--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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, 2000
COMMISSION FILE NUMBER: 1-13762
----------------
RECKSON OPERATING PARTNERSHIP, L. P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 11-3233647
(State other jurisdiction of incorporation (IRS. Employer Identification Number)
of organization)
</TABLE>
<TABLE>
<S> <C>
225 BROADHOLLOW ROAD, MELVILLE, NY 11747
(Address of principal executive office) (zip code)
</TABLE>
(631) 694-6900
(Registrant's telephone number including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No__, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No__.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
RECKSON OPERATING PARTNERSHIP, L.P.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
INDEX PAGE
------- -----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ................................................................. 2
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 .... 2
Consolidated Statements of Income for the three and six months ended June 30, 2000 and
1999 (unaudited) ..................................................................... 3
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999
(unaudited) .......................................................................... 4
Notes to the Consolidated Financial Statements (unaudited) ........................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................................... 22
Item 2. Changes in Securities and Use of Proceeds ............................................ 22
Item 3. Defaults Upon Senior Securities ...................................................... 22
Item 4. Submission of Matters to a Vote of Securities Holders ................................ 22
Item 5. Other Information .................................................................... 22
Item 6. Exhibits and Reports on Form 8-K ..................................................... 22
SIGNATURES ................................................................................. 22
</TABLE>
1
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
--------------- -------------
<S> <C> <C>
ASSETS:
Commercial real estate properties, at cost:
Land ....................................................................... $ 291,510 $ 276,204
Buildings and improvements ................................................. 1,916,027 1,802,611
Developments in progress:
Land ....................................................................... 61,013 60,894
Development costs .......................................................... 93,719 68,690
Furniture, fixtures and equipment ........................................... 7,157 6,473
---------- ----------
2,369,426 2,214,872
Less accumulated depreciation ............................................... (254,595) (218,385)
---------- ----------
2,114,831 1,996,487
Investments in real estate joint ventures ................................... 37,548 31,531
Investment in mortgage notes and notes receivable ........................... 356,642 352,466
Cash and cash equivalents ................................................... 26,514 21,122
Tenant receivables .......................................................... 3,340 5,117
Investments in and advances to affiliates ................................... 176,567 179,762
Deferred rent receivable .................................................... 44,666 32,132
Prepaid expenses and other assets ........................................... 70,800 66,855
Contract and land deposits and pre-acquisition costs ........................ 7,727 9,585
Deferred lease and loan costs ............................................... 47,137 39,520
---------- ----------
TOTAL ASSETS ................................................................ $2,885,772 $2,734,577
========== ==========
LIABILITIES:
Mortgage notes payable ...................................................... $ 527,466 $ 459,174
Unsecured credit facility ................................................... 373,600 297,600
Unsecured term loan ......................................................... 75,000 75,000
Senior unsecured notes ...................................................... 449,348 449,313
Accrued expenses and other liabilities ...................................... 89,536 81,265
Distributions payable ....................................................... 28,356 27,166
---------- ----------
TOTAL LIABILITIES ........................................................... 1,543,306 1,389,518
---------- ----------
Commitments and other comments .............................................. -- --
Minority interests' in consolidated partnerships ............................ 92,071 93,086
---------- ----------
PARTNERS' CAPITAL
Preferred Capital, 11,234,518 and 15,234,518 units outstanding, respectively 313,126 413,126
General Partner's Capital:
Class A common units, 45,045,573 and 40,375,506 units outstanding,
respectively ............................................................. 570,203 477,172
Class B common units, 10,283,513 and 10,283,763 units outstanding,
respectively ............................................................. 269,762 270,689
Limited Partners' Capital, 7,695,142 and 7,701,142 units outstanding,
respectively ............................................................... 97,304 90,986
---------- ----------
Total Partners' Capital ..................................................... 1,250,395 1,251,973
---------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL ..................................... $2,885,772 $2,734,577
========== ==========
</TABLE>
(see accompanying notes to financial statements)
2
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Base rents ............................................... $ 96,099 $ 77,192 $ 190,499 $ 139,285
Tenant escalations and reimbursements .................... 12,984 8,586 25,830 17,129
Equity in earnings of real estate joint ventures and
service companies ....................................... 1,775 512 3,187 889
Interest income on mortgage notes and notes
receivable .............................................. 2,190 1,910 4,476 4,718
Gain on sales of real estate ............................. 6,662 -- 6,662 --
Other .................................................... 5,738 2,646 12,451 4,932
----------- ----------- ----------- -----------
Total Revenues .......................................... 125,448 90,846 243,105 166,953
----------- ----------- ----------- -----------
EXPENSES:
Property operating expenses .............................. 36,368 27,539 74,523 50,446
Marketing, general and administrative .................... 6,769 4,550 12,649 8,624
Interest ................................................. 24,176 18,902 48,016 32,846
Depreciation and amortization ............................ 22,426 19,127 43,437 34,218
----------- ----------- ----------- -----------
Total Expenses .......................................... 89,739 70,118 178,625 126,134
----------- ----------- ----------- -----------
Income before distributions to preferred unit holders
and minority interestsinterests ......................... 35,709 20,728 64,480 40,819
Minority partners' interests in consolidated
partnerships ............................................ (1,925) (1,615) (3,899) (2,783)
----------- ----------- ----------- -----------
Income before distributions to preferred unitholders ..... 33,784 19,113 60,581 38,036
Preferred unit distributions ............................. (7,857) (5,989) (15,842) (11,031)
----------- ----------- ----------- -----------
Net income available to common unit holders .............. $ 25,927 $ 13,124 $ 44,739 $ 27,005
=========== =========== =========== ===========
Net Income available to:
General Partner -- Class A common units ................. $ 16,563 $ 9,550 $ 28,508 $ 21,190
General Partner -- Class B common units ................. 6,281 1,747 10,870 1,747
Limited Partners' ....................................... 3,083 1,827 5,361 4,068
----------- ----------- ----------- -----------
Total .................................................... $ 25,927 $ 13,124 $ 44,739 $ 27,005
=========== =========== =========== ===========
Net income per weighted average units:
Net income per weighted average Class A general
partnership unit ...................................... $ .40 $ .24 $ .70 $ .53
=========== =========== =========== ===========
Net income per weighted average Class B general
partnership unit ...................................... $ .61 $ .36 $ 1.06 $ .71
=========== =========== =========== ===========
Net income per weighted average limited
partnership unit ...................................... $ .40 $ .24 $ .70 $ .53
=========== =========== =========== ===========
Weighted average common units outstanding:
General Partner -- Class A common units ................. 41,343,000 40,285,000 40,863,000 40,167,000
General Partner -- Class B common units ................. 10,284,000 4,883,000 10,284,000 2,455,000
Limited Partners ........................................ 7,695,000 7,705,000 7,697,000 7,708,000
</TABLE>
(see accompanying notes to financial statements)
3
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before distributions to preferred unitholders ........................ $ 60,581 $ 38,036
Adjustments to reconcile income before distributions to preferred
unitholders to net cash provided by operating activities:
Depreciation and amortization .............................................. 43,437 34,218
Gain on sales of real estate ............................................... (6,662) --
Minority partners' interests in consolidated partnerships .................. 3,899 2,783
Loss reserve on real estate held for sale .................................. -- 4,450
Gain on mortgage redemption ................................................ -- (4,492)
Equity in earnings of real estate joint ventures and service companies ..... (3,187) (889)
Changes in operating assets and liabilities:
Prepaid expenses and other assets .......................................... (3,872) (15,254)
Tenant receivables ......................................................... 1,777 2,181
Deferred rents receivable .................................................. (12,534) (2,429)
Real estate tax escrows .................................................... 3,387 (618)
Accrued expenses and other liabilities ..................................... 7,073 11,201
---------- ----------
Net cash provided by operating activities .................................. 93,899 69,187
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of commercial real estate properties ............................. (154,573) (194,871)
Increase in real estate held for sale ...................................... -- (57,095)
Increase in deposits and pre-acquisition costs ............................. (6,079) (1,889)
Investment in mortgage notes and notes receivable .......................... -- (262,643)
Proceeds from mortgage note repayments ..................................... 2,157 --
Proceeds from sales of property and mortgage redemption .................... 42,595 25,929
Additions to commercial real estate properties ............................. (22,108) (16,389)
Increase in developments in progress ....................................... (15,923) (8,073)
Payment of leasing costs ................................................... (9,379) (7,377)
Purchase of furniture, fixtures and equipment .............................. (676) (447)
Distribution from a real estate joint venture .............................. 226 173
Investments in real estate joint ventures .................................. (4,770) (6,223)
---------- ----------
Net cash used in investing activities ...................................... (168,530) (528,905)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on secured borrowings ................................... (23,708) (1,495)
Proceeds from issuance of senior unsecured notes net of issuance costs ..... -- 299,262
Payment of loan costs ...................................................... (2,399) (5,368)
(Increase) decrease in investments in and advances to affiliates ........... 4,880 (41,304)
Proceeds from secured borrowings ........................................... 92,000 --
Proceeds from unsecured credit facility .................................... 125,000 299,000
Principal payments on unsecured credit facility ............................ (49,000) (230,750)
Contributions of minority partner in consolidated partnership .............. -- 75,000
Contributions .............................................................. 1,486 149,300
Distributions .............................................................. (63,322) (42,416)
Distributions to minority partners' in consolidated partnerships ........... (4,914) (2,450)
---------- ----------
Net cash provided by financing activities ................................... 80,023 498,779
---------- ----------
Net increase in cash and cash equivalents ................................... 5,392 39,061
Cash and cash equivalents at beginning of period ............................ 21,122 2,228
---------- ----------
Cash and cash equivalents at end of period .................................. $ 26,514 $ 41,289
========== ==========
</TABLE>
(see accompanying notes to financial statements)
4
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
Reckson Operating Partnership, L. P. (the "Operating Partnership")
commenced operations on June 2, 1995. The sole general partner in the Operating
Partnership, Reckson Associates Realty Corp. (the "Company") is a
self-administered and self-managed Real Estate Investment Trust ("REIT").
During June 1995, the Company contributed approximately $162 million in
cash to the Operating Partnership in exchange for an approximate 73% general
partnership interest. The Operating Partnership executed various option and
purchase agreements whereby it issued units in the Operating Partnership
("Units") to the continuing investors and assumed certain indebtedness in
exchange for interests in certain property partnerships, fee simple and
leasehold interests in properties and development land, certain business assets
of the executive center entities and 100% of the non-voting preferred stock of
the management and construction companies.
As of June 30, 2000, the Operating Partnership owned and operated 78 office
properties comprising approximately 13.7 million square feet, 105 industrial
properties comprising approximately 6.9 million square feet and two retail
properties comprising approximately 20,000 square feet, located in the New York
tri-state area (the "Tri-State Area"). The Operating Partnership also owns a
357,000 square foot office building located in Orlando, Florida and
approximately 346 acres of land in 16 separate parcels of which the Operating
Partnership can develop approximately 1.9 million square feet of office space
and approximately 350,000 square feet of industrial space. The Operating
Partnership also has invested approximately $301.5 million in mortgage notes
encumbering two Class A office properties encompassing approximately 1.6 million
square feet, approximately 403 acres of land located in New Jersey and
approximately $17.1 million in a note receivable secured by a partnership
interest in Omni Partner's, L.P., owner of the Omni, a 575,000 square foot Class
A office property located in Uniondale, New York.
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Tower Realty Trust, Inc.
("Tower"). On May 24, 1999 the Company completed the merger with Tower and
acquired three Class A office properties located in New York City totaling 1.6
million square feet and one office property located on Long Island totaling
approximately 101,000 square feet. In addition, pursuant to the merger, the
Company also acquired certain office properties, a property under development
and land located outside of the Tri-State Area. All of the assets acquired in
the merger located outside of the Tri-State Area, other than a 357,000 square
foot office property located in Orlando, Florida, have been sold.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Operating Partnership and its subsidiaries at June 30,
2000 and December 31, 1999 and the results of their operations for the three and
six months ended June 30, 2000 and 1999, respectively, and, their cash flows for
the six months ended June 30, 2000 and 1999, respectively. The Operating
Partnership's investments in Metropolitan, Omni Partners, L. P. ("Omni") and
certain industrial joint venture properties formerly owned by Reckson Morris
Operating Partnership, L. P. ("RMI") are reflected in the accompanying financial
statements on a consolidated basis with a reduction for minority partners'
interest. The Operating Partnership's investment in RMI was reflected in the
accompanying financial statements on a consolidated basis with a reduction for
minority partner's interest through September 26, 1999. On September 27, 1999,
the Operating Partnership sold its interest in RMI to Keystone Property Trust
("KTR"). The operating results of the service businesses currently conducted by
Reckson Management Group, Inc., and Reckson Construction Group, Inc., are
reflected in the accompanying financial statements on the equity method of
accounting. The Operating Partnership also invests in real
5
<PAGE>
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 minority interests at June 30, 2000 represent 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, 2000 and for the
three and six month periods ended June 30, 2000 and 1999 include, in the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial information set forth herein. The
results of operations for the interim periods are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. These
financial statements should be read in conjunction with the Operating
Partnership's audited financial statements and notes thereto included in the
Operating Partnership's Form 10-K for the year ended December 31, 1999.
In June 1999, the Financial Accounting Standards Board issued Statement No.
137, amending Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which extended the required date of adoption to the years
beginning after June 15, 2000. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Operating Partnership
expects to adopt the new Statement effective January 1, 2001. The Operating
Partnership does not anticipate that the adoption of this Statement will have
any effect on its results of operations or financial position.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. MORTGAGE NOTES PAYABLE
As of June 30, 2000, the Operating Partnership had approximately $457.5
million of fixed rate mortgage notes which mature at various times between 2000
and 2027. The notes are secured by 22 properties and have a weighted average
interest rate of approximately 7.6%. In addition, the Operating Partnership had
a $70 million variable rate mortgage note which matures in August 2001. The note
is secured by one property and bears interest at LIBOR plus 165 basis points.
4. SENIOR UNSECURED NOTES
As of June 30, 2000, the Operating Partnership had outstanding
approximately $449.3 million (net of issuance discounts) of senior unsecured
notes (the "Senior Unsecured Notes"). The following table sets forth the
Operating Partnership's Senior Unsecured Notes and other related disclosures
(dollars in thousands):
<TABLE>
<CAPTION>
FACE
ISSUANCE AMOUNT COUPON RATE TERM MATURITY
------------------- ----------- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
August 27, 1997 $150,000 7.20% 10 years August 28, 2007
March 26, 1999 $100,000 7.40% 5 years March 15, 2004
March 26, 1999 $200,000 7.75% 10 years March 15, 2009
</TABLE>
Interest on the Senior Unsecured Notes is payable semiannually with
principal and unpaid interest due on the scheduled maturity dates. In addition,
the Senior Unsecured Notes issued on March 26, 1999 were issued at an aggregate
discount of $738,000.
5. UNSECURED CREDIT FACILITIES AND UNSECURED TERM LOAN
As of June 30, 2000, 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 which matures in July, 2001. Interest rates on
borrowings under the Credit Facility are priced off of LIBOR plus 90 basis
points.
6
<PAGE>
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, 2000, the
Operating Partnership had availability under the Credit Facility to borrow an
additional $126.4 million (of which, $49.1 million has been reserved for
outstanding undrawn letters of credit).
As of June 30, 2000, the Operating Partnership had an 18-month, $75 million
unsecured term loan (the "Term Loan") from Chase Manhattan Bank which matures in
June, 2001. Interest rates on borrowings under the Term Loan are priced off of
LIBOR plus 150 basis points.
6. COMMERCIAL REAL ESTATE INVESTMENTS
On January 13, 2000, the Operating Partnership acquired 1350 Avenue of the
Americas, a 540,000 square foot, 35 story, Class A office property, located in
New York City, for a purchase price of approximately $126.5 million. This
acquisition was financed through a $70 million secured debt financing and a draw
under the Credit Facility.
On June 15, 1999, the Operating Partnership acquired the first mortgage
note secured by a 47 story, 1.4 million square foot Class A office property
located at 919 Third Avenue in New York City for approximately $277.5 million.
The first mortgage note entitles the Operating Partnership to all the net cash
flow of the property and to substantial rights regarding the operations of the
property, with the Operating Partnership anticipating to ultimately obtain title
to the property. This acquisition was financed with proceeds from the issuance
of six million Series E preferred units of general partnership interest and
through draws under the Credit Facility. Current financial accounting guidelines
provide that where a lender has virtually the same risks and potential rewards
as those of a real estate owner it should recognize the full economics
associated with the operations of the property. As such, the Operating
Partnership has recognized the real estate operations of the 919 Third Avenue in
the accompanying consolidated statement of income for the period from the date
of acquisition. On July 28, 2000, the Operating Partnership consented to the
filing of a consensual, pre-packaged bankruptcy plan with the current fee owner
and expects to take title to this property by November 30, 2000.
On August 9, 1999, the Operating Partnership executed a contract for the
sale of its interest in RMI, which consisted of 28 properties, comprising
approximately 6.1 million square feet and three other big box industrial
properties to KTR. In addition, the Operating Partnership also entered into a
sale agreement with Matrix relating to a first mortgage note and certain
industrial land holdings (the "Matrix Sale"). The combined total sale price is
$310 million ($41.6 million of which is payable to, and of which $10.4 million
of debt relief is attributable to the Morris Companies and its affiliates) and
will consist of a combination of (i) cash, (ii) convertible preferred and common
stock of KTR, (iii) preferred units of KTR's operating partnership, (iv) relief
of debt and (v) a purchase money mortgage note secured by certain land that is
being sold to Matrix.
As of June 30, 2000, the Matrix Sale and the sale of the Operating
Partnership's interest in RMI was completed for a combined sales price of
approximately $258 million (net of minority partner's interest). The combined
consideration consisted of approximately (i) $159.7 million in cash, (ii) $60
million of preferred stock and operating partnership units of KTR, (iii) $1.5
million in common stock of KTR, (iv) approximately $26.7 million of debt relief
and (v) approximately $10.1 million in purchase money mortgages. As a result,
the Operating Partnership incurred a gain of approximately $16.7 million of
which approximately $6.7 million was recognized during the three months ended
June 30, 2000. Cash proceeds from the sales were used primarily to repay
borrowings under the Credit Facility. During July 2000, the Operating
Partnership redeemed approximately $20 million of the preferred stock of KTR.
In July 1998, the Company formed a joint venture, Metropolitan Partners LLC
("Metropolitan"), with Crescent Real Estate Equities Company, a Texas REIT
("Crescent") for the purpose of acquiring Tower Realty Trust, Inc. ("Tower"). On
May 24, 1999 the Company completed the merger with Tower and acquired three
Class A office properties located in New York City totaling 1.6 million square
feet and one office property located on Long Island totaling approximately
101,000 square feet. In addition,
7
<PAGE>
pursuant to the merger, the Company also acquired certain office properties, a
property under development and land located outside of the Tri-State Area. All
of the assets acquired in the merger located outside of the Tri-State Area,
other than a 357,000 square foot office property located in Orlando, Florida,
have been sold.
The Company controls Metropolitan and owns 100% of the common equity;
Crescent owns a $85 million preferred equity investment in Metropolitan.
Crescent's investment accrues distributions at a rate of 7.5% per annum for a
two-year period (May 24, 1999 through May 24, 2001) and may be redeemed by
Metropolitan at any time during that period for $85 million, plus an amount
sufficient to provide a 9.5% internal rate of return. If Metropolitan does not
redeem the preferred interest, upon the expiration of the two-year period,
Crescent must convert its $85 million preferred interest into either (i) a
common membership interest in Metropolitan or (ii) shares of the Company's Class
A common stock at a conversion price of $24.61 per share.
7. PARTNERS' CAPITAL
On May 24, 1999, 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 were entitled to receive an initial annual
distribution of $2.24 per unit which distribution is subject to adjustment
annually. On July 1, 2000, the annual distribution on the Class B common units
was increased to $2.40 per unit.
The Class B common units are exchangeable at any time, at the option of the
holder, into an equal number of Class A 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 Class
A common units at any time following the four year, six-month anniversary of the
issuance of the Class B common units.
On June 14, 2000, the Operating Partnership declared the following
distributions:
<TABLE>
<CAPTION>
RECORD PAYMENT THREE MONTHS ANNUALIZED
SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION
------------------------- ------------------ --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Class A common unit $ .38600 July 10, 2000 July 21, 2000 June 30, 2000 $ 1.544
Class B common unit $ .59400 (a) July 14, 2000 July 31, 2000 July 31, 2000 $ 2.377 (a)
Series A preferred unit $ .47660 July 14, 2000 July 31, 2000 July 31, 2000 $ 1.906
Series E preferred unit $ .52188 July 14, 2000 July 31, 2000 July 31, 2000 $ 2.088
</TABLE>
----------------
(a) adjusted to $.60 per unit quarterly and $2.40 per unit annually on July 1,
2000.
On June 20, 2000, the Operating Partnership issued 4,181,818 Class A common
units in exchange for four million Series E preferred units of general
partnership interest with a liquidation preference value of $100 million.
As of June 30, 2000, in conjunction with the Company's Class B common stock
buy back program, the Operating Partnership had purchased and retired 1,410,804
Class B common units for approximately $30.3 million.
Net income per 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.
8
<PAGE>
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash paid during the period for interest ......... $52,135 $30,062
======= =======
Interest capitalized during the period ........... $ 5,173 $ 4,440
======= =======
</TABLE>
On June 20, 2000, the Operating Partnership issued 4,181,818 Class A common
units in exchange for four million Series E preferred units of general
partnership interest with a liquidation preference value of $100 million.
9. SEGMENT DISCLOSURE
The Operating Partnership's portfolio consists of Class A office properties
located within the New York City metropolitan area and Class A suburban office
and industrial properties located and operated within the Tri-State Area (the
"Core Portfolio"). In addition the Operating Partnership's portfolio also
includes one office property located in Orlando, Florida, and certain industrial
joint venture properties formerly owned by RMI and for the period commencing
January 6, 1998 and ending September 26, 1999, industrial properties which were
owned by RMI and subsequently sold to KTR. The Operating Partnership has
managing directors who report directly to the Chief Operating Officer and Chief
Financial Officer who have been identified as the Chief Operating Decision
Makers because of their final authority over resource allocation decisions and
performance assessment.
In addition, as the Operating Partnership expects to meet its short-term
liquidity requirements in part through the Credit Facility and Term Loan,
interest incurred on borrowings under the Credit Facility and Term Loan is not
considered as part of property operating performance. Further, the Operating
Partnership does not consider the property operating performance of the office
property located in Orlando, Florida as a part of its Core Portfolio.
Additionally, commencing January 1, 2000, the Operating Partnership does not
consider the operating performance of the industrial joint venture properties
formerly owned by RMI as part of its Core Portfolio.
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, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
JUNE 30, 2000
-------------------------------------------
CORE CONSOLIDATED
PORTFOLIO OTHER TOTALS
-------------- ------------- --------------
<S> <C> <C> <C>
REVENUES:
Base rents, tenant escalations and
reimbursements ........................ $ 106,852 $ 2,231 $ 109,083
Equity in earnings of real estate joint
ventures and service companies ........ -- 1,775 1,775
Interest and other income .............. 257 14,333 14,590
----------- --------- -----------
Total Revenues ......................... 107,109 18,339 125,448
----------- --------- -----------
EXPENSES:
Property operating expenses ............ 35,810 558 36,368
Marketing, general and administrative .. 4,928 1,841 6,769
Interest ............................... 9,403 14,773 24,176
Depreciation and amortization .......... 20,055 2,371 22,426
----------- --------- -----------
Total Expenses ......................... 70,196 19,543 89,739
----------- --------- -----------
Income (loss) before distributions to
preferred unitholders and minority
interests' ............................ $ 36,913 $ (1,204) $ 35,709
=========== ========= ===========
Total Assets ........................... $ 2,054,183 $ 831,589 $ 2,885,772
=========== ========= ===========
<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
Interest and other income .............. 144 -- 4,412 4,556
----------- -------- --------- -----------
Total Revenues ......................... 77,087 5,287 8,472 90,846
----------- -------- --------- -----------
EXPENSES:
Property operating 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 (loss) before distributions to
preferred unitholders and minority
interests' ............................ $ 26,272 $ 2,077 $ (7,621) $ 20,728
=========== ======== ========= ===========
Total Assets ........................... $ 2,082,784 $194,898 $ 615,692 $ 2,893,374
=========== ======== ========= ===========
</TABLE>
9
<PAGE>
The following table sets forth the components of the Operating
Partnership's revenues and expenses and other related disclosures for the six
months ended June 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------------
JUNE 30, 2000
----------------------------------------
CORE CONSOLIDATED
PORTFOLIO OTHER TOTALS
----------- ------------- --------------
<S> <C> <C> <C>
REVENUES:
Base rents, tenant escalations and
reimbursements ............................... $ 211,672 $ 4,657 $ 216,329
Equity in earnings of real estate joint
ventures and service companies ............... -- 3,187 3,187
Interest and other income ..................... 664 22,925 23,589
--------- --------- ---------
Total Revenues ................................ 212,336 30,769 243,105
--------- --------- ---------
EXPENSES:
Property operating expenses ................... 73,297 1,226 74,523
Marketing, general and administrative ......... 10,029 2,620 12,649
Interest ...................................... 18,595 29,421 48,016
Depreciation and amortization ................. 39,388 4,049 43,437
--------- --------- ---------
Total Expenses ................................ 141,309 37,316 178,625
--------- --------- ---------
Income (loss) before distributions to
preferred unitholders and minority
interests' ................................... $ 71,027 $ (6,547) $ 64,480
========= ========= =========
<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
Interest and other income ..................... 213 2 9,435 9,650
--------- ------- ---------- ---------
Total Revenues ................................ 143,179 9,902 13,872 166,953
--------- ------- ---------- ---------
EXPENSES:
Property operating 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 (loss) before distributions to
preferred unitholders and minority
interests' ................................... $ 48,925 $ 4,453 $ (12,559) $ 40,819
========= ======= ========== =========
</TABLE>
10. OTHER INVESTMENTS AND ADVANCES
During 1997, the Company formed FrontLine Capital Group ("FrontLine")
(formerly Reckson Service Industries, Inc.) and Reckson Strategic Venture
Partners, LLC ("RSVP"). In connection with the formation of FrontLine, the
Operating Partnership established a credit facility with FrontLine (the
"FrontLine Facility") in the amount of $100 million for FrontLine's e-commerce
and e-services operations and other general corporate purposes. As of June 30,
2000, the Company had advanced approximately $92.7 million under the FrontLine
Facility. In addition, the Operating Partnership has approved the funding of
investments of up to $100 million with or in RSVP (the "RSVP Commitment"),
through RSVP-controlled joint venture REIT-qualified investments or advances
made to FrontLine under terms similar to the FrontLine Facility. As of June 30,
2000, approximately $67.9 million had been invested through the RSVP Commitment,
of which $29.4 million represents RSVP-controlled joint venture REIT-qualified
investments and $38.5 million represents advances to FrontLine under the RSVP
Commitment. Both the FrontLine Facility and the RSVP Commitment have a term of
five years and advances under each are recourse obligations of FrontLine.
Interest accrues on advances made under the credit facilities at a rate equal to
the greater of (a) the prime rate plus two percent and (b) 12% per annum, with
the rate on amounts that are outstanding for more than one year increasing
annually at a rate of four percent of the prior year's rate. Prior to maturity,
interest is payable quarterly but only to the extent of net cash flow and on an
interest-only basis.
During November 1999, the Board of Directors of the Company approved an
amendment to the FrontLine Facility and the RSVP Commitment to permit FrontLine
to incur secured debt and to pay interest thereon and to issue preferred stock
and to pay dividends thereon. In consideration of the amendments, FrontLine paid
the Operating Partnership a fee of approximately $3.6 million in the form of
shares of FrontLine common stock. Such fee is being recognized in income over an
estimated nine month benefit period.
FrontLine identifies, acquires interests in and develops a network of
e-commerce and e-services companies that service small to medium sized
enterprises, independent professionals and entrepreneurs and the mobile
workforce of larger companies. FrontLine serves as the managing member of RSVP.
RSVP was formed to provide the Company with a research and development vehicle
to invest in alternative real estate sectors. RSVP invests primarily in real
estate and real estate related operating companies generally outside of the
Company's core office and industrial focus. RSVP's strategy is to identify and
acquire interests in established entrepreneurial enterprises with experienced
management teams in market sectors which are in the early stages of their growth
cycle or offer unique circumstances for attractive investments as well as a
platform for future growth.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the 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, 2000, the Operating Partnership owned and operated 78 office
properties comprising approximately 13.7 million square feet, 105 industrial
properties comprising approximately 6.9 million square feet and two retail
properties comprising approximately 20,000 square feet, located in the Tri-State
Area. The Operating Partnership also owns a 357,000 square foot office building
located in Orlando, Florida and approximately 346 acres of land in 16 separate
parcels of which the Operating Partnership can develop approximately 1.9 million
square feet of office space and approximately 350,000 square feet of industrial
space. The Operating Partnership also has invested approximately $301.5 million
in mortgage notes encumbering two Class A office properties encompassing
approximately 1.6 million square feet, approximately 403 acres of land located
in New Jersey and approximately $17.1 million in a note receivable secured by a
partnership interest in Omni Partner's, L.P., owner of the Omni, a 575,000
square foot Class A office property located in Uniondale, New York.
During 1997, the Company formed FrontLine Capital Group ("FrontLine")
(formerly Reckson Service Industries, Inc.) and Reckson Strategic Venture
Partners, LLC ("RSVP"). In connection with the formation of FrontLine, the
Operating Partnership established a credit facility with FrontLine (the
"FrontLine Facility") in the amount of $100 million for FrontLine's e-commerce
and e-services operations and other general corporate purposes. As of June 30,
2000, the Company had advanced approximately $92.7 million under the FrontLine
Facility. In addition, the Operating Partnership has approved the funding of
investments of up to $100 million with or in RSVP (the "RSVP Commitment"),
through RSVP-controlled joint venture REIT-qualified investments or advances
made to FrontLine under terms similar to the FrontLine Facility. As of June 30,
2000, approximately $67.9 million had been invested through the RSVP Commitment,
of which $29.4 million represents RSVP-controlled joint
11
<PAGE>
venture REIT-qualified investments and $38.5 million represents advances to
FrontLine under the RSVP Commitment. Both the FrontLine Facility and the RSVP
Commitment have a term of five years and advances under each are recourse
obligations of FrontLine. Interest accrues on advances made under the credit
facilities at a rate equal to the greater of (a) the prime rate plus two percent
and (b) 12% per annum, with the rate on amounts that are outstanding for more
than one year increasing annually at a rate of four percent of the prior year's
rate. Prior to maturity, interest is payable quarterly but only to the extent of
net cash flow and on an interest-only basis.
During November 1999, the Board of Directors of the Company approved an
amendment to the FrontLine Facility and the RSVP Commitment to permit FrontLine
to incur secured debt and to pay interest thereon and to issue preferred stock
and to pay dividends thereon. In consideration of the amendments, FrontLine paid
the Operating Partnership a fee of approximately $3.6 million in the form of
shares of FrontLine common stock. Such fee is being recognized in income over an
estimated nine month benefit period.
FrontLine identifies, acquires interests in and develops a network of
e-commerce and e-services companies that service small to medium sized
enterprises, independent professionals and entrepreneurs and the mobile
workforce of larger companies. FrontLine serves as the managing member of RSVP.
RSVP was formed to provide the Company with a research and development vehicle
to invest in alternative real estate sectors. RSVP invests primarily in real
estate and real estate related operating companies generally outside of the
Company's core office and industrial focus. RSVP's strategy is to identify and
acquire interests in established entrepreneurial enterprises with experienced
management teams in market sectors which are in the early stages of their growth
cycle or offer unique circumstances for attractive investments as well as a
platform for future growth.
On August 9, 1999, the Operating Partnership executed a contract for the
sale of its interest in Reckson Morris Operating Partnership, L. P., ("RMI")
which consisted of 28 properties, comprising approximately 6.1 million square
feet and three other big box industrial properties to Keystone Property Trust
("KTR"). In addition, the Operating Partnership also entered into a sale
agreement with Matrix relating to a first mortgage note and certain industrial
land holdings (the "Matrix Sale"). The combined total sale price is $310 million
($41.6 million of which is payable to, and of which $10.4 million of debt relief
is attributable to the Morris Companies and its affiliates) and will consist of
a combination of (i) cash, (ii) convertible preferred and common stock of KTR,
(iii) preferred units of KTR's operating partnership, (iv) relief of debt and
(v) a purchase money mortgage note secured by certain land that is being sold to
Matrix.
As of June 30, 2000, the Matrix Sale and the sale of the Operating
Partnership's interest in RMI was completed for a combined sales price of
approximately $258 million (net of minority partner's interest). The combined
consideration consisted of approximately (i) 159.7 million in cash, (ii) 60
million of preferred stock and operating partnership units of KTR, (iii) $1.5
million in comon stock of KTR, (iv) approximately $26.7 million of debt relief
and (v) approximately $10.1 million in purchase money mortgages. As a result,
the Operating Partnership incurred a gain of approximately $16.7 million of
which approximately $6.7 million was recognized during the three months ended
June 30, 2000. Cash proceeds from the sales were used primarily to repay
borrowings under the Credit Facility. During July 2000, the Operating
Partnership redeemed approximately $20 million of the preferred stock of KTR.
In July 1998, the Company formed a joint venture, Metropolitan Partners LLC
("Metropolitan"), with Crescent Real Estate Equities Company, a Texas REIT
("Crescent") for the purpose of acquiring Tower Realty Trust, Inc. ("Tower"). On
May 24, 1999 the Company completed the merger with Tower and acquired three
Class A office properties located in New York City totaling 1.6 million square
feet and one office property located on Long Island totaling approximately
101,000 square feet. In addition,
12
<PAGE>
pursuant to the merger, the Company also acquired certain office properties, a
property under development and land located outside of the Tri-State Area. All
of the assets acquired in the merger located outside of the Tri-State Area,
other than a 357,000 square foot office property located in Orlando, Florida,
have been sold.
The Company controls Metropolitan and owns 100% of the common equity;
Crescent owns a $85 million preferred equity investment in Metropolitan.
Crescent's investment accrues distributions at a rate of 7.5% per annum for a
two-year period (May 24, 1999 - May 24, 2001) and may be redeemed by
Metropolitan at any time during that period for $85 million, plus an amount
sufficient to provide a 9.5% internal rate of return. If Metropolitan does not
redeem the preferred interest, upon the expiration of the two-year period,
Crescent must convert its $85 million preferred interest into either (i) a
common membership interest in Metropolitan or (ii) shares of the Company's Class
A common stock at a conversion price of $24.61 per share.
The market capitalization of the Operating Partnership at June 30, 2000 was
approximately $3.33 billion. The Operating Partnership's market capitalization
is calculated based on the sum of (i) the value of the Operating Partnership's
Class A 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
Class A common stock and Class B common stock), (ii) the liquidation preference
values of the Operating Partnership's preferred units, (iii) the contributed
value of Metropolitan's preferred interest and (iv) the approximately $1.41
billion (including its share of joint venture debt and net of minority partners'
interest) of debt outstanding at June 30, 2000. As a result, the Operating
Partnership's total debt to total market capitalization ratio at June 30, 2000
equaled approximately 42.3%.
RESULT OF OPERATIONS
The Operating Partnership's total revenues increased by $34.6 million or
38.1% for the three months ended June 30, 2000 as compared to the 1999 period.
Property operating revenues, which include base rents and tenant escalations and
reimbursements ("Property Operating Revenues") increased by $23.3 million or
27.2% for the three months ended June 30, 2000 as compared to the 1999 period.
The increase in Property Operating Revenues is substantially attributable to the
Tower portfolio acquisition in May 1999, the acquisition of the first mortgage
note secured by 919 Third Avenue (which revenue was reflected in Property
Operating Revenues) in June 1999 and the acquisition of 1350 Avenue of the
Americas in January 2000. In addition, Property Operating Revenues were also
positively impacted by approximately $3.6 million from increases in occupancies
and rental rates in our "same store" properties. The Operating Partnership's
base rent reflects the positive impact of the straight-line rent adjustment of
$8.3 million for the three months ended June 30, 2000 as compared to $3.2
million for the 1999 period. The remaining balance of the increase in total
revenues is attributable to the gain on sales of real estate, interest income
and fees relating to the FrontLine Facility and the RSVP Commitment and earnings
generated by RSVP-controlled joint venture REIT-qualified investments.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $8.8 million or 32.1% for the three months ended June
30, 2000 as compared to the 1999 period. These increases are primarily due to
the acquisition of the Tower portfolio in May 1999, the acquisition of the first
mortgage note secured by 919 Third Avenue in June 1999, (which operations were
reflected in Property Expenses) and the acquisition of 1350 Avenue of the
Americas in January 2000. Gross operating margins (defined as Property Operating
Revenues less Property Expenses, taken as a percentage of Property Operating
Revenues) for the three months ended June 30 , 2000 and 1999 were 66.7% and
67.9% respectively. The decrease in gross operating margins is primarily
attributable to a larger proportionate share of gross operating margin derived
from office properties, which has a lower gross margin percentage, in 2000
compared to 1999. The higher proportionate share of the gross operating margins
is attributable to the office properties acquired during the period May 1999
through January 2000 and the disposition of net leased industrial properties in
September 1999 and April 2000. This shift in the composition of the portfolio
was offset by increases in rental rates and operating efficiencies realized.
Marketing, general and administrative expenses increased by $2.2 million
for the three months ended June 30, 2000 as compared to the 1999 period. The
increase is due to the increased costs of managing the acquisition properties
and the increase in corporate management and administrative costs associated
with
13
<PAGE>
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 5.4% for the three months ended June 30, 2000 as compared to
5.0% for the 1999 period.
Interest expense increased by $5.3 million for the three months ended June
30, 2000 as compared to the 1999 period. The increase is due to secured
borrowings assumed in the Tower acquisition as well as new debt incurred with
the Tower and 1350 Avenue of the Americas acquisitions. Additionally, the
increase is due to an increase cost attributable to an increased balance on the
Operating Partnership's credit facility and term loan. The weighted average
balance outstanding on the Operating Partnership's credit facility and term loan
was $464.1 million for the three months ended June 30, 2000 as compared to
$352.1 million for the three months ended June 30, 1999.
The Operating Partnership's total revenues increased by $76.2 million or
45.6% for the six months ended June 30, 2000 as compared to the 1999 period.
Property Operating Revenues, which include base rents and tenant escalations and
reimbursements increased by $59.9 million or 38.3% for the six months ended June
30, 2000 as compared to the 1999 period. The increase in Property Operating
Revenues is substantially attributable to the Tower portfolio acquisition in May
1999, the acquisition of the first mortgage note secured by 919 Third Avenue
(which revenue was reflected in Property Operating Revenues) in June 1999 and
the acquisition of 1350 Avenue of the Americas in January 2000. In addition,
Property Operating Revenues were also positively impacted by approximately $5.4
million from increases in occupancies and rental rates in our "same store"
properties. The Operating Partnership's base rent reflects the positive impact
of the straight-line rent adjustment of $12.8 million for the six months ended
June 30, 2000 as compared to $4.6 million for the 1999 period. The remaining
balance of the increase in total revenues is attributable to the gain on sales
of real estate, interest income and fees relating to the FrontLine Facility and
the RSVP Commitment and earnings generated by RSVP-controlled joint venture
REIT-qualified investments.
Property Expenses increased by $24.1 million or 47.7% for the six months
ended June 30, 2000 as compared to the 1999 period. These increases are
primarily due to the acquisition of the Tower portfolio in May 1999, the
acquisition of the first mortgage note secured by 919 Third Avenue in June 1999,
(which operations were reflected in Property Expenses) and the acquisition of
1350 Avenue of the Americas in January 2000. Gross Operating Margins for the six
months ended June 30 , 2000 and 1999 were 65.6% and 67.8% respectively. The
decrease in gross operating margins is primarily attributable to a larger
proportionate share of gross operating margin derived from office properties,
which has a lower gross margin percentage, in 2000 compared to 1999. The higher
proportionate share of the gross operating margins is attributable to the office
properties acquired during the period May 1999 through January 2000 and the
disposition of net leased industrial properties in September 1999. This shift in
the composition of the portfolio was offset by increases in rental rates and
operating efficiencies realized.
Marketing, general and administrative expenses increased by $4.0 million
for the six months ended June 30, 2000 as compared to the 1999 period. The
increase is due to the increased costs of managing the acquisition properties
and the increase in corporate management and administrative costs associated
with the growth of the Operating Partnership including the opening of its New
York City division. Marketing, general and administrative expenses as a
percentage of total revenues were 5.2% for the six month periods ended June 30,
2000 and June 30, 1999.
Interest expense increased by $15.2 million for the six months ended June
30, 2000 as compared to the 1999 period. The increase is primarily due to
secured borrowings assumed in the Tower acquisition as well as new debt incurred
with the Tower and 1350 Avenue of the Americas acquisitions. Additionally, the
increase is also due to $300 million of Senior Unsecured Notes issued on March
26, 1999 and an increased cost attributable to an increased average balance on
the Operating Partnership's credit facility and term loan. The weighted average
balance on the Operating Partnership's credit facility and term loan was $464.8
million for the six months ended June 30, 2000 as compared to $429.0 million for
the six months ended June 30, 1999.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, 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 which matures in July, 2001. Interest rates on
borrowings under the Credit Facility are priced off of 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, 2000, the
Operating Partnership had availability under the Credit Facility to borrow an
additional $126.4 million (of which, $49.1 million has been reserved for
outstanding undrawn letters of credit).
As of June 30, 2000, the Operating Partnership had an 18-month, $75 million
unsecured term loan (the "Term Loan") from Chase Manhattan Bank which matures in
June, 2001. Interest rates on borrowings under the Term Loan are priced off of
LIBOR plus 150 basis points.
On May 24, 1999, 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 were entitled to receive an initial annual
distribution of $2.24 per unit, which distribution is subject to adjustment
annually. On July 1, 2000, the annual distribution on the Class B common units
was increased to $2.40 per unit.
The Class B common units are exchangeable at any time, at the option of the
holder, into an equal number of Class A 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 Class
A common units at any time following the four year, six-month anniversary of the
issuance of the Class B common units.
On June 20, 2000, the Operating Partnership issued 4,181,818 Class A common
units in exchange for four million Series E preferred units of general
partnership interest with a liquidation preference value of $100 million.
As of June 30, 2000, in conjunction with the Company's Class B common stock
buy back program, the Operating Partnership had purchased and retired 1,410,804
Class B common units for approximately $30.3 million.
The Operating Partnership's indebtedness at June 30, 2000 totaled
approximately $1.41 billion (including its share of joint venture debt and net
of the minority partners' interests) and was comprised of $373.6 million
outstanding under the Credit Facility, $75 million outstanding under the Term
Loan, approximately $449.3 million of senior unsecured notes and approximately
$513.3 million of mortgage indebtedness. Based on the Operating Partnership's
total market capitalization of approximately $3.33 billion at June 30, 2000
(calculated based on the sum of (i) the value of the Operating Partnership's
Class A 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
Class A common stock and Class B common stock), (ii) the liquidation preference
value of the Operating Partnership's preferred units, (iii) the contributed
value of Metropolitan's preferred interest and (iv) the $1.41 billion of debt),
the Operating Partnership's debt represented approximately 42.3% of its total
market capitalization.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures of the 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 and equity securities of the Operating Partnership. In
addition, the Operating Partnership also believes that it will, from time to
time, generate funds from the sale of certain of its real estate properties or
interests therein. The Operating Partnership will refinance existing mortgage
indebtedness or indebtedness under the Credit Facility at maturity or
15
<PAGE>
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.
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 Facility 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.
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 November 1999, NAREIT issued a "White Paper" analysis to address
certain interpretive issues under its definition of FFO. The White Paper
provides that FFO should include both recurring and non-recurring operating
results, except those results defined as "extraordinary items" under GAAP. This
revised definition is effective for all periods beginning on or after January 1,
2000.
Since all companies and analysts do not calculate FFO in a similar fashion,
the 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net Income available to common unit holders ......... $25,927 $ 13,124 $44,739 $ 27,005
Adjustment for Funds From Operations:
Add:
Real estate depreciation and amortization .......... 21,937 18,406 42,552 33,094
Minority partners' interests in consolidated
partnerships ..................................... 1,925 1,615 3,899 2,783
Less:
Gain on sales of real estate ....................... 6,662 -- 6,662 --
Amount distributed to minority partners in
consolidated partnerships ........................ 2,136 1,980 4,517 3,424
------- -------- ------- --------
Funds From Operations ............................... $40,991 $ 31,165 $80,011 $ 59,458
======= ======== ======= ========
Weighted average units outstanding .................. 59,322 52,873 58,843 50,330
======= ======== ======= ========
</TABLE>
16
<PAGE>
SUPPLEMENTAL INFORMATION ON CAPITAL EXPENDITURES,
TENANT IMPROVEMENTS AND LEASING COMMISSIONS
The following table summarizes the expenditures incurred for
non-incremental capital expenditures, tenant improvements and leasing
commissions for the Operating Partnership's office and industrial properties for
the six month period ended June 30, 2000 and the historical average of such
non-incremental capital expenditures, tenant improvements and leasing
commissions for the years 1996 through 1999.
NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
SIX MONTHS
1996-1999 ENDED
1996 1997 1998 1999 AVERAGE JUNE 30, 2000
------------- --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
SUBURBAN OFFICE PROPERTIES
Total ................... $ 375,026 $ 1,108,675 $ 2,004,976 $ 2,298,899 $ 1,446,894 $ 1,698,839
Per Square Foot ......... 0.13 0.22 0.23 0.23 0.20 0.17
CBD OFFICE PROPERTIES
Total ................... N/A N/A N/A N/A N/A $ 746,275
Per Square Foot ......... N/A N/A N/A N/A N/A 0.35
INDUSTRIAL PROPERTIES
Total ................... $ 670,751 $ 733,233 $ 1,205,266 $ 1,048,688 $ 914,485 $ 431,699
Per Square Foot ......... 0.18 0.15 0.12 0.11 0.14 0.05
</TABLE>
NON-INCREMENTAL REVENUE GENERATING TENANT IMPROVEMENTS AND LEASING COMMISSIONS
<TABLE>
<CAPTION>
SIX MONTHS
1996-1999 ENDED
1996 1997 1998 1999 AVERAGE JUNE 30, 2000
------------- -------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
LONG ISLAND OFFICE PROPERTIES
Tenant Improvements .............. $ 523,574 $ 784,044 $ 1,140,251 $ 1,009,357 $ 864,307 $ 778,333
Per Square Foot Improved ......... 4.28 7.00 3.98 4.73 5.00 5.06
Leasing Commissions .............. $ 119,047 $ 415,822 $ 418,191 $ 551,762 $ 376,206 $ 936,595
Per Square Foot Leased ........... 0.97 4.83 1.46 2.59 2.46 4.92
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ $ 5.25 $ 11.83 $ 5.44 $ 7.32 $ 7.46 $ 9.98
========= ========== =========== =========== ========== =========
WESTCHESTER OFFICE PROPERTIES
Tenant Improvements .............. $ 834,764 $1,211,665 $ 711,160 $ 1,316,611 $1,018,550 $ 712,852
Per Square Foot Improved ......... 6.33 8.90 4.45 5.62 6.33 7.33
Leasing Commissions .............. $ 264,388 $ 366,257 $ 286,150 $ 457,730 $ 343,631 $ 131,402
Per Square Foot Leased ........... 2.00 2.69 1.79 1.96 2.11 3.00
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ $ 8.33 $ 11.59 $ 6.24 $ 7.58 $ 8.44 $ 10.33
========= ========== =========== =========== ========== =========
CONNECTICUT OFFICE PROPERTIES (A)
Tenant Improvements .............. $ 58,000 $1,022,421 $ 202,880 $ 179,043 $ 449,952 $ 230,365
Per Square Foot Improved ......... 12.45 13.39 5.92 4.88 9.16 5.44
Leasing Commissions .............. $ 0 $ 256,615 $ 151,063 $ 110,252 $ 159,363 $ 113,263
Per Square Foot Leased ........... 0.00 3.36 4.41 3.00 2.69 2.67
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ $ 12.45 $ 16.75 $ 10.33 $ 7.88 $ 11.85 $ 8.11
========= ========== =========== =========== ========== =========
NEW JERSEY OFFICE PROPERTIES
Tenant Improvements .............. N/A N/A $ 654,877 $ 454,054 $ 554,466 $ 914,789
Per Square Foot Improved ......... N/A N/A 3.78 2.29 3.04 7.03
Leasing Commissions .............. N/A N/A $ 396,127 $ 787,065 $ 591,596 $ 739,594
Per Square Foot Leased ........... N/A N/A 2.08 3.96 3.02 5.83
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ N/A N/A $ 5.86 $ 6.25 $ 6.06 $ 12.86
========= ========== =========== =========== ========== =========
NEW YORK OFFICE PROPERTIES
Tenant Improvements .............. N/A N/A N/A N/A N/A $ 11,977
Per Square Foot Improved ......... N/A N/A N/A N/A N/A 1.18
Leasing Commissions .............. N/A N/A N/A N/A N/A $ 21,031
Per Square Foot Leased ........... N/A N/A N/A N/A N/A 2.07
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ N/A N/A N/A N/A N/A $ 3.25
========= ========== =========== =========== ========== =========
INDUSTRIAL PROPERTIES
Tenant Improvements .............. $ 380,334 $ 230,466 $ 283,842 $ 375,646 $ 317,572 $ 263,746
Per Square Foot Improved ......... 0.72 0.55 0.76 0.25 0.57 0.50
Leasing Commissions .............. $ 436,213 $ 81,013 $ 200,154 $ 835,108 $ 388,122 $ 115,590
Per Square Foot Leased ........... 0.82 0.19 0.44 0.56 0.50 0.22
--------- ---------- ----------- ----------- ---------- ---------
Total Per Square Foot ............ $ 1.54 $ 0.74 $ 1.20 $ 0.81 $ 1.07 $ 0.72
========= ========== =========== =========== ========== =========
</TABLE>
----------
(A) 1996 -- 1999 average weighted to reflect October 1996 acquisition date
17
<PAGE>
LEASE EXPIRATIONS
The following table sets forth scheduled lease expirations for executed
leases as of June 30, 2000:
LONG ISLAND OFFICE PROPERTIES (EXCLUDING OMNI):
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 21 57,738 1.9% $ 20.43 $ 22.65
2001 ........................ 42 193,716 6.3% $ 22.44 $ 24.45
2002 ........................ 35 287,016 9.3% $ 21.86 $ 24.21
2003 ........................ 50 310,620 10.1% $ 22.17 $ 25.08
2004 ........................ 45 275,654 9.0% $ 23.04 $ 25.73
2005 ........................ 56 557,431 18.2% $ 22.87 $ 25.16
2006 AND THEREAFTER ......... 78 1,389,520 45.2% -- --
-- --------- -----
TOTAL ....................... 327 3,071,695 100.0%
=== ========= =====
</TABLE>
OMNI:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ -- -- -- -- --
2001 ........................ 4 32,680 5.8% $ 27.39 $ 32.92
2002 ........................ 4 129,351 22.8% $ 30.00 $ 38.62
2003 ........................ 6 81,809 14.4% $ 29.60 $ 33.87
2004 ........................ 4 112,414 19.8% $ 26.05 $ 33.44
2005 ........................ 6 59,115 10.4% $ 27.91 $ 34.38
2006 AND THEREAFTER ......... 6 152,411 26.8% -- --
-- ------- -----
TOTAL ....................... 30 567,780 100.0%
== ======= =====
</TABLE>
INDUSTRIAL PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 18 276,554 5.6% $ 5.43 $ 6.10
2001 ........................ 30 624,759 12.6% $ 5.79 $ 7.00
2002 ........................ 26 240,344 4.8% $ 6.43 $ 7.19
2003 ........................ 29 728,234 14.6% $ 5.29 $ 6.10
2004 ........................ 34 634,085 12.8% $ 6.40 $ 7.07
2005 ........................ 15 368,464 7.4% $ 5.65 $ 7.91
2006 AND THEREAFTER ......... 44 2,097,360 42.2% -- --
-- --------- -----
TOTAL ....................... 196 4,969,800 100.0%
=== ========= =====
</TABLE>
18
<PAGE>
LEASE EXPIRATIONS -- (CONTINUED)
RESEARCH AND DEVELOPMENT PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 3 22,501 1.8% $ 12.49 $ 11.06
2001 ........................ 7 96,120 7.5% $ 11.61 $ 13.21
2002 ........................ 3 118,620 9.3% $ 10.19 $ 11.80
2003 ........................ 6 301,064 23.5% $ 5.72 $ 6.71
2004 ........................ 10 129,218 10.1% $ 11.98 $ 13.43
2005 ........................ 3 293,704 23.0% $ 8.08 $ 8.86
2006 AND THEREAFTER ......... 13 317,457 24.8% -- --
-- ------- -----
TOTAL ....................... 45 1,278,684 100.0%
== ========= =====
</TABLE>
WESTCHESTER OFFICE PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 22 118,125 3.9% $ 20.53 $ 21.07
2001 ........................ 38 253,217 8.3% $ 20.79 $ 21.07
2002 ........................ 48 459,216 15.1% $ 20.12 $ 20.37
2003 ........................ 42 259,105 8.5% $ 21.90 $ 23.14
2004 ........................ 26 164,609 5.4% $ 21.27 $ 22.01
2005 ........................ 29 302,342 9.9% $ 22.52 $ 23.57
2006 AND THEREAFTER ......... 40 1,483,874 48.9% -- --
-- --------- -----
TOTAL ....................... 245 3,040,488 100.0%
=== ========= =====
</TABLE>
STAMFORD OFFICE PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 18 83,909 8.0% $ 21.52 $ 22.39
2001 ........................ 23 112,738 10.7% $ 24.46 $ 24.16
2002 ........................ 19 100,029 9.5% $ 27.15 $ 28.31
2003 ........................ 13 94,448 9.0% $ 31.61 $ 32.41
2004 ........................ 21 224,424 21.3% $ 22.85 $ 23.71
2005 ........................ 12 80,132 7.6% $ 26.79 $ 29.02
2006 AND THEREAFTER ......... 19 357,199 33.9% -- --
-- ------- -----
TOTAL ....................... 125 1,052,879 100.0%
=== ========= =====
</TABLE>
19
<PAGE>
LEASE EXPIRATIONS -- (CONTINUED)
NEW JERSEY OFFICE PROPERTIES:
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 7 29,478 1.5% $ 17.20 $ 17.68
2001 ........................ 21 247,144 12.8% $ 17.68 $ 17.95
2002 ........................ 21 180,187 9.4% $ 19.92 $ 20.41
2003 ........................ 21 337,598 17.5% $ 20.02 $ 20.21
2004 ........................ 35 248,891 12.9% $ 22.69 $ 23.13
2005 ........................ 28 343,777 17.9% $ 22.47 $ 23.12
2006 AND THEREAFTER ......... 17 539,228 28.0% -- --
-- ------- -----
TOTAL ....................... 150 1,926,303 100.0%
=== ========= =====
</TABLE>
NEW YORK CITY OFFICE
<TABLE>
<CAPTION>
YEAR OF TOTAL RENTABLE % OF TOTAL PER PER
LEASE NUMBER SQUARE FEET RENTABLE SQUARE SQUARE FOOT SQUARE FOOT
EXPIRATION OF LEASES EXPIRING FEET EXPIRING S/L RENT (1) RENT (2)
----------------------------- ----------- ---------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
2000 ........................ 8 85,054 2.6% $ 30.12 $ 31.68
2001 ........................ 21 172,930 5.3% $ 37.24 $ 35.12
2002 ........................ 18 184,130 5.6% $ 31.98 $ 32.83
2003 ........................ 7 115,726 3.5% $ 31.89 $ 32.34
2004 ........................ 18 215,648 6.6% $ 35.83 $ 36.97
2005 ........................ 30 437,437 13.3% $ 34.63 $ 35.94
2006 AND THEREAFTER ......... 110 2,072,808 63.1% -- --
--- --------- -----
TOTAL ....................... 212 3,283,733 100.0%
=== ========= =====
</TABLE>
(1) Per square foot rental rate represents annualized straight line rent as of
the lease expiration date.
(2) Per square foot rental rate represents annualized base rent as of the lease
expiration date plus non-recoverable operating expense pass-throughs.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing the Operating Partnership is interest rate
risk on its long-term debt, mortgage notes and notes receivable. The Operating
Partnership does not hedge interest rate risk using financial instrument nor is
the Operating Partnership subject to foreign currency risk.
The Operating Partnership manages its exposure to interest rate risk on its
variable rate indebtedness by borrowing on a short-term basis under its Credit
Facility or Term Loan until such time as it is able to retire the short-term
variable rate debt with a long-term fixed rate debt offering on terms that are
advantageous to the Operating Partnership or through general partner
contributions.
The following table sets forth the Operating Partnership's long term debt
obligations by scheduled principal cash flow payments and maturity date,
weighted average interest rates and estimated fair market value ("FMV") at June
30, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2000 2001 2002 2003 2004
------------ ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Long term debt:
Fixed rate ............................. $ 11,577 $ 23,048 $ 16,820 $ 8,698 $ 112,146
Weighted average interest rate ......... 7.49% 7.59% 7.80% 7.78% 7.50%
Variable rate .......................... $ -- $ 518,600 $ -- $ -- $ --
Weighted average interest rate ......... -- 7.62% -- -- --
<CAPTION>
THEREAFTER TOTAL(1) FMV
------------ ------------- -----------
<S> <C> <C> <C>
Long term debt:
Fixed rate ............................. $ 735,177 $ 907,466 $ 907,466
Weighted average interest rate ......... 7.56% 7.56%
Variable rate .......................... $ -- $ 518,600 $ 518,600
Weighted average interest rate ......... -- 7.62%
</TABLE>
------------------
(1) Includes unamortized issuance discounts of $652,000 on the 5 and 10-year
senior unsecured notes issued on March 26, 1999, which are due at maturity.
In addition, the 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 $5.2 million annual
increase in interest expense based on approximately $518.6 million outstanding
at June 30, 2000.
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, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2000 2001 2002 2003 2004
-------------- ---------- ----------- ------ ------------
<S> <C> <C> <C> <C> <C>
Mortgage notes and notes receivable:
Fixed rate ............................. $ 283,116 $ 15 $ 9,361 $ -- $ 36,500
Weighted average interest rate ......... 9.42% 9.00% 10.31% -- 10.23%
<CAPTION>
THEREAFTER TOTAL (2) FMV
------------ -------------- -----------
<S> <C> <C> <C>
Mortgage notes and notes receivable:
Fixed rate ............................. $ 16,990 $ 345,982 $345,982
Weighted average interest rate ......... 11.65% 9.64%
</TABLE>
The fair value of the Operating Partnership's long term debt, mortgage
notes and notes receivable is estimated based on discounting future cash flows
at interest rates that management believes reflects the risks associated with
long term debt, mortgage notes and notes receivable of similar risk and
duration.
------------------
(2) Excludes mortgage note receivable acquisition costs and interest receivables
aggregating approximately $10.7 million.
21
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities and use of proceeds
On June 20, 2000, the Operating Partnership issued 4,181,818 Class A common
units in exchange for four million Series E preferred units of general
partnership interest with a liquidation preference value of $100 million. This
transaction was exempt from registration pursuant to section 4(2) of the
Securities Act of 1933.
Item 3. Defaults Upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Securities Holders -- None
Item 5. Other information -- None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
<TABLE>
<CAPTION>
NUMBER
-----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
b) During the three months ended June 30, 2000 the Registrant did not file any
reports on Form 8K.
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
<TABLE>
<S> <C>
By: \s\ Scott H. Rechler \s\ Michael Maturo
-------------------------------- -----------------------------------
Scott H. Rechler, Co-Chief Executive Officer Michael Maturo, Executive Vice President,
and President Treasurer and Chief Financial Officer
</TABLE>
DATE: August 10, 2000
22
