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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
AMENDMENT NO.1
TO
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, 2000
COMMISSION FILE NUMBER: 1-13762
----------------
RECKSON ASSOCIATES REALTY CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 11-3233650
(State other jurisdiction of incorporation (IRS. Employer Identification Number)
of organization)
225 BROADHOLLOW ROAD, MELVILLE, NY 11747
(Address of principal executive office) (zip code)
</TABLE>
(631) 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) Yes X No__, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No__.
----------------
The company has two classes of common stock, issued at $.01 par value per
share with 45,125,839 and 10,283,513 shares of Class A common stock and Class B
common stock outstanding, respectively as of August 9, 2000
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<PAGE>
RECKSON ASSOCIATES REALTY CORP.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
INDEX PAGE
------- -----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999 ........................................................ 2
Consolidated Statements of Income for the three and six months ended
June 30, 2000 and 1999 (unaudited) ....................................... 3
Consolidated Statements of Cash Flows for the six months ended
June30, 2000 and 1999 (unaudited) ........................................ 4
Notes to the Consolidated Financial Statements (unaudited) ............... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................ 25
Item 2. Changes in Securities and Use of Proceeds ................................ 25
Item 3. Defaults Upon Senior Securities .......................................... 25
Item 4. Submission of Matters to a Vote of Securities Holders .................... 25
Item 5. Other Information ........................................................ 25
Item 6. Exhibits and Reports on Form 8-K ......................................... 25
SIGNATURES ....................................................................... 25
</TABLE>
1
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
--------------- -------------
<S> <C> <C>
ASSETS:
Commercial real estate properties, at cost:
Land ............................................................................. $ 291,510 $ 276,204
Building and improvements ........................................................ 1,916,027 1,802,611
Developments in progress:
Land ............................................................................. 61,013 60,894
Development costs ................................................................ 93,719 68,690
Furniture, fixtures and equipment ................................................. 7,157 6,473
---------- ----------
2,369,426 2,214,872
Less accumulated depreciation ..................................................... (254,595) (218,385)
---------- ----------
2,114,831 1,996,487
Investment in real estate joint ventures .......................................... 37,548 31,531
Investment in mortgage notes and notes receivable ................................. 356,642 352,466
Cash and cash equivalents ......................................................... 27,135 21,368
Tenants receivables ............................................................... 3,340 5,117
Investments in and advances to affiliates ......................................... 174,734 178,695
Deferred rents receivable ......................................................... 44,666 32,132
Prepaid expenses and other assets ................................................. 70,907 66,977
Contract and land deposits and pre-acquisition costs .............................. 7,727 9,585
Deferred leasing and loan costs ................................................... 47,137 39,520
---------- ----------
TOTAL ASSETS ...................................................................... $2,884,667 $2,733,878
========== ==========
LIABILITIES:
Mortgage notes payable ............................................................ $ 527,466 $ 459,174
Unsecured credit facility ......................................................... 373,600 297,600
Unsecured term loan ............................................................... 75,000 75,000
Senior unsecured notes ............................................................ 449,348 449,313
Accrued expenses and other liabilities ............................................ 90,507 82,079
Dividends and distributions payable ............................................... 28,356 27,166
---------- ----------
TOTAL LIABILITIES ................................................................. 1,544,277 1,390,332
---------- ----------
Commitments and other comments .................................................... -- --
Minority partners' interests in consolidated partnerships ......................... 92,071 93,086
Preferred unit interest in the operating partnership .............................. 42,518 42,518
Limited partners' minority interest in the operating partnership .................. 97,304 90,986
---------- ----------
231,893 226,590
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 25,000,000 shares authorized
Series A preferred stock, 9,192,000 shares issued and outstanding ................ 92 92
Series B preferred stock, 2,000,000 and 6,000,000 shares issued and outstanding,
respectively ................................................................... 20 60
Common Stock, $01 par value, 100,000,000 shares authorized
Class A Common Stock, 45,045,573 and 40,375,506 shares issued and outstanding,
respectively ................................................................... 451 401
Class B Common Stock, 10,283,513 and 10,283,763 shares issued and outstanding,
respectively ................................................................... 103 103
Additional paid in capital ........................................................ 1,107,831 1,116,300
---------- ----------
Total Stockholders' Equity ........................................................ 1,108,497 1,116,956
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................ $2,884,667 $2,733,878
========== ==========
</TABLE>
(see accompanying notes to financial statements)
2
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Base rents .......................................... $ 96,099 $ 77,192 $ 190,499 $ 139,285
Tenant escalations and reimbursements ............... 12,984 8,586 25,830 17,129
Equity in earnings of real estate joint ventures and
service companies .................................. 1,775 512 3,187 889
Interest income on mortgage notes and notes
receivable ......................................... 2,190 2,299 4,476 5,107
Gain on sales of real estate ........................ 6,662 -- 6,662 --
Other ............................................... 5,745 2,650 12,459 4,938
----------- ----------- ----------- -----------
Total Revenues ..................................... 125,455 91,239 243,113 167,348
----------- ----------- ----------- -----------
EXPENSES:
Property operating expenses ......................... 36,368 27,539 74,523 50,446
Marketing, general and administrative ............... 6,649 5,045 13,221 9,437
Interest ............................................ 24,176 18,902 48,016 32,846
Depreciation and amortization ....................... 22,426 19,127 43,437 34,218
----------- ----------- ----------- -----------
Total Expenses ..................................... 89,619 70,613 179,197 126,947
----------- ----------- ----------- -----------
Income before preferred dividends and distributions
and minority interests ............................. 35,836 20,626 63,916 40,401
Minority partners' interests in consolidated
partnerships ....................................... (1,925) (1,615) (3,899) (2,783)
Distributions to preferred unit holders ............. (660) (660) (1,321) (1,321)
Limited partners' minority interest in the operating
partnership ........................................ (3,083) (1,827) (5,361) (4,068)
----------- ----------- ----------- -----------
Income before dividends to preferred shareholders . 30,168 16,524 53,335 32,229
Dividends to preferred shareholders ................. (7,197) (5,329) (14,521) (9,710)
----------- ----------- ----------- -----------
Net income available to common shareholders ......... $ 22,971 $ 11,195 $ 38,814 $ 22,519
=========== =========== =========== ===========
Net Income available to:
Class A common shareholders ........................ $ 16,655 $ 9,464 $ 28,101 $ 20,788
Class B common shareholders ........................ 6,316 1,731 10,713 1,731
----------- ----------- ----------- -----------
Total ............................................... $ 22,971 $ 11,195 $ 38,814 $ 22,519
=========== =========== =========== ===========
Basic net income per weighted average common
share:
Class A common shareholders ........................ $ .40 $ .23 $ .69 $ .52
=========== =========== =========== ===========
Class B common shareholders ........................ $ .61 $ .35 $ 1.04 $ .71
=========== =========== =========== ===========
Basic weighted average common shares outstanding:
Class A common shareholders ........................ 41,343,118 40,284,511 40,862,650 40,167,445
Class B common shareholders ........................ 10,283,513 4,883,446 10,283,556 2,455,213
Diluted net income per weighted average common
share:
Class A common shareholders ........................ $ .40 $ .23 $ .68 $ .51
=========== =========== =========== ===========
Class B common shareholders ........................ $ .44 $ .24 $ .75 $ .52
=========== =========== =========== ===========
Diluted weighted average common shares
outstanding:
Class A common shareholders ........................ 41,700,478 40,704,147 41,204,762 40,577,871
Class B common shareholders ........................ 10,283,513 4,883,446 10,283,556 2,455,213
</TABLE>
(see accompanying notes to financial statements)
3
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before dividends to preferred shareholders ............................ $ 53,335 $ 32,229
Adjustments to reconcile income before dividends to preferred shareholders
to net cash provided by operating activities:
Depreciation and amortization ............................................... 43,437 34,218
Gain on sales of real estate ................................................ (6,662) --
Minority partners' interests in consolidated partnerships ................... 3,899 2,783
Loss reserve on real estate held for sale ................................... -- 4,450
Gain on mortgage redemption ................................................. -- (4,492)
Limited partners' minority interest in the operating partnership ............ 5,361 4,068
Equity in earnings of real estate joint ventures and service companies ...... (3,187) (889)
Changes in operating assets and liabilities:
Tenant receivables .......................................................... 1,777 2,181
Real estate tax escrows ..................................................... 3,387 (618)
Prepaid expenses and other assets ........................................... (3,857) (15,593)
Deferred rents receivable ................................................... (12,534) (2,429)
Accrued expenses and other liabilities ...................................... 8,552 13,138
---------- ----------
Net cash provided by operating activities ................................... 93,508 69,046
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in deposits and pre-acquisition costs .............................. (6,079) (1,889)
Increase in developments in progress ........................................ (15,923) (8,073)
Purchase of commercial real estate properties ............................... (154,573) (194,871)
Increase in real estate held for sale ....................................... -- (57,095)
Investment in mortgage notes and notes receivable ........................... -- (262,643)
Proceeds from mortgage note repayments ...................................... 2,157 --
Investments in real estate joint ventures ................................... (4,770) (6,223)
Distribution from a real estate joint venture ............................... 226 173
Additions to commercial real estate properties .............................. (22,108) (16,389)
Purchase of furniture, fixtures and equipment ............................... (676) (447)
Payment of leasing costs .................................................... (9,379) (7,377)
Proceeds from sales of property and mortgage redemption ..................... 42,595 25,929
---------- ----------
Net cash used in investing activities ....................................... (168,530) (528,905)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock net of issuance costs ................ 1,486 1,300
Proceeds from issuance of preferred stock net of issuance costs ............. -- 148,000
Principal payments on secured borrowings .................................... (23,708) (1,495)
Payment of loan and equity issuance costs ................................... (2,399) (5,368)
(Increase) decrease in investments in and advances to affiliates ............ 5,646 (40,544)
Proceeds from issuance of senior unsecured notes net of issuance costs ...... -- 299,262
Proceeds from secured borrowings ............................................ 92,000 --
Proceeds from unsecured credit facility ..................................... 125,000 299,000
Repayment of unsecured credit facility ...................................... (49,000) (230,750)
Contributions of minority partners' in consolidated partnerships ............ -- 75,000
Distributions to minority partners' in consolidated partnerships ............ (4,914) (2,450)
Distributions to limited partners' in the operating partnership ............. (5,714) (5,222)
Distributions to preferred unit holders ..................................... (1,321) (1,321)
Dividends to common shareholders ............................................ (41,638) (27,111)
Dividends to preferred shareholders ......................................... (14,649) (8,762)
---------- ----------
Net cash provided by financing activities .................................... 80,789 499,539
---------- ----------
Net increase in cash and cash equivalents .................................... 5,767 39,680
Cash and cash equivalents at beginning of period ............................. 21,368 2,349
---------- ----------
Cash and cash equivalents at end of period ................................... $ 27,135 $ 42,029
========== ==========
</TABLE>
(see accompanying notes to financial statements)
4
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Reckson Associates Realty Corp. (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") which was incorporated in
Maryland in September 1994. In June, 1995 the Company completed an initial
public offering (the "IPO") and commenced operations.
The Company became the sole general partner of Reckson Operating
Partnership L.P. (the "Operating Partnership") by contributing substantially all
of the net proceeds of the IPO, in exchange for an approximate 73% interest in
the Operating Partnership. All properties acquired by the Company are held by or
through the Operating Partnership. In conjunction with the IPO, the Operating
Partnership executed various option and purchase agreements whereby it issued
common units of limited partnership interest in the Operating Partnership ("OP
Units") to certain continuing investors in exchange for (i) interests in certain
property partnerships, (ii) fee simple and leasehold interests in properties and
development land, (iii) certain business assets of executive center entities and
(iv) 100% of the non-voting preferred stock of the management and construction
companies.
As of June 30, 2000, the Company owned and operated 78 office properties
comprising approximately 13.7 million square feet, 105 industrial properties
comprising approximately 6.9 million square feet and two retail properties
comprising approximately 20,000 square feet, located in the New York tri-state
area (the "Tri-State Area"). The Company also owns a 357,000 square foot office
building located in Orlando, Florida and approximately 346 acres of land in16
separate parcels of which the Company can develop approximately 1.9 million
square feet of office space and approximately 350,000 square feet of industrial
space. The Company also has invested approximately $301.5 million in mortgage
notes encumbering two Class A office properties encompassing approximately 1.6
million square feet, approximately 403 acres of land located in New Jersey and
approximately $17.1 million 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 July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Tower Realty Trust, Inc.
("Tower"). On May 24, 1999 the Company completed the merger with Tower and
acquired three Class A office properties located in New York City totaling 1.6
million square feet and one office property located on Long Island totaling
approximately 101,000 square feet. In addition, pursuant to the merger, the
Company also acquired certain office properties, a property under development
and land located outside of the Tri-State Area. All of the assets acquired in
the merger located outside of the Tri-State Area, other than a 357,000 square
foot office property located in Orlando, Florida, have been sold.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Company and the Operating Partnership at June 30, 2000
and December 31, 1999 and the results of their operations for the three and six
months ended June 30, 2000 and 1999 respectively, and, their cash flows for the
six months ended June 30, 2000 and 1999, respectively. The Operating
Partnership's investments in Metropolitan, Omni Partner's, L. P. ("Omni") and
certain industrial joint venture properties formerly owned by Reckson Morris
Operating Partnership, L. P. ("RMI") are reflected in the accompanying financial
statements on a consolidated basis with a reduction for minority partners'
interest. The Operating Partnership's investment in RMI was reflected in the
accompanying financial statements on a consolidated basis with a reduction for
minority partner's interest through September 26, 1999. On September 27, 1999,
the Operating Partnership sold its interest in RMI to Keystone Property Trust
("KTR"). 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.
5
<PAGE>
The minority interests at June 30, 2000 represent an approximate 12%
limited partnership interest in the Operating Partnership, 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, 2000 and for the
three and six month periods ended June 30, 2000 and 1999 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, 2000. 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, 1999.
The Company intends to qualify as a REIT under Section 856 through 869 of
the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the
Company will not generally be subject to corporate Federal income taxes as long
as it satisfies certain technical requirements of the Code relating to
composition of its income and assets and requirements relating to distributions
of taxable income to shareholders.
In June 1999, the Financial Accounting Standards Board issued Statement No.
137, amending Statement No. 133, "accounting for Derivative Instruments and
Hedging Activities", which extended the required date of adoption to the years
beginning after June 15, 2000. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company expects to adopt
the new Statement effective January 1, 2001. The Company does not anticipate
that the adoption of this Statement will have any effect on its results of
operations or financial position.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. MORTGAGE NOTES PAYABLE
As of June 30, 2000, the Company had approximately $457.5 million of fixed
rate mortgage notes which mature at various times between 2000 and 2027. The
notes are secured by 22 properties and have a weighted average interest rate of
approximately 7.6%. In addition, the Company had a $70 million variable rate
mortgage note which matures in August 2001. The note is secured by one property
and bears interest at LIBOR plus 165 basis points.
4. SENIOR UNSECURED NOTES
As of June 30, 2000, 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):
<TABLE>
<CAPTION>
FACE
ISSUANCE AMOUNT COUPON RATE TERM MATURITY
---------------------- ----------- ------------- ------ ----------------
<S> <C> <C> <C> <C>
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
</TABLE>
Interest on the Senior Unsecured Notes is payable semiannually with
principal and unpaid interest due on the scheduled maturity dates. In addition,
the Senior Unsecured Notes issued on March 26, 1999 were issued at an aggregate
discount of $738,000.
6
<PAGE>
5. UNSECURED CREDIT FACILITY AND UNSECURED TERM LOAN
As of June 30, 2000, 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 which matures in July, 2001. Interest rates on borrowings under the
Credit Facility are priced off of 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, 2000, the
Company had availability under the Credit Facility to borrow an additional
$126.4 million (of which, $49.1 million has been reserved for outstanding
undrawn letters of credit).
As of June 30, 2000, the Company had outstanding an 18 month, $75 million
unsecured term loan (the "Term Loan") from Chase Manhattan Bank which matures in
June, 2001. Interest rates on borrowings under the Term Loan are priced off of
LIBOR plus 150 basis points.
6. COMMERCIAL REAL ESTATE INVESTMENTS
On January 13, 2000, the Company acquired 1350 Avenue of the Americas, a
540,000 square foot, 35 story, Class A office property, located in New York
City, for a purchase price of approximately $126.5 million. This acquisition was
financed through a $70 million secured debt financing and a draw under the
Credit Facility.
On June 15, 1999, the Company acquired the first mortgage note secured by a
47 story, 1.4 million square foot Class A office property located at 919 Third
Avenue in New York City for approximately $277.5 million. The first mortgage
note entitles the Company to all the net cash flow of the property and to
substantial rights regarding the operations of the property, with the Company
anticipating to ultimately obtain title to the property. This acquisition was
financed with proceeds from the issuance of six million shares of Series B
Convertible Cumulative Preferred Stock and through draws under the Credit
Facility. Current financial accounting guidelines provide that where a lender
has virtually the same risks and potential rewards as those of a real estate
owner it should recognize the full economics associated with the operations of
the property. As such, the Company has recognized the real estate operations of
the 919 Third Avenue in the accompanying consolidated statements of income from
the date of acquisition. On July 28, 2000, the Company consented to the filing
of a consensual, pre-packaged bankruptcy plan with the current fee owner and
expects to take title to this property by November 30, 2000.
On August 9, 1999, the Company executed a contract for the sale of its
interest in RMI, which consisted of 28 properties, comprising approximately 6.1
million square feet and three other big box industrial properties to KTR. In
addition, the Company also entered into a sale agreement with Matrix relating to
a first mortgage note and certain industrial land holdings (the "Matrix Sale").
The combined total sale price is $310 million ($41.6 million of which is payable
to and of which $10.4 million of debt relief is attributable to the Morris
Companies and its affiliates) and consists of a combination of (i) cash, (ii)
convertible preferred and common stock of KTR, (iii) preferred units of KTR's
operating partnership, (iv) relief of debt and (v) a purchase money mortgage
note secured by certain land that is being sold to Matrix.
As of June 30, 2000, the Matrix Sale and the sale of the Company's interest
in RMI was completed for a combined sales price of approximately $258 million
(net of minority partner's interest). The combined consideration consisted of
approximately (i) $159.7 million in cash, (ii) $60 million of preferred stock
and operating partnership units of KTR, (iii) $1.5 million in common stock of
KTR, (iv) approximately $26.7 million of debt relief and (v) approximately $10.1
million in purchase money mortgages. As a result, the Company incurred a gain of
approximately $16.7 million of which approximately $6.7 million was recognized
during the three months ended June 30, 2000. Cash proceeds from the sales were
used primarily to repay borrowings under the Credit Facility. During July 2000,
the Company redeemed approximately $20 million of the preferred stock of KTR.
7
<PAGE>
In July 1998, the Company formed a joint venture, Metropolitan Partners LLC
("Metropolitan"), with Crescent Real Estate Equities Company, a Texas REIT
("Crescent") for the purpose of acquiring Tower Realty Trust, Inc. ("Tower"). On
May 24, 1999 the Company completed the merger with Tower and acquired three
Class A office properties located in New York City totaling 1.6 million square
feet and one office property located on Long Island totaling approximately
101,000 square feet. In addition, pursuant to the merger, the Company also
acquired certain office properties, a property under development and land
located outside of the Tri-State Area. All of the assets acquired in the merger
located outside of the Tri-State Area, other than a 357,000 square foot office
property located in Orlando, Florida, have been sold.
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 (May 24, 1999 through May 24, 2001) 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 Class
A common stock at a conversion price of $24.61 per share.
7. STOCKHOLDERS' EQUITY
On May 24, 1999, the Company issued 11,694,567 shares of Class B
Exchangeable Common Stock, par value $.01 per share, of the Company (the "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 were 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 Class A 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 Class A common stock at any time
following the four year, six-month anniversary of the issuance of the Class B
common stock. On July 1, 2000, the annual dividend on the Class B Common Stock
was increased to $2.40 per share.
On June 14, 2000, the Board of Directors of the Company declared the
following dividends on the Company's securities:
<TABLE>
<CAPTION>
ANNUALIZED
DIVIDEND/ RECORD PAYMENT THREE MONTHS DIVIDEND/
SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION
-------------------------- ----------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Class A common stock $ .38600 July 10, 2000 July 21, 2000 June 30, 2000 $ 1.544
Class B common stock $ .59400 (a) July 14, 2000 July 31, 2000 July 31, 2000 $ 2.377 (a)
Series A preferred stock $ .47660 July 14, 2000 July 31, 2000 July 31, 2000 $ 1.906
Series B preferred stock $ .52188 July 14, 2000 July 31, 2000 July 31, 2000 $ 2.088
</TABLE>
------------------
(a) adjusted to $.60 per share quarterly and $2.40 per share annually on July
1, 2000.
On June 20, 2000, the Company issued 4,181,818 shares of Class A common
stock in exchange for four million shares of Series B Convertible Cumulative
Preferred Stock with a liquidation preference value of $100 million.
The Board of Directors of the Company has authorized the purchase of up to
three million shares of the Company's Class B common stock. In addition, the
Board of Directors has also authorized the purchase of up to an additional three
million shares of the Company's Class B common stock and/or its Class A common
stock. The buy-back program will be effected in accordance with the safe harbor
provisions of the Securities Exchange Act of 1934 and may be terminated by the
Company at any time. As of June 30, 2000, the Company had purchased and retired
1,410,804 shares of Class B common stock for approximately $30.3 million.
8
<PAGE>
Basic net income per share on the Company's Class A common stock was
calculated using the weighted average number of shares outstanding of 41,343,118
and 40,284,511 for the three months ended June, 2000 and 1999, respectively and
40,862,650 and 40,167,445 for the six months ended June 30, 2000 and 1999,
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 10,283,513
and 4,883,446 for the three months ended June 30, 2000 and 1999, respectively
and 10,283,556 and 2,455,213 for the six months ended June 30, 2000 and 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 Class A common stock (in thousands except for earnings per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Income before, dividends to preferred shareholders and
income allocated to Class B common shareholders ......... $ 30,168 $ 16,524 $ 53,335 $ 32,229
Dividends to preferred shareholders ....................... (7,197) (5,329) (14,521) (9,710)
Income allocated to Class B common shareholders ........... (6,316) (1,731) (10,713) (1,731)
-------- -------- --------- --------
Numerator for basic and diluted earnings per Class A
common share ............................................ $ 16,655 $ 9,464 $ 28,101 $ 20,788
======== ======== ========= ========
Denominator:
Denominator for basic earnings per share-
weighted-average Class A common shares .................. 41,343 40,285 40,863 40,167
Effect of dilutive securities:
Employee stock options .................................. 357 419 342 411
-------- -------- --------- --------
Denominator for diluted earnings per Class A common
share-adjusted weighted-average shares and assumed
conversions ............................................. 41,700 40,704 41,205 40,578
======== ======== ========= ========
Basic earnings per Class A common share:
Net income per Class A common share ....................... $ .40 $ .23 $ .69 $ .52
======== ======== ========= ========
Diluted earnings per Class A common share:
Diluted net income per Class A common share ............... $ .40 $ .23 $ .68 $ .51
======== ======== ========= ========
</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, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Income before dividends to preferred shareholders and
income allocated to Class A common shareholders ......... $ 30,168 $ 16,524 $ 53,335 $ 32,229
Dividends to preferred shareholders ....................... (7,197) (5,329) (14,521) (9,710)
Income allocated to Class A common shareholders ........... (16,655) (9,464) (28,101) (20,788)
--------- -------- --------- ---------
Numerator for basic earnings per Class B common ........... 6,316 1,731 10,713 1,731
Add back:
Income allocated to Class A common shareholders ........... 16,655 9,464 28,101 20,788
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Limited partners' minority interest in the operating
partnership ................................................ 3,083 1,827 5,361 4,068
--------- -------- --------- ---------
Numerator for diluted earnings per Class B common
share ...................................................... $ 26,054 $ 13,022 $ 44,175 $ 26,587
========= ======== ========= =========
Denominator:
Denominator for basic earnings per share-
weighted-average Class B common shares ..................... 10,284 4,883 10,284 2,455
Effect of dilutive securities:
Weighted average Class A common shares outstanding ......... 41,343 40,285 40,863 40,167
Weighted average OP Units outstanding ...................... 7,695 7,705 7,697 7,708
Employee stock options ..................................... 357 419 342 411
--------- -------- --------- ---------
Denominator for diluted earnings per Class B common
share-adjusted weighted-average shares and assumed
conversions .................................................. 59,679 53,292 59,186 50,741
========= ======== ========= =========
Basic earnings per Class B common share:
Net income per Class B common share .......................... $ .61 $ .35 $ 1.04 $ .71
========= ======== ========= =========
Diluted earnings per Class B common share:
Diluted net income per Class B common share .................. $ .44 $ .24 $ .75 $ .52
========= ======== ========= =========
</TABLE>
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash paid during the period for interest ......... $52,135 $30,062
======= =======
Interest capitalized during the period ........... $ 5,173 $ 4,400
======= =======
</TABLE>
On June 20, 2000, the Company issued 4,181,818 shares of Class A common
stock in exchange for four million shares of Series B Convertible Cumulative
Preferred Stock with a liquidation preference value of $100 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"). The Company's portfolio also includes one
office property located in Orlando, Florida, certain industrial joint venture
properties formerly owned by RMI and for the period commencing January 6, 1998
and ending September 26, 1999, industrial properties which were owned by RMI and
subsequently sold to KTR. The Company has managing directors who report directly
to the Chief Operating Officer and Chief Financial Officer who have been
identified as the Chief Operating Decision Makers because of their final
authority over resource allocation, decisions and performance assessment.
In addition, as the Company expects to meet its short-term liquidity
requirements in part through the Credit Facility and Term Loan, interest
incurred on borrowings under the Credit Facility and Term Loan is not considered
as part of property operating performance. Further, the Company does not
consider the property operating performance of the office property located in
Orlando, Florida as a part of its Core Portfolio. Additionally, commencing
January 1, 2000, the Company does not consider the operating performance of the
industrial joint venture properties formerly owned by RMI as part of its Core
Portfolio.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
10
<PAGE>
The following table sets forth the components of the Company's revenues and
expenses and other related disclosures for the three months ended June 30, 2000
and 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
JUNE 30, 2000
---------------------------------------------
CONSOLIDATED
CORE PORTFOLIO OTHER TOTALS
---------------- ------------- --------------
<S> <C> <C> <C>
REVENUES:
Base rents, tenant escalations and
reimbursements ..................... $ 106,852 $ 2,231 $ 109,083
Equity in earnings of real estate
joint ventures and service
companies .......................... -- 1,775 1,775
Interest and other income ........... 257 14,340 14,597
----------- --------- ----------
Total Revenues ...................... 107,109 18,346 125,455
----------- --------- ----------
EXPENSES:
Property operating expenses ......... 35,810 558 36,368
Marketing, general and
administrative ..................... 4,928 1,721 6,649
Interest ............................ 9,403 14,773 24,176
Depreciation and amortization ....... 20,055 2,371 22,426
----------- --------- ----------
Total Expenses ...................... 70,196 19,423 89,619
----------- --------- ----------
Income (loss) before preferred
dividends and distributions and
minority interests ................. $ 36,913 $ (1,077) $ 35,836
=========== ========= ==========
Total assets ........................ $ 2,054,183 $ 830,484 $2,884,667
=========== ========= ==========
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
JUNE 30, 1999
---------------------------------------------------------
CONSOLIDATED
CORE 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
Interest and other income ........... 144 -- 4,805 4,949
----------- --------- --------- -----------
Total Revenues ...................... 77,087 5,287 8,865 91,239
----------- --------- --------- -----------
EXPENSES:
Property operating 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 (loss) before preferred
dividends and distributions and
minority interests ................. $ 26,272 $ 2,077 $ (7,723) $ 20,626
=========== ========= ========= ===========
Total assets ........................ $ 2,082,784 $ 194,898 $ 618,673 $ 2,896,355
=========== ========= ========= ===========
</TABLE>
The following table sets forth the components of the Company's revenues and
expenses and other related disclosures for the six months ended June 30, 2000
and 1999 (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------
JUNE 30, 2000
---------------------------------------------
CONSOLIDATED
CORE PORTFOLIO OTHER TOTALS
---------------- ------------- --------------
<S> <C> <C> <C>
REVENUES:
Base rents, tenant escalations and
reimbursements ...................... $ 211,672 $ 4,657 216,329
Equity in earnings of real estate
joint ventures and service
companies ........................... -- 3,187 3,187
Interest and other income ............ 664 22,933 23,597
--------- --------- -------
Total Revenues ....................... 212,336 30,777 243,113
--------- --------- -------
EXPENSES:
Property operating expenses .......... 73,297 1,226 74,523
Marketing, general and
administrative ...................... 10,029 3,192 13,221
Interest ............................. 18,595 29,421 48,016
Depreciation and amortization ........ 39,388 4,049 43,437
--------- --------- -------
Total Expenses ....................... 141,309 37,888 179,197
--------- --------- -------
Income (loss) before preferred
dividends and distributions and
minority interests .................. $ 71,027 $ (7,111) $ 63,916
========= ========= ========
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------------------
JUNE 30, 1999
--------------------------------------------------------
CONSOLIDATED
CORE PORTFOLIO RMI OTHER TOTALS
---------------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
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
Interest and other income ............ 213 2 9,830 10,045
--------- ------- ---------- ---------
Total Revenues ....................... 143,179 9,902 14,267 167,348
--------- ------- ---------- ---------
EXPENSES:
Property operating 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 (loss) before preferred
dividends and distributions and
minority interests .................. $ 48,925 $ 4,453 $ (12,977) $ 40,401
========= ======= ========== =========
</TABLE>
10. OTHER INVESTMENTS AND ADVANCES
During 1997, the Company formed FrontLine Capital Group ("FrontLine")
(formerly Reckson Service Industries, Inc.) and Reckson Strategic Venture
Partners, LLC ("RSVP"). In connection with the formation of FrontLine, the
Operating Partnership established a credit facility with FrontLine (the
"FrontLine Facility") in the amount of $100 million for FrontLine's e-commerce
and e-services
11
<PAGE>
operations and other general corporate purposes. As of June 30, 2000, the
Company had advanced approximately $92.7 million under the FrontLine 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
FrontLine under terms similar to the FrontLine Facility. As of June 30, 2000,
approximately $67.9 million had been invested through the RSVP Commitment, of
which $29.4 million represents RSVP-controlled joint venture REIT-qualified
investments and $38.5 million represents advances to FrontLine under the RSVP
Commitment. Both the FrontLine Facility and the RSVP Commitment have a term of
five years and advances under each are recourse obligations of FrontLine.
Interest accrues on advances made under the credit facilities at a rate equal
to the greater of (a) the prime rate plus two percent and (b) 12% per annum,
with the rate on amounts that are outstanding for more than one year increasing
annually at a rate of four percent of the prior year's rate. Prior to maturity,
interest is payable quarterly but only to the extent of net cash flow and on an
interest-only basis.
During November 1999, the Board of Directors of the Company approved an
amendment to the FrontLine Facility and the RSVP Commitment to permit FrontLine
to incur secured debt and to pay interest thereon and to issue preferred stock
and to pay dividends thereon. In consideration of the amendments, FrontLine paid
the Operating Partnership a fee of approximately $3.6 million in the form of
shares of FrontLine common stock. Such fee is being recognized in income over an
estimated nine month benefit period.
FrontLine identifies, acquires interests in and develops a network of
e-commerce and e-services companies that service small to medium sized
enterprises, independent professionals and entrepreneurs and the mobile
workforce of larger companies. FrontLine serves as the managing member of RSVP.
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.
12
<PAGE>
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
tri-state 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, 2000, the Company owned and operated 78 office properties comprising
approximately 13.7 million square feet, 105 industrial properties comprising
approximately 6.9 million square feet and two retail properties comprising
approximately 20,000 square feet, located in the Tri-State Area. The Company
also owns a 357,000 square foot office building located in Orlando, Florida and
approximately 346 acres of land in 16 separate parcels of which the Company can
develop approximately 1.9 million square feet of office space and approximately
350,000 square feet of industrial space. The Company also has invested
approximately $301.5 million in mortgage notes encumbering two Class A office
properties encompassing approximately 1.6 million square feet, approximately 403
acres of land located in New Jersey and approximately $17.1 million 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 FrontLine Capital Group ("FrontLine")
(formerly Reckson Service Industries, Inc.) and Reckson Strategic Venture
Partners, LLC ("RSVP"). In connection with the formation of FrontLine, the
Operating Partnership established a credit facility with FrontLine (the
"FrontLine Facility") in the amount of $100 million for FrontLine's e-commerce
and e-services operations and other general corporate purposes. As of June 30,
2000, the Company had advanced approximately $92.7 million under the FrontLine
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 FrontLine under terms similar to the FrontLine Facility. As of June 30,
2000, approximately $67.9 million had been invested through the RSVP Commitment,
of which $29.4 million represents RSVP-controlled joint venture REIT-qualified
investments and $38.5 million represents advances to FrontLine under the RSVP
Commitment. Both the FrontLine Facility and the RSVP Commitment have a term of
five years and
13
<PAGE>
advances under each are recourse obligations of FrontLine. Interest accrues on
advances made under the credit facilities at a rate equal to the greater of (a)
the prime rate plus two percent and (b) 12% per annum, with the rate on amounts
that are outstanding for more than one year increasing annually at a rate of
four percent of the prior year's rate. Prior to maturity, interest is payable
quarterly but only to the extent of net cash flow of FrontLine and on an
interest-only basis.
During November 1999, the Board of Directors of the Company approved an
amendment to the FrontLine Facility and the RSVP Commitment to permit FrontLine
to incur secured debt and to pay interest thereon and to issue preferred stock
and to pay dividends thereon. In consideration of the amendments, FrontLine paid
the Operating Partnership a fee of approximately $3.6 million in the form of
shares of FrontLine common stock. Such fee is being recognized in income over an
estimated nine month benefit period.
FrontLine identifies, acquires interests in and develops a network of
e-commerce and e-services companies that service small to medium sized
enterprises, independent professionals and entrepreneurs and the mobile
workforce of larger companies. FrontLine serves as the managing member of RSVP.
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 August 9, 1999, the Company executed a contract for the sale of its
interest in Reckson Morris Operating Partnership, L. P. ("RMI"), which consisted
of 28 properties, comprising approximately 6.1 million square feet and three
other big box industrial properties to Keystone Property Trust ("KTR"). In
addition, the Company also entered into a sale agreement with Matrix relating to
a first mortgage note and certain industrial land holdings (the "Matrix Sale").
The combined total sale price is $310 million ($41.6 million of which is payable
to, and of which $10.4 million of debt relief is attributable to the Morris
Companies and its affiliates) and consists of a combination of (i) cash, (ii)
convertible preferred and common stock of KTR, (iii) preferred units of KTR's
operating partnership, (iv) relief of debt and (v) a purchase money mortgage
note secured by certain land that is being sold to Matrix.
As of June 30, 2000, the Matrix Sale and the sale of the Company's interest
in RMI was completed for a combined sales price of approximately $258 million
(net of minority partner's interest). The combined consideration consisted of
approximately (i) $159.7 million in cash, (ii) $60 million of preferred stock
and operating partnership units of KTR, (iii) $1.5 million in common stock of
KTR, (iv) approximately $26.7 million of debt relief and (v) approximately $10.1
million in purchase money mortgages. As a result, the Company incurred a gain of
approximately $16.7 million of which approximately $6.7 million was recognized
during the three months ended June 30, 2000. Cash proceeds from the sales were
used primarily to repay borrowings under the Credit Facility. During July 2000,
the Company redeemed approximately $20 million of the preferred stock of KTR.
In July 1998, the Company formed a joint venture, Metropolitan Partners LLC
("Metropolitan"), with Crescent Real Estate Equities Company, a Texas REIT
("Crescent") for the purpose of acquiring Tower Realty Trust, Inc. ("Tower"). On
May 24, 1999 the Company completed the merger with Tower and acquired three
Class A office properties located in New York City totaling 1.6 million square
feet and one office property located on Long Island totaling approximately
101,000 square feet. In addition, pursuant to the merger, the Company also
acquired certain office properties, a property under development and land
located outside of the Tri-State Area. All of the assets acquired in the merger
located outside of the Tri-State Area, other than a 357,000 square foot office
property located in Orlando, Florida, have been sold.
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 (May 24, 1999 through May 24, 2001) and may be redeemed by
Metropolitan at any time during that period for $85 million, plus an amount
sufficient to provide a
14
<PAGE>
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 Class A common stock at a
conversion price of $24.61 per share.
The market capitalization of the Company at June 30, 2000 was approximately
$3.33 billion. The Company's market capitalization is based on the sum of (i)
the market value of the Company's Class A common stock and common units of
limited partnership interest in the Operating Partnership ("OP Units") (assuming
conversion) of $23.77 per share/unit (based on the closing price of the
Company's Class A common stock on June 30, 2000), (ii) the market value of the
Company's Class B common stock of $25.44 per share (based on the closing price
of the Company's Class B common stock on June 30, 2000), (iii) the liquidation
preference value of the Company's Series A preferred and Series B preferred
stock of $25 per share, (iv) the liquidation preference value of the Operating
Partnership's preferred units of $1,000 per unit, (v) the contributed value of
Metropolitan's preferred interest of $85 million and (vi) the approximately
$1.41 billion (including its share of joint venture debt and net of minority
partners' interests) of debt outstanding at June 30, 2000. As a result, the
Company's total debt to total market capitalization ratio at June 30, 2000
equaled approximately 42.3%.
RESULTS OF OPERATIONS
The Company's total revenues increased by $34.2 million or 37.5% for the
three months ended June 30, 2000 as compared to the 1999 period. Property
operating revenues, which include base rents and tenant escalations and
reimbursements ("Property Operating Revenues") increased by $23.3 million or
27.2% for the three months ended June 30, 2000 as compared to the 1999 period.
The increase in Property Operating Revenues is substantially attributable to the
Tower portfolio acquisition in May 1999, the acquisition of the first mortgage
note secured by 919 Third Avenue (which revenue was reflected in Property
Operating Revenues) in June 1999 and the acquisition of 1350 Avenue of the
Americas in January 2000. In addition, Property Operating Revenues were also
positively impacted by approximately $3.6 million from increases in occupancies
and rental rates in our "same store" properties. The Company's base rent
reflects the positive impact of the straight-line rent adjustment of $8.3
million for the three months ended June 30, 2000 as compared to $3.2 million for
the 1999 period. The remaining balance of the increase in total revenues is
attributable to the gain on sales of real estate, interest income and fees
relating to the FrontLine Facility and the RSVP Commitment and earnings
generated by RSVP-controlled joint venture REIT-qualified investments.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $8.8 million or 32.1% for the three months ended June
30, 2000 as compared to the 1999 period. These increases are primarily due to
the acquisition of the Tower portfolio in May 1999, the acquisition of the first
mortgage note secured by 919 Third Avenue in June 1999, (which operations were
reflected in Property Expenses) and the acquisition of 1350 Avenue of the
Americas in January 2000. 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 , 2000 and 1999 were 66.7% and
67.9% respectively. The decrease in gross operating margins is primarily
attributable to a larger proportionate share of gross operating margin derived
from office properties, which has a lower gross margin percentage, in 2000
compared to 1999. The higher proportionate share of the gross operating margins
is attributable to the office properties acquired during the period May 1999
through January 2000 and the disposition of net leased industrial properties in
September 1999 and April 2000. This shift in the composition of the portfolio
was offset by increases in rental rates and operating efficiencies realized.
Marketing, general and administrative expenses increased by $1.6 million
for the three months ended June 30, 2000 as compared to the 1999 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 5.3% for the three months ended June 30, 2000 as compared to
5.5% for the 1999 period.
15
<PAGE>
Interest expense increased by $5.3 million for the three months ended June
30, 2000 as compared to the 1999 period. The increase is due to secured
borrowings assumed in the Tower acquisition as well as new debt incurred with
the Tower and 1350 Avenue of the Americas acquisitions. Additionally, the
increase is due to an increase cost attributable to an increased balance on the
Company's credit facility and term loan. The weighted average balance
outstanding on the Company's credit facility and term loan was $464.1 million
for the three months ended June 30, 2000 as compared to $352.1 million for the
three months ended June 30, 1999.
The Company's total revenues increased by $75.8 million or 45.3% for the
six months ended June 30, 2000 as compared to the 1999 period. Property
Operating Revenues, which include base rents and tenant escalations and
reimbursements increased by $59.9 million or 38.3% for the six months ended June
30, 2000 as compared to the 1999 period. The increase in Property Operating
Revenues is substantially attributable to the Tower portfolio acquisition in May
1999, the acquisition of the first mortgage note secured by 919 Third Avenue
(which revenue was reflected in Property Operating Revenues) in June 1999 and
the acquisition of 1350 Avenue of the Americas in January 2000. In addition,
Property Operating Revenues were also positively impacted by approximately $5.4
million from increases in occupancies and rental rates in our "same store"
properties. The Company's base rent reflects the positive impact of the
straight-line rent adjustment of $12.8 million for the six months ended June 30,
2000 as compared to $4.6 million for the 1999 period. The remaining balance of
the increase in total revenues is attributable to the gain on sales of real
estate, interest income and fees relating to the FrontLine Facility and the RSVP
Commitment and earnings generated by RSVP-controlled joint venture
REIT-qualified investments.
Property Expenses increased by $24.1 million or 47.7% for the six months
ended June 30, 2000 as compared to the 1999 period. These increases are
primarily due to the acquisition of the Tower portfolio in May 1999, the
acquisition of the first mortgage note secured by 919 Third Avenue in June 1999,
(which operations were reflected in Property Expenses) and the acquisition of
1350 Avenue of the Americas in January 2000. Gross Operating Margins for the six
months ended June 30 , 2000 and 1999 were 65.6% and 67.8% respectively. The
decrease in gross operating margins is primarily attributable to a larger
proportionate share of gross operating margin derived from office properties,
which has a lower gross margin percentage, in 2000 compared to 1999. The higher
proportionate share of the gross operating margins is attributable to the office
properties acquired during the period May 1999 through January 2000 and the
disposition of net leased industrial properties in September 1999. This shift in
the composition of the portfolio was offset by increases in rental rates and
operating efficiencies realized.
Marketing, general and administrative expenses increased by $3.8 million
for the six months ended June 30, 2000 as compared to the 1999 period. The
increase is due to the increased costs of managing the acquisition properties
and the increase in corporate management and administrative costs associated
with the growth of the Company including the opening of its New York City
division. Marketing, general and administrative expenses as a percentage of
total revenues were 5.4% for the six months ended June 30, 2000 as compared to
5.6% for the 1999 period.
Interest expense increased by $15.2 million for the six months ended June
30, 2000 as compared to the 1999 period. The increase is primarily due to
secured borrowings assumed in the Tower acquisition as well as new debt incurred
with the Tower and 1350 Avenue of the Americas acquisitions. Additionally, the
increase is also due to $300 million of Senior Unsecured Notes issued on March
26, 1999 and an increased cost attributable to an increased average balance on
the Company's credit facility and term loan. The weighted average balance on the
Company's credit facility and term loan was $464.8 million for the six months
ended June 30, 2000 as compared to $429.0 million for the six months ended June
30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000 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 which matures in July, 2001. Interest rates on borrowings under the
Credit Facility are priced off of LIBOR plus 90 basis points.
16
<PAGE>
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, 2000, the
Company had availability under the Credit Facility to borrow an additional
$126.4 million (of which, $49.1 million has been reserved for outstanding
undrawn letters of credit).
As of June 30, 2000, the Company had an 18 month, $75 million unsecured
term loan (the "Term Loan") from Chase Manhattan Bank which matures during June,
2001. Interest rates on borrowings under the Term Loan are priced off of LIBOR
plus 150 basis points.
On May 24, 1999, the Company issued 11,694,567 shares of Class B
Exchangeable Common Stock, par value $.01 per share, of the Company (the "Class
B common stock"), which were valued for generally accepted accounting principles
("GAAP") purposes at $26 per share for total consideration of approximately
$304.1 million. The shares of Class B common stock were 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 Class A
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 Class A common stock at any time following the four year, six-month
anniversary of the issuance of the Class B common stock. On July 1, 2000, the
annual dividend on the Class B Common Stock was increased to $2.40 per share.
On June 20, 2000, the Company issued 4,181,818 shares of Class A common
stock in exchange for four million shares of Series B Convertible Cumulative
Preferred Stock with a liquidation preference value of $100 million.
The Board of Directors of the Company has authorized the purchase of up to
three million shares of the Company's Class B common stock. In addition, the
Board of Directors has also authorized the purchase of up to an additional three
million shares of the Company's Class B common stock and/or its Class A common
stock. The buy-back program will be effected in accordance with the safe harbor
provisions of the Securities Exchange Act of 1934 and may be terminated by the
Company at any time. As of June 30, 2000, the Company had purchased and retired
1,410,804 shares of Class B Common Stock for approximately $30.3 million.
The Company's indebtedness at June 30, 2000 totaled approximately $1.41
billion (including its share of joint venture debt and net of minority partners'
interests) and was comprised of $373.6 million outstanding under the Credit
Facility, $75 million outstanding under the Term Loan, approximately $449.3
million of senior unsecured notes and approximately $513.3 million of mortgage
indebtedness. Based on the Company's total market capitalization of
approximately $3.33 billion at June 30, 2000 (calculated based on the sum of (i)
the market value of the Company's Class A common stock and OP Units, assuming
conversion, (ii) the market value of the Company's Class B common stock, (iii)
the liquidation preference value of the Company's preferred stock, (iv) the
liquidation preference value of the Operating Partnership's preferred units, (v)
the contributed value of Metropolitan's preferred interest and (vi) the $1.41
billion of debt), the Company's debt represented approximately 42.3% 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 and equity securities
of the Company. In addition, the Company also believes that it will, from time
to time, generate funds from the sale of certain of its real estate properties
or interests therein. 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.
17
<PAGE>
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.
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 Facility 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.
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 principles
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 November 1999, NAREIT issued a "White Paper" analysis to address
certain interpretive issues under its definition of FFO. The White Paper
provides that FFO should include both recurring and non-recurring operating
results, except those results defined as "extraordinary items" under GAAP. This
revised definition is effective for all periods beginning on or after January 1,
2000.
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.
18
<PAGE>
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,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net income available to common shareholders ...................................... $ 22,971 $ 11,195
Add:
Real estate depreciation and amortization ....................................... 21,937 18,406
Minority partners' interests in consolidated partnerships ....................... 1,925 1,615
Limited partners' minority interest in the operating partnership ................ 3,083 1,827
Less:
Gain on sales of real estate .................................................... 6,662 --
Amounts distributable to minority partners' in consolidated partnerships ........ 2,136 1,980
-------- --------
Funds From Operations (FFO) -- basic ............................................. 41,118 31,063
Less:
Straight line rents ............................................................. 8,300 3,178
Non-Incremental capitalized tenant improvements and leasing commissions ......... 1,873 1,236
Non-Incremental capitalized improvements ........................................ 1,446 838
-------- --------
Cash available for distribution ("CAD") -- basic ................................. $ 29,499 $ 25,811
======== ========
Computation of diluted FFO and CAD:
Basic FFO ........................................................................ $ 41,118 $ 31,063
Add:
Dividends and distributions on dilutive shares and units ........................ 9,451 6,663
-------- --------
FFO -- diluted ................................................................... 50,569 37,726
Less:
Straight line rents, non incremental capitalized improvements, tenant
improvements and leasing commissions ........................................... 11,619 5,252
-------- --------
CAD -- diluted ................................................................... $ 38,950 $ 32,474
======== ========
Basic FFO and CAD calculations:
Weighted average shares outstanding ............................................. 51,627 45,168
Weighted average units of limited partnership interest outstanding .............. 7,695 7,705
-------- --------
Weighted average shares and units outstanding ................................... 59,322 52,873
======== ========
FFO per weighted average share or unit .......................................... $ .69 $ .59
======== ========
CAD per weighted average share or unit .......................................... $ .50 $ .49
======== ========
Weighted average dividends or distributions per share or unit ................... $ .42 $ .39
======== ========
FFO payout ratio ................................................................ 60.8% 66.2%
======== ========
CAD payout ratio ................................................................ 84.7% 79.6%
======== ========
Diluted FFO and CAD calculations:
Basic GAAP weighted average shares and units outstanding ........................ 59,322 52,873
Add GAAP weighted average dilutive securities ................................... 357 419
-------- --------
Dilutive GAAP weighted average shares and units ................................. 59,679 53,292
Adjustments for dilutive FFO and CAD weighted average shares and units:
Add:
Weighted average shares of Series A Preferred Stock ............................ 8,060 8,060
Weighted average shares of Series B Preferred Stock ............................ 5,294 1,835
Weighted average shares of minority partner's preferred interest ............... 3,454 1,443
Weighed average shares of preferred units of limited partnership interest . 1,367 1,367
-------- --------
Dilutive FFO and CAD weighted average shares and units outstanding ............... 77,854 65,997
======== ========
FFO per weighted average share or unit ........................................... $ .65 $ .57
======== ========
CAD per weighted average share or unit ........................................... $ .50 $ .49
======== ========
Weighted average dividends or distributions per share or unit .................... $ .41 $ .39
======== ========
FFO payout ratio ................................................................. 63.6% 67.4%
======== ========
CAD payout ratio ................................................................. 82.5% 78.3%
======== ========
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net income available to common shareholders ...................................... $ 38,814 $ 22,519
Add:
Real estate depreciation and amortization ....................................... 42,552 33,094
Minority partners' interests in consolidated partnerships ....................... 3,899 2,783
Limited partners' minority interest in the operating partnership ................ 5,361 4,068
Less:
Gain on sales of real estate .................................................... 6,662 --
Amounts distributable to minority partners' in consolidated partnerships ........ 4,517 3,424
-------- --------
Funds From Operations (FFO) -- basic ............................................. 79,447 59,040
Less:
Straight line rents ............................................................. 12,838 4,514
Non-Incremental capitalized tenant improvements and leasing commissions ......... 4,743 2,055
Non-Incremental capitalized improvements ........................................ 2,697 1,479
-------- --------
Cash available for distribution ("CAD") -- basic ................................. $ 59,169 $ 50,992
======== ========
Computation of diluted FFO and CAD:
Basic FFO ........................................................................ $ 79,447 $ 59,040
Add:
Dividends and distributions on dilutive shares and units ........................ 19,029 11,704
-------- --------
FFO -- diluted ................................................................... 98,476 70,744
Less:
Straight line rents, non incremental capitalized improvements, tenant
improvements and leasing commissions ........................................... 20,278 8,048
-------- --------
CAD -- diluted ................................................................... $ 78,198 $ 62,696
======== ========
Basic FFO and CAD calculations:
Weighted average shares outstanding ............................................. 51,146 42,623
Weighted average units of limited partnership interest outstanding .............. 7,697 7,707
-------- --------
Weighted average shares and units outstanding ................................... 58,843 50,330
======== ========
FFO per weighted average share or unit .......................................... $ 1.35 $ 1.17
======== ========
CAD per weighted average share or unit .......................................... $ 1.01 $ 1.01
======== ========
Weighted average dividends or distributions per share or unit ................... $ .83 $ .73
======== ========
FFO payout ratio ................................................................ 61.2% 62.1%
======== ========
CAD payout ratio ................................................................ 82.1% 71.9%
======== ========
Diluted FFO and CAD calculations:
Basic GAAP weighted average shares and units outstanding ........................ 58,843 50,330
Add GAAP weighted average dilutive securities ................................... 342 411
-------- --------
Dilutive GAAP weighted average shares and units ................................. 59,185 50,741
Adjustments for dilutive FFO and CAD weighted average shares and units:
Add:
Weighted average shares of Series A Preferred Stock ............................ 8,060 8,060
Weighted average shares of Series B Preferred Stock ............................ 5,526 923
Weighted average shares of minority partner's preferred interest ............... 3,454 724
Weighed average shares of preferred units of limited partnership interest . 1,367 1,367
-------- --------
Dilutive FFO and CAD weighted average shares and units outstanding ............... 77,592 61,815
======== ========
FFO per weighted average share or unit ........................................... $ 1.27 $ 1.14
======== ========
CAD per weighted average share or unit ........................................... $ 1.01 $ 1.01
======== ========
Weighted average dividends or distributions per share or unit .................... $ .81 $ .73
======== ========
FFO payout ratio ................................................................. 63.8% 63.4%
======== ========
CAD payout ratio ................................................................. 80.3% 71.5%
======== ========
</TABLE>
19
<PAGE>
SUPPLEMENTAL INFORMATION ON CAPITAL EXPENDITURES, TENANT
IMPROVEMENTS 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, 2000 and the historical average of such non-incremental
capital expenditures, tenant improvements and leasing commissions for the years
1996 through 1999.
NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
SIX MONTHS
1998-1999 ENDED
1996 1997 1998 1999 AVERAGE JUNE 30, 2000
------------- --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
SUBURBAN OFFICE PROPERTIES
Total ................... $ 375,026 $ 1,108,675 $ 2,004,976 $ 2,298,899 $ 1,446,894 $ 1,698,839
Per Square Foot ......... 0.13 0.22 0.23 0.23 0.20 0.17
CBD OFFICE PROPERTIES
Total ................... N/A N/A N/A N/A N/A $ 746,275
Per Square Foot ......... N/A N/A N/A N/A N/A 0.35
INDUSTRIAL PROPERTIES
Total ................... $ 670,751 $ 733,233 $ 1,205,266 $ 1,048,688 $ 914,485 $ 431,699
Per Square Foot ......... 0.18 0.15 0.12 0.11 0.14 0.05
</TABLE>
NON-INCREMENTAL REVENUE GENERATING TENANT IMPROVEMENTS AND LEASING COMMISSIONS
<TABLE>
<CAPTION>
SIX MONTHS
1998-1999 ENDED
1996 1997 1998 1999 AVERAGE JUNE 30, 2000
------------- -------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
LONG ISLAND OFFICE PROPERTIES
Tenant Improvements .............. $ 523,574 $ 784,044 $ 1,140,251 $ 1,009,357 $ 864,307 $ 778,333
Per Square Foot Improved ......... 4.28 7.00 3.98 4.73 5.00 5.06
Leasing Commissions .............. $ 119,047 $ 415,822 $ 418,191 $ 551,762 $ 376,206 $ 936,595
Per Square Foot Leased ........... 0.97 4.83 1.46 2.59 2.46 4.92
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ $ 5.25 $ 11.83 $ 5.44 $ 7.32 $ 7.46 $ 9.98
========= ========== =========== =========== ========== =========
WESTCHESTER OFFICE PROPERTIES
Tenant Improvements .............. $ 834,764 $1,211,665 $ 711,160 $ 1,316,611 $1,018,550 $ 712,852
Per Square Foot Improved ......... 6.33 8.90 4.45 5.62 6.33 7.33
Leasing Commissions .............. $ 264,388 $ 366,257 $ 286,150 $ 457,730 $ 343,631 $ 131,402
Per Square Foot Leased ........... 2.00 2.69 1.79 1.96 2.11 3.00
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ $ 8.33 $ 11.59 $ 6.24 $ 7.58 $ 8.44 $ 10.33
========= ========== =========== =========== ========== =========
CONNECTICUT OFFICE PROPERTIES (A)
Tenant Improvements .............. $ 58,000 $1,022,421 $ 202,880 $ 179,043 $ 449,952 $ 230,365
Per Square Foot Improved ......... 12.45 13.39 5.92 4.88 9.16 5.44
Leasing Commissions .............. $ 0 $ 256,615 $ 151,063 $ 110,252 $ 159,363 $ 113,263
Per Square Foot Leased ........... 0.00 3.36 4.41 3.00 2.69 2.67
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ $ 12.45 $ 16.75 $ 10.33 $ 7.88 $ 11.85 $ 8.11
========= ========== =========== =========== ========== =========
NEW JERSEY OFFICE PROPERTIES
Tenant Improvements .............. N/A N/A $ 654,877 $ 454,054 $ 554,466 $ 914,789
Per Square Foot Improved ......... N/A N/A 3.78 2.29 3.04 7.03
Leasing Commissions .............. N/A N/A $ 396,127 $ 787,065 $ 591,596 $ 739,594
Per Square Foot Leased ........... N/A N/A 2.08 3.96 3.02 5.83
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ N/A N/A $ 5.86 $ 6.25 $ 6.06 $ 12.86
========= ========== =========== =========== ========== =========
NEW YORK OFFICE PROPERTIES
Tenant Improvements .............. N/A N/A N/A N/A N/A $ 11,977
Per Square Foot Improved ......... N/A N/A N/A N/A N/A 1.18
Leasing Commissions .............. N/A N/A N/A N/A N/A $ 21,031
Per Square Foot Leased ........... N/A N/A N/A N/A N/A 2.07
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ N/A N/A N/A N/A N/A $ 3.25
========= ========== =========== =========== ========== =========
INDUSTRIAL PROPERTIES
Tenant Improvements .............. $ 380,334 $ 230,466 $ 283,842 $ 375,646 $ 317,572 $ 263,746
Per Square Foot Improved ......... 0.72 0.55 0.76 0.25 0.57 0.50
Leasing Commissions .............. $ 436,213 $ 81,013 $ 200,154 $ 835,108 $ 388,122 $ 115,590
Per Square Foot Leased ........... 0.82 0.19 0.44 0.56 0.50 0.22
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ $ 1.54 $ 0.74 $ 1.20 $ 0.81 $ 1.07 $ 0.72
========= ========== =========== =========== ========== =========
</TABLE>
----------
(A) 1996 -- 1999 average weighted to reflect October 1996 acquisition date
20
<PAGE>
LEASE EXPIRATIONS
The following table sets forth scheduled lease expirations for executed
leases as of June 30, 2000:
LONG ISLAND OFFICE PROPERTIES (EXCLUDING OMNI):
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 21 57,738 1.9% $ 20.43 $ 22.65
2001 ........................ 42 193,716 6.3% $ 22.44 $ 24.45
2002 ........................ 35 287,016 9.3% $ 21.86 $ 24.21
2003 ........................ 50 310,620 10.1% $ 22.17 $ 25.08
2004 ........................ 45 275,654 9.0% $ 23.04 $ 25.73
2005 ........................ 56 557,431 18.2% $ 22.87 $ 25.16
2006 AND THEREAFTER ......... 78 1,389,520 45.2% -- --
-- --------- -----
TOTAL ....................... 327 3,071,695 100.0%
=== ========= =====
</TABLE>
OMNI:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ -- -- -- -- --
2001 ........................ 4 32,680 5.8% $ 27.39 $ 32.92
2002 ........................ 4 129,351 22.8% $ 30.00 $ 38.62
2003 ........................ 6 81,809 14.4% $ 29.60 $ 33.87
2004 ........................ 4 112,414 19.8% $ 26.05 $ 33.44
2005 ........................ 6 59,115 10.4% $ 27.91 $ 34.38
2006 AND THEREAFTER ......... 6 152,411 26.8% -- --
-- ------- -----
TOTAL ....................... 30 567,780 100.0%
== ======= =====
</TABLE>
INDUSTRIAL PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 18 276,554 5.6% $ 5.43 $ 6.10
2001 ........................ 30 624,759 12.6% $ 5.79 $ 7.00
2002 ........................ 26 240,344 4.8% $ 6.43 $ 7.19
2003 ........................ 29 728,234 14.6% $ 5.29 $ 6.10
2004 ........................ 34 634,085 12.8% $ 6.40 $ 7.07
2005 ........................ 15 368,464 7.4% $ 5.65 $ 7.91
2006 AND THEREAFTER ......... 44 2,097,360 42.2% -- --
-- --------- -----
TOTAL ....................... 196 4,969,800 100.0%
=== ========= =====
</TABLE>
21
<PAGE>
LEASE EXPIRATIONS -- (CONTINUED)
RESEARCH AND DEVELOPMENT PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 3 22,501 1.8% $ 12.49 $ 11.06
2001 ........................ 7 96,120 7.5% $ 11.61 $ 13.21
2002 ........................ 3 118,620 9.3% $ 10.19 $ 11.80
2003 ........................ 6 301,064 23.5% $ 5.72 $ 6.71
2004 ........................ 10 129,218 10.1% $ 11.98 $ 13.43
2005 ........................ 3 293,704 23.0% $ 8.08 $ 8.86
2006 AND THEREAFTER ......... 13 317,457 24.8% -- --
-- ------- -----
TOTAL ....................... 45 1,278,684 100.0%
== ========= =====
</TABLE>
WESTCHESTER OFFICE PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 22 118,125 3.9% $ 20.53 $ 21.07
2001 ........................ 38 253,217 8.3% $ 20.79 $ 21.07
2002 ........................ 48 459,216 15.1% $ 20.12 $ 20.37
2003 ........................ 42 259,105 8.5% $ 21.90 $ 23.14
2004 ........................ 26 164,609 5.4% $ 21.27 $ 22.01
2005 ........................ 29 302,342 9.9% $ 22.52 $ 23.57
2006 AND THEREAFTER ......... 40 1,483,874 48.9% -- --
-- --------- -----
TOTAL ....................... 245 3,040,488 100.0%
=== ========= =====
</TABLE>
STAMFORD OFFICE PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 18 83,909 8.0% $ 21.52 $ 22.39
2001 ........................ 23 112,738 10.7% $ 24.46 $ 24.16
2002 ........................ 19 100,029 9.5% $ 27.15 $ 28.31
2003 ........................ 13 94,448 9.0% $ 31.61 $ 32.41
2004 ........................ 21 224,424 21.3% $ 22.85 $ 23.71
2005 ........................ 12 80,132 7.6% $ 26.79 $ 29.02
2006 AND THEREAFTER ......... 19 357,199 33.9% -- --
-- ------- -----
TOTAL ....................... 125 1,052,879 100.0%
=== ========= =====
</TABLE>
22
<PAGE>
LEASE EXPIRATIONS -- (CONTINUED)
NEW JERSEY OFFICE PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 7 29,478 1.5% $ 17.20 $ 17.68
2001 ........................ 21 247,144 12.8% $ 17.68 $ 17.95
2002 ........................ 21 180,187 9.4% $ 19.92 $ 20.41
2003 ........................ 21 337,598 17.5% $ 20.02 $ 20.21
2004 ........................ 35 248,891 12.9% $ 22.69 $ 23.13
2005 ........................ 28 343,777 17.9% $ 22.47 $ 23.12
2006 AND THEREAFTER ......... 17 539,228 28.0% -- --
-- ------- -----
TOTAL ....................... 150 1,926,303 100.0%
=== ========= =====
</TABLE>
NEW YORK CITY OFFICE
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 8 85,054 2.6% $ 30.12 $ 31.68
2001 ........................ 21 172,930 5.3% $ 37.24 $ 35.12
2002 ........................ 18 184,130 5.6% $ 31.98 $ 32.83
2003 ........................ 7 115,726 3.5% $ 31.89 $ 32.34
2004 ........................ 18 215,648 6.6% $ 35.83 $ 36.97
2005 ........................ 30 437,437 13.3% $ 34.63 $ 35.94
2006 AND THEREAFTER ......... 110 2,072,808 63.1% -- --
--- --------- -----
TOTAL ....................... 212 3,283,733 100.0%
=== ========= =====
</TABLE>
(1) Per square foot rental rate represents annualized straight line rent as of
the lease expiration date.
(2) Per square foot rental rate represents annualized base rent as of the lease
expiration date plus non-recoverableoperating expense pass-throughs.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing the Company is interest rate risk on its
long term debt, mortgage notes and notes receivable. The Company does not hedge
interest rate risk using financial instruments nor is the Company subject to
foreign currency risk.
The Company manages its exposure to interest rate risk on its variable rate
indebtedness by borrowing on a short-term basis under its Credit Facility or
Term Loan until such time as it is able to retire the short-term variable rate
debt with a long-term fixed rate debt offering or an equity offering through
accessing the capital markets on terms that are advantageous to the Company.
The following table sets forth the Company's long term debt obligations by
scheduled principal cash flow payments and maturity date, weighted average
interest rates and estimated fair market value ("FMV" ) at June 30, 2000
(dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 2001 2002 2003 2004
------------ ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Long term debt:
Fixed rate ..................... $ 11,577 $ 23,048 $ 16,820 $ 8,698 $ 112,146
Weighted average interest rate . 7.49% 7.59% 7.80% 7.78% 7.50%
Variable rate .................. $ -- $518,600 $ -- $ -- $ --
Weighted average interest rate . -- 7.62% -- -- --
<CAPTION>
THEREAFTER TOTAL(1) FMV
-------------- -------------- ------------
<S> <C> <C> <C>
Long term debt:
Fixed rate ..................... $ 735,177 $ 907,466 $ 907,466
Weighted average interest rate . 7.56% 7.56%
Variable rate .................. $ -- $ 518,600 $ 518,600
Weighted average interest rate . -- 7.62%
</TABLE>
----------------
(1) Includes unamortized issuance discounts of $652,000 on the 5 and 10 year
senior unsecured notes issued on March 26, 1999 which are due at maturity.
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 $5.2 million annual increase in interest
expense based on approximately $518.6 million outstanding at June 30, 2000.
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, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL (2) FMV
------------- ---------- ----------- ------ ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage notes and Notes
receivable:
Fixed rate ..................... $ 283,116 $ 15 $ 9,361 $ -- $ 36,500 $ 16,990 $ 345,982 $345,982
Weighted average Interest rate . 9.42% 9.00% 10.31% -- 10.23% 11.65% 9.64%
</TABLE>
The fair value of the Company's long term debt, mortgage notes and notes
receivable is estimated based on discounting future cash flows at interest rates
that management believes reflects the risks associated with long term debt,
mortgage notes and notes receivable of similar risk and duration.
----------------
(2) Excludes mortgage note receivable acquisition costs and interest
receivables aggregating approximately $10.7 million.
24
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities and use of proceeds
On June 20, 2000, the Company issued 4,181,818 shares of Class A common stock
in exchange for four million shares of Series B Convertible Cumulative
Preferred Stock with a liquidation preference value of $100 million. In
connection with this transaction the Company granted registration rights with
respect to the Class A common stock. This transaction was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Securities Holders
On May 18, 2000 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 three nominees as class II directors to serve until the 2003 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 three nominees were elected and the auditors were ratified. The
results of the voting are set forth below:
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS VOTES CAST FOR VOTES CAST AGAINST
-------------------------------- ---------------- -------------------
<S> <C> <C>
Donald J. Rechler 38,062,442 --
Mitchell D. Rechler 38,062,442 --
Leonard Feinstein 38,062,442 --
RATIFICATION OF AUDITORS 37,902,465 20,126
--------------------------------
</TABLE>
Item 5. Other information -- None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER
-----------
<S> <C>
10.1 Registration rights agreement, dated June 16, 2000,
between Reckson Associates Realty Corp. and
Stichting Pensioenfonds ABP
27.0 Financial Data Schedule
</TABLE>
b) During the three months ended June 30, 2000, the Registrant did not file
any reports on Form 8-K.
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.
<TABLE>
<S> <C>
By: \s\ Scott H. Rechler \s\ Michael Maturo
---------------------------------- -----------------------------------
Scott H. Rechler, Co-Chief Executive Officer Michael Maturo, Executive Vice President,
and President Treasurer and Chief Financial Officer
</TABLE>
DATE: August 9, 2000
25
