UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number: 1-13762
RECKSON OPERATING PARTNERSHIP, L.P.
(Exact name of registrant as specified in its charter)
Delaware 11-3233647
- -------- ----------
(State other jurisdiction of (IRS. Employer
incorporation of organization) Identification Number)
225 Broadhollow Road, Melville, NY 11747
- ---------------------------------- -----
(Address of principal executive office) (zip code)
(516) 694-6900
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
INDEX PAGE
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of September
30, 1999 (unaudited) and December 31, 1998
Consolidated Statements of Income for the
three and six months ended September 30, 1999
and 1998 (unaudited)
Consolidated Statements of Cash Flows for
the six months ended September 30, 1999 and
1998 (unaudited)
Notes to the Consolidated Financial
Statements (unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and use of proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on form 8-K
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Reckson Operating Partnership, L.P.
Consolidated Balance Sheets
(Dollars in thousands, except for share amounts)
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Commercial real estate properties, at cost
Land $ 264,326 $ 212,540
Buildings and improvements 1,764,826 1,372,549
Developments in progress:
Land 61,487 69,143
Development costs 78,955 82,901
Furniture, fixtures and equipment 6,378 6,090
-------------- --------------
2,175,972 1,743,223
Less accumulated depreciation (202,212) (159,049)
-------------- --------------
1,973,760 1,584,174
Investments in real estate joint ventures 27,774 15,104
Investment in mortgage notes and notes receivable 349,690 99,268
Cash and cash equivalents 38,928 2,228
Tenant receivables 3,260 5,159
Investments in and advances to affiliates 161,602 53,154
Deferred rent receivable 23,804 22,526
Prepaid expenses and other assets 62,493 46,372
Contract and land deposits and pre-acquisition costs 2,847 2,253
Deferred lease and loan costs 36,866 24,282
-------------- --------------
Total Assets $ 2,681,024 $ 1,854,520
============== ==============
Liabilities
Mortgage notes payable $ 460,725 $ 253,463
Unsecured credit facilities 253,600 465,850
Unsecured term loan 75,000 20,000
Senior unsecured notes 449,296 150,000
Accrued expenses and other liabilities 53,758 50,779
Distributions payable 27,241 19,663
-------------- --------------
Total Liabilities 1,319,620 959,755
-------------- --------------
Commitments and other comments --- ---
Minority interests' in consolidated partnerships 92,718 52,173
-------------- --------------
PARTNERS' CAPITAL
Preferred Capital, 15,234,518 and 9,234,518 units
outstanding, respectively 413,065 263,126
General Partner's Capital:
Common units, 40,369,506 and 40,035,419 units
outstanding, respectively 480,627 485,341
Class B Common Units, 10,913,763 and 0 units
outstanding , respectively 283,477 ---
Limited Partners' Capital, 7,701,542 and 7,764,630
units outstanding, respectively 91,517 94,125
-------------- --------------
Total Partners' Capital 1,268,686 842,592
-------------- --------------
Total Liabilities and Partners' Capital $ 2,681,024 $ 1,854,520
============== ==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Reckson Operating Partnership, L.P.
Consolidated Statements of Income
(Unaudited and in thousands, except per share and share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Base rents $ 95,474 $ 60,275 $ 234,759 $ 162,846
Tenant escalations and reimbursements 15,395 7,663 32,524 20,776
Equity in earnings of real estate joint ventures
and service companies 483 536 1,372 1,201
Interest income on mortgage notes and notes
receivable 909 2,083 5,627 5,536
Gain on sales of real estate 10,052 --- 10,052 ---
Other 3,418 1,038 8,350 2,565
--------------- --------------- --------------- ---------------
Total Revenues 125,731 71,595 292,684 192,924
--------------- --------------- --------------- ---------------
Expenses:
Property operating expenses 40,679 22,202 91,125 61,774
Marketing, general and administrative 6,312 4,170 14,936 11,116
Interest 21,163 13,040 54,009 34,537
Depreciation and amortization 21,868 14,835 56,086 38,098
--------------- --------------- --------------- ---------------
Total Expenses 90,022 54,247 216,156 145,525
--------------- --------------- --------------- ---------------
Income before distributions to preferred unit holders,
minority interests' and extraordinary items 35,709 17,348 76,528 47,399
Preferred unit distributions (7,985) (5,034) (19,016) (9,202)
Minority partners' interest in consolidated
partnerships income (2,150) (665) (4,933) (1,938)
--------------- --------------- --------------- ---------------
Income before extraordinary items 25,574 11,649 52,579 36,259
Extraordinary items - (loss) on extinguishment
of debts (629) (1,993) (629) (1,993)
--------------- --------------- --------------- ---------------
Net income available to common unit holders $ 24,945 $ 9,656 $ 51,950 $ 34,266
=============== =============== =============== ===============
Net Income available to:
General Partner - common units $ 15,409 $ 8,770 $ 36,599 $ 28,627
General Partner - Class B Common Units 6,596 --- 8,343 ---
Limited Partners' 2,940 886 7,008 5,639
--------------- --------------- --------------- ---------------
Total $ 24,945 $ 9,656 $ 51,950 $ 34,266
=============== =============== =============== ===============
Net income per weighted average units:
General Partner - per common unit before
extraordinary items $ 0.39 $ 0.26 $ 0.92 $ 0.77
Extraordinary loss per general partnership common
unit (0.01) (0.04) (0.01) (0.04)
--------------- --------------- --------------- ---------------
Net income per weighted average general partnership
common unit $ 0.38 $ 0.22 $ 0.91 $ 0.73
=============== =============== =============== ===============
General Partner - per Class B Common Unit before
extraordinary items $ 0.59 $ --- $ 1.55 $ ---
Extraordinary loss per Class B general partnership
unit (0.01) --- (0.03) ---
--------------- --------------- --------------- ---------------
Net income per weighted average Class B general
partnership unit $ 0.58 $ --- $ 1.52 $ ---
=============== =============== =============== ===============
Limited Partners' - per common unit before
extraordinary items $ 0.39 $ 0.16 $ 0.92 $ 0.77
Extraordinary loss per limited partnership unit (0.01) (0.05) (0.01) (0.04)
--------------- --------------- --------------- ---------------
Net income per weighted average limited partnership
unit $ 0.38 $ 0.11 $ 0.91 $ 0.73
=============== =============== =============== ===============
Weighted average common units outstanding:
General Partner - common units 40,367,000 40,012,000 40,235,000 39,284,000
General Partner - Class B Common Units 11,457,000 --- 5,489,000 ---
Limited Partners' 7,702,000 7,741,000 7,706,000 7,715,000
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Reckson Operating Partnership, L.P.
Consolidated Statements of Cash Flows)
(Unaudited and in thousands)
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income available to common unitholders $ 51,950 $ 34,266
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56,086 38,098
Extraordinary loss on extinguishment of debt 629 1,993
Minority partners' interests in consolidated
partnerships 4,933 1,938
Gain of sale of interest in Reckson Executive
Centers, LLC --- (9)
Gain on sales of real estate, securities and
mortgage redemption (10,052) (43)
Distribution from a real estate joint venture 337 379
Equity in earnings of real estate joint ventures
and service companies (1,372) (1,201)
Changes in operating assets and liabilities:
Prepaid expenses and other assets (13,453) 4,984
Tenant receivables 1,899 249
Deferred rents receivable (3,473) (6,950)
Real estate tax escrow (2,405) 236
Accrued expenses and other liabilities 21,099 12,970
------------ ------------
Net cash provided by operating activities 106,178 86,910
------------ ------------
Cash Flows from Investing Activities:
Purchases of commercial real estate properties (265,400) (466,959)
Increase in deposits and pre-acquisition costs (3,485) (245)
Investment in mortgage notes and notes
receivable (295,048) 12,257
Additions to commercial real estate properties (21,612) (15,507)
Increase in developments in progress (8,198) (89,648)
Payment of leasing costs (11,851) (6,254)
Additions to furniture, fixtures and equipment (396) (1,649)
Investments in real estate joint ventures (11,875) (7,760)
Proceeds from sales of real estate, securities
and mortgage redemption 269,324 809
------------ ------------
Net cash used in investing activities (348,541) (574,956)
------------ ------------
Cash Flows from Financing Activities:
Principal payments on secured borrowings (3,163) (4,006)
Proceeds from issuance of senior unsecured
notes net of issuance costs 299,262 ---
Payment of loan costs (7,113) (3,557)
Investments in and advances to affiliates (108,476) (32,218)
Proceeds from secured borrowings 125,547 ---
Proceeds from unsecured credit facilities 353,500 345,000
Principal payments on unsecured credit
facilities (510,750) (112,000)
Repurchase of Class B Common Units (17,389) ---
Contributions of minority partners' in
consolidated partnerships 75,000 ---
Contributions 149,397 314,430
Distributions (72,179) (36,484)
Distributions to minority partners' in
consolidated partnerships (4,573) (1,847)
------------ ------------
Net cash provided by financing activities 279,063 469,318
------------ ------------
Net increase (decrease) in cash and cash equivalents 36,700 (18,728)
Cash and cash equivalents at beginning of period 2,228 21,676
------------ ------------
Cash and cash equivalents at end of period $ 38,928 $ 2,948
============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(unaudited)
1. Organization and Formation of the Operating Partnership
Reckson Operating Partnership, L. P. (The "Operating Partnership")
commenced operations on June 2, 1995. The sole general partner in the Operating
Partnership, Reckson Associates Realty Corp. (the "Company") is a self
administered and self managed Real Estate Investment Trust ("REIT").
The Operating Partnership executed various option and purchase agreements
whereby it issued units in the Operating Partnership ("Units") to the continuing
investors and assumed certain indebtedness in exchange for interests in certain
property partnerships, fee simple and leasehold interests in properties and
development land, certain business assets of the executive center entities and
100% of the non-voting preferred stock of the management and construction
companies.
As of September 30, 1999, the Operating Partnership owned and operated 77
office properties comprising approximately 13.1 million square feet, 109
industrial properties comprising approximately 8.0 million square feet and two
retail properties comprising approximately 20,000 square feet, located in the
New York Tri-State area (the "Tri-State Area"). The Operating Partnership also
owns and operates a 357,000 square foot office building located in Orlando
Florida. In addition, the Operating Partnership owned or had contracted to
acquire approximately 377 acres of land in 16 separate parcels of which the
Operating Partnership can develop approximately 2.8 million square feet of
industrial and office space. The Operating Partnership also has invested
approximately $312.9 million in mortgage notes encumbering three Class A office
properties encompassing approximately 1.6 million square feet, approximately 472
acres of land located in New Jersey and in a note receivable secured by a
partnership interest in Omni Partner's, L.P., owner of the Omni, a 575,000
square foot Class A office property located in Uniondale, New York.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI")
and Reckson Strategic Venture Partners, LLC ("RSVP"). On June 11, 1998, the
Operating Partnership distributed its 95% common stock interest in RSI of
approximately $3 million to its owners, including the Company which, in turn,
distributed the common stock of RSI to its stockholders. Additionally, during
June 1998, the Operating Partnership established a credit facility with RSI
(the"RSI Facility") in the amount of $100 million for RSI's service sector
operations and other general corporate purposes. As of September 30, 1999, the
Operating Partnership had advanced $83.6 million under the RSI Facility all of
which is outstanding. In addition, the Operating Partnership approved the
funding of investments of up to $100 million with or in RSVP (the "RSVP
Commitment"), through RSVP-controlled joint venture REIT-qualified investments
or advances made to RSI under terms similar to the RSI Facility. As of September
30, 1999, approximately $54.8 million had been invested through the RSVP
Commitment, of which $21.8 million represents RSVP controlled joint venture
REIT-qualified investments and $33.0 million represents advances to RSI under
the RSVP Commitment. RSI serves as the managing member of RSVP. RSI invests in
operating companies that generally provide commercial services to the RSI
customer base which includes the tenants of RSI's executive suite business and
to properties owned by the Operating Partnership and its tenants and third
parties nationwide. RSVP was formed to provide the Company with a research and
development vehicle to invest in alternative real estate sectors. RSVP invests
primarily in real estate and real estate related operating companies generally
outside of the Company's core office and industrial focus. RSVP's strategy is to
identify and acquire interests in established entrepreneurial enterprises with
experienced management teams in market sectors which are in the early stages of
their growth cycle or offer unique circumstances for attractive investments as
well as a platform for future growth.
On January 6, 1998, the Operating Partnership made its initial investment
in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse
facilities. In connection with the transaction the Morris Companies contributed
100% of their interests in certain industrial properties to Reckson Morris
Operating Partnership, L. P. ("RMI") in exchange for operating partnership units
in RMI. The Operating Partnership has agreed to invest up to $150 million in
RMI. On September 27, 1999, the Operating Partnership sold its interest in RMI
to Keystone Property Trust ("KTR") (formerly American Real Estate Investment
Corporation) (see note 6).
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Tower Realty Trust, Inc.
("Tower"). On May 24, 1999 the Company completed the merger with Tower and
acquired three Class A office properties located in New York City totaling 1.6
million square feet and one office property located on Long Island totaling
approximately 101,000 square feet. In addition, pursuant to the merger, the
Company also acquired certain office properties, a property under development
and land located outside of the Tri-State Area. All of the assets acquired in
the merger, other than a 357,000 square foot office property located in Orlando,
Florida, have been sold (see note 6).
Basis of Presentation
The accompanying consolidated financial statements include the consolidated
financial position of the Operating Partnership and its subsidiaries at
September 30, 1999 and December 31, 1998 and the results of its operations for
the three and nine months ended September 30, 1999 and 1998, respectively, and,
its cash flows for the nine months ended September 30, 1999 and 1998,
respectively. The Operating Partnership's investments in Metropolitan and Omni
Partners, L. P. ("Omni"), are reflected in the accompanying financial statements
on a consolidated basis with a reduction for minority partners' interest. The
Operating Partnership's investment in RMI was reflected in the accompanying
financial statements on a consolidated basis with a reduction for minority
partner's interest through September 26, 1999. On September 27, 1999, the
Operating Partnership sold its interest in RMI to KTR (see note 6). The
operating results of the service businesses currently conducted by Reckson
Management Group, Inc., and Reckson Construction Group, Inc., are reflected in
the accompanying financial statements on the equity method of accounting. The
Operating Partnership also invests in real estate joint ventures where it may
own less than a controlling interest, such investments are also reflected in the
accompanying financial statements on the equity method of accounting. All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements
The merger with Tower (see note 6) was accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16. Accordingly, the
fair value of the consideration given by the Operating Partnership, in
accordance with generally accepted accounting principles ("GAAP"), was used as
the valuation basis for the merger. The assets acquired and liabilities assumed
by the Operating Partnership were recorded at the fair value as of the closing
date of the merger and the excess of the purchase price over the historical
basis of the net assets acquired was allocated primarily to operating real
estate properties and real estate properties which have been sold.
The minority interests at September 30, 1999 represent an approximate 28%
interest in certain industrial joint venture properties formerly owned by RMI, a
convertible preferred interest in Metropolitan and a 40% interest in Omni.
The accompanying interim unaudited financial statements have been prepared
by the Operating Partnership's management pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosure normally included in the financial statements prepared in
accordance with GAAP may have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures are adequate
to make the information presented not misleading. The unaudited financial
statements as of September 30, 1999 and for the nine month periods ended
September 30, 1999 and 1998 include, in the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial information set forth herein. The results of operations for
the interim periods are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. These financial statements
should be read in conjunction with the Operating Partnership's audited financial
statements and notes thereto for the year ended December 31, 1998 included in
the Operating Partnership's Form S-3 filed on March 11, 1999 with the SEC.
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 Operating Partnership
expects to adopt the new Statement effective January 1, 2001. The Operating
Partnership does not anticipate that the adoption of this Statement will have
any effect on its results of operations or financial position.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Mortgage Notes Payable
As of September 30, 1999, the Operating Partnership had approximately
$460.7 million of fixed rate mortgage notes which mature at various times
between June 2000 and November 2027. The notes are secured by 23 properties and
have a weighted average interest rate of approximately 7.6%.
3. Senior Unsecured Notes
As of September 30, 1999, the Operating Partnership had outstanding
approximately $449.3 million (net of issuance discounts) of senior unsecured
notes (the "Senior Unsecured Notes"). The following table sets forth the
Operating Partnership's Senior Unsecured Notes and other related disclosures
(dollars in thousands):
Issuance Face Amount Coupon Rate Term Maturity
- ------------------ ------------ ------------ ----------- ---------------
August 27, 1997 $ 150,000 7.20% 10 years August 28, 2007
March 26, 1999 $ 100,000 7.40% 5 years March 15, 2004
March 26, 1999 $ 200,000 7.75% 10 years March 15, 2009
Interest on the Senior Unsecured Notes is payable semiannually with
principal and unpaid interest due on the scheduled maturity dates. In addition,
the five year and 10 year Senior Unsecured Notes issued on March 26, 1999 were
issued at a discount of $172,000 and $566,000, respectively.
Net proceeds of approximately $297.4 million received from the issuance of
the March 26, 1999 Senior Unsecured Notes were used to repay outstanding
borrowings under the Operating Partnership's unsecured credit facility.
4. Unsecured Credit Facilities and Unsecured Term Loan
As of September 30, 1999, the Operating Partnership had a three year $500
million unsecured revolving credit facility (the "Credit Facility") from Chase
Manhattan Bank, Union Bank of Switzerland and PNC Bank as co-managers of the
credit facility bank group. Interest rates on borrowings under the Credit
Facility are priced off of LIBOR plus a sliding scale ranging from 65 basis
points to 90 basis points based on the Operating Partnership's investment grade
rating on its senior unsecured debt. On March 16, 1999, the Operating
Partnership received its investment grade rating on its senior unsecured debt.
As a result, the pricing under the Credit Facility was adjusted to LIBOR plus 90
basis points.
The Operating Partnership utilizes the Credit Facility primarily to finance
the acquisitions of properties and other real estate investments, fund its
development activities and for working capital purposes. At September 30, 1999,
the Operating Partnership had availability under the Credit Facility to borrow
an additional $196.2 million (net of $50.2 million of outstanding undrawn
letters of credit).
As of September 30, 1999, the Operating Partnership had a one year $75
million unsecured term loan (the "Term Loan") from Chase Manhattan Bank.
Interest rates on borrowings under the Term Loan are currently priced off of
LIBOR plus 175 basis points. The Term Loan matures on December 3, 1999 and the
Operating Partnership is currently in negotiations with the Chase Manhattan Bank
to extend and refinance the Term Loan. At September 30, 1999, the Operating
Partnership had $75 million outstanding under the Term Loan.
On May 24, 1999, in conjunction with the acquisition of Tower (see Note 6),
the Operating Partnership obtained a $130 million unsecured bridge facility (The
"Bridge Facility") from UBS AG. Interest rates on borrowings under the Bridge
Facility were priced off of LIBOR plus approximately 214 basis points. On July
23, 1999, the Bridge Facility was repaid through a long term fixed rate secured
borrowing. As a result, certain deferred loan costs incurred in connection with
the Bridge Facility were written off. Such amount is reflected as an
extraordinary loss in the accompanying consolidated statements of income.
5. Partners' Capital
On May 24, 1999, in conjunction with the Tower acquisition, the Operating
Partnership issued 11,694,567 Class B Common Units of general partnership
interest to the Company which were valued for GAAP purposes at $26 per unit for
total consideration of approximately $304.1 million. The Class B Common Units
are entitled to receive an initial annual distribution of $2.24 per unit which
distribution is subject to adjustment annually. The Class B Common Units are
exchangeable at any time, at the option of the holder, into an equal number of
common units subject to customary antidilution adjustments. The Operating
Partnership, at its option, may redeem any or all of the Class B Common Units in
exchange for an equal number of common units at any time following the four
year, six-month anniversary of the issuance of the Class B Common Units.
On June 2, 1999, the Operating Partnership issued six million Series B
preferred units of general partnership interests to the Company in exchange for
approximately $150 million. The Series B preferred units have a liquidation
preference of $25 per unit, and an initial distribution rate of 7.85% per annum
with such rate increasing to 8.35% per annum on April 30, 2000 and to 8.85% per
annum from and after April 30, 2001. The Series B preferred units are
convertible to common units at a conversion rate of .9597 common units for each
preferred unit and are redeemable by the Operating Partnership on or after March
2, 2002. Proceeds from the issuance of the Series B preferred units were used as
partial consideration in the acquisition of the first mortgage note secured by
919 Third Avenue located in New York City.
On September 22, 1999, the Operating Partnership declared a distribution of
$.37125 per common partnership unit payable on October 19, 1999 to its
unitholders of record as of October 7, 1999. The distribution declared, which
related to the three months ended September 30, 1999, is based upon an annual
distribution of $1.485 per unit.
On September 22, 1999, the Operating Partnership declared a distribution on
the general partner's Series A preferred units of $.4766 per unit payable on
November 1, 1999. The distribution declared, which relates to the three months
ended October 31, 1999, is based on an annual distribution of $1.906 per unit.
On September 22, 1999, the Operating Partnership declared a distribution on
the general partner's Series B preferred units of $.49063 per unit payable on
November 1, 1999. The distribution declared, which relates to the three months
ended October 31, 1999, is based upon an annual distribution of $1.96 per unit.
On September 22, 1999, the Operating Partnership declared a distribution of
$.56 per Class B common partnership unit payable on November 1, 1999 to the
general partner. The distribution declared, which related to the three months
ended October 31, 1999, is based upon an annual distribution of $2.24 per unit.
The Board of Directors of the Company has authorized the purchase of up to
three million shares of the Company's Class B Common Stock. In addition, the
Board of Directors has also authorized the purchase of up to an additional three
million shares of the Company's Class B Common Stock and/or its common stock. As
of September 30, 1999, in conjunction with the Company's buy back program, the
Operating Partnership purchased and retired 780,804 Class B Common Units,
previously held by the Company, for approximately $17.4 million.
Net income per common partnership unit and Class B Common partnership unit
is determined by allocating net income after preferred distributions and
minority partners' interest in consolidated partnerships income to the general
and limited partners' based on their weighted average distribution per common
partnership units outstanding during the respective periods presented.
Holders of preferred units of limited and general partnership interest are
entitled to distributions based on the stated rates of return (subject to
adjustment) for those units.
6. Commercial Real Estate Investments
During the three months ended March 31, 1999, the Operating Partnership
purchased approximately 68.1 acres of vacant land in Northern New Jersey for
approximately $2.6 million. In addition, RMI purchased 74.6 acres of vacant land
for approximately $3.7 million and an 846,000 square foot industrial property
located in Cranbury, New Jersey for approximately $34 million. During the three
months ended September 30, 1999, these were sold to KTR and the Matrix
Development Group ("Matrix").
On April 13, 1999, the Operating Partnership received approximately $25.8
million from the redemption of a mortgage note receivable which secured three
office properties located in Garden City, Long Island, encompassing
approximately 400,000 square feet. As a result, the Operating Partnership
recognized a gain of approximately $4.3 million. Such gain has been included in
gain on sales of real estate on the accompanying consolidated statements of
income.
On June 7, 1999 the Operating Partnership sold a 24,000 square foot office
property located in Ossining, New York for approximately $1.5 million. As
partial consideration for the sale, the Operating Partnership obtained a $1.2
million, three year purchase money mortgage.
On June 15, 1999, the Operating Partnership acquired the first mortgage
note secured by a 42 story, 1.4 million square foot Class A office property
located at 919 Third Avenue in New York City for approximately $277.5 million.
The first mortgage note entitles the Operating Partnership to all the net cash
flow of the property and to substantial rights regarding the operations of the
property, with the Operating Partnership anticipating to ultimately obtain title
to the property. This acquisition was financed with proceeds from the issuance
of six million Series B preferred units of general partnership interest (see
note 5) 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
Operating Partnership has recognized the real estate operations of the 919 Third
Avenue in the accompanying consolidated statement of income for the period from
the date of acquisition..
On August 9, 1999, the Operating Partnership executed a contract for the
sale, which will take place in three stages, 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 Operating
Partnership also entered into a sale agreement with Matrix relating to a first
mortgage note and certain industrial land holdings (the "Matrix Sale"). The
combined total sale price is $310 million (approximately $42 million of which is
payable to the Morris Companies and its affiliates) and will consist of a
combination of cash, convertible preferred and common stock of KTR, preferred
units of KTR's operating partnership, relief of debt and a purchase money
mortgage note secured by certain land that is being sold to Matrix.
During September 1999, the Matrix Sale and the first stage of the RMI
closing occurred whereby the Operating Partnership sold its interest in RMI to
KTR for a combined sales price of approximately $164.7 million (net of minority
partner's interest). The combined consideration consisted of approximately $86.3
million in cash, $40 million of preferred stock of KTR, $1.5 million in common
stock of KTR, approximately $26.7 million of debt relief and approximately $10.2
million in purchase money mortgages. As a result, the Operating Partnership
incurred a gain of approximately $10.1 million. Cash proceeds from the sales
were used primarily to repay borrowings under the Credit Facility.
The second and third stages of the RMI closing are scheduled to be
completed in December 1999 and April 2000, respectively. Both of the remaining
stages each consist of three industrial buildings and are being sold for total
consideration of $50 million and $48 million, respectively.
In July 1998, the Company formed a joint venture, Metropolitan Partners
LLC, a Delaware limited liability company ("Metropolitan"), with Crescent Real
Estate Equities Company, a Texas real estate investment trust ("Crescent").
On December 8, 1998, the Company, Metropolitan and Tower Realty Trust, Inc.
("Tower") executed a merger agreement and on May 24, 1999 Tower was merged (the
"Merger") into Metropolitan, with Metropolitan surviving the Merger.
Concurrently with the Merger, Tower Realty Operating Partnership, L.P. ("Tower
OP") was merged with and into a subsidiary of Metropolitan. The consideration
issued in the mergers was comprised of (i) 25% cash (approximately $107.2
million) and (ii) 75% of shares of Class B Exchangeable Common Stock, par value
$.01 per share, of the Company (the "Class B Common Stock") (valued for GAAP
purposes at approximately $304.1 million).
Under the terms of the transaction, Metropolitan effectively paid for each
share of Tower common stock and each unit of limited partnership interest of
Tower OP the sum of (i) $5.75 in cash, and (ii) 0.6273 of a share of Class B
Common Stock. The shares of Class B Common Stock are entitled to receive an
initial annual dividend of $2.24 per share, which dividend is subject to
adjustment annually. The shares of Class B Common Stock are exchangeable at any
time, at the option of the holder, into an equal number of shares of common
stock, par value $.01 per share, of the Company subject to customary
antidilution adjustments. The Company, at its option, may redeem any or all of
the Class B Common Stock in exchange for an equal number of shares of the
Company's common stock at any time following the four year, six-month
anniversary of the issuance of the Class B Common Stock.
The Board of Directors of the Company has authorized a purchase buy back
program for the Company's Class B Common Stock (see Note 5).
The Company controls Metropolitan and owns 100% of the common equity;
Crescent owns a $85 million preferred equity investment in Metropolitan.
Crescent's investment accrues distributions at a rate of 7.5% per annum for a
two-year period and may be redeemed by Metropolitan at any time during that
period for $85 million, plus an amount sufficient to provide a 9.5% internal
rate of return. If Metropolitan does not redeem the preferred interest, upon the
expiration of the two-year period, Crescent must convert its $85 million
preferred interest into either (i) a common membership interest in Metropolitan
or (ii) shares of the Company's common stock at a conversion price of $24.61 per
share.
The Tower portfolio acquired in the Merger consisted of three office
properties comprising approximately 1.6 million square feet located in New York
City, one office property located on Long Island and certain office properties
and other real estate assets located outside the Tri-State Area.
Prior to the closing of the Merger, the Company arranged for the sale of
four of Tower's Class B New York City properties, comprising approximately
701,000 square feet for approximately $84.5 million. Subsequent to the closing
of the Merger, the Company has sold a real estate joint venture interest and all
of the property located outside the Tri State Area other than one office
property located in Orlando, Florida for approximately $171.1 million. The
combined consideration consisted of approximately $143.8 million in cash and
approximately $27.3 million of debt relief. Net cash proceeds from the sales
were used primarily to repay borrowings under the Credit Facility. As a result
of incurring certain sales and closing costs in connection with the sale of the
assets located outside the Tri State Area, the Company has incurred a loss of
approximately $4.4 million which has been included in gain on sales of real
estate on the accompanying consolidated statements of income.
7. Segment Disclosure
The Operating Partnership's portfolio consists of Class A office properties
located within the New York City metropolitan area and Class A suburban office
and industrial properties located and operated within the Tri-State Area (the
"Core Portfolio"). In addition the Operating Partnership's portfolio also
includes one office property located in Orlando, Florida and for the period
commencing January 6, 1998 and ending September 26, 1999, industrial properties
which were owned by RMI. The Operating Partnership 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 Operating Partnership 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 Operating
Partnership does not consider the property operating performance of the office
property located in Orlando, Florida as a part of its Core Portfolio.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
The following table sets forth the components of the Operating
Partnership's revenues and expenses and other related disclosures for the three
months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, 1999
-----------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and
reimbursements $ 97,787 $ 5,480 $ 7,602 $ 110,869
Equity in earnings of real estate joint ventures
and service companies --- --- 483 483
Other income 209 --- 14,170 14,379
----------- ----------- ----------- --------------
Total Revenues 97,996 5,480 22,255 125,731
----------- ----------- ----------- --------------
Expenses:
Property expenses 37,202 823 2,654 40,679
Marketing, general and administrative 4,384 158 1,770 6,312
Interest 7,817 128 13,218 21,163
Depreciation and amortization 18,684 1,343 1,841 21,868
----------- ----------- ----------- --------------
Total Expenses 68,087 2,452 19,483 90,022
----------- ----------- ----------- --------------
Income before distributions to preferred unitholders,
minority interests' and extraordinary items $ 29,909 $ 3,028 $ 2,772 $ 35,709
=========== =========== =========== ==============
Total Assets $2,104,169 $ 0 $ 576,855 $ 2,681,024
=========== =========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1998
-----------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and
reimbursements $ 63,820 $ 3,967 $ 151 $ 67,938
Equity in earnings of real estate joint ventures
and service companies --- --- 536 536
Other income 107 --- 3,014 3,121
----------- ----------- ----------- --------------
Total Revenues 63,927 3,967 3,701 71,595
----------- ----------- ----------- --------------
Expenses:
Property expenses 21,032 677 493 22,202
Marketing, general and administrative 3,349 158 663 4,170
Interest 4,427 278 8,335 13,040
Depreciation and amortization 12,560 934 1,341 14,835
----------- ----------- ----------- --------------
Total Expenses 41,368 2,047 10,832 54,247
----------- ----------- ----------- --------------
Income before distributions to preferred unitholders,
minority interests' and extraordinary items $ 22,559 $ 1,920 $ (7,131) $ 17,348
=========== =========== =========== ==============
Total Assets $1,557,066 $ 142,863 $ 72,308 $ 1,772,237
=========== =========== =========== ==============
</TABLE>
The following table sets forth the components of the Operating
Partnership's revenues and expenses and other related disclosures for the nine
months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
--------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and
reimbursements $240,753 $ 15,380 $ 11,150 $ 267,283
Equity in earnings of real estate joint ventures
and service companies --- --- 1,372 1,372
Other income 422 2 23,605 24,029
--------- ---------- --------- --------------
Total Revenues 241,175 15,382 36,127 292,684
--------- ---------- --------- --------------
Expenses:
Property expenses 84,912 2,390 3,823 91,125
Marketing, general and administrative 12,184 456 2,296 14,936
Interest 17,179 671 36,159 54,009
Depreciation and amortization 47,677 3,710 4,699 56,086
--------- ---------- --------- --------------
Total Expenses 161,952 7,227 46,977 216,156
--------- ---------- --------- --------------
Income before distributions to preferred unitholders,
minority interests' and extraordinary items $ 79,223 $ 8,155 $(10,850) $ 76,528
========= ========== ========= ==============
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
------------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
--------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and
reimbursements $172,868 $ 10,603 $ 151 $ 183,622
Equity in earnings of real estate joint ventures
and service companies --- --- 1,201 1,201
Other income 329 --- 7,772 8,101
--------- ---------- --------- --------------
Total Revenues 173,197 10,603 9,124 192,924
--------- ---------- --------- --------------
Expenses:
Property expenses 59,488 1,793 493 61,774
Marketing, general and administrative 8,587 364 2,165 11,116
Interest 12,110 814 21,613 34,537
Depreciation and amortization 32,804 2,469 2,825 38,098
--------- ---------- --------- --------------
Total Expenses 112,989 5,440 27,096 145,525
--------- ---------- --------- --------------
Income before distributions to preferred unitholders,
minority interests' and extraordinary items $ 60,208 $ 5,163 $(17,972) $ 47,399
========= ========== ========= ==============
</TABLE>
8. Non-Cash Investing and Financing Activities (in thousands)
Nine Months Ended September 30,
------------------------------
1999 1998
---------- -----------
Cash paid during the period for interest $ 40,341 $ 29,411
========== ===========
Interest capitalized during the period $ 7,281 $ 5,140
========== ===========
On May 24, 1999, in conjunction with the Tower acquisition, the Operating
Partnership issued 11,694,567 Class B Common Units which were valued for GAAP
purposes at approximately $304.1 million and assumed approximately $133.4
million of indebtedness for a total non cash investment of approximately $437.5
million.
9. Subsequent Events
On October 15, 1999 the Operating Partnership entered into a contract to
purchase 1350 Avenue of the Americas, a 540,000 square foot, Class A office
property located in New York City for approximately $126.5 million. The closing
is anticipated to occur in December,1999.
As of October 25, 1999, in conjunction with the Company's buy back
program, the Operating Partnership has purchased and retired an additional
430,000 Class B Common Units, previously held by the Company, for approximately
$8.6 million.
During November 1999, the Board of Directors of RSI and the Operating
Partnership have approved amendments to the RSI Facility and the RSVP Commitment
which are necessary for RSI to proceed with certain proposed acquisition
financing. As consideration for such approvals, RSI will pay a fee to the
Operating Partnership in the form of approximately 176,000 shares of RSI common
stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of Reckson Operating Partnership, L. P. (the "Operating
Partnership") and related notes.
The Operating Partnership considers certain statements set forth herein to
be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, with respect to the Operating Partnership's
expectations for future periods. Certain forward-looking statements, including,
without limitation, statements relating to the timing and success of
acquisitions, the financing of the Operating Partnership's operations, the
ability to lease vacant space and the ability to renew or relet space under
expiring leases, involve certain risks and uncertainties. Although the Operating
Partnership believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, the actual results may differ
materially from those set forth in the forward-looking statements and the
Operating Partnership can give no assurance that its expectation will be
achieved. Certain factors that might cause the results of the Operating
Partnership 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 Operating Partnership's real estate markets. Consequently, such
forward-looking statements should be regarded solely as reflections of the
Operating Partnership's current operating and development plans and estimates.
These plans and estimates are subject to revisions from time to time as
additional information becomes available, and actual results may differ from
those indicated in the referenced statements.
Overview and Background
The Operating Partnership, which commenced operations on June 2 1995, is
engaged in the ownership, management, operation, leasing and development of
commercial real estate properties, principally office and industrial buildings,
and also owns certain undeveloped land located in the New York Tri-State area
(the "Tri-State Area"). Reckson Associates Realty Corp. (the "Company"), is a
self administered and self managed Real Estate Investment Trust ("REIT"), and
serves as the sole general partner in the Operating Partnership.
As of September 30, 1999, the Operating Partnership owned and operated 77
office properties comprising approximately 13.1 million square feet, 109
industrial properties comprising approximately 8.0 million square feet and two
retail properties comprising approximately 20,000 square feet, located in the
Tri-State Area. The Operating Partnership also owns and operates a 357,000
square foot office building located in Orlando, Florida. In addition, the
Operating Partnership owned or had contracted to acquire approximately 377 acres
of land in 16 separate parcels of which the Operating Partnership can develop
approximately 2.8 million square feet of industrial and office space. The
Operating Partnership also has invested approximately $312.9 million in mortgage
notes encumbering three Class A office properties encompassing approximately 1.6
million square feet, approximately 472 acres of land located in New Jersey and
in a note receivable secured by a partnership interest in Omni Partner's, L.P.,
owner of the Omni, a 575,000 square foot Class A office property located in
Uniondale, New York.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI")
and Reckson Strategic Venture Partners, LLC ("RSVP"). On June 11, 1998, the
Operating Partnership distributed its 95% common stock interest in RSI of
approximately $3 million to its owners, including the Company which, in turn,
distributed the common stock of RSI received from the Operating Partnership to
its stockholders. Additionally, during June 1998, the Operating Partnership
established a credit facility with RSI (the"RSI Facility") in the amount of $100
million for RSI's service sector operations and other general corporate
purposes. As of September 30, 1999, the Operating Partnership had advanced $83.6
million under the RSI Facility. In addition, the Operating Partnership has
approved the funding of investments of up to $100 million with or in RSVP (the
"RSVP Commitment"), through RSVP-controlled joint venture REIT- qualified
investments or advances made to RSI under terms similar to the RSI Facility. As
of September 30, 1999, approximately $54.8 million had been invested through the
RSVP Commitment, of which $21.8 million represents RSVP-controlled joint venture
REIT- qualified investments and $33.0 million represents advances to RSI under
the RSVP Commitment.
During November 1999, the Board of Directors of RSI and the Operating
Partnership have approved amendments to the RSI Facility and the RSVP Commitment
which are necessary for RSI to proceed with certain proposed acquisition
financing. As consideration for such approvals, RSI will pay a fee to the
Operating Partnership in the form of approximately 176,000 shares of RSI common
stock.
RSI serves as the managing member of RSVP. RSI invests in operating
companies that generally provide commercial services to properties owned by the
Operating Partnership and its tenants and third parties nationwide. RSVP was
formed to provide the Company with a research and development vehicle to invest
in alternative real estate sectors. RSVP invests primarily in real estate and
real estate related operating companies generally outside of the Company's core
office and industrial focus. RSVP's strategy is to identify and acquire
interests in established entrepreneurial enterprises with experienced management
teams in market sectors which are in the early stages of their growth cycle or
offer unique circumstances for attractive investments as well as a platform for
future growth.
On January 6, 1998, the Operating Partnership made its initial investment
in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse
facilities. In connection with the transaction the Morris Companies contributed
100% of their interests in certain industrial properties to Reckson Morris
Operating Partnership, L. P. ("RMI") in exchange for operating partnership units
in RMI. The Operating Partnership has agreed to invest up to $150 million in
RMI.
On August 9, 1999, the Operating Partnership executed a contract for the
sale, which will take place in three stages, 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 Operating
Partnership also entered into a sale agreement with Matrix relating to a first
mortgage note and certain industrial land holdings (the "Matrix Sale"). The
combined total sale price is $310 million (approximately $42 million of which is
payable to the Morris Companies and its affiliates) and will consist of a
combination of cash, convertible preferred and common stock of KTR, preferred
units of KTR's operating partnership, relief of debt and a purchase money
mortgage note secured by certain land that is being sold to Matrix.
In July 1998, the Company formed a joint venture, Metropolitan Partners
LLC, a Delaware limited liability company ("Metropolitan"), with Crescent Real
Estate Equities Company, a Texas real estate investment trust ("Crescent").
On December 8, 1998, the Company, Metropolitan and Tower Realty Trust, Inc.
("Tower") executed a merger agreement and on May 24, 1999 Tower was merged (the
"Merger") into Metropolitan, with Metropolitan surviving the Merger.
Concurrently with the Merger, Tower Realty Operating Partnership, L.P. ("Tower
OP") was merged with and into a subsidiary of Metropolitan. The consideration
issued in the mergers was comprised of (i) 25% cash (approximately $107.2
million) and (ii) 75% of shares of Class B Exchangeable Common Stock, par value
$.01 per share, of the Company (the "Class B Common Stock") (valued for GAAP
purposes at approximately $304.1 million).
Under the terms of the transaction, Metropolitan effectively paid for each
share of Tower common stock and each unit of limited partnership interest of
Tower OP the sum of (i) $5.75 in cash, and (ii) 0.6273 of a share of Class B
Common Stock. The shares of Class B Common Stock are entitled to receive an
initial annual dividend of $2.24 per share, which dividend is subject to
adjustment annually. The shares of Class B Common Stock are exchangeable at any
time, at the option of the holder, into an equal number of shares of common
stock, par value $.01 per share, of the Company subject to customary
antidilution adjustments. The Company, at its option, may redeem any or all of
the Class B Common Stock in exchange for an equal number of shares of the
Company's common stock at any time following the four year, six-month
anniversary of the issuance of the Class B Common Stock.
The Board of Directors of the Company has authorized a purchase buy back
program for the Company's Class B Common Stock (see Liquidity and Capital
Resources).
The Company controls Metropolitan and owns 100% of the common equity;
Crescent owns a $85 million preferred equity investment in Metropolitan.
Crescent's investment accrues distributions at a rate of 7.5% per annum for a
two-year period and may be redeemed by Metropolitan at any time during that
period for $85 million, plus an amount sufficient to provide a 9.5% internal
rate of return. If Metropolitan does not redeem the preferred interest, upon the
expiration of the two-year period, Crescent must convert its $85 million
preferred interest into either (i) a common membership interest in Metropolitan
or (ii) shares of the Company's common stock at a conversion price of $24.61 per
share.
The Tower portfolio acquired in the Merger consisted of three office
properties comprising approximately 1.6 million square feet located in New York
City, one office property located on Long Island and certain office properties
and other real estate assets located outside the Tri-State Area.
Prior to the closing of the Merger, the Company arranged for the sale of
four of Tower's Class B New York City properties, comprising approximately
701,000 square feet for approximately $84.5 million. Subsequent to the closing
of the Merger, the Company has sold a real estate joint venture interest and all
of the property located outside the Tri State Area other than one office
property located in Orlando, Florida for approximately $171.1 million. The
combined consideration consisted of approximately $143.8 million in cash and
approximately $27.3 million of debt relief. Net cash proceeds from the sales
were used primarily to repay borrowings under the Credit Facility. As a result
of incurring certain sales and closing costs in connection with the sale of the
assets located outside the Tri State Area, the Company has incurred a loss of
approximately $4.4 million which has been included in gain on sales of real
estate on the Company's consolidated statements of income.
The market capitalization of the Operating Partnership at September 30,
1999 was approximately $2.9 billion. The Operating Partnership's market
capitalization is calculated based on the value of the Operating Partnership's
common units and Class B Common Units (which, for this purpose, is assumed to be
the same per unit as the market value of a share of the Company's common stock
and Class B Common Stock), the liquidation preference values of the Operating
Partnership's preferred units and the $1.2 billion (including its share of joint
venture debt and net of minority partners' interest) of debt outstanding at
September 30, 1999. As a result, the Operating Partnership's total debt to total
market capitalization ratio at September 30, 1999 equaled approximately 42.4%.
Result of Operations
The Operating Partnership's total revenues increased by $54.1 million or
75.6% for the three months ended September 30, 1999 as compared to the 1998
period. The growth in total revenues is primarily attributable to the gain on
sales of real estate ($10.1 million or 18.6%), the Operating Partnership's
acquisition of the Tower portfolio on May 24, 1999 (including $4.8 million
attributable to properties sold during the quarter) and the acquisition of the
first mortgage note secured by 919 Third Avenue. Property operating revenues,
which include base rents and tenant escalations and reimbursements ("Property
Operating Revenues") increased by $42.9 million or 63.2% for the three months
ended September 30, 1999 as compared to the 1998 period. The 1999 increase in
Property Operating Revenues is comprised of approximately $3.9 million
attributable to increases in rental rates and changes in occupancies and
approximately $39.0 million attributable to the acquisitions and development of
properties. The Company's base rent was increased by the impact of the
straight-line rent adjustment by $2.1 million for the three months ended
September 30, 1999 as compared to $2.0 million for the 1998 period.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $18.5 million or 83.2% for the three months ended
September 30, 1999 as compared to the 1998 period. These increases are primarily
due to the acquisition of the Tower portfolio on May 24, 1999 (including $2.2
million attributable to properties sold during the quarter) and the acquisition
of the first mortgage note secured by 919 Third Avenue, which operations were
reflected in Property Expenses. Gross operating margins (defined as Property
Operating Revenues less Property Expenses, taken as a percentage of Property
Operating Revenues) for the three months ended September 30, 1999 and 1998 were
63.3% and 67.3% respectively. The decrease in gross operating margins is
primarily attributable to the Operating Partnership's acquisitions of full
service office buildings which generally operate on lower gross operating
margins.
Marketing, general and administrative expenses increased by $2.1 for the
three months ended September 30, 1999 as compared to the 1998 period. The
increase is due to the increased costs of managing the acquisition properties
and the increase in corporate management and administrative costs associated
with the growth of the Company including the opening of its New York City
division. Marketing, general and administrative expenses as a percentage of
total revenues were 5.02% for the three months ended September 30, 1999 as
compared to 5.82% for the 1998 period.
Interest expense increased by $8.1 million for the three months ended
September 30, 1999 as compared to the 1998 period. The increase is attributable
to an increased cost attributable to an increased average balance on the
Operating Partnership's credit facilities and Term Loan, interest on the
Operating Partnership's senior unsecured notes issued on March 26, 1999 and an
increase in secured borrowings primarily attributable to the assumption of debt
(including $26.9 million relating to properties sold during the quarter) and
incurrence of new debt in conjunction with the Tower acquisition. The weighted
average balance outstanding on the Company's credit facilities and Term Loan was
$479.7 million for the three months ended September 30, 1999 as compared to
$419.8 million for the 1998 period.
The Operating Partnership's total revenues increased by $99.8 million or
51.7 % for the nine months ended September 30, 1999 as compared to the 1998
period. The growth in total revenues is primarily attributable to the gain on
sales of real estate ($10.1 million or 10.1%), the Operating Partnership's
acquisition of the Tower portfolio on May 24, 1999 (including $7.3 million
attributable to properties that were sold) and the acquisition of the first
mortgage note secured by 919 Third Avenue. Property Operating Revenues increased
by $83.7 million or 45.6% for the nine months ended September 30, 1999 as
compared to the 1998 period. The 1999 increase in Property Operating Revenues is
comprised of $7.9 million attributable to increases in rental rates and changes
in occupancies and $75.8 million attributable to acquisitions and development of
properties. The Operating Partnership's base rent was increased by the impact of
the straight-line rent adjustment by $6.8 million for the nine months ended
September 30, 1999 as compared to $5.7 million for the 1998 period.
Property Expenses increased by $29.4 million or 47.5% for the nine months
ended September 30, 1999 as compared to the 1998 period. These increases are
primarily due to the acquisition of the Tower portfolio (including $3.1 million
attributable to properties sold during the third quarter) and the acquisition of
the first mortgage note secured by 919 Third Avenue, which operations are
reflected in Property Expenses. Gross operating margins for the nine months
ended September 30, 1999 and 1998 were 65.9% and 66.4%, respectively. The
decrease in gross operating margins reflects The Operating Partnership's
acquisition of full service office buildings which generally operate on lower
gross operating margins.
Marketing, general and administrative expenses increased by $3.8 million
for the nine months ended September 30, 1999 as compared to the 1998 period. The
increase is due to increased costs of managing the acquisition properties and
the increase in corporate management and administrative costs associated with
the growth of the Operating Partnership including the opening of its New York
City division. Marketing, general and administrative expenses as a percentage of
total revenues were 5.1% for the nine months ended September 30, 1999 as
compared to 5.8% for the 1998 period.
Interest expense increased by $19.5 million for the nine months ended
September 30, 1999 as compared to the 1998 period. The increase is attributable
to an increased cost attributable to an increased average balance on the
Operating Partnership's credit facilities and Term Loan, interest on the
Operating Partnership's senior unsecured notes issued on March 26, 1999 and an
increase in secured borrowings primarily attributable to the assumption of debt
(including $26.9 million relating to properties sold during the third quarter)
and incurrence of new debt in conjunction with the Tower acquisition. The
weighted average balance outstanding on the Operating Partnership's credit
facilities was $446.1 million for the nine months ended September 30, 1999 as
compared to $348.0 million for the 1998 period.
Liquidity and Capital Resources
During April 1998, the Company contributed approximately $221 million to
the Operating Partnership in exchange for 9,200,000 Series A preferred units.
The Series A preferred units have a liquidation preference of $25 per unit, a
distribution rate of 7.625 % and are convertible to the Operating Partnership's
common units at a conversion rate of .8769 common units for each preferred unit.
Additionally, with the acquisition of six office properties and the remaining
50% interest in a 365,000 square foot vacant office building located in
Westchester County, the Operating Partnership issued series B, C and D preferred
operating units in the amount of approximately $42.5 million. The series B, C
and D preferred units have a current distribution rate of 6.25% and are
convertible to common units at conversion prices of approximately $32.51, $29.39
and $29.12, respectively for each preferred unit.
On March 26, 1999, the Operating Partnership issued $100 million of 7.4%
senior unsecured notes due March 15, 2004 and $200 million of 7.75% senior
unsecured notes due March 15, 2009. Net proceeds of approximately $297.4 million
were used to repay outstanding borrowings under the Operating Partnership's
unsecured credit facility.
As of September 30, 1999, the Operating Partnership had a three year $500
million unsecured revolving credit facility (the "Credit Facility") from Chase
Manhattan Bank, Union Bank of Switzerland and PNC Bank as co-managers of the
credit facility bank group. Interest rates on borrowings under the Credit
Facility are priced off of LIBOR plus a sliding scale ranging from 65 basis
points to 90 basis points based on the Operating Partnership's investment grade
rating on its senior unsecured debt. On March 16, 1999, the Operating
Partnership received its investment grade rating on its senior unsecured debt.
As a result, the pricing under the Credit Facility was adjusted to LIBOR plus 90
basis points.
The Operating Partnership utilizes the Credit Facility primarily to finance
the acquisitions of properties and other real estate investments, fund its
development activities and for working capital purposes. At September 30, 1999,
the Operating Partnership had availability under the Credit Facility to borrow
an additional $196.2 million (net of $50.2 million of outstanding undrawn
letters of credit).
As of September 30, 1999, the Operating Partnership had a one year $75
million unsecured term loan (the "Term Loan") from Chase Manhattan Bank.
Interest rates on borrowings under the Term Loan are currently priced off of
LIBOR plus 175 basis points. The Term Loan matures on December 3, 1999 and the
Operating Partnership is currently in negotiations with the Chase Manhattan Bank
to extend and refinance the Term Loan. At September 30, 1999, the Operating
Partnership had $75 million outstanding under the Term Loan.
On May 24, 1999, in conjunction with the acquisition of Tower, the
Operating Partnership obtained a $130 million unsecured bridge facility (The
"Bridge Facility") from UBS AG. Interest rates on borrowings under the Bridge
Facility were priced off of LIBOR plus approximately 214 basis points. On July
23, 1999, the Bridge Facility was repaid through a long term fixed rate secured
borrowing. As a result, certain deferred loan costs incurred in connection with
the Bridge Facility were written off. Such amount has been reflected as an
extraordinary loss in the Operating Partnership's consolidated statements of
income.
On May 24, 1999, in conjunction with the Tower acquisition, the Operating
Partnership issued 11,694,567 Class B Common Units of general partnership
interest to the Company which were valued for GAAP purposes at $26 per unit for
total consideration of approximately $304.1 million. The Class B Common Units
are entitled to receive an initial annual distribution of $2.24 per unit, which
distribution is subject to adjustment annually. The Class B Common Units are
exchangeable at any time, at the option of the holder, into an equal number of
common units subject to customary antidilution adjustments. The Operating
Partnership, at its option, may redeem any or all of the Class B Common Units in
exchange for an equal number of common units at any time following the four
year, six-month anniversary of the issuance of the Class B Common Units.
The Board of Directors of the Company has authorized the purchase of up to
three million shares of the Company's Class B Common Stock. In addition, the
Board of Directors has also authorized the purchase of up to an additional three
million shares of the Company's Class B Common Stock and/or its common stock. As
of September 30, 1999, in conjunction with the Company's buy back program, the
Operating Partnership purchased and retired 780,804 Class B Common Units,
previously held by the Company, for approximately $17.4 million.
On June 2, 1999, the Operating Partnership issued six million Series B
preferred units of general partnership interests to the Company in exchange for
approximately $150 million. The Series B preferred units have a liquidation
preference of $25 per unit, and an initial distribution rate of 7.85% per annum
with such rate increasing to 8.35% per annum on April 30, 2000 and to 8.85% per
annum from and after April 30, 2001. The Series B preferred units are
convertible to common units at a conversion rate of .9597 common units for each
preferred unit and are redeemable by the Operating Partnership on or after March
2, 2002. Proceeds from the issuance of the Series B preferred units were used as
partial consideration in the acquisition of the first mortgage note secured by
919 Third Avenue located in New York City.
The Operating Partnership's indebtedness at September 30, 1999 totaled $1.2
billion (including its share of joint venture debt and net of the minority
partners' interests) and was comprised of $253.6 million outstanding under the
credit facilities, $75 million outstanding under the Term Loan, $449.3 million
of senior unsecured notes and approximately $460.7 million of mortgage
indebtedness. Based on the Operating Partnership's total market capitalization
of approximately $2.9 billion at September 30, 1999 (calculated based on the
value of the Operating Partnership's common units and Class B Common Units
(which, for this purpose, is assumed to be the same per unit as the market value
of a share of the Company's common stock and Class B Common Stock), the stated
value of the Operating Partnership's preferred units), the Operating
Partnership's debt represented approximately 42.4% of its total market
capitalization.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures of the Operating Partnership. The Operating
Partnership 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 Operating Partnership expects to meet certain
of its financing requirements through long-term secured and unsecured borrowings
and the issuance of debt securities and additional equity securities of the
Operating Partnership. The Operating Partnership 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 Operating Partnership anticipates that the
current balance of cash and cash equivalents and cash flows from operating
activities, together with cash available from borrowings and debt and equity
offerings, will be adequate to meet the capital and liquidity requirements of
the Operating Partnership in both the short and long-term.
SUPPLEMENTAL INFORMATION ON CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING
COMMISSIONS
The following table summarizes the expenditures incurred for
non-incremental capital expenditures, tenant improvements and leasing
commissions for the Operating Partnership's office and industrial properties for
the nine month period ended September 30, 1999 and the historical average of
such non-incremental capital expenditures, tenant improvements and leasing
commissions for the years 1995 through 1998.
<TABLE>
Non-Incremental Revenue Generating Capital Expenditures
<CAPTION>
Nine
Months
Ended
1995 -1998 Sept. 30,
1995 1996 1997 1998 Average 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office Properties
Total $364,545 $375,026 $1,108,675 $2,004,976 $963,305 $1,513,209
Per Square Foot 0.19 0.13 0.22 0.23 0.19 0.16
Industrial Properties
Total $290,457 $670,751 $733,233 $1,205,266 $724,927 $791,704
Per Square Foot 0.08 0.18 0.15 0.12 0.13 0.09
</TABLE>
<TABLE>
Non-Incremental Revenue Generating Tenant Improvements and Leasing Commissions
<CAPTION>
Nine
Months
Ended
1995 -1998 Sept. 30,
1995 1996 1997 1998 Average 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long Island Office Properties
Tenant Improvements $452,057 $523,574 $784,044 $1,140,251 $724,982 $542,538
Per Square Foot Improved 4.44 4.28 7.00 3.98 4.92 4.15
Leasing Commissions $144,925 $119,047 $415,822 $418,191 $274,496 $190,105
Per Square Foot Leased 1.42 0.97 4.83 1.46 2.17 0.88
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot $5.86 $5.25 $11.83 $5.44 $7.09 $5.03
============ ============ ============ ============ ============ =============
Westchester Office Properties
Tenant Improvements N/A $834,764 $1,211,665 $711,160 $961,413 $865,536
Per Square Foot Improved N/A 6.33 8.90 4.45 6.67 6.25
Leasing Commissions N/A $264,388 $366,257 $286,150 $326,204 $334,783
Per Square Foot Leased N/A 2.00 2.69 1.79 2.24 2.42
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot N/A $8.33 $11.59 $6.24 $8.91 $8.67
============ ============ ============ ============ ============ =============
Connecticut Office Properties <F1>
Tenant Improvements N/A $58,000 $1,022,421 $202,880 $570,356 $108,881
Per Square Foot Improved N/A 12.45 13.39 5.92 9.66 4.89
Leasing Commissions N/A $0.00 $256,615 $151,063 $181,190 $89,142
Per Square Foot Leased N/A 0.00 3.36 4.41 3.89 4.00
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot N/A $12.45 $16.75 $10.33 $13.55 $8.89
============ ============ ============ ============ ============ =============
New Jersey Office Properties
Tenant Improvements N/A N/A N/A $654,877 $654,877 $190,958
Per Square Foot Improved N/A N/A N/A 3.78 3.78 2.10
Leasing Commissions N/A N/A N/A $396,127 $396,127 $346,831
Per Square Foot Leased N/A N/A N/A 2.08 2.08 3.81
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot N/A N/A N/A $5.86 $5.86 $5.91
============ ============ ============ ============ ============ =============
Industrial Properties
Tenant Improvements $210,496 $380,334 $230,466 $283,842 $276,285 $249,807
Per Square Foot Improved 0.90 0.72 0.55 0.76 0.73 0.20
Leasing Commissions $107,351 $436,213 $81,013 $200,154 $206,183 $753,855
Per Square Foot Leased 0.46 0.82 0.19 0.44 0.48 0.61
------------ ------------ ------------ ------------ ------------ -------------
Total Per Square Foot $1.36 $1.54 $0.75 $1.20 $1.21 $0.81
============ ============ ============ ============ ============ =============
<FN>
<F1>
1995 - 1998 average weighted to reflect October 1996 acquisition date
</FN>
</TABLE>
LEASE EXPIRATIONS
The following table sets forth scheduled lease expirations for executed leases
as of September 30, 1999:
<TABLE>
Long Island Office Properties (excluding Omni):
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 10 41,860 1.4% $20.65 $21.28
2000 43 254,282 8.6% $21.86 $21.11
2001 40 187,022 6.3% $22.15 $24.16
2002 32 253,748 8.6% $22.31 $24.37
2003 52 345,662 11.7% $21.81 $24.60
2004 43 259,947 8.8% $22.83 $25.29
2005 and thereafter 94 1,623,174 54.7% --- ---
------- ------------ ------------
Total 314 2,965,695 100.0%
======= ============ ============
<FN>
<F1> Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2> Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Omni:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 ---
2000 3 56,211 9.5% $32.15 $36.99
2001 4 32,680 5.6% $27.36 $33.63
2002 4 129,351 22.0% $30.00 $33.26
2003 5 72,530 12.3% $29.56 $34.29
2004 4 112,414 19.1% $26.03 $33.16
2005 and thereafter 9 185,607 31.5% --- ---
------- ------------ ------------
Total 29 588,793 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Industrial Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 13 145,928 3.1% $5.11 $5.98
2000 32 491,504 10.6% $4.97 $5.63
2001 31 732,183 15.8% $5.69 $7.02
2002 26 221,744 4.8% $6.25 $6.96
2003 30 724,434 15.6% $5.26 $5.98
2004 27 522,242 11.3% $6.65 $7.18
2005 and thereafter 44 1,799,267 38.8% --- ---
------- ------------ ------------
Total 203 4,637,302 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Research and Development Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 3 14,039 1.1% $11.71 $12.87
2000 6 101,419 8.0% $7.77 $8.01
2001 8 150,120 11.8% $10.75 $11.31
2002 3 67,967 5.3% $10.54 $12.51
2003 4 271,042 21.3% $5.38 $6.41
2004 7 107,344 8.4% $11.87 $13.13
2005 and thereafter 13 560,554 44.1% --- ---
------- ------------ ------------
Total 44 1,272,485 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Westchester Office Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 13 30,593 1.1% $22.77 $20.40
2000 51 366,033 13.4% $22.42 $22.74
2001 44 322,090 11.8% $22.03 $22.34
2002 48 457,396 16.7% $20.47 $20.70
2003 35 246,705 9.0% $21.75 $22.98
2004 25 134,039 4.9% $20.42 $21.41
2005 and thereafter 38 1,176,001 43.0% --- ---
------- ------------ ------------
Total 254 2,732,857 100.0%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Stamford Office Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 7 16,966 1.7% $22.58 $21.84
2000 26 106,290 10.4% $22.41 $22.78
2001 25 103,383 10.1% $24.14 $25.22
2002 16 91,088 8.9% $27.20 $28.43
2003 14 93,385 9.1% $31.89 $32.69
2004 19 213,768 20.9% $21.23 $22.20
2005 and thereafter 23 399,020 39.0% --- ---
------- ------------ ------------
Total 130 1,023,900 100.0%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
New Jersey Office Properties:
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 --- --- 0.0% --- ---
2000 30 285,661 15.8% $23.30 $23.72
2001 22 261,036 14.5% $18.09 $18.29
2002 21 182,636 10.1% $19.82 $20.02
2003 18 327,593 18.1% $17.90 $18.01
2004 31 217,955 12.1% $22.32 $22.87
2005 and thereafter 23 530,546 29.4% --- ---
------- ------------ ------------
Total 145 1,805,427 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
New York City
<CAPTION>
%
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 2 8,010 0.3% $36.46 $36.47
2000 10 267,904 9.3% $28.53 $31.91
2001 17 138,472 4.8% $35.10 $32.75
2002 14 176,539 6.1% $32.37 $33.18
2003 6 93,752 3.3% $31.16 $31.64
2004 8 108,110 3.8% $34.31 $33.76
2005 and thereafter 76 2,081,702 72.4% --- ---
------- ------------ ------------
Total 133 2,874,489 100.00%
======= ============ ============
<FN>
<F1>
Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
Inflation
The office leases generally provide 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 also generally provide for fixed base rent increases, direct
pass through of certain operating expenses and separate real estate tax
escalations over a base amount. The Operating Partnership believes that
inflationary increases in expenses will generally be offset by contractual rent
increases and expense escalations described above.
The credit facilities and Term Loan bear interest at a variable rate, which
will be influenced by changes in short-term interest rates, and are sensitive to
inflation.
Impact of Year 2000
Some of the Operating Partnership's older computer programs were written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognizes a date
using "00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, or engage in
similar normal business activities.
The Operating Partnership has completed an assessment to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. Currently, the entire
property management system is year 2000 compliant and has been thoroughly
tested. Since the Operating Partnership's accounting software is maintained and
supported by an unaffiliated third party, the total year 2000 project cost as it
relates to the accounting software is estimated to be minimal.
The year 2000 project has been completed, which is prior to any anticipated
impact on its operating systems. Additionally, the Operating Partnership has
received assurances from its contractors that all of the Operating Partnership's
building management and mechanical systems are currently year 2000 compliant or
will be made compliant prior to any impact on those systems. However, the
Operating Partnership cannot guarantee that all contractors will comply with
their assurances and therefore, the Operating Partnership may not be able to
determine year 2000 compliance of those contractors. At that time, the Operating
Partnership will determine the extent to which the Operating Partnership will be
able to replace non compliant contractors. The Operating Partnership believes
that with modifications to existing software and conversions to new software,
the year 2000 issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not made,
or are not completed timely, the year 2000 issue could have a material impact on
the operations of the Operating Partnership.
To date, the Operating Partnership has expended approximately one million
dollars in connection with upgrading building management, mechanical and
computer systems. The costs and completion of the project on which the Operating
Partnership believes it has completed the year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and costs of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
In a "worst case scenario", the Operating Partnership believes that failure
of the building management and mechanical systems to operate properly would
result in inconveniences to the building tenants which might include no elevator
service, lighting or entry and egress. In this case, the management of the
Operating Partnership would manually override such systems in order for normal
operations to resume. Additionally, in a "worst case scenario" of the failure of
the upgrades to the accounting software, the Operating Partnership would be
required to process transactions, such as the issuance of disbursements,
manually until an alternative system was implemented. If the Operating
Partnership was not successful in implementing their year 2000 compliance plan,
the Operating Partnership may suffer a material adverse impact on their
consolidated results of operations and financial condition.
Funds From Operations
Management believes that funds from operations ("FFO") is an appropriate
measure of performance of an operating partnership which is a general partner 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 restructurings 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 Operating Partnership's operating performance or as an
alternative to cash flow as a measure of liquidity. In March 1995, NAREIT issued
a "White Paper" analysis to address certain interpretive issues under its
definition of FFO. The White Paper provides that amortization of deferred
financing costs and depreciation of non-rental real estate assets are no longer
to be added back to net income to arrive at FFO.
Since all companies and analysts do not calculate FFO in a similar fashion,
the Operating Partnership's calculation of FFO presented herein may not be
comparable to similarly titled measures as reported by other companies.
The following table presents the Operating Partnership's FFO calculation (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income before extraordinary items $ 25,574 $ 11,649 $ 52,579 $ 36,259
Less:
Extraordinary loss 629 1,993 629 1,993
--------------- --------------- --------------- ---------------
Net Income 24,945 9,656 51,950 34,266
Adjustment for Funds From Operations:
Add:
Real Estate Depreciation and Amortization 21,312 14,035 54,406 36,822
Minority interests in consolidated partnerships 2,150 665 4,933 1,938
Extraordinary loss 629 1,993 629 1,993
Less:
Gain on sales of real estate 10,052 --- 10,052 ---
Amount distributed to minority partners in
consolidated partnerships 2,607 1,190 6,031 2,989
--------------- --------------- --------------- ---------------
Funds From Operations $ 36,377 $ 25,159 $ 95,835 $ 72,030
=============== =============== =============== ===============
Weighted average units outstanding 59,526 47,753 53,430 46,999
=============== =============== =============== ===============
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing the Operating Partnership is interest rate
risk on its long term debt, mortgage notes and notes receivable. The Operating
Partnership does not hedge interest rate risk using financial instrument nor is
the Operating Partnership subject to foreign currency risk.
The Operating Partnership manages its exposure to interest rate risk on its
variable rate indebtedness by borrowing on a short-term basis under its Credit
Facility 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 on terms that are
advantageous to the Operating Partnership or through general partner
contributions.
The following table sets forth the Operating Partnership's long term debt
obligations by scheduled principal cash flow payments and maturity date,
weighted average interest rates and estimated fair market value ("FMV") at
September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total<F1> F.M.V
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long term debt:
Fixed rate $ 1,347 $33,883 $ 21,332 $ 14,980 $ 6,724 $ 832,459 $ 910,725 $ 910,725
Weighted average
interest rate 7.96% 7.40% 7.45% 7.89% 8.00% 7.52% 7.53%
Variable rate $75,000 $ --- $253,600 $ --- $ --- $ --- $ 328,600 $ 328,600
Weighted average
interest rate 7.13% --- 6.28% --- --- --- 6.47%
<FN>
<F1>
Includes unamortized issuance discounts of $704,000 on the 5 and 10 year senior
unsecured notes issued on March 26, 1999 which are due at maturity.
</FN>
</TABLE>
In addition, the Operating Partnership has assessed the market risk for its
variable rate debt, which is based upon LIBOR, and believes that a one percent
increase in the LIBOR rate would have an approximate $3.3 million annual
increase in interest expense based on approximately $328.6 million outstanding
at September 30, 1999.
The following table sets forth the Operating Partnership's mortgage notes
and note receivables by scheduled maturity date, weighted average interest rates
and estimated FMV at September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total F.M.V
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage notes and
notes receivable:
Fixed rate $ 685 $282,727 $ 15 $ 10,624 $ --- $ 53,490 $ 347,541 $ 347,541
Weighted average
interest rate 10.49% 9.42% 9.00% 10.34% --- 10.68% 9.64%
</TABLE>
The fair value of the Operating Partnership's long term debt, mortgage
notes and notes receivable is estimated based on discounting future cash flows
at interest rates that management believes reflects the risks associated with
long term debt, mortgage notes and notes receivable of similar risk and
duration.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and use of proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information
The Board of Directors of the Company has approved certain amendments to
the governance provisions of the Company.
The Board of Directors has approved an amendment to the Company's
charter to opt into a provision of the Maryland General Corporation Law
(the "MGCL") requiring a vote of two-thirds of the common stock to
remove one or more directors. Previously the entire board of directors
could be removed, at any time, with or without cause, by the affirmative
vote of a majority of the votes entitled to be cast for the election of
directors.
Under Section 3-805 of the MGCL (a recent amendment) a corporation may
raise the threshold amount of shares that must be held by stockholders
calling a special stockholder meeting to a majority of all votes to be
cast at such meeting. In accordance the with MGCL, the Board of
Directors has approved an amendment to the Company's by laws providing
that a special meeting of stockholders need only be called if requested
by holders of the majority of votes eligible to be cast at such meeting.
The Company's previous bylaws provided that special meetings of
stockholders could be called by the secretary upon the written request
of holders of shares entitled to cast not less than 25% of all votes
entitled to be cast at such meeting. Raising the threshold allows the
Company to avoid calling special meetings, unless the purpose of the
meeting has substantial support among stockholders.
The Board of Directors has also approved the Company's opting into the
Maryland Business Combination Statute. A business combination statue
provides substantial defensive protection to a company, by preventing an
unsolicited acquiror seeking a post-offer merger from acquiring a
substantial stock position without first obtaining approval of the
Company's board. Maryland's business combination law imposes a 5-year
time limitation and supermajority stockholder approval requirements on
business combinations with persons who acquire 10% or more of a
company's voting power before the company's board of directors has
approved the proposed business combination.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 Financial Data Schedule
b) During the three months ended September 30, 1999 the registrant
filed the following reports:
On August 25, 1999, the Operating Partnership filed Form 8-K
announcing its entering into a Contribution and Exchange
agreement with respect to the disposition of RMI. In addition,
the Operating Partnership announced its entering into an
agreement with Matrix relating to the disposition of certain
industrial land holdings and a mortgage note.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECKSON OPERATING PARTNERSHIP, L.P.
BY: RECKSON ASSOCIATES REALTY CORP., its general partner
November 11, 1999 /s/ Scott H. Rechler
Date Scott H. Rechler, Co-Chief Executive Officer
and President
November 11, 1999 /s/ Michael Maturo
Date Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer
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<NAME> RECKSON OPERATING PARTNERSHIP, L.P.
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<FISCAL-YEAR-END> DEC-31-1999
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413,065
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