UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number: 1-13762
RECKSON 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 JUNE 30, 1999
TABLE OF CONTENTS
INDEX PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of June 30,
1999 (unaudited) and December 31, 1998 2
Consolidated Statements of Income for the
three and six months ended June 30, 1999 and
1998 (unaudited) 3
Consolidated Statements of Cash Flows for
the six months ended June 30, 1999 and
1998 (unaudited) 4
Notes to the Consolidated Financial
Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
Item 2. Changes in Securities and use of proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on form 8-K
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SIGNATURES
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Reckson Operating Partnership, L.P.
Consolidated Balance Sheets
(Dollars in thousands, except for share amounts)
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Assets
Commercial real estate properties, at cost
Land $ 289,191 $ 212,540
Buildings and improvements 1,835,625 1,372,549
Developments in progress: ---
Land 75,354 69,143
Development costs 71,613 82,901
Real estate held for sale 221,703 ---
Furniture, fixtures and equipment 6,486 6,090
----------- -----------
2,499,972 1,743,223
Less accumulated depreciation (189,482) (159,049)
----------- -----------
2,310,490 1,584,174
Investments in real estate joint ventures 21,803 15,104
Investment in mortgage notes and notes
receivable 341,666 99,268
Cash and cash equivalents 41,289 2,228
Tenant receivables 2,978 5,159
Investments in and advances to affiliates 94,698 53,154
Deferred rent receivable 24,955 22,526
Prepaid expenses and other assets 20,053 46,372
Contract and land deposits and
pre-acquisition costs 2,118 2,253
Deferred lease and loan costs 33,324 24,282
----------- -----------
Total Assets $ 2,893,374 $ 1,854,520
=========== ===========
Liabilities
Mortgage notes payable $ 387,014 $ 253,463
Unsecured credit facilities 479,100 465,850
Unsecured term loan 75,000 20,000
Senior unsecured notes 449,279 150,000
Accrued expenses and other liabilities 64,472 48,384
Distributions payable 24,915 19,663
Affiliate payables 1,157 2,395
----------- -----------
Total Liabilities 1,480,937 959,755
----------- -----------
Commitments and other comments --- ---
Minority interests in consolidated partnerships 127,506 52,173
----------- -----------
PARTNERS' CAPITAL
Preferred Capital, 15,234,518 and 9,234,518
units outstanding, respectively 413,126 263,126
General Partner's Capital:
Common units, 40,364,588 and 40,035,419
units outstanding, respectively 479,826 485,341
Class B Common Units, 11,694,567 and 0 units
outstanding, respectively 300,539 ---
Limited Partners' Capital, 7,701,542 and
7,764,630 units outstanding, respectively 91,440 94,125
----------- -----------
Total Partners' Capital 1,284,931 842,592
----------- -----------
Total Liabilities and Partners' Capital $ 2,893,374 $ 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 June 30, Six Months Ended June 30,
------------------------------ -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Base rents $ 77,192 $ 55,536 $ 139,285 $ 102,571
Tenant escalations and reimbursements 8,586 7,061 17,129 13,113
Equity in earnings of real estate joint ventures 438 173 649 273
Equity in earnings of service companies 74 651 240 392
Interest income on mortgage notes and notes
receivable 1,910 1,773 4,718 3,453
Other 2,646 1,073 4,932 1,527
------------ ------------ ------------ -------------
Total Revenues 90,846 66,267 166,953 121,329
------------ ------------ ------------ -------------
Expenses:
Property operating expenses 15,038 12,073 27,436 21,693
Real estate taxes 12,011 9,032 22,112 17,036
Ground rents 490 432 898 845
Marketing, general and administrative 4,550 3,639 8,624 6,943
Interest 18,902 10,970 32,846 21,497
Depreciation and amortization 19,127 12,457 34,218 23,264
------------ ------------ ------------ -------------
Total Expenses 70,118 48,603 126,134 91,278
------------ ------------ ------------ -------------
Income before distributions to preferred unit
holders and minority interests' 20,728 17,664 40,819 30,051
Preferred unit distributions (5,989) (4,168) (11,031) (4,168)
Minority partners' interest in consolidated
partnerships income (1,615) (712) (2,783) (1,273)
------------ ------------ ------------ -------------
Net income available to common unit holders $ 13,124 $ 12,784 $ 27,005 $ 24,610
============ ============ ============ =============
Net Income:
General Partner - common units $ 9,550 $ 10,022 $ 21,190 $ 19,857
General Partner - Class B Common Units 1,747 --- 1,747 ---
Limited Partners' 1,827 2,762 4,068 4,753
------------ ------------ ------------ -------------
Total $ 13,124 $ 12,784 $ 27,005 $ 24,610
============ ============ ============ =============
Net income per common unit:
General Partner - common units $ 0.24 $ 0.25 $ 0.53 $ 0.51
General Partner - Class B Common Units $ 0.36 $ --- $ 0.71 $ ---
Limited Partners' $ 0.24 $ 0.36 $ 0.53 $ 0.62
Weighted average common units outstanding:
General Partner - common units 40,285,000 39,637,000 40,167,000 38,914,000
General Partner - Class B Common Units 4,883,000 --- 2,455,000 ---
Limited Partners' 7,705,000 7,694,000 7,708,000 7,701,000
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Reckson Operating Partnership, L.P
Consolidated Statement of Cash Flows
(Unaudited and in thousands)
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income available to common unitholders $ 27,005 $ 24,610
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 34,218 23,264
Minority partners' interests in consolidated partnerships 2,783 1,273
Loss reserve on real estate held for sale . 4,450 ---
Gain of sale of interest in Reckson Executive Centers, LLC --- (9)
Gain on sale of securities and mortgage redemption (4,492) (43)
Distribution from a real estate joint venture 173 217
Equity in earnings of service companies (240) (392)
Equity in earnings of real estate joint ventures (649) (273)
Changes in operating assets and liabilities:
Prepaid expenses and other assets (15,254) (10,728)
Tenant receivables 2,181 913
Deferred rents receivable (2,429) (3,614)
Real estate tax escrow (618) 115
Accrued expenses and other liabilities 22,232 8,573
---------- -----------
Net cash provided by operating activities 69,360 43,906
---------- -----------
Cash Flows from Investing Activities:
Purchases of commercial real estate properties (194,871) (383,366)
Increase in real estate held for sale . (57,095) ---
Increase in deposits and pre- acquisition costs (1,889) 4,187
Investment in mortgage notes and notes receivable (262,643) 20,097
Additions to commercial real estate properties (16,389) (9,754)
Additions to developments in progress (8,073) (43,330)
Payment of leasing costs (7,377) (3,768)
Additions to furniture, fixtures and equipment (447) (776)
Investments in real estate joint ventures (6,223) (2,970)
Proceeds from sales of property, securities and mortgage
redemption 25,929 809
---------- -----------
Net cash used in investing activities (529,078) (418,871)
---------- -----------
Cash Flows from Financing Activities:
Principal payments on secured borrowings (1,495) (3,118)
Proceeds from issuance of senior unsecured notes net of
issuance costs 299,262 ---
Payment of loan costs (5,368) (69)
Investments in and advances to affiliates (41,304) (26,205)
Proceeds from unsecured credit facilities 299,000 180,996
Principal payments on unsecured credit facilities (230,750) (94,000)
Contributions of minority partners' in consolidated partnerships 75,000 ---
Contributions 149,300 314,315
Distributions (42,416) (14,498)
Distributions to minority partners' in consolidated partnerships (2,450) (1,311)
---------- -----------
Net cash provided by financing activities 498,779 356,110
---------- -----------
Net increase (decrease) in cash and cash equivalents 39,061 (18,855)
Cash and cash equivalents at beginning of period 2,228 21,676
---------- -----------
Cash and cash equivalents at end of period $ 41,289 $ 2,821
========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 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 and is the successor to the operations of
the Reckson Group. 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 2,758,960 units in the Operating Partnership ("Units") to the
continuing investors and assumed approximately $163 million (net of the Omni
mortgages) of 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 June 30, 1999, the Operating Partnership owned and operated 92 office
properties comprising approximately 14.9 million square feet, 130 industrial
properties comprising approximately 11.1 million square feet and two retail
properties comprising approximately 20,000 square feet, located in the New York
Tri-State area (the "Tri-State Area"). In addition, the Operating Partnership
owned or had contracted to acquire approximately 1,013 acres of land (including
approximately 306 acres under option) in 20 separate parcels of which the
Operating Partnership can develop approximately 9.8 million square feet of
industrial and office space. The Operating Partnership also has invested
approximately $306.1 million in mortgage notes encumbering three Class A office
properties encompassing approximately 1.6 million square feet, a 306 acre parcel
of land located in New Jersey and in a note receivable secured by a partnership
interest in Omni Partner's, L.P., owner of the Omni, a 575,000 square foot Class
A office property located in Uniondale, New York.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI")
and Reckson Strategic Venture Partners, LLC ("RSVP"). On June 11, 1998, the
Operating Partnership distributed its 95% common stock interest in RSI of
approximately $3 million to its owners, including the Company which, in turn,
distributed the common stock of RSI to its stockholders. Additionally, during
June 1998, the Operating Partnership established a credit facility with RSI
(the"RSI Facility") in the amount of $100 million for RSI's service sector
operations and other general corporate purposes. As of June 30, 1999, the
Operating Partnership had advanced $46.4 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 June 30,
1999, approximately $36.9 million had been invested through the RSVP Commitment,
of which $16.3 million represents RSVP controlled joint venture REIT-qualified
investments and $20.6 million represents advances to RSI under the RSVP
Commitment. RSI serves as the managing member of RSVP. RSI invests in operating
companies that generally provide commercial services to 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. As of June 30, 1999, the Operating Partnership has invested approximately
$95.5 million for an approximate 72% controlling interest. In addition, at June
30, 1999, the Operating Partnership had advanced approximately $34 million to
RMI to acquire an 846,000 square foot industrial property (see note 9).
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Tower Realty Trust, Inc.
("Tower"). On May 24, 1999 the Company completed the merger with Tower (see Note
6) and acquired three Class A office properties located in New York City
totaling 1.6 million square feet and one office property located on Long Island
totaling approximately 101,000 square feet. In addition, pursuant to the merger,
the Company also acquired certain office properties, a property under
development and land located outside of the Tri-State Area which have either
been sold, are under contract to sell or are being held for sale. The assets
currently being held for sale have been included in real estate held for sale on
the accompanying consolidated balance sheet.
Basis of Presentation
The accompanying consolidated financial statements include the consolidated
financial position of the Operating Partnership and its subsidiaries at June 30,
1999 and December 31, 1998 and the results of its operations for the three and
six months ended June 30, 1999 and 1998, respectively, and, its cash flows for
the six months ended June 30, 1999 and 1998, respectively. The Operating
Partnership's investments in Metropolitan, RMI 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 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 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 commercial real estate properties and real estate held
for sale.
The minority interests at June 30, 1999 represent an approximate 28%
interest in RMI, a convertible preferred interest in Metropolitan and a 40%
interest in Omni.
The accompanying interim unaudited financial statements have been prepared
by the 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 generally accepted accounting principles ("GAAP") may have been
condensed or omitted pursuant to such rules and regulations, although management
believes that the disclosures are adequate to make the information presented not
misleading. The unaudited financial statements as of June 30, 1999 and for the
six month periods ended June 30, 1999 and 1998 include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial information set forth herein. The
results of operations for the interim periods are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. These
financial statements should be read in conjunction with the 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 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The 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 June 30, 1999, the Operating Partnership had approximately $387
million of fixed rate mortgage notes which mature at various times between
August 1999 and November 2027. The notes are secured by 25 properties and two
parcels of land and have a weighted average interest rate of approximately 7.5%.
In addition, as of June 30, 1999, the Operating Partnership had a construction
loan payable secured by a development property held for sale in the amount of
approximately $5.4 million which was satisfied during July 1999.
3. Senior Unsecured Notes
As of June 30, 1999, the Operating Partnership had outstanding
approximately $449.3 million (net of issuance discounts) of senior unsecured
notes (the "Senior Unsecured Notes"). The following table sets forth the
Operating Partnership's Senior Unsecured Notes and other related disclosures
(dollars in thousands):
Issuance Face Amount Coupon Rate Term Maturity
-------- ----------- ----------- ---- --------
August 27, 1997 $ 150,000 7.20% 10 years August 28, 2007
March 26, 1999 $ 100,000 7.40% 5 years March 15, 2004
March 26, 1999 $ 200,000 7.75% 10 years March 15, 2009
Interest on the Senior Unsecured Notes is payable semiannually with
principal and unpaid interest due on the scheduled maturity dates. In addition,
the five year and 10 year Senior Unsecured Notes issued on March 26, 1999 were
issued at a discount of $172,000 and $566,000, respectively.
Net proceeds of approximately $297.4 million received from the issuance of
the March 26, 1999 Senior Unsecured Notes were used to repay outstanding
borrowings under the Credit Facility.
4. Unsecured Credit Facilities and Unsecured Term Loan
As of June 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 second investment grade rating on its senior unsecured
debt. As a result, the pricing under the Credit Facility was adjusted to LIBOR
plus 90 basis points.
The 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 June 30, 1999, the
Operating Partnership had availability under the Credit Facility to borrow an
additional $123 million (net of $28 million of outstanding undrawn letters of
credit).
As of June 30, 1999, the 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 priced off of LIBOR plus 150 basis points
for the first nine months and 175 basis points for the remaining three months.
At June 30, 1999, the 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.
5. Partners' Capital
On May 26, 1999 the Operating Partnership declared a distribution of
$.37125 per common partnership unit payable on July 16, 1999 to its unitholders
of record as of July 8, 1999. The distribution declared, which related to the
three months ended June 30, 1999, is based upon an annual distribution of $1.485
per unit.
On May 26, 1999 the Operating Partnership declared a distribution on the
general partner's Series A preferred units of $.4766 per unit payable on August
2, 1999. The distribution declared, which relates to the three months ended July
31, 1999 is based on an annual distribution of $1.906 per unit.
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 July 9, 1999 the Operating Partnership declared a distribution of $.4231
per Class B common partnership unit payable on August 2, 1999 to the general
partner. The distribution declared, which related to the period from May 24,
1999 through July 31, 1999, is based upon an annual distribution of $2.24 per
unit.
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 which allows for approximately 1.1 million square
feet of future development opportunities. In addition, RMI purchased 74.6 acres
of vacant land for approximately $3.7 million which allows for approximately
1,000,000 square feet of future development opportunities and an 846,000 square
foot industrial property located in Cranbury, New Jersey for approximately $34
million which was advanced by the Company.
On April 13, 1999, the 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 $4.5 million. Such gain has been included in
other income on the accompanying consolidated statement 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 ultimately obtaining 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 acquisitions through June 30, 1999.
In July 1998, the Company formed a joint venture, Metropolitan Partners
LLC, a Delaware limited liability company ("Metropolitan"), with Crescent Real
Estate Equities Company, a Texas real estate investment trust ("Crescent").
On December 8, 1998, the Company, Metropolitan and Tower Realty Trust, Inc.
("Tower") executed a merger agreement and on May 24, 1999 Tower was merged (the
"Merger") into Metropolitan, with Metropolitan surviving the Merger.
Concurrently with the Merger, Tower Realty Operating Partnership, L.P. ("Tower
OP") was merged with and into a subsidiary of Metropolitan. The consideration
issued in the mergers was comprised of (i) 25% cash (approximately $107.2
million) and (ii) 75% of shares of Class B Exchangeable Common Stock, par value
$.01 per share, of the Company (the "Class B Common Stock") (valued for GAAP
purposes at approximately $304.1 million).
Under the terms of the transaction, Metropolitan effectively paid for each
share of Tower common stock and each unit of limited partnership interest of
Tower OP the sum of (i) $5.75 in cash, and (ii) 0.6273 of a share of Class B
Common Stock. The shares of Class B Common Stock are entitled to receive an
initial annual dividend of $2.24 per share, which dividend is subject to
adjustment annually. The shares of Class B Common Stock are exchangeable at any
time, at the option of the holder, into an equal number of shares of common
stock, par value $.01 per share, of the Company subject to customary
antidilution adjustments. The Company, at its option, may redeem any or all of
the Class B Common Stock in exchange for an equal number of shares of the
Company's common stock at any time following the four year, six-month
anniversary of the issuance of the Class B Common Stock.
The Company controls Metropolitan and owns 100% of the common equity;
Crescent owns a $85 million preferred equity investment in Metropolitan.
Crescent's investment accrues distributions at a rate of 7.5% per annum for a
two-year period and may be redeemed by Metropolitan at any time during that
period for $85 million, plus an amount sufficient to provide a 9.5% internal
rate of return. If Metropolitan does not redeem the preferred interest, upon the
expiration of the two-year period, Crescent must convert its $85 million
preferred interest into either (i) a common membership interest in Metropolitan
or (ii) shares of the Company's common stock at a conversion price of $24.61 per
share.
The Tower portfolio acquired in the Merger consists of three office
properties comprising approximately 1.6 million square feet located in New York
City, one office property located on Long Island and certain office properties
and other real estate assets located outside the Tri-State Area.
Prior to the closing of the Merger, the Company arranged for the sale of
four of Tower's Class B New York City properties, comprising approximately
701,000 square feet for approximately $84.5 million. Subsequent to the closing
of the Merger, the Company has sold a real estate joint venture interest, one
office property and one development property all located outside the Tri State
Area for approximately $58 million. In addition, the remaining properties
located outside of the Tri-State Area are under contract to sell or are being
held for sale. The Company currently anticipates that it will incur certain
sales and closing costs in connection with the sale of several of the assets
located outside the Tri State Area. As a result, the Company has recorded a loss
reserve of approximately $4.4 million which has been included in other income on
the Company's consolidated statement of income.
7. 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 in the Tri-State Area (the "Core Portfolio").
In addition the Operating Partnership's portfolio also includes 22 industrial
properties owned by RMI. The Company and RMI have managing directors who report
directly to the Chief Operating Officer and Chief Financial Officer who have
been identified as the Chief Operating Decision Makers because of their final
authority over resource allocation decisions and performance assessment.
In addition, as the Operating Partnership expects to meet its short term
liquidity requirements in part through the credit facilities and Term Loan,
interest incurred on borrowings under the credit facilities and Term Loan is not
considered as part of property operating performance. Further, the Company does
not consider the property operating performance of real estate held for sale as
a reportable segment.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
The following table sets forth the components of the Operating
Partnership's revenues and expenses and other related disclosures for the three
months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, 1999
------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and reimbursements $ 76,943 $ 5,287 $ 3,548 $ 85,778
Equity in earnings of real estate joint ventures
and service companies ....................... -- -- 512 512
Other income .................................... 144 -- 4,412 4,556
---------- --------- --------- ----------
Total Revenues ....................................... 77,087 5,287 8,472 90,846
---------- --------- --------- ----------
Expenses:
Property expenses ............................... 25,554 816 1,169 27,539
Marketing, general and administrative ........... 3,858 167 525 4,550
Interest ........................................ 5,191 940 12,771 18,902
Depreciation and amortization ................... 16,212 1,287 1,628 19,127
---------- --------- --------- ----------
Total Expenses ....................................... 50,815 3,210 16,093 70,118
---------- --------- --------- ----------
Income before preferred dividends and distributions
and minority interests' ......................... $ 26,272 $ 2,077 $ (7,621) $ 20,728
========== ========= ========= ==========
Total Assets $2,082,784 $ 194,898 $ 615,692 $2,893,374
========== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1998
------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and reimbursements $ 59,186 $ 3,411 $ -- $ 62,597
Equity in earnings of real estate joint ventures
and service companies ....................... -- -- 824 824
Other income .................................... 189 -- 2,657 2,846
---------- --------- --------- ----------
Total Revenues ....................................... 59,375 3,411 3,481 66,267
---------- --------- --------- ----------
Expenses:
Property expenses ............................... 20,963 574 -- 21,537
Marketing, general and administrative ........... 2,508 106 1,025 3,639
Interest ........................................ 4,211 281 6,478 10,970
Depreciation and amortization ................... 10,899 778 780 12,457
---------- --------- --------- ----------
Total Expenses ....................................... 38,581 1,739 8,283 48,603
---------- --------- --------- ----------
Income before preferred dividends and distributions
and minority interests' ......................... $ 20,794 $ 1,672 $ (4,802) $ 17,664
========== ========= ========= ==========
Total Assets $1,425,924 $ 113,937 $ 84,481 $1,624,342
========== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and reimbursements $ 142,966 $ 9,900 $ 3,548 $ 156,414
Equity in earnings of real estate joint ventures
and service companies ....................... --- --- 889 889
Other income .................................... 213 2 9,435 9,650
---------- --------- --------- ----------
Total Revenues ....................................... 143,179 9,902 13,872 166,953
---------- --------- --------- ----------
Expenses:
Property expenses ............................... 47,710 1,567 1,169 50,446
Marketing, general and administrative ........... 7,800 298 526 8,624
Interest ........................................ 9,751 1,217 21,878 32,846
Depreciation and amortization ................... 28,993 2,367 2,858 34,218
---------- --------- --------- ----------
Total Expenses ....................................... 94,254 5,449 26,431 126,134
---------- --------- --------- ----------
Income before preferred dividends and distributions
and minority interests' ......................... $ 48,925 $ 4,453 $ (12,559) $ 40,819
========== ========= ========= ==========
Total Assets $2,082,784 $ 194,898 $ 615,692 $2,893,374
========== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998
------------------------------------------
Core Consolidated
Portfolio RMI Other Totals
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Revenues:
Base rents, tenant escalations and reimbursements $ 109,048 $ 6,636 $ --- $ 115,684
Equity in earnings of real estate joint ventures
and service companies ....................... --- --- 665 665
Other income .................................... 222 --- 4,758 4,980
---------- --------- --------- ----------
Total Revenues ....................................... 109,270 6,636 5,423 121,329
---------- --------- --------- ----------
Expenses:
Property expenses ............................... 38,458 1,116 --- 39,574
Marketing, general and administrative ........... 5,238 206 1,499 6,943
Interest ........................................ 7,683 536 13,278 21,497
Depreciation and amortization ................... 20,245 1,535 1,484 23,264
---------- --------- --------- ----------
Total Expenses ....................................... 71,624 3,393 16,261 91,278
---------- --------- --------- ----------
Income before preferred dividends and distributions
and minority interests' ......................... $ 37,646 $ 3,243 $ (10,838) $ 30,051
========== ========= ========= ==========
Total Assets $1,425,924 $ 113,937 $ 84,481 $1,624,342
========== ========= ========= ==========
</TABLE>
8. Non-Cash Investing and Financing Activities (in thousands)
Six Months Ended June 30,
-----------------------
1999 1998
---------- -----------
Cash paid during the period for interest $ 24,662 $ 17,869
======== =========
Interest capitalized during the period $ 4,440 $ 3,263
======== =========
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 Event
On August 9, 1999, the Operating Partnership executed a contract for the
sale of RMI and three other big box industrial properties to American Real
Estate Investment Corporation ("REA"). In addition, the Operating Partnership
also entered into a sale agreement with Matrix Development Group ("Matrix")
relating to a first mortgage note and certain industrial land holdings. The
combined total sale price is $310 million (approximately $42 million of which is
payable to the Morris Companies and its affiliates) and will consist of a
combination of cash, convertible preferred and common stock of REA, preferred
units of REA's operating partnership, relief of debt and a purchase money
mortgage note secured by certain land that is being sold to Matrix. The closing
will take place in three stages which are anticipated to be completed during
August 1999, December 1999, and April 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the 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 June 30, 1999, the Operating Partnership owned and operated 92 office
properties comprising approximately 14.9 million square feet, 130 industrial
properties comprising approximately 11.1 million square feet and two retail
properties comprising approximately 20,000 square feet, located in the Tri-State
Area. In addition, the Operating Partnership owned or had contracted to acquire
approximately 1,013 acres of land (including approximately 306 acres under
option) in 20 separate parcels of which the Operating Partnership can develop
approximately 9.8 million square feet of industrial and office space. The
Operating Partnership also has invested approximately $306.1 million in mortgage
notes encumbering three Class A office properties encompassing approximately 1.6
million square feet, a 306 acre parcel of land located in New Jersey and in a
note receivable secured by a partnership interest in Omni Partner's, L.P., owner
of the Omni, a 575,000 square foot Class A office property located in Uniondale,
New York.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI")
and Reckson Strategic Venture Partners, LLC ("RSVP"). On June 11, 1998, the
Operating Partnership distributed its 95% common stock interest in RSI of
approximately $3 million to its owners, including the Company which, in turn,
distributed the common stock of RSI received from the Operating Partnership to
its stockholders. Additionally, during June 1998, the Operating Partnership
established a credit facility with RSI (the"RSI Facility") in the amount of $100
million for RSI's service sector operations and other general corporate
purposes. As of June 30, 1999, the Operating Partnership had advanced $46.4
million under the RSI Facility. In addition, the Operating Partnership has
approved the funding of investments of up to $100 million with or in RSVP (the
"RSVP Commitment"), through RSVP-controlled joint venture REIT-qualified
investments or advances made to RSI under terms similar to the RSI Facility. As
of June 30, 1999, approximately $36.9 million had been invested through the RSVP
Commitment, of which $16.3 million represents RSVP-controlled joint venture
REIT-qualified investments and $20.6 million represents advances to RSI under
the RSVP Commitment. RSI serves as the managing member of RSVP. RSI invests in
operating companies that generally provide commercial services to properties
owned by the 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. As of June 30, 1999, the Operating Partnership has invested approximately
$95.5 million for an approximate 72% controlling interest. In addition, at June
30, 1999, the Operating Partnership had advanced approximately $34 million to
RMI to acquire an 846,000 square foot industrial property.
On August 9, 1999, the Operating Partnership executed a contract for the
sale of RMI and three other big box industrial properties to American Real
Estate Investment Corporation ("REA"). In addition, the Operating Partnership
also entered into a sale agreement with Matrix Development Group ("Matrix")
relating to a first mortgage note and certain industrial land holdings. The
combined total sale price is $310 million (approximately $42 million of which is
payable to the Morris Companies and its affiliates) and will consist of a
combination of cash, convertible preferred and common stock of REA, preferred
units of REA's operating partnership, relief of debt and a purchase money
mortgage note secured by certain land that is being sold to Matrix. The closing
will take place in three stages which are anticipated to be completed during
August 1999, December 1999, and April 2000.
In July 1998, the Company formed a joint venture, Metropolitan Partners
LLC, a Delaware limited liability company ("Metropolitan"), with Crescent Real
Estate Equities Company, a Texas real estate investment trust ("Crescent").
On December 8, 1998, the Company, Metropolitan and Tower Realty Trust, Inc.
("Tower") executed a merger agreement and on May 24, 1999 Tower was merged (the
"Merger") into Metropolitan, with Metropolitan surviving the Merger.
Concurrently with the Merger, Tower Realty Operating Partnership, L.P. ("Tower
OP") was merged with and into a subsidiary of Metropolitan. The consideration
issued in the mergers was comprised of (i) 25% cash (approximately $107.2
million) and (ii) 75% of shares of Class B Exchangeable Common Stock, par value
$.01 per share, of the Company (the "Class B Common Stock") (valued for GAAP
purposes at approximately $304.1 million).
Under the terms of the transaction, Metropolitan effectively paid for each
share of Tower common stock and each unit of limited partnership interest of
Tower OP the sum of (i) $5.75 in cash, and (ii) 0.6273 of a share of Class B
Common Stock. The shares of Class B Common Stock are entitled to receive an
initial annual dividend of $2.24 per share, which dividend is subject to
adjustment annually. The shares of Class B Common Stock are exchangeable at any
time, at the option of the holder, into an equal number of shares of common
stock, par value $.01 per share, of the Company subject to customary
antidilution adjustments. The Company, at its option, may redeem any or all of
the Class B Common Stock in exchange for an equal number of shares of the
Company's common stock at any time following the four year, six-month
anniversary of the issuance of the Class B Common Stock.
The Company controls Metropolitan and owns 100% of the common equity;
Crescent owns a $85 million preferred equity investment in Metropolitan.
Crescent's investment accrues distributions at a rate of 7.5% per annum for a
two-year period and may be redeemed by Metropolitan at any time during that
period for $85 million, plus an amount sufficient to provide a 9.5% internal
rate of return. If Metropolitan does not redeem the preferred interest, upon the
expiration of the two-year period, Crescent must convert its $85 million
preferred interest into either (i) a common membership interest in Metropolitan
or (ii) shares of the Company's common stock at a conversion price of $24.61 per
share.
The Tower portfolio acquired in the Merger consists of three office
properties comprising approximately 1.6 million square feet located in New York
City, one office property located on Long Island and certain office properties
and other real estate assets located outside the Tri-State Area.
Prior to the closing of the Merger, the Company arranged for the sale of
four of Tower's Class B New York City properties, comprising approximately
701,000 square feet for approximately $84.5 million. Subsequent to the closing
of the Merger, the Company has sold a real estate joint venture interest, one
office property and one development property all located outside the Tri State
Area for approximately $58 million. In addition, the remaining properties
located outside of the Tri-State Area are under contract to sell or are being
held for sale. The Company currently anticipates that it will incur certain
sales and closing costs in connection with the sale of several of the assets
located outside the Tri State Area. As a result, the Company has recorded a loss
reserve of approximately $4.4 million which has been included in other income on
the Company's consolidated statement of income.
The market capitalization of the Operating Partnership at June 30, 1999 was
approximately $3.2 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 stated values of the Operating Partnership's preferred units
and the $1.4 billion (including its share of joint venture debt and net of
minority partners' interest) of debt outstanding at June 30, 1999. As a result,
the Operating Partnership's total debt to total market capitalization ratio at
June 30, 1999 equaled approximately 42.7%.
Result of Operations
The Operating Partnership's total revenues increased by $24.6 million or
37.1% for the three months ended June 30, 1999 as compared to the 1998 period.
The growth in total revenues is substantially attributable to the Operating
Partnership's acquisition of 42 properties comprising approximately 8.0 million
square feet and the development of three properties comprising approximately
412,000 square feet. Property operating revenues, which include base rents and
tenant escalations and reimbursements ("Property Operating Revenues") increased
by $23.2 million or 37% for the three months ended June 30, 1999 as compared to
the 1998 period. The 1999 increase in Property Operating Revenues is comprised
of approximately $2.4 million attributable to increases in rental rates and
changes in occupancies and approximately $20.8 million attributable to the
acquisitions and development of properties. The remaining balance of the
increase in total revenues in 1999 is primarily attributable to interest income
on the Operating Partnership's investments in mortgage notes and notes
receivable. The Operating Partnership's base rent was increased by the impact of
the straight-line rent adjustment by $3.2 million for the three months ended
June 30, 1999 as compared to $2.1 million for the 1998 period.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $6 million or 27.9% for the three months ended June 30,
1999 as compared to the 1998 period. These increases are primarily due to the
acquisition of properties. Gross operating margins (defined as Property
Operating Revenues less Property Expenses, taken as a percentage of Property
Operating Revenues) for the three months ended June 30, 1999 and 1998 were 67.9%
and 65.6% respectively. The increase in gross operating margins reflects
increases realized in rental rates and the Operating Partnership's ability to
realize certain operating efficiencies as a result of operating a larger
portfolio of properties with concentrations of properties in office and
industrial parks or in its established sub-markets.
Marketing, general and administrative expenses increased by $911,000 for
the three months ended June 30, 1999 as compared to the 1998 period. The
increase is due to the increased costs of managing the acquisition properties
and the increase in corporate management and administrative costs associated
with the growth of the Operating Partnership including the opening of its New
York City division. Marketing, general and administrative expenses as a
percentage of total revenues were 5.01% for the three months ended June 30, 1999
as compared to 5.49% for the 1998 period.
Interest expense increased by $7.9 million for the three months ended June
30, 1999 as compared to the 1998 period. The increase is attributable to an
increased cost attributable to an increased average balance on the 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 in
conjunction with the Tower acquisition. The weighted average balance outstanding
on the Company's credit facilities and Term Loan was $352.1 million for the
three months ended June 30, 1999 as compared to $306.9 million for the 1998
period.
The Operating Partnership's total revenues increased by $45.6 million or
37.6% for the six months ended June 30 1999 as compared to the 1998 period. The
growth in total revenues is substantially attributable to the Operating
Partnership's acquisition of 70 properties comprising approximately 12.4 million
square feet. Property Operating Revenues increased by $40.7 million or 35.2% for
the six months ended June 30, 1999. As compared to the 1998 period. The 1999
increase in Property Operating Revenues is comprised of $5.5 million
attributable to increases in rental rates and changes in occupancies and $35.2
million attributable to acquisitions and development of properties. The
remaining balance of the increase in total revenues in 1999 is primarily
attributable to interest income on the Operating Partnership's investments in
mortgage notes and notes receivable. The Operating Partnership's base rent was
increased by the impact of the straight-line rent adjustment by $4.6 million for
the six months ended June 30 1999 as compared to $3.6 million for the 1998
period.
Property Expenses increased by $10.9 million for the six months ended June
30, 1999 as compared to the 1998 period. These increases are primarily due to
the acquisition of properties. Gross operating margins for the six months ended
June 30, 1999 and 1998 were 67.8% and 65.8%, respectively. The increase in gross
operating margins reflects increases realized in rental rates and the Operating
Partnership's ability to realize certain operating efficiencies as a result of
operating a larger portfolio of properties with concentration of properties in
office and industrial parks or in its established sub-markets.
Marketing, general and administrative increased by $1.7 million for the six
months ended June 30, 1999 as comparable to the 1998 period. The increase is due
to increased costs of managing the acquisition properties and the increase in
corporate management and administrative costs associated with the growth of the
Operating Partnership including the opening of its New York City division.
Marketing, general and administrative expenses as a percentage of total revenues
were 5.17% for the six months ended June 30, 1999 as compared to 5.72% for the
1999 period.
Interest expense increased by $11.3 million for the six months ended June
30, 1999 as compared to the 1998 period. The increase is attributable to an
increased cost attributable to an increased average balance on the 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 in
conjunction with the Tower acquisition. The weighted average balance outstanding
on the Operating Partnership's credit facilities was $429 million for the six
months ended June 30, 1999 as compared to $311.5 million for the 1998 period.
Liquidity and Capital Resources
During April 1998, the Company 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 June 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 second investment grade rating on its senior unsecured
debt. As a result, the pricing under the Credit Facility was adjusted to LIBOR
plus 90 basis points.
The 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 June 30, 1999, the
Operating Partnership had availability under the Credit Facility to borrow an
additional $123 million (net of $28 million of outstanding undrawn letters of
credit).
As of June 30, 1999, the 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 priced off of LIBOR plus 150 basis points
for the first nine months and 175 basis points for the remaining three months.
At June 30, 1999, the 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.
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.
The Operating Partnership's indebtedness at June 30, 1999 totaled $1.4
billion (including its share of joint venture debt and net of the minority
partners' interests) and was comprised of $473.3 million outstanding under the
credit facilities (of which $125 million has been subsequently refinanced with a
long term fixed rate secured borrowing), $75 million outstanding under the Term
Loan, $449.3 million of senior unsecured notes and approximately $366.3 million
of mortgage indebtedness. Based on the Operating Partnership's total market
capitalization of approximately $3.2 billion at June 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 42.7% of its total market
capitalization.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures of the 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 Partnerhips's office and industrial properties for
the six month period ended June 30, 1999 and the historical average of such
non-incremental capital expenditures, tenant improvements and leasing
commissions for the years 1995 through 1998.
<TABLE>
Non-Incremental Revenue Generating Tenant Improvements and Leasing Commissions
<CAPTION>
Six
Months
Ended
1995 -1998 June 30,
1995 1996 1997 1998 Average 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long Island Office Properties
Tenant Improvements $452,057 $523,574 $784,044 $1,140,251 $724,982 $141,292
Per Square Foot Improved 4.44 4.28 7.00 3.98 4.92 2.33
Leasing Commissions $144,925 $119,047 $415,822 $418,191 $274,496 $90,216
Per Square Foot Leased 1.42 0.97 4.83 1.46 2.17 1.18
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot $5.86 $5.25 $11.83 $5.44 $7.09 $3.51
========= ========= ========== =========== ========= =========
Westchester Office Properties
Tenant Improvements N/A $834,764 $1,211,665 $711,160 $961,413 $376,574
Per Square Foot Improved N/A 6.33 8.90 4.45 6.67 4.12
Leasing Commissions N/A $264,388 $366,257 $286,150 $326,204 $165,254
Per Square Foot Leased N/A 2.00 2.69 1.79 2.24 1.81
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot N/A $8.33 $11.59 $6.24 $8.91 $5.93
========= ========= ========== =========== ========= =========
Connecticut Office Properties<F1>
Tenant Improvements N/A $58,000 $1,022,421 $202,880 $570,356 $45,445
Per Square Foot Improved N/A 12.45 13.39 5.92 9.66 6.47
Leasing Commissions N/A $0.00 $256,615 $151,063 $181,190 $14,550
Per Square Foot Leased N/A 0.00 3.36 4.41 3.89 2.07
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot N/A $12.45 $16.75 $10.33 $13.55 $8.54
========= ========= ========== =========== ========= =========
New Jersey Office Properties
Tenant Improvements N/A N/A N/A $654,877 $654,877 $119,323
Per Square Foot Improved N/A N/A N/A 3.78 3.78 2.20
Leasing Commissions N/A N/A N/A $396,127 $396,127 $193,570
Per Square Foot Leased N/A N/A N/A 2.08 2.08 3.18
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot N/A N/A N/A $5.86 $5.86 $5.38
========= ========= ========== =========== ========= =========
Industrial Properties
Tenant Improvements $210,496 $380,334 $230,466 $283,842 $276,285 $150,222
Per Square Foot Improved 0.90 0.72 0.55 0.76 0.73 0.15
Leasing Commissions $107,351 $436,213 $81,013 $200,154 $206,183 $681,474
Per Square Foot Leased 0.46 0.82 0.19 0.44 0.48 0.67
--------- --------- ---------- ----------- --------- ---------
Total Per Square Foot $1.36 $1.54 $0.75 $1.20 $1.21 $0.82
========= ========= ========== =========== ========= =========
<FN>
<F1>
1995 - 1998 average weighted to reflect October 1996 acquisition date
</FN>
</TABLE>
LEASE EXPIRATIONS
The following table sets forth scheduled lease expirations for executed
leases as of June 30, 1999:
<TABLE>
Long Island Office Properties (excluding Omni):
<CAPTION>
Percent
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 19 79,657 2.7% $21.31 $21.54
2000 45 268,683 9.1% $21.71 $23.29
2001 40 187,022 6.3% $22.15 $24.02
2002 33 255,550 8.6% $22.30 $23.71
2003 52 342,577 11.6% $21.81 $23.10
2004 38 246,753 8.4% $22.69 $25.17
2005 and thereafter 89 1,576,056 53.3% --- ---
------ ---------- --------
Total 316 2,956,298 100.0%
====== ========== ========
<FN>
<F1> Per square foot rental rate represents annualized straight line
rent as of the lease expiration date.
<F2> Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Omni:
<CAPTION>
Percent
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 --- --- --- --- ---
2000 4 60,316 10.2% $31.71 $36.63
2001 4 32,680 5.6% $27.36 $33.63
2002 4 129,351 22.0% $24.78 $27.14
2003 5 72,530 12.3% $29.56 $29.71
2004 4 112,414 19.1% $25.98 $33.12
2005 and thereafter 8 181,502 30.8% --- ---
------ ---------- --------
Total 29 588,793 100.0%
====== ========== ========
<FN>
<F1>
Per square foot rental rate represents annualized straight line rent as of the
lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Industrial Properties:
<CAPTION>
Percent
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 22 296,298 5.2% $5.12 $5.68
2000 30 1,105,940 19.3% $4.84 $5.19
2001 28 676,925 11.8% $5.70 $7.16
2002 26 207,544 3.6% $6.42 $7.09
2003 30 724,434 12.7% $5.26 $6.06
2004 24 509,372 8.9% $6.59 $7.15
2005 and thereafter 42 2,207,616 38.5% --- ---
------ ---------- --------
Total 202 5,728,129 100.0%
====== ========== ========
<FN>
<F1>
Per square foot rental rate represents annualized straight line rent as of the
lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Research and Development Properties:
<CAPTION>
Percent
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 4 26,891 2.1% $8.68 $9.44
2000 7 111,040 8.7% $8.20 $8.58
2001 8 150,120 11.8% $10.75 $11.31
2002 3 67,967 5.3% $10.54 $12.51
2003 4 271,042 21.3% $5.38 $5.25
2004 6 105,303 8.3% $11.93 $13.20
2005 and thereafter 11 540,277 42.5% --- ---
------ ---------- --------
Total 43 1,272,640 100.0%
====== ========== ========
<FN>
<F1>
Per square foot rental rate represents annualized straight line rent as of the
lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Westchester Office Properties:
<CAPTION>
Percent
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 21 77,887 2.8% $19.74 $20.18
2000 53 502,045 18.1% $22.63 $22.86
2001 46 334,819 12.1% $21.83 $21.89
2002 46 441,072 15.9% $20.16 $20.40
2003 35 245,108 8.8% $21.80 $22.94
2004 19 106,700 3.9% $20.10 $20.34
2005 and thereafter 34 1,063,628 38.4% --- ---
------ ---------- --------
Total 254 2,771,259 100.0%
====== ========== ========
<FN>
<F1>
Per square foot rental rate represents annualized straight line rent as of the
lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Stamford Office Properties:
<CAPTION>
Percent
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 10 24,916 2.4% $23.61 $23.78
2000 26 114,054 11.0% $22.16 $22.54
2001 23 102,583 9.9% $24.10 $25.18
2002 15 89,774 8.7% $27.32 $28.51
2003 16 99,052 9.6% $31.71 $32.46
2004 15 201,091 19.4% $20.77 $21.29
2005 and thereafter 25 403,160 39.0% --- ---
------ ---------- --------
Total 130 1,034,630 100.0%
====== ========== ========
<FN>
<F1>
Per square foot rental rate represents annualized straight line rent as of the
lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
New Jersey Office Properties:
<CAPTION>
Percent
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 5 41,540 2.5% $20.06 $20.28
2000 34 329,989 19.7% $22.66 $22.83
2001 21 260,195 15.5% $18.09 $18.10
2002 20 166,699 10.0% $19.96 $20.06
2003 18 327,593 19.6% $18.09 $18.14
2004 25 200,994 12.0% $21.98 $21.94
2005 and thereafter 17 346,494 20.7% --- ---
------ ---------- --------
Total 140 1,673,504 100.0%
====== ========== ========
<FN>
<F1>
Per square foot rental rate represents annualized straight line rent as of the
lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
New York Office Properties:
<CAPTION>
Percent
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 8 34,158 1.3% $34.19 $35.37
2000 19 946,214 34.9% $32.61 $32.72
2001 19 136,453 5.0% $36.25 $36.38
2002 16 194,873 7.2% $32.20 $33.92
2003 7 93,752 3.4% $31.34 $31.75
2004 8 107,589 4.0% $34.48 $34.59
2005 and thereafter 68 1,197,158 44.2% --- ---
------ ---------- --------
Total 145 2,710,197 100.0%
====== ========== ========
<FN>
<F1>
Per square foot rental rate represents annualized straight line rent as of the
lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent
as of the lease expiration date plus non-recoverable operating
expense pass-throughs.
</FN>
</TABLE>
<TABLE>
Reckson / Morris Industrial:
<CAPTION>
Percent
Total of Total Per
Rentable Rentable Square Per
Year of Number Square Square Foot Square
Lease of Feet Feet S/L Foot
Expiration Leases Expiring Expiring Rent <F1> Rent <F2>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 7 387,686 12.7% $3.95 $3.98
2000 6 173,768 5.7% $5.14 $5.31
2001 1 243,751 8.0% $7.50 $7.69
2002 1 610,949 20.0% $3.75 $3.96
2003 3 113,916 3.8% $4.53 $4.72
2004 5 308,057 10.1% $4.52 $4.87
2005 and thereafter 8 1,211,594 39.7% --- ---
------ ---------- --------
Total 31 3,049,721 100.0%
====== ========== ========
<FN>
<F1>
Per square foot rental rate represents annualized straight line rent as of the
lease expiration date.
<F2>
Per square foot rental rate represents annualized base rent as of the lease
expiration date plus non-recoverable operating expense pass-throughs. </FN>
</TABLE>
Inflation
The office leases generally 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Income $ 13,124 $ 12,784 $ 27,005 $ 24,610
Adjustment for Funds From Operations:
Add:
Real Estate Depreciation and Amortization 18,406 12,181 33,094 22,787
Minority interests in consolidated partnerships 1,615 712 2,783 1,273
Less:
Amount distributed to minority partners in consolidated
partnerships 1,980 1,001 3,448 1,799
--------- --------- --------- ---------
Funds From Operations $ 31,165 $ 24,676 $ 59,434 $ 46,871
========= ========= ========= =========
</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, principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value ("FMV") at June 30, 1999 (dollars
in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total<F1> F.M.V
---------- --------- --------- -------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long term debt:
Fixed rate $ 8,904 $ 32,487 $ 19,825 $ 15,002 $ 19,742 $ 735,681 $ 831,641 $ 831,641
Average interest rate 8.85% 7.38% 7.43% 7.80% 7.65% 7.49% 7.51%
Variable rate $ 205,000 $ 5,373 $ 349,100 $ --- $ --- $ --- $ 559,473 $ 559,473
Average interest rate 6.93% 7.75% 5.93% --- --- --- 6.39%
<FN>
<F1>
Includes unamortized issuance discounts of $721,000 on the 5 and 10 year senior
unsecured notes issued on March 26, 1999 which are due at maturity.
</FN>
</TABLE>
In addition, the 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 5.6 million annual increase
in interest expense based on approximately $559.4 million outstanding at June
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 June 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total F.M.V
---------- --------- --------- -------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage notes and notes
receivable:
Fixed rate $ 5,038 $ 277,548 $ --- $ 6,785 $ --- $ 50,990 $ 340,361 $ 340,361
Average interest rate 10% 9.41% --- 10.65% --- 10.69% 9.63%
</TABLE>
The fair value of the 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
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 share 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 share and 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 March 16 , 1999, the Operating Partnership's Registration Statement
on Form S-3 (File No. 333-67129) was declared effective by the
Securities and Exchange Commission. On March 23, 1999, the Operating
Partnership offered $100 million of its 7.40% Notes due March 15, 2004
and $200 million of its 7.75% Notes due March 15 2009 in an
underwritten public offering in which Goldman, Sachs & Co. acted as
the managing underwriter. The public offering price of the Notes
aggregated approximately $299.3 million and the underwriting discount
aggregated $1.9 million. Net proceeds to the Operating Partnership
aggregated approximately $297.4 million and were used to repay
borrowings under the Operating Partnership's Credit Facility.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information - None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 Financial Data Schedule
b) During the three months ended June 30, 1999 the registrant filed
the following reports:
On May 11, 1999, the Operating Partnership filed Form 8-K announcing
that the Operating Partnership had entered into an agreement to
acquire the first mortgage note secured by 919 Third Avenue located in
New York City.
On June 7, 1999, the Operating Partnership filed Form 8-K announcing
that on May 24, 1999 (i) the stockholders of Tower Realty Trust, Inc.
approved the merger of the two companies, (ii) Metropolitan Operating
Partnership, L. P. entered into a $130 million unsecured credit
agreement, (iii) that on May 26, 1999, the Company announced Scott
Rechler had been named Co-Chief Executive Officer and President along
with other appointments, (iv) that the Operating Partnership had
increased its distribution on its common units to an annualized
distribution rate of $1.485 per unit and (v) that on June 2, 1999, the
Company issued six million shares of Preferred Stock for aggregate
proceeds of $150 million.
On June 25, 1999, the Operating Partnership filed Form 8-K announcing
that it had closed on the acquisition of the first mortgage note
secured by 919 Third Avenue located in New York City.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECKSON OPERATING PARTNERSHIP, L.P.
BY: RECKSON ASSOCIATES REALTY CORP., its general partner
August 11, 1999 /s/ Scott H. Rechler
Date Scott H. Rechler, Co-Chief Executive Officer
and President
August 11, 1999 /s/ Michael Maturo
Date Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000930810
<NAME> RECKSON OPERATING PARTNERSHIP, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 41,289
<SECURITIES> 0
<RECEIVABLES> 122,631
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 163,920
<PP&E> 2,499,972
<DEPRECIATION> (189,482)
<TOTAL-ASSETS> 2,893,374
<CURRENT-LIABILITIES> 90,544
<BONDS> 1,390,393
0
413,126
<COMMON> 871,805
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,893,374
<SALES> 156,414
<TOTAL-REVENUES> 166,953
<CGS> 0
<TOTAL-COSTS> 59,070
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,846
<INCOME-PRETAX> 40,819
<INCOME-TAX> 0
<INCOME-CONTINUING> 40,819
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,258
<EPS-BASIC> .53
<EPS-DILUTED> 0
</TABLE>
