9% $6.59 $7.15
2005 and thereafter 42 2,207,616 38.5% --- ---
------ ---------- --------
Total 202 5,728,129 100.0%
====== ========== ========
<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>
Research and Development Properties:
<CAPTION>
Percent
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 4 26,891 2.1% $8.68 $9.44
2000 7 111,040 8.7% $8.20 $8.58
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 $5.25
2004 6 105,303 8.3% $11.93 $13.20
2005 and thereafter 11 540,277 42.5% --- ---
------ ---------- --------
Total 43 1,272,640 100.0%
====== ========== ========
<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>
Westchester Office Properties:
<CAPTION>
Percent
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 21 77,887 2.8% $19.74 $20.18
2000 53 502,045 18.1% $22.63 $22.86
2001 46 334,819 12.1% $21.83 $21.89
2002 46 441,072 15.9% $20.16 $20.40
2003 35 245,108 8.8% $21.80 $22.94
2004 19 106,700 3.9% $20.10 $20.34
2005 and thereafter 34 1,063,628 38.4% --- ---
------ ---------- --------
Total 254 2,771,259 100.0%
====== ========== ========
<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>
Percent
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 24,916 2.4% $23.61 $23.78
2000 26 114,054 11.0% $22.16 $22.54
2001 23 102,583 9.9% $24.10 $25.18
2002 15 89,774 8.7% $27.32 $28.51
2003 16 99,052 9.6% $31.71 $32.46
2004 15 201,091 19.4% $20.77 $21.29
2005 and thereafter 25 403,160 39.0% --- ---
------ ---------- --------
Total 130 1,034,630 100.0%
====== ========== ========
<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>
Percent
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 5 41,540 2.5% $20.06 $20.28
2000 34 329,989 19.7% $22.66 $22.83
2001 21 260,195 15.5% $18.09 $18.10
2002 20 166,699 10.0% $19.96 $20.06
2003 18 327,593 19.6% $18.09 $18.14
2004 25 200,994 12.0% $21.98 $21.94
2005 and thereafter 17 346,494 20.7% --- ---
------ ---------- --------
Total 140 1,673,504 100.0%
====== ========== ========
<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 York Office Properties:
<CAPTION>
Percent
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 8 34,158 1.3% $34.19 $35.37
2000 19 946,214 34.9% $32.61 $32.72
2001 19 136,453 5.0% $36.25 $36.38
2002 16 194,873 7.2% $32.20 $33.92
2003 7 93,752 3.4% $31.34 $31.75
2004 8 107,589 4.0% $34.48 $34.59
2005 and thereafter 68 1,197,158 44.2% --- ---
------ ---------- --------
Total 145 2,710,197 100.0%
====== ========== ========
<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>
Reckson / Morris Industrial:
<CAPTION>
Percent
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 7 387,686 12.7% $3.95 $3.98
2000 6 173,768 5.7% $5.14 $5.31
2001 1 243,751 8.0% $7.50 $7.69
2002 1 610,949 20.0% $3.75 $3.96
2003 3 113,916 3.8% $4.53 $4.72
2004 5 308,057 10.1% $4.52 $4.87
2005 and thereafter 8 1,211,594 39.7% --- ---
------ ---------- --------
Total 31 3,049,721 100.0%
====== ========== ========
<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>
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
non-rental 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 June 30, Six Months Ended June 30,
------------------------ -------------------------
1999 1998 1999 1998
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net income available to common shareholders $ 11,195 $ 9,911 $ 22,519 $ 19,484
Adjustments for Funds from Operations:
Add:
Real Estate depreciation and amortization 18,406 12,181 33,094 22,787
Minority partners' interests in consolidated partnerships 1,615 683 2,783 1,216
Limited partners' interest in the operating partnership 1,827 2,762 4,068 4,753
Dividends and distributions on dilutive shares/units 6,663 --- 11,704 ---
---------- --------- ---------- ----------
39,706 25,537 74,168 48,240
Subtract:
Amount distributable to minority partners in consolidated
partnerships 1,980 987 3,424 1,775
---------- --------- ---------- ----------
Funds From Operations (FFO) - diluted 37,726 24,550 70,744 46,465
Subtract:
Straight line rents 3,178 2,024 4,514 3,488
Non-Incremental capitalized tenant improvements and leasing
commissions 1,236 1,592 2,055 2,815
Non-Incremental capitalized improvements 838 848 1,479 1,473
---------- --------- ---------- ----------
Cash available for distribution (CAD) - diluted $ 32,474 $ 20,086 $ 62,696 $ 38,689
========== ========= ========== ==========
Diluted FFO and CAD calculations:
Weighted average shares/units 52,873 47,331 50,330 46,616
Weighted average dilutive shares/units 13,124 541 11,485 563
---------- --------- ---------- ----------
Diluted weighted average shares/units 65,997 47,872 61,815 47,179
========== ========= ========== ==========
FFO per weighted average share/unit $ 0.57 $ 0.51 $ 1.14 $ 0.98
========== ========= ========== ==========
CAD per weighted average share/unit $ 0.49 $ 0.42 $ 1.01 $ 0.82
========== ========= ========== ==========
Weighted average dividends per share/unit $ 0.39 $ 0.34 $ 0.73 $ 0.65
========== ========= ========== ==========
FFO payout ratio 68.0% 66.2% 63.7% 66.3%
========== ========= ========== ==========
CAD payout ratio 79.0% 80.4% 71.9% 79.3%
========== ========= ========== ==========
</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,
principal cash flows by scheduled maturity, weighted average interest rates and
estimated fair market value ("FMV") at June 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 $ 8,904 $ 32,487 $ 19,825 $ 15,002 $ 19,742 $ 735,681 $ 831,641 $ 831,641
Average interest rate 8.85% 7.38% 7.43% 7.80% 7.65% 7.49% 7.51%
Variable rate $ 205,000 $ 5,373 $ 349,100 $ --- $ --- $ --- $ 559,473 $ 559,473
Average interest rate 6.93% 7.75% 5.93% --- --- --- 6.39%
<FN>
<F1>
Includes unamortized issuance discounts of $721,000 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 $5.6 million annual increase in interest
expense based on approximately $559.5 million outstanding at June 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 June 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 $ 5,038 $ 277,548 $ --- $ 6,785 $ --- $ 50,990 $ 340,361 $ 340,361
Average interest rate 10% 9.41% --- 10.65% --- 10.69% 9.63%
</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.
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds
On June 2, 1999, the Company issued 6,000,000 shares of its Series B
Convertible Cumulative Preferred Stock, for aggregate proceeds of $150
million. The offering was made pursuant to the exemption from
registration under Section 4(2) of the Securities Act of 1933 and
involved only institutional accredited investors. Shares of said
Series B Preferred Stock are redeemable by the Company on or after
March 2, 2002. In addition, such shares are convertible into the
Company's common stock at a price of $26.05 per share (equivalent to a
conversion rate of .9597 shares of common stock for each share of
preferred stock). The Series B Preferred Stock accumulates 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.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
On May 20, 1999 the Company held its annual meeting of stockholders.
The matters on which the stockholders voted, in person or by proxy,
were (1) the election of four nominees as class I directors to serve
until the 2002 annual meeting of stockholders and until their
respective successors are duly elected and qualified and (2) to ratify
the selection of the independent auditors of the Company. The four
nominees were elected and the auditors were ratified. The results of
the voting are set forth below:
Election of Directors Votes Cast For Votes Cast Against
--------------------- -------------- ------------------
Scott H. Rechler 34,885,811 ----
Herve A. Kevenides 34,885,711 ----
Conrad D. Stephenson 34,885,711 ----
Lewis Ranieri 34,885,711 ----
Ratification of Auditors 34,880,930 21,980
On May 24, 1999, the Company held a special meeting of stockholders at
which the stockholders approved the issuance by the Company of only
shares of its Class B Common Stock as the non-cash portion of the
merger consideration in the merger with Tower Realty Trust, Inc. The
results of the voting are set forth below:
Votes Cast For Votes Cast Against
-------------- ------------------
14,277,014 4,357,113
Item 5. Other information - None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 Financial Data Schedule
b) During the three months ended June 30, 1999, the registrant filed the
following reports:
On May 11, 1999, the Company filed Form 8-K announcing that it had
entered into an agreement to acquire the first mortgage note secured
by 919 Third Avenue located in New York City.
On June 7, 1999 the Company filed Form 8-K announcing that on May 24,
1999 (i) the stockholders of Tower Realty Trust, Inc. approved the
merger of the two companies, (ii) Metropolitan Operating Partnership,
L. P. entered into a $130 million unsecured credit agreement, (iii)
that on May 26, 1999, the Company announced Scott Rechler had been
named Co-Chief Executive Officer and President along with other
appointments, (iv) that the Company had increased its dividend on its
common stock to an annualized dividend rate of $1.485 per share and
(v) that on June 2, 1999, the Company issued six million shares of
Preferred Stock for aggregate proceeds of $150 million.
On June 25, 1999, the Company filed Form 8-K announcing that it had
closed on the acquisition of the first mortgage note secured by 919
Third Avenue located in New York City.
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
August 11, 1999 /s/ Scott H. Rechler
Date Scott H. Rechler, Co-Chief Executive Officer
and President
August 11, 1999 /s/ Michael Maturo
Date Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer
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