ITEM 1. BUSINESS
GENERAL
Reckson Associates Realty Corp. was incorporated in September 1994 and commenced operations effective with the completion of its initial public offering on June 2, 1995. Reckson Associates Realty Corp., together with Reckson Operating Partnership, L.P. (the "Operating Partnership"), and their affiliates (collectively, the "Company") were formed for the purpose of continuing the commercial real estate business of Reckson Associates, its affiliated partnerships and other entities ("Reckson"). For more than 40 years, Reckson has been engaged in the business of owning, developing, acquiring, constructing, managing and leasing office and industrial properties in the New York tri-state area (the "Tri-State Area"). Based on industry surveys, management believes that the Company is one of the largest owners and operators of Class A office properties and industrial properties in the Tri-State Area. The Company operates as a fully-integrated, self-administered and self-managed real estate investment trust ("REIT"). As of December 31, 1999, the Company owned 189 properties (the "Properties") (including two joint venture properties) in the Tri-State Area encompassing approximately 21.4 million rentable square feet, all of which are managed by the Company. The Properties consist of 77 Class A office properties (the "Office Properties") encompassing approximately 13.1 million square feet, 110 industrial properties (the "Industrial Properties") encompassing approximately 8.3 million square feet and two 10,000 square foot retail properties. The Company also owns a 357,000 square foot office building located in Orlando, Florida. In addition, as of December 31, 1999, the Company had approximately $315.6 million invested in certain mortgage indebtedness encumbering three Class A Office Properties encompassing approximately 1.6 million square feet, approximately 472 acres of land located in New Jersey and in a note receivable secured by a partnership interest in Omni Partners, L. P., owner of the Omni, a 575,000 square foot Class A Office Property located in Uniondale, New York (the "Mortgage Note Investments"). As of December 31, 1999, the Company also owned approximately 346 acres of land in 16 separate parcels of which the Company can develop approximately 1.9 million square feet of office space and approximately 300,000 square feet of industrial space. During 1998 and 1999, the Company made investments in joint ventures with Reckson Strategic Venture Partners, LLC ("RSVP"), a venture capital fund created as a research and development vehicle for the Company to invest in alternative real estate sectors (see Corporate Strategies and Growth Opportunities). RSVP is managed by an affiliate of Reckson Service Industries, Inc. currently D/B/A FrontLine Capital Group ("FrontLine"). The Company has committed up to $100 million for investments in the form of either (i) joint ventures with RSVP or (ii) loans to FrontLine for FrontLine's investment in RSVP. To date, the Company has invested $24.8 million in RSVP joint venture investments. During 1998, the Company spun off FrontLine, its commercial service business, to its shareholders and has provided FrontLine with a $100 million line of credit. As of December 31, 1999, $79.5 million had been drawn and is outstanding on this line.
The Office Properties are Class A office buildings and are well-located, well-maintained and professionally managed. In addition, these properties are modern with high finishes or have been modernized to successfully compete with newer buildings and achieve among the highest rent, occupancy and tenant retention rates within their markets. The majority of the Office Properties are located in twelve planned office parks and are tenanted by a diverse industry group of national firms which include consumer products, telecommunication, health care, insurance and professional service firms such as accounting firms and securities brokerage houses. The Industrial Properties are utilized for distribution, warehousing, research and development and light manufacturing / assembly activities and are located primarily in three planned industrial parks developed by Reckson.
All of the Company's interests in the Properties, the Mortgage Note Investments and land are held directly or indirectly by, and all of its operations are conducted through, the Operating Partnership. Reckson Associates Realty Corp. controls the Operating Partnership as the sole general partner and as of December 31, 1999, owned approximately 87% of the Operating Partnership's outstanding common units of limited partnership ("Units") and Class B common units of limited partnership interest.
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The Company seeks to maintain cash reserves for normal repairs, replacements, improvements, working capital and other contingencies. The Operating Partnership has established an unsecured credit facility (the "Credit Facility") with a maximum borrowing amount of $500 million scheduled to mature on July 23, 2001 and an unsecured term loan ("the "Term Loan") with a maximum borrowing capacity of $75 million scheduled to mature on June 16, 2001. The Credit Facility and the Term Loan require the Company to comply with a number of financial and other covenants on an ongoing basis.
During 1999, the Operating Partnership issued $300 million of five year and ten year senior unsecured notes and the Company issued six million shares of Series B Convertible Cumulative Preferred Stock for proceeds of $150 million. The combined net proceeds of approximately $447.4 million were used to repay outstanding borrowings under the Credit Facility and as partial consideration in the acquisition of the first mortgage note secured by 919 Third Avenue located in New York City.
On May 24, 1999, in conjunction with the Tower portfolio acquisition (see Corporate Strategies and Growth Opportunities below), the Company issued 11,694,567 shares of Class B Exchangeable Common Stock, par value $.01 per share, of the Company (the "Class B Common Stock") which were valued for purposes under generally accepted accounting principals ("GAAP") at $26 per share for total consideration of approximately $304.1 million.
There are numerous commercial properties that compete with the Company in attracting tenants and numerous companies that compete in selecting land for development and properties for acquisition.
The Company's executive offices are located at 225 Broadhollow Road, Melville, New York 11747 and its telephone number at that location is (631) 694-6900. At December 31, 1999, the Company had approximately 300 employees.
RECENT DEVELOPMENTS
Acquisition Activity.
Set forth below is a brief description of the Company's major acquisition activity during 1999.
On May 24, 1999, the Tower portfolio acquisition was completed with the Company obtaining title to all of Tower's real estate assets. Simultaneously with the closing of the Tower portfolio acquisition the Company arranged for the sale of four of Tower's Class B New York City office properties. In addition, the Company sold, with the exception of one Class A, 357,000 square foot office building located in Orlando, Florida, all of the assets located outside of the Tri-State Area. In addition to the aforementioned property in Orlando, Florida, the Company's remaining assets from the Tower portfolio acquisition include three Class A New York City Office Properties encompassing approximately 1.6 million square feet and one Class A Office Property on Long Island encompassing approximately 101,000 square feet.
On June 15, 1999, the Company acquired the first mortgage note secured by 919 Third Avenue, a 47 story, 1.4 million square foot Class A Office Property located in New York City for approximately $277.5 million. The first mortgage note entitles the Company to all the net cash flow of the property and to substantial rights regarding the operations of the property.
In addition, as of December 31, 1999, the Company has invested approximately $15.7 million in certain mortgage indebtedness encumbering one Class A Office Property encompassing approximately 177,000 square feet and approximately 472 acres of land located in New Jersey. The Company has also loaned approximately $17 million to its minority partner in Omni, its 575,000 square foot flagship Long Island Office Property, and effectively increased its economic interest in the property owning partnership.
On January 13, 2000, the Company acquired 1350 Avenue of the Americas, a 540,000 square foot, 35 story, Class A office property, located in New York City, for a purchase price of approximately $126.5 million. This acquisition was financed through a $70 million secured debt financing and a draw under the Company's Credit Facility.
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On January 6, 1998, the Company made an 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.
During 1999, the Company executed a contract for the sale, which will take place in three stages, of its interest in RMI which consisted of 28 properties, comprising approximately 6.1 million square feet and three other big box Industrial Properties. The combined total sale price is approximately $298 million (approximately $42 million of which is payable to the Morris Companies and its affiliates).
During 1999, the first stage of the RMI closing occurred and stages two and three are scheduled for April 2000.
Leasing Activity
During the year ended December 31, 1999, the Company leased 1.7 million square feet at the Office Properties at an average effective rent (i.e.,base rent adjusted on a straight-line basis for free rent periods, tenant improvements and leasing commissions) of $24.14 per square foot and 1.3 million square feet at the Industrial Properties at an average effective rent of $6.71 per square foot. Included in this leasing data is 388,531 square feet at the Long Island Office Properties at an average effective rent of $24.87; 707,731 square feet at the Westchester Office Properties at an average effective rent of $22.04; 109,006 square feet at the Connecticut Office Properties at an average effective rent of $26.57; 413,072 square feet at the New Jersey Office Properties at an average effective rent of $22.63 and 86,476 square feet of the New York City office properties at an average effective rent of $42.27. Also included in this leasing data is 940,315 square feet at the Long Island Industrial Properties at an average effective rent of $7.16 and 373,497 square feet at the New Jersey Industrial Properties at an average effective rent of $5.60.
Financing Activities
On July 23, 1998, the Company obtained its three year $500 million unsecured revolving Credit Facility from Chase Manhattan Bank, Union Bank of Switzerland and PNC Bank as co-managers of the Credit Facility bank group. Interest rates on borrowings under the Credit Facility are priced off of LIBOR plus a sliding scale ranging from 65 basis points to 90 basis points based on the Company's investment grade rating on its senior unsecured debt. On March 16, 1999, the Company received its investment grade rating on its senior unsecured debt. As a result, the pricing under the Credit Facility was adjusted to LIBOR plus 90 basis points.
The Company utilizes the Credit Facility primarily to finance the acquisitions of Properties and other real estate investments, fund its development activities and for working capital purposes. At December 31, 1999, the Company had availability under the Credit Facility to borrow an additional $150.1 million (net of $52.3 million of outstanding undrawn letters of credit).
As of December 31, 1999, the Company had outstanding its 18 month, $75 million unsecured Term Loan from Chase Manhattan Bank. Interest rates on borrowings under the Term Loan are priced off of LIBOR plus 150 basis points. The Term Loan replaced the Company's previous term loan which matured on December 17, 1999.
Other Financing Activities
On March 26, 1999, the Operating Partnership issued $100 million of 7.4% senior unsecured notes due March 15, 2004 and $200 million of 7.75% senior unsecured notes due March 15, 2009. Net proceeds of approximately $297.4 million were used to repay outstanding borrowings under the Company's Credit Facility.
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On May 24, 1999, in conjunction with the Tower portfolio acquisition, the Company obtained a $130 million unsecured bridge facility (The "Bridge Facility") from USB 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 and an advance under the Credit Facility. The new mortgage note, in the amount of $125 million, is secured by two Office Properties with an aggregate carrying value of approximately $261 million, is for a term of ten years and bears interest at the rate of 7.73% per annum.
Stock Offerings
On May 24, 1999, in conjunction with the Tower portfolio acquisition, the Company issued 11,694,567 shares of Class B Common Stock which were valued for GAAP purposes at $26 per share for total consideration of approximately $304.1 million. The shares of Class B Common Stock are entitled to receive an initial annual dividend of $2.24 per share, which dividend is subject to adjustment annually commencing on July 1, 2000. The shares of Class B Common Stock are exchangeable at any time, at the option of the holder, into an equal number of shares of common stock, par value $.01 per share, of the Company subject to customary antidilution adjustments. The Company, at its option, may redeem any or all of the Class B Common Stock in exchange for an equal number of shares of the Company's common stock at any time following the four year, six-month anniversary of the issuance of the Class B Common Stock.
On June 2, 1999 the Company issued six million shares of its Series B Preferred Stock for total proceeds of $150 million. The Series B Preferred Stock accumulate dividends at an initial rate of 7.85% per annum with such rate increasing to 8.35% per annum on April 30, 2000 and to 8.85% per annum from and after April 30, 2001. The Series B Preferred Stock is convertible into the Company's common stock at a price of $26.05 per share. Proceeds from the stock offering were used as partial consideration in the acquisition of the first mortgage note secured by 919 Third Avenue located in New York City.
CORPORATE STRATEGIES AND GROWTH OPPORTUNITIES
The Company's primary business objectives are to maximize current return to stockholders through increases in distributable cash flow per share and to increase stockholders' long-term total return through the appreciation in value of its common stock. The Company plans to achieve these objectives by continuing Reckson's corporate strategies and capitalizing on the internal and external growth opportunities as described below.
Corporate Strategies. Management believes that throughout its 40-year operating history, Reckson has created value in its properties through a variety of market cycles by implementing the operating strategies described below. These operating strategies include the implementation of: (i) a multidisciplinary leasing approach that involves architectural design and construction personnel as well as leasing professionals, (ii) innovative property marketing programs such as the broker frequent leasing points program which was established by the Company to enhance relationships with the brokerage community and which allows brokers to accumulate points for leasing space in the Company's portfolio which can be redeemed for luxurious prizes, (iii) a comprehensive tenant service program and property amenities designed to maximize tenant satisfaction and retention, (iv) cost control management and systems that take advantage of economies of scale that arise from the Company's market position and efficiencies attributable to the state-of-the-art energy control systems at many of the Office Properties and (v) an acquisition and development strategy that is continuously adjusted in light of anticipated changes in market conditions and that seeks to capitalize on management's multidisciplinary expertise and market knowledge to modify, upgrade and reposition a property in its marketplace in order to maximize value.
The Company also intends to adhere to a policy of maintaining a debt ratio (defined as the total debt of the Company as a percentage of the sum of the Company's total debt and the market value of its equity) of less than 50%. As of December 31, 1999, the Company's debt ratio was approximately 42.3%. This calculation is net of minority partners' proportionate share of debt and including the Company's share of unconsolidated joint venture debt. This debt ratio is intended to provide the Company with financial flexibility to select the optimal source of capital (whether debt or equity) with which to finance external growth.
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Growth Opportunities. The Company intends to achieve its primary business objectives by applying its corporate strategies to the internal and external growth opportunities described below.
Internal Growth. To the extent Long Island, Westchester, New Jersey and Southern Connecticut suburban office and industrial markets continue to improve, management believes the Company is well positioned to benefit from rental revenue growth through: (i) contractual annual compounding 4% Base Rent increases (defined as fixed gross rental amounts that excludes payments on account of real estate tax, operating expense escalations and base electrical charges) on approximately 85% of existing leases at the Long Island Properties, (ii) periodic contractual increases in Base Rent on existing leases at the Westchester Properties, the New Jersey Properties and the Southern Connecticut Properties and (iii) the potential for increases to Base Rents as leases expire as a result of continued tightening of the office and industrial markets with limited new supply.
In connection with the Company's acquisition and merger transaction with Tower Realty Trust, Inc. (see External Growth below) the Company entered the New York City office market. The Manhattan office market is currently experiencing favorable supply and demand characteristics similar to those currently in the Company's suburban markets and also is characterized by its similar lack of available land supply and other barriers to entry that limit our competition. The Tower portfolio includes Manhattan office buildings that offer similar potential for increase in Base Rents as described in (iii) above.
External Growth. The Company seeks to acquire multi-tenant suburban Class A office and industrial properties located in the Tri-State Area. Management believes that the Tri-State Area presents opportunities to acquire or invest in properties at attractive yields. The Company believes that its (i) capital structure, in particular its Credit Facility providing for a maximum borrowing amount of up to $500 million, (ii) ability to acquire a property for Units of the Operating Partnership and thereby defer the seller's income tax on gain, (iii) operating economies of scale, (iv) relationships with financial institutions and private real estate owners, (v) fully integrated operations in its five existing divisions and (vi) its dominant position and franchise in the submarkets in which it owns properties will enhance the Company's ability to identify and capitalize on acquisition opportunities. The Company also intends to selectively develop new Class A suburban office and industrial properties and to continue to redevelop existing Office and Industrial Properties as these opportunities arise. In the near future, the Company will concentrate its development activities on industrial and Class A office properties within the Tri-State Area. The Company's expansion into the Manhattan office market and the opening of its New York City division provides it with additional opportunities to acquire an interest in properties at attractive yields. The Company also believes that the addition of its New York City division provides additional leasing and operational facilities and enhances its overall franchise value by being the only real estate operating company in the Tri-State Area with significant presence in both Manhattan and each of the surrounding sub-markets.
During 1997, the Company formed FrontLine and RSVP. On June 11, 1998, the Operating Partnership distributed its 95% common stock interest in FrontLine of approximately $3 million to its owners, including the Company which, in turn, distributed the common stock of FrontLine received from the Operating Partnership to its stockholders. Additionally, during June 1998, 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 December 31, 1999, the Company had advanced $79.5 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 December 31, 1999, approximately $67.2 million had been invested through the RSVP Commitment, of which $24.8 million represents RSVP-controlled joint venture REIT-qualified investments and $42.4 million represents advances to FrontLine under the RSVP Commitment.
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FrontLine identifies, acquires interests in and develops a network of business to business 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 27, 1998 the Company announced the formation of a joint venture with RSVP and the Dominion Group, an Oklahoma-based, privately-owned group of companies that focuses on the development, acquisition and ownership of government occupied office buildings and correctional facilities. The new venture, Dominion Properties LLC (the "Dominion Venture"), is owned by Dominion Venture Group LLC, and by a subsidiary of the Company. The Dominion Venture is primarily engaged in acquiring, developing and/or owning government-occupied office buildings and privately operated correctional facilities. Under the Dominion Venture's operating agreement, RSVP is to invest up to $100 million, some of which may be invested by the Company (the "RSVP Capital"). The initial contribution of RSVP Capital was approximately $39 million of which approximately $10.1 million was invested by a subsidiary of the Company. The Company's investment was funded through the RSVP Commitment. In addition, the Company advanced approximately $2.9 million to FrontLine through the RSVP Commitment for an investment in RSVP which was then invested on a joint venture basis with the Dominion Group in certain service business activities related to the real estate activities. As of December 31, 1999, the Company had invested approximately $17.6 million in the Dominion Venture which had investments in 13 government office buildings and three correctional facilities.
In 1999, the Company invested approximately $7.2 million, through a subsidiary, in RAP Student Housing Properties, LLC ("RAP -- SHP"), a company that engages primarily in the acquisition and development of off-campus student housing projects. The Company's investment was funded through the RSVP Commitment. In addition, the Company has advanced approximately $3.2 million to FrontLine through the RSVP Commitment for an additional investment in RSVP which was invested in certain service business activities related to student housing. As of December 31, 1999, RAP -- SHP had investments in four off-campus student housing projects.
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.
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. 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 Common Stock (valued for GAAP purposes at approximately $304.1 million).
The Company controls Metropolitan and owns 100% of the common equity; Crescent owns a $85 million preferred equity interest in Metropolitan. Crescent's interest 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 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.
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Prior to the closing of the Merger, the Company arranged for the sale of four of Tower's Class B New York City properties, comprising approximately 701,000 square feet for approximately $84.5 million. Subsequent to the closing of the Merger, the Company has sold a real estate joint venture interest and all of the property located outside the Tri-State Area other than one office property located in Orlando, Florida for approximately $171.1 million. The combined consideration consisted of approximately $143.8 million in cash and approximately $27.3 million of debt relief. Net cash proceeds from the sales were used primarily to repay borrowings under the Credit Facility. As a result of incurring certain sales and closing costs in connection with the sale of the assets located outside the Tri-State Area, the Company has incurred a loss of approximately $4.4 million which has been included in gain on sales of real estate on the accompanying consolidated statements of income.
ENVIRONMENTAL MATTERS
Under various Federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The cost of any required remediation and the owner's liability therefore as to any property is generally not limited under such enactments and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws govern the removal, encapsulation or disturbance of asbestos-containing materials ("ACMs") when such materials are in poor condition, or in the event of renovation or demolition. Such laws impose liability for release of ACMs into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property.
All of the Office Properties and all of the Industrial Properties have been subjected to a Phase I or similar environmental audit after April 1, 1994 (which involved general inspections without soil sampling, ground water analysis or radon testing and, for the Properties constructed in 1978 or earlier, survey inspections to ascertain the existence of ACMs were conducted) completed by independent environmental consultant companies (except for 35 Pinelawn Road which was originally developed by Reckson and subjected to a Phase 1 in April 1992). These environmental audits have not revealed any environmental liability that would have a material adverse effect on the Company's business.
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ITEM 2.
ITEM 2. PROPERTIES
GENERAL
As of December 31, 1999, the Company owned and operated 189 Properties (including two joint venture office properties but excluding the RSVP -- controlled joint ventures) in the Tri-State Area encompassing approximately 21.4 million square feet. These properties consist of 77 Class A Office Properties encompassing approximately 13.1 million rentable square feet, 110 Industrial Properties encompassing approximately 8.3 million rentable square feet and two free-standing 10,000 square foot retail properties. The Company also owns a 357,000 square foot Class A office building in Orlando, Florida. The rentable square feet of each property has been determined for these purposes based on the aggregate leased square footage specified in currently effective leases and, with respect to vacant space, management's estimate. In addition, as of December 31, 1999, the Company owned approximately 346 acres of land in 16 separate parcels of which the Company can develop approximately 1.9 million square feet of office space and approximately 300,000 square feet of industrial space.
Reckson has historically emphasized the development and acquisition of properties that are part of large scale office and industrial parks and approximately 54% of the Office Properties and approximately 46% of the Industrial Properties are located in such parks (measured by rentable square footage). The Company believes that owning properties in planned office and industrial parks provides certain strategic advantages, including the following: (i) certain tenants prefer being located in a park with other high quality companies to enhance their corporate image, (ii) parks afford tenants certain aesthetic amenities such as a common landscaping plan, standardization of signage and common dining and recreational facilities, (iii) tenants may expand (or contract) their business within a park, enabling them to centralize business functions and (iv) a park provides tenants with access to other tenants and may facilitate business relationships between tenants.
Also, as of December 31, 1999, the Company had invested approximately $298.6 million in certain mortgage indebtedness encumbering three Class A Office Properties encompassing approximately 1.6 million square feet and approximately 472 acres of land located in New Jersey. In addition, the Company has loaned approximately $17 million to its minority partner in Omni, its flagship Long Island Office Property and effectively increased its economic interest in the property owning partnership.
Set forth below is a summary of certain information relating to the Properties, categorized by Office and Industrial Properties, as of December 31, 1999.
OFFICE PROPERTIES
General
As of December 31, 1999, the Company owned or had an interest in 77 Tri-State Area Class A Office Properties encompassing approximately 13.1 million rentable square feet. As of December 31, 1999, these Office Properties were approximately 95% leased to approximately 1,000 tenants.
The Office Properties are Class A office buildings and are well-located, well-maintained and professionally managed. In addition, these properties are modern with high finishes and achieve among the highest rent, occupancy and tenant retention rates within their sub-markets. Forty-nine of the 73 suburban Office Properties are located in the following twelve planned office parks: the North Shore Atrium, the Huntington Melville Corporate Center, the Nassau West Corporate Center, the Tarrytown Corporate Center, the Landmark Square Office Complex, the Executive Hill Office Park, the Reckson Executive Park, the University Square Office Complex, the Summit at Valhalla, the Mt. Pleasant Corporate Center, the Stamford Towers Office Center, and the Short Hills Office Complex. The buildings in these office parks offer a full array of amenities including health clubs, racquetball courts, sun decks, restaurants, computer controlled HVAC access systems and conference centers. Management believes that the location, quality of construction and amenities as well as the Company's reputation for providing a high level of tenant service have enabled the Company to attract and retain a national tenant base. The office tenants include national service companies, such as telecommunications firms, "Big Five" accounting firms, securities brokerage houses, insurance companies and health care providers.
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The Office Properties are leased to both national and local tenants. Leases on the Office Properties are typically written for terms ranging from five to ten years and require: (i) payment of a fixed gross rental amount that excludes payments on account of real estate tax, operating expense escalations and base electrical charges ("Base Rent"), (ii) payment of a base electrical charge, (iii) payment of real estate tax escalations over a base year, (iv) payment of compounded annual increases to Base Rent and/or payment of operating expense escalations over a base year, (v) payment of overtime HVAC and electric and (vi) payment of electric escalations over a base year. In virtually all leases, the landlord is responsible for structural repairs. Renewal provisions typically provide for renewal rates at market rates or a percentage thereof, provided that such rates are not less than the most recent renewal rates.
The following table sets forth certain information as of December 31, 1999 for each of the Office Properties.
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- ------------------ (1) Ground lease expirations assume exercise of renewal options by the lessee. (2) Represents Base Rent of signed leases at December 31, 1999 adjusted for scheduled contractual increases during the 12 months ending December 31, 2000. Total Base Rent for these purposes reflects the effect of any lease expirations that occur during the 12-month period ending December 31, 2000. Amounts included in rental revenue for financial reporting purposes have been determined on a straight-line basis rather than on the basis of contractual rent as set forth in the foregoing table. (3) Property is currently under redevelopment. (4) Percent leases excludes properties under development. (5) Year renovated. (6) The actual fee interest in 520 White Plains Road is held by the County of Westchester Industrial Development Agency. The fee interest in 520 White Plains Road may be acquired if the outstanding principal under certain loan agreements and annual basic installments are prepaid in full. (7) The Company currently holds the first mortgage note secured by this property. There is a ground lease in place on a small portion of the land which expires in 2066.
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INDUSTRIAL PROPERTIES
General.
As of December 31, 1999, the Company owned or had an interest in 110 Industrial Properties that encompass approximately 8.3 million rentable square feet. As of December 31, 1999, the Industrial Properties were approximately 98% leased to approximately 250 tenants. Many of the Industrial Properties have been constructed with high ceiling heights (i.e., above 18 feet), upscale office building facades, parking in excess of zoning requirements, drive-in and/or loading dock facilities and other features which permit them to be leased for industrial and/or office purposes.
The Industrial Properties are leased to both national and local tenants. These tenants utilize the Industrial Properties for distribution, warehousing, research and development and light manufacturing/assembly activities. Leases on the Industrial Properties are typically written for terms ranging from three to seven years and require: (i) payment of a Base Rent, (ii) payments of real estate tax escalations over a base year, (iii) payments of compounded annual increases to Base Rent and (iv) reimbursement of all operating expenses. Electric costs are borne and paid directly by the tenant. Certain leases are "triple net" (i.e., the tenant is required to pay in addition to annual Base Rent, all operating expenses and real estate taxes). In virtually all leases, the landlord is responsible for structural repairs. Renewal provisions typically provide for renewal rents at market rates, provided that such rates are not less than the most recent rental rates.
Approximately 71% of the Industrial Properties measured by square footage are located on Long Island. Sixty five percent of these properties as measured by square footage were located in the following three Industrial Parks developed by Reckson: (i) Vanderbilt Industrial Park, (ii) Airport International Plaza and (iii) County Line Industrial Center.
In addition to the Industrial Properties on Long Island, the Company owns 15 Industrial Properties in the other suburban markets. These properties encompass approximately 2.4 million square feet and were approximately 97% leased (excluding properties under redevelopment) as of December 31, 1999.
The following table sets forth certain information as of December 31, 1999 for each of the Industrial Properties.
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- ---------------- (1) Calculated as the difference from the lowest beam to floor.
(2) Represents Base Rent of signed leases at December 31, 1999 adjusted for scheduled contractual increases during the 12 months ending December 31, 2000. Total Base Rent for these purposes reflects the effect of any lease expirations that occur during the 12 month period ending December 31, 2000. Amounts included in rental revenue for financial reporting purposes have been determined on a straight-line basis rather than on the basis of contractual rent as set forth in the foregoing table.
(3) Property under redevelopment.
(4) Percent leased excludes properties under redevelopment.
(5) A tenant has been granted an option exercisable after April 30, 1997 and prior to October 31, 2002 to purchase this property for $600,000.
(6) The actual fee interest in 19 Nicholas Drive is currently held by the Town of Brookhaven Industrial Development Agency. The Company may acquire such fee interest by making a nominal payment to the Town of Brookhaven Industrial Development Agency.
(7) The Company has entered into a 20 year lease agreement in which it has the right to sublease the premises.
RETAIL PROPERTIES
As of December 31, 1999, the Company owned two free-standing 10,000 square foot retail properties located in Great Neck and Huntington, New York and were 100% leased as of December 31, 1999.
DEVELOPMENTS IN PROGRESS
As of December 31, 1999, the Company had invested approximately $130 million in developments in progress. This amount includes approximately $64 million relating to existing buildings encompassing approximately 1.1 million square feet. The Company estimates that if these projects were to be completed, total additional development costs would be approximately $25.3 million. In addition, the Company has also invested approximately $66 million relating to approximately 346 acres of land which it can develop approximately 2.2 million square feet. The Company estimates that if these projects were to be completed, total additional development costs would be approximately $270 million.
THE OPTION PROPERTIES
In connection with the IPO, the Company was granted a ten year option to acquire ten properties (the "Option Properties") which were not contributed to the Operating Partnership and are either owned by Reckson or in which Reckson owns a non controlling minority interest.
As of December 31, 1999, the Company has acquired four of the Option Properties for an aggregate purchase price of approximately $35 million and the issuance of approximately 475,000 Units. In addition, during 1998, one of the Option Properties was sold by Reckson to a third party.
The remaining Option Properties consist of three Class A office properties encompassing approximately 311,000 square feet and two industrial properties encompassing approximately 69,000 square feet.
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HISTORICAL NON-INCREMENTAL REVENUE-GENERATING CAPITAL EXPENDITURES, TENANT IMPROVEMENT COSTS AND LEASING COMMISSIONS
The following table sets forth annual and per square foot recurring, non-incremental revenue-generating capital expenditures and non-incremental revenue-generating tenant improvement costs and leasing commissions incurred by the Company to retain revenues attributable to existing leased space for the period 1995 through 1999 for the Office Properties and the Industrial Properties. As noted, incremental revenue-generating tenant improvement costs and leasing commissions are excluded from the table set forth immediately below. The historical capital expenditures, tenant improvement costs and leasing commissions set forth below are not necessarily indicative of future recurring, non-incremental revenue-generating capital expenditures or non-incremental revenue-generating tenant improvement costs and leasing commissions.
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MORTGAGE INDEBTEDNESS The following table sets forth certain information regarding the mortgage debt of the Company, as of December 31, 1999.
- ---------- (1) The Company has a 60% general partnership interest in the Omni Partnership. The Company's proportionate share of the aggregate principal amount of the mortgage debt on the Omni is approximately $33.8 million.
(2) Interest rate increases to 10.1% at June 2000.
(3) Principal payments of $34,000 per month.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently subject to any material litigation nor, to the Company's knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations or business or financial condition of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of the year ended December 31, 1999.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's common stock began trading on the New York Stock Exchange ("NYSE") on May 25, 1995, under the symbol "RA". The following table sets forth the quarterly high and low closing sales prices per share of the Company's common stock as reported on the NYSE and the distributions paid by the Company for each respective quarter ended.
(1) Commencing with the distribution for the quarter ending June 30, 1998, the Board of Directors of the Company increased the quarterly distribution to $.3375 per share, which is equivalent to an annual distribution of $1.35 per share. In addition, on June 11, 1998, the Company paid a stock dividend equivalent to $.0824 per share relating to the Operating Partnership's distribution of its common stock interest in Reckson Service Industries, Inc. currently D/B/A FrontLine Capital Group to the Company.
(2) Commencing with the distribution for the quarter ending June 30, 1999, the Board of Directors of the Company increased the quarterly distribution to $.37125 per share, which is equivalent to an annual distribution of $1.485 per share.
CLASS B COMMON STOCK
The Company's Class B Common Stock began trading on the NYSE on May 25, 1999 under the symbol "RAb". The following table sets forth the quarterly high and low closing sales prices per share of the Comapny8's Class B Common Stock as reported on the NYSE and the distributions paid by the Company for each respective quarter ended.
(1) Represents the period May 24, 1999 through June 30, 1999
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (in thousands except share and properties data)
(1) Represents certain financial information on a consolidated historical basis for Reckson Associates Realty Corp. and on a combined historical basis for the Reckson Group.
(2) Based on the sum of:
(i) the market value of the Company's common stock and operating partnership units (assuming conversion) of 48,076,648, 47,800,049, 44,988,846, 31,119,364 and 20,690,448 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively (based on a per share/unit price of $20.50, $22.19, $25.38, $21.13 and $14.69 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively),
(ii) the market value of the Company's Class B Common Stock of 10,283,763 shares at December 31,1999 (based on a per share price of $22.75),
(iii) the liquidation preference value of 15,192,000 and 9,192,000 shares of the Company's preferred stock at December 31, 1999 and 1998, respectively (based on a per share value of $25.00),
(iv) the liquidation preference value of 42,518 of the operating partnership's preferred units at December 31, 1999 and 1998 (based on a per unit value of $1,000) and
(v) the contributed value of Metropolitan's preferred interest of $85 million at December 31, 1999
(3) Debt amount is net of minority partners' proportionate share plus the Company's share of unconsolidated joint venture debt.
(4) See "Management's Discussion and Analysis" for a discussion of funds from operations.
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ITEM 7.
ITEM 7. 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 Associates Realty Corp. (the "Company") and related notes.
The Company 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 Company's expectations for future periods. Certain forward-looking statements, including, without limitation, statements relating to the timing and success of acquisitions, the financing of the Company's operations, the ability to lease vacant space and the ability to renew or relet space under expiring leases, involve certain risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, the actual results may differ materially from those set forth in the forward-looking statements and the Company can give no assurance that its expectation will be achieved. Certain factors that might cause the results of the Company to differ materially from those indicated by such forward-looking statements include, among other factors, general economic conditions, general real estate industry risks, tenant default and bankruptcies, loss of major tenants, the impact of competition and acquisition, redevelopment and development risks, the ability to finance business opportunities and local real estate risks such as an oversupply of space or a reduction in demand for real estate in the Company's real estate markets. Consequently, such forward-looking statements should be regarded solely as reflections of the Company's current operating and development plans and estimates. These plans and estimates are subject to revisions from time to time as additional information becomes available, and actual results may differ from those indicated in the referenced statements.
OVERVIEW AND BACKGROUND
The Reckson Group, the predecessor to the Company, was engaged in the ownership, management, operation, leasing and development of commercial real estate properties, principally office and industrial buildings, and also owned certain undeveloped land located primarily on Long Island, New York. In June 1995, the Company completed an Initial Public Offering (the "IPO"), succeeded to the Reckson Group's real estate business and commenced operations.
The Company is a self-administered and self managed real estate investment trust ("REIT") specializing in the acquisition, leasing, financing, management and development of office and industrial properties. The Company's growth strategy is focused on the real estate markets in and around the New York tri-state area (the "Tri-State Area").
The Company owns all of the interests in its real estate properties through Reckson Operating Partnership, L.P. (the "Operating Partnership"). At December 31, 1999, the Company owned and operated 189 properties (the "Properties"), (including two joint venture properties) encompassing approximately 21.4 million square feet in the Tri-State Area. The Properties include 77 office properties (the "Office Properties") containing approximately 13.1 million square feet, 110 industrial properties (the "Industrial Properties") containing approximately 8.3 million square feet and two retail properties containing approximately 20,000 square feet. The Company also owns and operates a 357,000 square foot office property located in Orlando Florida. In addition, the Company owned approximately 346 acres of land in 16 separate parcels of which the Company can develop approximately 1.9 million square feet of office space and approximately 300,000 square feet of industrial space. The Company also has invested approximately $315.6 million in mortgage notes encumbering three Class A Office Properties encompassing approximately 1.6 million square feet, approximately 472 acres of land located in New Jersey and in a note receivable secured by a partnership interest in Omni Partners, L.P., owner of the Omni, a 575,000 square foot Class A Office Property located in Uniondale, New York.
On January 6, 1998, the Company made its initial investment in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse facilities. In connection with the transaction the Morris Companies contributed 100% of their interests in certain industrial properties to Reckson Morris Operating Partnership, L. P. ("RMI") in exchange for operating partnership units in RMI.
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On August 9, 1999, the Company executed a contract for the sale, which will take place in three stages, of its interest in RMI which consisted of 28 properties, comprising approximately 6.1 million square feet and three other big box industrial properties to Keystone Property Trust ("KTR") (formerly American Real Estate Investment Corporation). In addition, the Company also entered into a sale agreement with the Matrix Development Group ("Matrix"), relating to a first mortgage note and certain industrial land holdings (the "Matrix Sale"). The combined total sale price is $310 million (approximately $42 million of which is payable to the Morris Companies and its affiliates) and consists of a combination of (i) cash, (ii) convertible preferred and common stock of KTR, (iii) preferred units of KTR's operating partnership, (iv) relief of debt and (v) a purchase money mortgage note secured by certain land that is being sold to Matrix.
During September 1999, the Matrix Sale and the first stage of the RMI closing occurred whereby the Company sold its interest in RMI to KTR for a combined sales price of approximately $164.7 million (net of minority partner's interest). The combined consideration consisted of approximately (i) $86.3 million in cash, (ii) $40 million of preferred stock of KTR, (iii) $1.5 million in common stock of KTR, (iv) approximately $26.7 million of debt relief and (v) approximately $10.2 million in purchase money mortgages. As a result, the Company incurred a gain of approximately $10.1 million which has been included in gain on sales of real estate on the Company's consolidated statements of income. Cash proceeds from the sales were used primarily to repay borrowings under the Credit Facility.
The second and third stages of the RMI closing are scheduled to be completed in April 2000. The remaining stages consist of six industrial buildings and are being sold for total consideration of approximately $98 million.
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.
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. 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 generally accepted accounting principles ("GAAP") purposes at approximately $304.1 million).
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 and all of the property located outside the Tri-State Area other than one office property located in Orlando, Florida for approximately $171.1 million. The combined consideration consisted of approximately $143.8 million in cash and approximately $27.3 million of debt relief. Net cash proceeds from the sales were used primarily to repay borrowings under the Company's unsecured credit facility. As a result of incurring certain sales and closing costs in connection with the sale of the assets located outside the Tri-State Area, the Company has incurred a loss of approximately $4.4 million which has been included in gain on sales of real estate on the Company's consolidated statements of income.
During 1997, the Company formed Reckson Service Industries, Inc. currently D/B/A FrontLine Capital Group ("FrontLine") and Reckson Strategic Venture Partners, LLC ("RSVP"). On June 11, 1998, the Operating Partnership distributed its 95% common stock interest in FrontLine of approximately $3 million to its owners, including the Company which, in turn, distributed the common stock of FrontLine received from the Operating Partnership to its stockholders. Additionally, during June
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1998, 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 December 31, 1999, the Company had advanced $79.5 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 December 31, 1999, approximately $67.2 million had been invested through the RSVP Commitment, of which $24.8 million represents RSVP-controlled joint venture REIT-qualified investments and $42.4 million represents advances to FrontLine under the RSVP Commitment.
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. In consideration of the amendments, FrontLine has paid the Operating Partnership a fee of approximately $3.6 million in the form of shares of FrontLine common stock. Such fee is being amortized in income over an estimated nine month benefit period.
FrontLine identifies, acquires interests in and develops a network of business to business 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.
The Operating Partnership and FrontLine have entered into an intercompany agreement (the "Reckson Intercompany Agreement") to formalize their relationship and to limit conflicts of interest. Under the Reckson Intercompany Agreement, FrontLine granted the Operating Partnership a right of first opportunity to make any REIT -qualified investment that becomes available to FrontLine. In addition, if a REIT-qualified investment opportunity becomes available to an affiliate of FrontLine, including RSVP, the Reckson Intercompany Agreement requires such affiliate to allow the Operating Partnership to participate in such opportunity to the extent of FrontLine's interest.
Under the Reckson Intercompany Agreement, the Operating Partnership granted FrontLine a right of first opportunity to provide commercial services to the Operating Partnership and its tenants. FrontLine will provide services to the Operating Partnership at rates and on terms as attractive as either the best available for comparable services in the market or those offered by FrontLine to third parties. In addition, the Operating Partnership will give FrontLine access to its tenants with respect to commercial services that may be provided to such tenants and, under the Reckson Intercompany Agreement, subject to certain conditions, the Operating Partnership granted FrontLine a right of first refusal to become the lessee of any real property acquired by the Operating Partnership if the Operating Partnership determines that, consistent with the Company's status as a REIT, it is required to enter into a "master" lease agreement.
On August 27, 1998 the Company announced the formation of a joint venture with RSVP and the Dominion Group, an Oklahoma-based, privately-owned group of companies that focuses on the development, acquisition and ownership of government occupied office buildings and correctional facilities. The new venture, Dominion Properties LLC (the "Dominion Venture"), is owned by Dominion Venture Group LLC, and by a subsidiary of the Company. The Dominion Venture is primarily engaging in acquiring, developing and/or owning government-occupied office buildings and privately operated correctional facilities. Under the Dominion Venture's operating agreement, RSVP is to invest up to $100 million, some of which may be invested by the Company ( the "RSVP Capital"). The initial contribution of RSVP Capital was approximately $39 million of which approximately $10.1 million was invested by a subsidiary of the Company. The Company's investment was funded through the RSVP Commitment. In addition, the Company advanced approximately $2.9 million to FrontLine through the RSVP
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Commitment for an investment in RSVP which was then invested on a joint venture basis with the Dominion Group in certain service business activities related to the real estate activities. As of December 31, 1999, the Company had invested approximately $17.6 million in the Dominion Venture which had investments in 13 government office buildings and three correctional facilities.
In 1999 the Company invested approximately $7.2 million, through a subsidiary, in RAP Student Housing Properties, LLC ("RAP -- SHP"), a company that engages primarily in the acquisition and development of off-campus student housing projects. The Company's investment was funded through the RSVP Commitment. In addition, the Company has advanced approximately $3.2 million to FrontLine through the RSVP Commitment for an additional investment in RSVP which was invested in certain service business activities related to student housing. As of December 31, 1999, RAP -- SHP had investments in four off -- campus student housing projects.
The market capitalization of the Company at December 31, 1999 was approximately $3 billion. The Company's market capitalization is based on the sum of (i) the market value of the Company's common stock and common units of limited partnership interest in the Operating Partnership ("OP Units") (assuming conversion) of $20.50 per share/unit (based on the closing price of the Company's common stock on December 31, 1999), (ii) the market value of the Company's Class B Common Stock of $22.75 per share (based on the closing price of the Company's Class B Common Stock on December 31, 1999), (iii) the liquidation preference value of the Company's Series A preferred and Series B preferred stock of $25 per share, (iv) the liquidation preference value of the Operating Partnership's preferred units, (v) the contributed value of Metropolitan's preferred interest of $85 million and (vi) the $1.3 billion (including its share of joint venture debt and net of minority partners' interests) of debt outstanding at December 31,1999. As a result, the Company's total debt to total market capitalization ratio at December 31, 1999 equaled approximately 42.3%.
RESULTS OF OPERATIONS
The Company's total revenues increased by $136.8 million or 51.4% from 1998 to 1999 and $113 million or 73.7% from 1997 to 1998. Property operating revenues, which include base rents and tenant escalations and reimbursements ("Property Operating Revenues") increased by $116.7 million or 46.2% from 1998 to 1999 and $108.7 million or 75.6% from 1997 to 1998. The 1999 increase in Property Operating Revenues is substantially attributable to the Tower portfolio acquisition on May 24, 1999. The revenue generated from these assets generated approximately $47.5 million of revenue in 1999. Additionally, approximately $29.1 million of revenue was generated from the Company's acquisition of the first mortgage note secured by 919 Third Avenue. Property Operating Revenues were also positively effected by approximately $9.9 million from increases in occupancies and rental rates in our "same store" properties and approximately $27.2 million in additional revenue generated from properties acquired during 1998 and new development activity. The remaining balance of the increase in total revenues in 1999 is primarily attributable to the gain on sales of real estate of $10.1 million and approximately $8.7 million in other income related to interest earned on advances made to FrontLine through the FrontLine Facility and to RSVP through the RSVP Commitment. The 1998 increase in Property Operating Revenues is comprised of $2.1 million attributable to increases in rental rates and changes in occupancies and $106.6 million attributable to acquisitions of properties. The remaining balance of the increase in total revenues in 1998 is primarily attributable to increases in interest income on the Company's investments in mortgage notes and notes receivable and income related to the Company's interest in its service companies. The Company's base rent reflects the positive impact of the straight-line rent adjustment of $ 10.7 million in 1999, $7.7 million in 1998 and $4.5 million in 1997.
Property operating expenses, real estate taxes and ground rents ("Property Expenses") increased by $41.7 million or 49.5% from 1998 to 1999 and by $34.0 million or 67.5% from 1997 to 1998. These increases are primarily due to the acquisition of the properties included in the Tower portfolio acquisition on May 24, 1999 and the acquisition of the first mortgage note secured by 919 Third Avenue. Gross operating margins (defined as Property Operating Revenues less Property Expenses, taken as a percentage of Property Operating Revenues) for 1999, 1998 and 1997 were 65.9%, 66.6% and 65.0%, respectively. The slight decrease in the gross operating margin percentage from 1998 to 1999 resulted
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from a larger proportionate share of gross operating margin derived from office properties, which has a lower gross margin percentage, in 1999 compared to 1998. The higher proportionate share of the gross operating margin attributable to the office properties was a result of the office properties acquired in the Tower portfolio acquisition and the disposition of net leased industrial properties in the "Big Box" industrial transaction. This shift in the composition of the portfolio was offset by increases in rental rates and operating efficiencies realized as a result of operating a larger portfolio of properties with concentration on properties in office and industrial parks or in its established sub-markets. The increase from 1997 to 1998 in the gross operating margin percentage resulted from increases realized in rental rates, the Company's ability to realize certain operating efficiencies as a result of operating a larger portfolio of properties with concentrations of properties in office and industrial parks or in its established sub-markets, a stable operating cost environment and the increased ownership of net leased properties.
Marketing, general and administrative expenses were $24.3 million in 1999, $16.9 million in 1998 and $8.8 million in 1997. The increase in marketing, general and administrative expenses is due to the increased costs of opening and maintaining the Company's New York City division and the increase in corporate management and administrative costs associated with the growth of the Company. The Company's business strategy has been to expand further into the Tri-State Area suburban markets and the New York City market by applying its standards for high quality office and industrial space and premier tenant service to its New Jersey, Westchester, Southern Connecticut and New York City divisions. In doing this, the Company seeks to create a superior franchise value that it enjoys in its home base of Long Island. Over the past three years the Company has supported this effort by increasing the marketing programs in the other divisions and strengthening the resources and operating systems in these divisions. The cost of these efforts are reflected in both marketing, general and administrative expenses as well as the revenue growth of the Company. Marketing, general and administrative expense as a percentage of total revenues were 6.0% in 1999, 6.3% in 1998 and 5.7% in 1997.
Interest expense was $74.3 million in 1999, $47.8 million in 1998 and $21.6 million in 1997. The increase of $26.5 million from 1998 to 1999 is attributable to (i)an increase in mortgage debt including approximately $232 million relating to the Tower portfolio acquisition (ii) the issuance of $300 million of senior unsecured notes in March 1999 and (iii) an increased average balance on the Company's credit facilities and term loan. The weighted average balance outstanding on the Company's credit facilities and term loan was $423.8 million for 1999, $377.9 million for 1998 and $103.2 million for 1997.
Included in amortization expense is amortized financing costs of $3.4 million in 1999, $1.6 million in 1998 and $.8 million in 1997. The increase of $1.8 million from 1998 to 1999 is primarily attributable to the increased loan costs incurred in connection with the Company increasing its unsecured term loan in January 1999 to $75 million, the issuance of $300 million of senior unsecured notes in March 1999 and the Company's $130 million unsecured bridge facility obtained in connection with the Tower portfolio acquisition in May 1999. The increase of $.8 million from 1997 to 1998 is primarily attributable to loan costs incurred in connection with the Company's obtaining a $500 million unsecured credit facility and a $50 million unsecured term loan.
Extraordinary losses, net of minority interest resulted in a $555,000 loss in 1999, a $1.7 million loss in 1998 and a $2.2 million loss in 1997. The extraordinary losses were all attributed to the write-offs of certain deferred loan costs incurred in connection with the Company's restructuring of its unsecured bridge and credit facilities and term loans.
LIQUIDITY AND CAPITAL RESOURCES
Summary of Cash Flows
Net cash provided by operating activities totaled $154.6 million in 1999, $117.5 million in 1998 and $75.8 million in 1997. Increases for each year were primarily attributable to the growth in cash flow provided by the acquisition of properties and to a lesser extent from interest income from mortgage notes and notes receivable.
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Net cash used in investing activities totaled $392.9 million in 1999, $612.6 million in 1998 and $549.3 million in 1997. Cash used in investing activities related primarily to investments in real estate properties including development costs and investments in mortgage notes and notes receivable. In addition, during 1998, the Company purchased $40 million of preferred stock of Tower Realty Trust, Inc. in connection with the Tower portfolio acquisition.
Net cash provided by financing activities totaled $257.4 million in 1999, $475.6 million in 1998 and $482.7 million in 1997. Cash provided by financing activities during 1999, 1998 and 1997 was primarily attributable to proceeds from the issuances of preferred stock, common stock, senior unsecured notes and advances under the Company's credit facilities and term loan. Additionally, during 1999, approximately $126 million in proceeds from secured borrowings was provided by financing activities.
Investing Activities
On May 24, 1999, the Tower portfolio acquisition was completed with the Company obtaining title to all of Tower's real estate assets. Simultaneously with the closing of the Tower acquisition the Company arranged for the sale of four of Tower's Class B New York City office properties. In addition, the Company sold, with the exception of one Class A, 357,000 square foot office building located in Orlando, Florida, all of the assets located outside of the Tri-State Area. In addition to the aforementioned property in Orlando, Florida, the Company's remaining assets from the Tower acquisition include three Class A New York City office properties encompassing approximately 1.6 million square feet and one Class A office property on Long Island encompassing approximately 101,000 square feet.
On June 15, 1999, the Company acquired the first mortgage note secured by 919 Third Avenue, a 47 story, 1.4 million square foot Class A office property located in New York City. The first mortgage note entitles the Company to all the net cash flow of the property and to substantial rights regarding the operations of the property.
On January 13, 2000, the Company acquired 1350 Avenue of the Americas, a 540,000 square foot, 35 story, Class A office property, located in New York City, for a purchase price of approximately $126.5 million. This acquisition was financed through a $70 million secured debt financing and a draw under the Company's unsecured credit facility.
In June 1998, the Company established the FrontLine Facility in the amount of $100 million for FrontLine's e-commerce and e-services operations and for other general corporate purposes. As of December 31, 1999, approximately $79.5 million had been advanced to FrontLine under this facility. In addition, the Company approved the commitment to fund investments of up to $100 million with or in RSVP. As of December 31, 1999, the Company has invested approximately $67.2 million under this commitment, of which $24.8 million represents RSVP -- controlled joint venture REIT -- qualified investments and $42.4 million represents advances to FrontLine under the RSVP Commitment.
Financing Activities
During 1999, the Company paid cash dividends on its common stock of approximately $1.42 per share and approximately $.98 per share (representing the period from May 24, 1999 through October 31, 1999) on its Class B Common Stock.
On March 26, 1999, the Operating Partnership issued $100 million of 7.4% senior unsecured notes due March 15, 2004 and $200 million of 7.75% senior unsecured notes due March 15, 2009. Net proceeds of approximately $297.4 million were used to repay outstanding borrowings under the Company's unsecured credit facility.
On May 24, 1999, in conjunction with the Tower portfolio acquisition, the Company issued 11,694,567 shares of Class B Common Stock which were valued for purposes under GAAP at $26 per share for total consideration of approximately $304.1 million. The shares of Class B Common Stock are entitled to receive an initial annual dividend of $2.24 per share, which dividend is subject to adjustment annually commencing on July 1, 2000. 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
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share, of the Company subject to customary antidilution adjustments. The Company, at its option, may redeem any or all of the Class B Common Stock in exchange for an equal number of shares of the Company's common stock at any time following the four year, six-month anniversary of the issuance of the Class B Common Stock.
The Board of Directors of the Company has authorized the purchase of up to three million shares of the Company's Class B Common Stock and has also authorized the purchase of up to an additional three million shares of the Company's Class B Common Stock and/or its common stock. The buy-back program will be effected in accordance with the safe harbor provisions of the Securities Exchange Act of 1934 and may be terminated by the Company at any time. As of December 31, 1999, the Company purchased and retired 1,410,804 shares of Class B Common Stock for approximately $30.3 million.
On June 2, 1999, the Company issued six million shares of Series B Convertible Cumulative Preferred Stock (the "Series B Preferred Stock") for aggregate proceeds of $150 million. The Series B Preferred Stock is redeemable by the Company on or after March 2, 2002 and is convertible into the Company's common stock at a price of $26.05 per share. The Series B Preferred Stock accumulate dividends at an initial rate of 7.85% per annum with such rate increasing to 8.35% per annum on April 30, 2000 and to 8.85% per annum from and after April 30, 2001. Proceeds from the Series B Preferred Stock offering were used as partial consideration in the acquisition of the first mortgage note secured by 919 Third Avenue located in New York City.
As of December 31, 1999 the Company had a three year $500 million unsecured revolving credit facility (the "Credit Facility") with Chase Manhattan Bank, Union Bank of Switzerland and PNC Bank as co-managers of the Credit Facility bank group. Interest rates on borrowings under the Credit Facility are priced off of LIBOR plus a sliding scale ranging from 65 basis points to 90 basis points based on the Company's investment grade rating on its senior unsecured debt. On March 16, 1999, the Company received its investment grade rating on its senior unsecured debt. As a result, the pricing under the Credit Facility was adjusted to LIBOR plus 90 basis points.
The Company utilizes the Credit Facility primarily to finance the acquisitions of properties and other real estate investments, fund its development activities and for working capital purposes. At December 31, 1999, the Company had availability under the Credit Facility to borrow an additional $150.1 million (net of $52.3 million of outstanding undrawn letters of credit).
As of December 31, 1999, the Company had outstanding an 18 month, $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. The Term Loan replaced the Company's previous term loan which matured on December 17, 1999.
On May 24, 1999, in conjunction with the Tower portfolio acquisition, the Company obtained a $130 million unsecured bridge facility (The "Bridge Facility") from UBS AG. Interest rates on borrowings under the Bridge Facility were priced off of LIBOR plus approximately 214 basis points. On July 23, 1999, the Bridge Facility was repaid through a long term fixed rate secured borrowing and an advance under the Credit Facility. As a result, certain deferred loan costs incurred in connection with the Bridge Facility were written off. Such amount is reflected as an extraordinary loss in the Company's consolidated statements of income. The new mortgage note, in the amount of $125 million, is secured by two office properties with an aggregate carrying value of approximately $261 million, is for a term of ten years and bears interest at the rate of 7.73% per annum.
Capitalization
The Company's indebtedness at December 31, 1999 totaled $1.3 billion (including its share of joint venture debt and net of minority partners' interests) and was comprised of $297.6 million outstanding under the Credit Facility, $75 million outstanding under the Term Loan, approximately $449.3 million of senior unsecured notes and approximately $445 million of mortgage indebtedness with a weighted average interest rate of approximately 7.6% and a weighted average maturity of approximately 12.1 years. Based on the Company's total market capitalization of approximately $3 billion at December 31, 1999 (calculated based on the market value of the Company's common stock and OP Units, assuming
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conversion , the market value of the Company's Class B Common Stock, the liquidation preference value of the Company's preferred stock, the liquidation preference value of the Operating Partnership's preferred units, the contributed value of Metropolitan's preferred interest of $85 million and the $1.3 billion of debt), the Company's debt represented approximately 42.3% of its total market capitalization.
Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service and capital expenditures, excluding non-recurring capital expenditures of the Company. In addition, the Company's investments in mortgage notes, RSVP and advances under the FrontLine Facility are expected to produce cash flows. The Company expects to meet its short term liquidity requirements generally through its net cash provided by operating activities along with the Credit Facility and Term Loan previously discussed. The Company expects to meet certain of its financing requirements through long-term secured and unsecured borrowings and the issuance of debt securities and additional equity securities of the Company. The Company also expects certain strategic dispositions of assets or interests in assets to generate cash flows. The Company will refinance existing mortgage indebtedness or indebtedness under the Credit Facility at maturity or retire such debt through the issuance of additional debt securities or additional equity securities. The Company anticipates that the current balance of cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and debt and equity offerings, will be adequate to meet the capital and liquidity requirements of the Company in both the short and long-term.
In order to qualify as a REIT for federal income tax purposes, the Company is required to make distributions to its stockholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to stockholders and for payment of expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments.
INFLATION
Certain office leases provide for fixed base rent increases or indexed escalations. In addition, certain 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 escalation over a base amount. The Company believes that inflationary increases in expenses will generally be offset by contractual rent increases and expense escalations described above.
The Credit Facility and the 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
During 1999, the Company discussed the nature and progress of its plans to become Year 2000 ready. In that regard, the Company has completed its assessment, remediation and testing of its systems in order for those systems to function properly with respect to dates occurring in the Year 2000 and thereafter. As a result of those efforts, the Company experienced no significant disruptions in connection with its building management, mechanical and computer systems and believes that those systems successfully responded to the Year 2000 date change. The Company has expended approximately one million dollars with upgrading, replacing or remediating its systems and is not aware of any material problems resulting from Year 2000 issues. Further, the Company will continue to monitor its critical building management, mechanical and computer systems throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
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FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") is an appropriate measure of performance of an equity REIT. FFO is defined by the National Association of Real Estate Investment Trusts (NAREIT) as net income or loss, excluding gains or losses from debt 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 GAAP and is not indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. (See Selected Financial Data). 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. In October 1999, NAREIT revised the definition of FFO to include gains and losses from sales of properties and non-recurring events. This revised definition is effective for all periods beginning on or after January 1, 2000.
Since all companies and analysts do not calculate FFO in a similar fashion, the Company's calculation of FFO presented herein may not be comparable to similarly titled measures as reported by other companies.
The following table presents the Company's FFO calculation for the years ended December 31, (in thousands):
- ---------- (1) Assumes conversion of limited partnership units of the Operating Partnership.
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ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing the Company is interest rate risk on its long term debt, mortgage notes and notes receivable. The Company does not hedge interest rate risk using financial instruments nor is the Company subject to foreign currency risk.
The Company manages its exposure to interest rate risk on its variable rate indebtedness by borrowing on a short-term basis under its Credit Facility or Term Loan until such time as it is able to retire the short-term variable rate debt with a long-term fixed rate debt offering or an equity offering through accessing the capital markets on terms that are advantageous to the Company.
The following table sets forth the Company's long term debt obligations by scheduled principal cash flow payments and maturity date, weighted average interest rates and estimated fair market value ("FMV") at December 31, 1999 (dollars in thousands):
(1) Includes unamortized issuance discounts of $687,000 on the 5 and 10 year senior unsecured notes issued on March 26, 1999 which are due at maturity.
In addition, the Company has assessed the market risk for its variable rate debt, which is based upon LIBOR, and believes that a one percent increase in the LIBOR rate would have an approximate $3.7 million annual increase in interest expense based on approximately $372.6 million outstanding at December 31, 1999.
The following table sets forth the Company's mortgage notes and note receivables by scheduled maturity date, weighted average interest rates and estimated FMV at December 31, 1999 (dollars in thousands):
(2) Excludes mortgage note receivable acquisition costs and interest receivables aggregating approximately $4.8 million.
The fair value of the Company's long term debt, mortgage notes and notes receivable is estimated based on discounting future cash flows at interest rates that management believes reflects the risks associated with long term debt, mortgage notes and notes receivable of similar risk and duration.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in a separate section of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
II-12
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the section captioned "Proposal I: Election of Directors" of the Company's definitive proxy statement for the 2000 annual meeting of stockholders is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section captioned "Executive Compensation" of the Company's definitive proxy statement for the 2000 annual meeting of stockholders is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section captioned "Principal and Management Stockholders" of the Company's definitive proxy statement for the 2000 annual meeting of stockholders is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section captioned "Certain Relationships and Related Transactions" of the Company's definitive proxy statement for the 2000 annual meeting of the stockholders is incorporated herein by reference.
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PART IV
ITEM 14.
ITEM 14. FINANCIAL STATEMENTS AND SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a)(1 and 2) Financial Statements and Schedules
The following consolidated financial information is included as a separate section of this annual report on Form 10-K:
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All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.
(3) Exhibits
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- -------- (a) Previously filed as an exhibit to Registration Statement Form S-11 (No. 333-1280) and incorporated herein by reference.
(b) Previously filed as an exhibit to Registration Statement Form S-11 (No. 33-84324) and incorporated herein by reference.
(c) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on November 25, 1996 and incorporated herein by reference.
(d) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on August 14, 1998 and incorporated herein by reference.
(e) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on February 5, 1999 and incorporated herein by reference.
(f) Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 26, 1998 and incorporated herein by reference.
(g) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on December 22, 1998 and incorporated herein by reference.
(h) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on March 1, 1999 and incorporated herein by reference.
(i) Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 16, 1999 and incorporated herein by reference.
(j) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on March 26, 1999 and incorporated herein by reference.
(k) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on June 7, 1999 and incorporated herein by reference.
(l) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on June 25, 1999 and incorporated herein by reference.
(m) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on August 25, 1999 and incorporated herein by reference.
(n) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on October 25, 1999 and incorporated herein by reference.
(o) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on January 14, 2000 and incorporated herein by reference.
(p) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on February 8, 2000 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
On October 25, 1999, the Company filed reports on Form 8-K relating to:
(i) The completion of the first stage of the RMI closing and the sale of certain industrial properties to Matrix,
(ii) the Company's Board of Directors authorizing the repurchase of up to three million shares of Class B Common Stock,
(iii) the Company's sale and disposition of the Tower assets located outside the Tri-State Area other than one Class A office property located in Orlando, Florida and
(iv) the Operating Partnership entering into a contract to acquire 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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 15, 2000.
RECKSON ASSOCIATES REALTY CORP.
By: /s/ Donald J. Rechler ------------------------------ (Donald J. Rechler) Chairman of the Board, and Co-Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Reckson Associates Realty Corp., hereby severally constitute Scott H. Rechler, Mitchell D. Rechler and Michael Maturo, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors to enable Reckson Associates Realty Corp. to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2000.
IV-4
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Reckson Associates Realty Corp.
We have audited the accompanying consolidated balance sheets of Reckson Associates Realty Corp. as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. We have also audited the financial statement schedule listed in the index at item 14(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reckson Associates Realty Corp. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York February 15, 2000
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RECKSON ASSOCIATES REALTY CORP. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(see accompanying notes to financial statements)
IV-6
RECKSON ASSOCIATES REALTY CORP. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(see accompanying notes to financial statements)
IV-7
RECKSON ASSOCIATES REALTY CORP. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
(see accompanying notes to financial statements)
IV-8
RECKSON ASSOCIATES REALTY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(see accompanying notes to financial statements)
IV-9
RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Reckson Associates Realty Corp. (the "Company") is a self-administered and self managed real estate investment trust ("REIT") engaged in the ownership, management, operation, leasing and development of commercial real estate properties, principally office and industrial buildings and also owns land for future development (collectively, the "Properties") located in the New York tri-state area (the "Tri-State Area").
ORGANIZATION AND FORMATION OF THE COMPANY
The Company was incorporated in Maryland in September 1994. In June 1995, the Company completed an Initial Public Offering (the "IPO") and commenced operations. The aggregate proceeds to the Company, net of underwriters' discount, advisory fees and other offering costs were approximately $162 million.
The Company became the sole general partner of Reckson Operating Partnership, L.P. (the "Operating Partnership") by contributing substantially all of the net proceeds of the IPO, in exchange for an approximate 73% interest in the Operating Partnership. All Properties acquired by the Company are held by or through the Operating Partnership. In conjunction with the IPO, the Operating Partnership executed various option and purchase agreements whereby it issued common units of limited partnership interest in the Operating Partnership ("Units") to certain continuing investors in exchange for (i) interests in certain property partnerships, (ii) fee simple and leasehold interests in properties and development land, (iii) certain business assets of executive center entities and (iv) 100% of the non-voting preferred stock of the management and construction companies.
During 1997, the Company formed Reckson Service Industries, Inc. currently D/B/A FrontLine Capital Group ("FrontLine") and Reckson Strategic Venture Partners, LLC ("RSVP"). On June 11, 1998, the Operating Partnership distributed its 95% common stock interest in FrontLine of approximately $3 million to its owners, including the Company which, in turn, distributed the common stock of FrontLine received from the Operating Partnership to its stockholders. Additionally, during June 1998, 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 December 31, 1999, the Company had advanced $79.5 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 December 31, 1999, approximately $67.2 million had been invested through the RSVP Commitment, of which $24.8 million represents RSVP-controlled joint venture REIT-qualified investments and $42.4 million represents advances to FrontLine under the RSVP Commitment.
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. In consideration of the amendments, FrontLine has 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 business to business 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
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
focus. RSVP's strategy is to identify and acquire interests in established entrepreneurial enterprises with experienced management teams in market sectors which are in the early stages of their growth cycle or offer unique circumstances for attractive investments as well as a platform for future growth.
On January 6, 1998, the Company made its initial investment in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse facilities. In connection with the transaction the Morris Companies contributed 100% of their interests in certain industrial properties to Reckson Morris Operating Partnership, L. P. ("RMI") in exchange for operating partnership units in RMI. On September 27, 1999, the Company sold its interest in RMI to Keystone Property Trust ("KTR") (formerly American Real Estate Investment Corporation) (see note 6).
During July 1998, the Company formed Metropolitan Partners, LLC ("Metropolitan") for the purpose of acquiring Tower Realty Trust, Inc. ("Tower"). On May 24, 1999 the Company completed the merger with Tower and acquired three Class A office properties located in New York City totaling 1.6 million square feet and one office property located on Long Island totaling approximately 101,000 square feet. In addition, pursuant to the merger, the Company also acquired certain office properties, a property under development and land located outside of the Tri-State Area. All of the assets acquired in the merger, located outside of the Tri-State Area, other than a 357,000 square foot office property located in Orlando, Florida, have been sold (see note 6).
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the consolidated financial position of the Company and the Operating Partnership at December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31,1999. The Operating Partnership's investments in Metropolitan and Omni Partners, L. P. ("Omni") are reflected in the accompanying financial statements on a consolidated basis with a reduction for minority partners' interest. The Operating Partnership's investment in RMI was reflected in the accompanying financial statements on a consolidated basis with a reduction for minority partner's interest through September 26, 1999. On September 27, 1999, the Operating Partnership sold its interest in RMI to KTR (see note 6). The operating results of Reckson Executive Centers, L.L.C., ("REC"), a service business of the Operating Partnership were reflected in the accompanying financial statements on the equity method of accounting through March 31, 1998. On April 1, 1998, the Operating Partnership sold its 9.9% interest in REC to FrontLine. Additionally, the operating results of FrontLine were reflected in the accompanying financial statements on the equity method of accounting through June 10, 1998. On June 11, 1998 the Operating Partnership distributed its 95% common stock interest in FrontLine to its owners, including the Company which, in turn, distributed the common stock of FrontLine to its stockholders. The operating results of the service businesses currently conducted by Reckson Management Group, Inc.("RMG"), and Reckson Construction Group, Inc.("RCG"), are reflected in the accompanying financial statements on the equity method of accounting. The Operating Partnership also invests in real estate joint ventures where it may own less than a controlling interest, such investments are also reflected in the accompanying financial statements on the equity method of accounting. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
The merger with Tower (see note 6) was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. Accordingly, the fair value of the consideration given by the Company, in accordance with generally accepted accounting principles ("GAAP"), was used as the valuation basis for the merger. The assets acquired and liabilities assumed by the Company were recorded at the fair value as of the closing date of the merger and the excess of the purchase price over the historical basis of the net assets acquired was allocated primarily to operating real estate properties and real estate properties which have been sold.
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The minority interests at December 31, 1999 represent an approximate 13% limited partnership interest in the Operating Partnership, an approximate 28% interest in certain industrial joint venture properties formerly owned by RMI, a convertible preferred interest in Metropolitan and a 40% interest in Omni.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Real Estate
Depreciation is computed utilizing the straight-line method over the estimated useful lives of ten to thirty years for buildings and improvements and five to ten years for furniture, fixtures and equipment. Tenant improvements, which are included in buildings and improvements, are amortized on a straight-line basis over the term of the related leases.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three months or less when purchased, to be cash equivalents.
Deferred Costs
Tenant leasing commissions and related costs incurred in connection with leasing tenant space are capitalized and amortized over the life of the related lease. In addition, loan costs incurred are capitalized and amortized over the term of the related loan.
Costs incurred in connection with stock offerings are charged to stockholders equity when incurred.
Income Taxes
The Company generally will not be subject to federal income taxes as long as it qualifies as a REIT. A REIT will generally not be subject to federal income taxation on that portion of income that qualifies as REIT taxable income and to the extent that it distributes such taxable income to its stockholders and complies with certain requirements. As a REIT, the Company is allowed to reduce taxable income by all or a portion of distributions to stockholders and must distribute at least 95% of its taxable income to qualify as a REIT. As distributions, for federal income tax purposes, have exceeded taxable income, no federal income tax provision has been reflected in the accompanying consolidated financial statements. State income taxes are not significant.
During 1999, the Company paid cash dividends on its common stock of approximately $1.42 per share and approximately $.98 per share (representing the period from May 24, 1999 through October 31, 1999) on its Class B Common Stock. During 1998, the Company paid cash dividends on its common stock of $.99 per share (representing dividends for three quarters). In addition, on June 11, 1998, the Company paid a stock dividend equivalent to $.0824 per share relating to the Operating Partnership's distribution of its common stock interest in FrontLine to the Company. All of the dividends paid on the Company's common stock during 1998 were considered ordinary income for federal tax purposes. For 1999, approximately 92.75% of the dividends paid on the Company's common stock and Class B Common Stock were considered ordinary income for federal tax purposes. The remaining 7.25% of the dividends paid were treated as a capital gain distribution, subject to a 20% tax rate for individuals and certain other taxpayers.
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Revenue Recognition
Minimum rental income is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due are included in deferred rents receivable on the accompanying balance sheets. Contractually due but unpaid rents are included in tenant receivables on the accompanying balance sheets. Certain lease agreements provide for reimbursement of real estate taxes, insurance, common area maintenance costs and indexed rental increases, which are recorded on an accrual basis.
The Company records interest income on investments in mortgage notes and notes receivable on an accrual basis of accounting. The Company does not accrue interest on impaired loans where, in the judgment of management, collection of interest according to the contractual terms is considered doubtful. Among the factors the Company considers in making an evaluation of the collectibility of interest are: the status of the loan, the value of the underlying collateral, the financial condition of the borrower and anticipated future events. Loan discounts are amortized over the life of the real estate using the constant interest method.
Gains from sales of real estate are recorded when title is conveyed to the buyer, subject to the buyer's financial commitment being sufficient to provide economic substance to the sale.
Earnings Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, "Earnings per Share" ("Statement 128") which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. The conversion of Units into common stock would not have a significant effect on per share amounts as the Units share proportionately with the common stock in the results of the Operating Partnership's operations.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("Statement 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense was recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant (see Note 7).
Comprehensive Income
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" ("Statement 130") which is effective for fiscal years beginning after December 15, 1997. Statement 130 established standards for reporting comprehensive income and its components in a full set of general-purpose financial statements. Statement 130 requires that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The adoption of this standard had no impact on the Company's financial position or results of operations.
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Segment Reporting
In 1997, the FASB issued Statement No. 131 "Disclosures about segments of an Enterprise and Related Information" ("Statement 131") which is effective for fiscal years beginning after December 15, 1997. Statement 131 establishes standards for reporting information about operating segments in annual financial statements and in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of this standard had no impact on the Company's financial position or results of operations but did affect the disclosure of segment information. See Note 11.
Recent Pronouncements
In June 1999, the FASB issued Statement No. 137, amending Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which extended the required date of adoption to the years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new Statement effective January 1, 2001. The Company does not anticipate that the adoption of this Statement will have any effect on its results of operations or financial position.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. MORTGAGE NOTES PAYABLE
At December 31, 1999, there were 17 mortgage notes payable with an aggregate outstanding principal amount of approximately $459.2 million. Properties with an aggregate carrying value at December 31, 1999 of approximately $808 million are pledged as collateral against the mortgage notes payable. In addition, $47.8 million of the $459.2 million are recourse to the Company. The mortgage notes bear interest at rates ranging from 6.45% to 9.25%, and mature between 2000 and 2027. The weighted average interest rates on the outstanding mortgage notes payable at December 31, 1999, 1998 and 1997 were approximately 7.6%, 7.8% and 7.7%, respectively. Certain of the mortgage notes payable are guaranteed by certain minority partners in the Operating Partnership.
Scheduled principal repayments during the next five years and thereafter are as follows (in thousands):
YEAR ENDED DECEMBER 31, - -------------------------------- 2000 ......................... $ 35,145 2001 ......................... 22,751 2002 ......................... 16,499 2003 ......................... 8,350 2004 ......................... 11,769 Thereafter ................... 364,660 -------- $459,174 ========
3. UNSECURED CREDIT FACILITIES AND UNSECURED TERM LOAN
As of December 31, 1999, the Company had a three year $500 million unsecured revolving credit facility (the "Credit Facility") from Chase Manhattan Bank, Union Bank of Switzerland and PNC Bank as co-managers of the Credit Facility bank group. Interest rates on borrowings under the Credit Facility
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. UNSECURED CREDIT FACILITIES AND UNSECURED TERM LOAN - (CONTINUED)
are priced off of LIBOR plus a sliding scale ranging from 65 basis points to 90 basis points based on the Company's investment grade rating on its senior unsecured debt. On March 16, 1999, the Company received its investment grade rating on its senior unsecured debt. As a result, the pricing under the Credit Facility was adjusted to LIBOR plus 90 basis points.
The Company utilizes the Credit Facility primarily to finance the acquisitions of properties and other real estate investments, fund its development activities and for working capital purposes. At December 31, 1999, the Company had availability under the Credit Facility to borrow an additional $150.1 million (net of $52.3 million of outstanding undrawn letters of credit).
As of December 31, 1999, the Company had outstanding an 18 month, $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. The Term Loan replaced the Company's previous term loan which matured on December 17, 1999.
On May 24, 1999, in conjunction with the Tower portfolio acquisition (see Note 6), the Company obtained a $130 million unsecured bridge facility (The "Bridge Facility") from UBS AG. Interest rates on borrowings under the Bridge Facility were priced off of LIBOR plus approximately 214 basis points. On July 23, 1999, the Bridge Facility was repaid through a long term fixed rate secured borrowing and an advance under the Credit Facility. As a result, certain deferred loan costs incurred in connection with the Bridge Facility were written off. Such amount is reflected as an extraordinary loss in the accompanying consolidated statements of income.
The Company capitalized interest incurred on borrowings to fund certain acquisition and development costs in the amount of $9.8 million, $7.3 million and $2.4 million for the years ended December 31, 1999, 1998 and 1997, respectively.
4. SENIOR UNSECURED NOTES
As of December 31, 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):
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.
Net proceeds of approximately $297.4 million received from the issuance of the March 26, 1999 Senior Unsecured Notes were used to repay outstanding borrowings under the Company's Credit Facility.
5. LAND LEASES
The Company leases, pursuant to noncancellable operating leases, the land on which ten of its buildings were constructed. The leases, which contain renewal options, expire between 2018 and 2080. The leases either contain provisions for scheduled increases in the minimum rent at specified intervals or
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
5. LAND LEASES - (CONTINUED)
for adjustments to rent based upon the fair market value of the underlying land or other indexes at specified intervals. Minimum ground rent is recognized on a straight-line basis over the terms of the leases. The excess of amounts recognized over amounts contractually due is approximately $2.6 million and $2.3 million at December 31, 1999 and 1998, respectively. These amounts are included in accrued expenses and other liabilities on the accompanying balance sheets.
Future minimum lease commitments relating to the land leases during the next five years and thereafter are as follows (in thousands):
YEAR ENDED DECEMBER 31, - -------------------------------- 2000 ......................... $ 1,833 2001 ......................... 1,850 2002 ......................... 1,869 2003 ......................... 1,818 2004 ......................... 1,942 Thereafter ................... 48,232 ------- $57,544 =======
6. COMMERCIAL REAL ESTATE INVESTMENTS
The Tower Merger
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 commencing on July 1, 2000. The shares of Class B Common Stock are exchangeable at any time, at the option of the holder, into an equal number of shares of common stock, par value $.01 per share, of the Company subject to customary antidilution adjustments. The Company, at its option, may redeem any or all of the Class B Common Stock in exchange for an equal number of shares of the Company's common stock at any time following the four year, six-month anniversary of the issuance of the Class B Common Stock.
The Board of Directors of the Company has authorized a purchase buy back program for the Company's Class B Common Stock (see note 7).
The Company controls Metropolitan and owns 100% of the common equity; Crescent owns a $85 million preferred equity interest in Metropolitan. Crescent's interest 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
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. COMMERCIAL REAL ESTATE INVESTMENTS - (CONTINUED)
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 and all of the property located outside the Tri-State Area other than one office property located in Orlando, Florida for approximately $171.1 million. The combined consideration consisted of approximately $143.8 million in cash and approximately $27.3 million of debt relief. Net cash proceeds from the sales were used primarily to repay borrowings under the Credit Facility. As a result of incurring certain sales and closing costs in connection with the sale of the assets located outside the Tri-State Area, the Company has incurred a loss of approximately $4.4 million which has been included in gain on sales of real estate on the accompanying consolidated statements of income.
"Big Box" Industrial Investment Activity
On January 6, 1998, the Company made an 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 RMI in exchange for operating partnership units in RMI.
During 1999, the Company purchased approximately 68.1 acres of vacant land in Northern New Jersey for approximately $2.6 million. In addition, RMI purchased 74.6 acres of vacant land for approximately $3.7 million and a 846,000 square foot industrial property located in Cranbury, New Jersey for approximately $34 million. These assets were sold to KTR and the Matrix Development Group ("Matrix") as discussed below.
On August 9, 1999, the Company executed a contract for the sale, which will take place in three stages, of its interest in RMI which consisted of 28 properties, comprising approximately 6.1 million square feet and three other big box industrial properties to KTR. In addition, the Company also entered into a sale agreement with Matrix relating to a first mortgage note and certain industrial land holdings (the "Matrix Sale"). The combined total sale price is $310 million (approximately $42 million of which is payable to the Morris Companies and its affiliates) and consists of a combination of (i) cash, (ii) convertible preferred and common stock of KTR, (iii) preferred units of KTR's operating partnership, (iv) relief of debt and (v) a purchase money mortgage note secured by certain land that is being sold to Matrix.
During September 1999, the Matrix Sale and the first stage of the RMI closing occurred whereby the Company sold its interest in RMI to KTR for a combined sales price of approximately $164.7 million (net of minority partner's interest). The combined consideration consisted of approximately (i) $86.3 million in cash, (ii) $40 million of preferred stock of KTR, (iii) $1.5 million in common stock of KTR, (iv) approximately $26.7 million of debt relief and (v) approximately $10.2 million in purchase money mortgages. As a result, the Company incurred a gain of approximately $10.1 million which has been included in gain on sales of real estate on the accompanying consolidated statements of income. In
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. COMMERCIAL REAL ESTATE INVESTMENTS - (CONTINUED)
addition, the $41.5 million of common and preferred stock of KTR has been included in prepaid expenses and other assets on the accompanying consolidated balance sheet. Cash proceeds from the sales were used primarily to repay borrowings under the Credit Facility.
The second and third stages of the RMI closing are scheduled to be completed in April 2000. The remaining stages consist of six industrial buildings and are being sold for total consideration of approximately $98 million .
Other Real Estate Investment Activity
During 1998, the Company acquired three office properties encompassing approximately 674,000 square feet, two industrial properties encompassing approximately 200,000 square feet and approximately 79.9 acres of vacant land which allows for approximately 816,000 square feet of future development opportunities on Long Island for an aggregate purchase price of approximately $82.8 million.
During 1998, the Company acquired four office properties encompassing approximately 522,000 square feet, six industrial properties encompassing approximately 985,000 square feet and approximately 112.2 acres of vacant land which allows for approximately 815,000 square feet of future development opportunities in New Jersey for an aggregate purchase price of approximately $138.1 million.
During 1998, the Company acquired Stamford Towers located in Stamford, Connecticut for approximately $61.3 million. Stamford Towers is a Class A office complex consisting of two eleven story towers totaling approximately 325,000 square feet.
During 1998, the Company acquired a portfolio of six office properties encompassing approximately 980,000 square feet in Westchester County, New York from Cappelli Enterprises and affiliated entities ("Cappelli") for a purchase price of approximately $173 million. The Cappelli acquisition includes a five building, 850,000 square foot Class A office park located in Valhalla, New York and Court House Square, a 130,000 square foot Class A office building located in White Plains, New York. The Company also obtained from Cappelli the remaining 50% interest in 360 Hamilton Avenue, a 365,000 square foot vacant office tower in downtown White Plains for $10 million plus the return of his capital contributions of approximately $1.5 million. In addition, the Company received an option from Cappelli to acquire the remaining development parcels within the Valhalla office park on which up to 875,000 square feet of office space can be developed. These acquisitions were financed in part through proceeds from a draw under the Credit Facility, the issuance of 42,518 (approximately $42.5 million) preferred operating partnership units (the "Cappelli Preferred Units"), and the assumption of approximately $47.1 million of mortgage debt. Additionally, as of December 31, 1999, the Company issued and advanced to Cappelli $36.5 million under three liquidity loans (the "Cappelli Liquidity Loans"). The Cappelli Liquidity Loans bear interest at rates ranging from 10% to 10.5% per annum and are secured by Cappelli's right, title and interest in the Cappelli Preferred Units. Such amounts have been included in investments in mortgage notes and notes receivable on the accompanying balance sheets.
On April 13, 1999, the Company received approximately $25.8 million from the repayment of a mortgage note receivable which had been acquired at a discount and secured three office properties located in Garden City, Long Island, encompassing approximately 400,000 square feet. As a result, the Company recognized a gain of approximately $4.3 million. Such gain has been included in gain on sales of real estate on the accompanying consolidated statements of income.
On June 7, 1999 the Company sold a 24,000 square foot office property located in Ossining, New York for approximately $1.5 million. As partial consideration for the sale, the Company obtained a $1.2 million, three year purchase money mortgage.
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. COMMERCIAL REAL ESTATE INVESTMENTS - (CONTINUED)
On June 15, 1999, the Company acquired the first mortgage note secured by a 47 story, 1.4 million square foot Class A office property located at 919 Third Avenue in New York City for approximately $277.5 million. The first mortgage note entitles the Company to all the net cash flow of the property and to substantial rights regarding the operations of the property, with the Company anticipating to ultimately obtain title to the property. This acquisition was financed with proceeds from the issuance of six million shares of Series B Convertible Cumulative Preferred Stock (see note 7) and through an advance 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 economic effect associated with the operations of the property. As such, the Company has included the real estate operations of 919 Third Avenue in the accompanying consolidated statements of income from the date of acquisition.
In addition, as of December 31, 1999, the Company has invested approximately $15.7 million in certain mortgage indebtedness encumbering one Class A office property encompassing approximately 177,000 square feet and approximately 472 acres of land located in New Jersey. The Company has also loaned approximately $17 million to its minority partner in Omni, its 575,000 square foot flagship Long Island office property, and effectively increased its economic interest in the property owning partnership.
7. STOCKHOLDERS' EQUITY
A Unit and a share of common stock have essentially the same economic characteristics as they effectively share equally in the net income or loss and distributions of the Operating Partnership. Subject to certain holding periods Units may either be redeemed for cash or, at the election of the Company, for shares of common stock on a one-for-one basis.
On February 18, 1998, the Company sold 791,152 shares of the Company's common stock at $25.44 per share for an aggregate consideration of approximately $20.1 million before deducting offering expenses.
During April 1998, the Company completed a preferred stock offering and sold 9,200,000 shares (including 1,200,000 shares related to the exercise of the underwriters over allotment option) of 7.625% Series A Convertible Cumulative Preferred Stock (the "Series A Preferred Stock") at a price of $25.00 per share for an aggregate consideration of $230 million before deducting offering expenses. The Series A Preferred Stock is convertible to the Company's common stock at a conversion rate of .8769 shares of common stock for each share of Series A Preferred Stock. As of December 31, 1999, 8,000 shares of the Series A Preferred Stock were converted into the Company's common stock.
On April 29, 1998, the Company completed a common stock offering and sold 1,093,744 common shares at a price of $24.38 per share for an aggregate consideration of approximately $26.7 million before deducting offering expenses.
On May 24, 1999, in conjunction with the Tower portfolio acquisition, the Company issued 11,694,567 shares of Class B Common Stock which were valued for GAAP purposes at $26 per share for total consideration of approximately $304.1 million. The shares of Class B Common Stock are entitled to receive an initial annual dividend of $2.24 per share, which dividend is subject to adjustment annually. The shares of Class B Common Stock are exchangeable at any time, at the option of the holder, into an equal number of shares of common stock, par value $.01 per share, of the Company subject to customary antidilution adjustments. The Company, at its option, may redeem any or all of the Class B Common Stock in exchange for an equal number of shares of the Company's common stock at any time following the four year, six-month anniversary of the issuance of the Class B Common Stock.
On June 2, 1999, the Company issued six million shares of Series B Convertible Cumulative Preferred Stock (the "Series B Preferred Stock") for aggregate proceeds of $150 million. The Series B Preferred Stock is redeemable by the Company on or after March 2, 2002 and is convertible into the
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. STOCKHOLDERS' EQUITY - (CONTINUED)
Company's common stock at a price of $26.05 per share. The Series B Preferred Stock accumulates dividends at an initial rate of 7.85% per annum with such rate increasing to 8.35% per annum on April 30, 2000 and to 8.85% per annum from and after April 30, 2001. Proceeds from the Series B Preferred Stock offering were used as partial consideration in the acquisition of the first mortgage note secured by 919 Third Avenue located in New York City.
The Board of Directors of the Company has authorized the purchase of up to three million shares of the Company's Class B Common Stock and has also authorized the purchase of up to an additional three million shares of the Company's Class B Common Stock and/or its common stock. The buy-back program will be effected in accordance with the safe harbor provisions of the Securities Exchange Act of 1934 and may be terminated by the Company at any time. As of December 31, 1999, the Company purchased and retired 1,410,804 shares of its Class B Common Stock for approximately $30.3 million.
The Company has made loans to certain executive officers to purchase 545,393 shares of common stock at market prices ranging from $20.56 per share to $27.13 per share. The loans bear interest at the mid-term Applicable Federal Rate and are secured by the shares purchased. Such loans including accrued interest will be forgiven each year on the annual anniversary of the grant date based upon amortization periods ranging from four to ten years. In addition, the loans which are secured by 310,834 shares of common stock are due with a balloon payment on the fifth anniversary of the grant date and loans which are secured by 47,059 and 187,500 shares of common stock are forgiven over terms of four and seven years, respectively. As of December 31, 1999, the loan balances aggregated approximately $11.1 million and have been included as a reduction of additional paid in capital on the accompanying consolidated statement of stockholders' equity.
The Company has established the 1995, 1996, 1997 and 1998 Employee Stock Option Plans (the "Plans") for the purpose of attracting and retaining executive officers, directors and other key employees. As of December 31, 1999, 1,500,000, 400,000, 3,000,000 and 3,000,000 of the Company's authorized shares have been reserved for issuance under the 1995, 1996, 1997 and 1998 plans, respectively.
The following table sets forth the options granted under the Plans and their corresponding exercise price range per share:
EXERCISE PRICE RANGE ---------------------- OPTIONS GRANTED(1) FROM (1) TO(1) ------------ ---------- ----------- 1995 Employee Stock Option Plan 1,495,538 $ 12.04 $ 25.56 1996 Employee Stock Option Plan 182,350 $ 19.67 $ 26.13 1997 Employee Stock Option Plan 2,485,965 $ 22.67 $ 27.04 1998 Employee Stock Option Plan 1,494,001 $ 18.19 $ 25.67 --------- Total .......................... 5,657,854 =========
- ---------- (1) Exercise prices have been split adjusted, where applicable.
Options granted to new employees vest in three equal installments on the first, second and third anniversaries of the date of the grant. Options granted to existing employees are generally exercisable on the date of the grant.
The independent directors of the Company have been granted options to purchase 129,000 shares pursuant to the 1995 Employee Stock Option Plan at exercise prices ranging from $12.04 to $25.56 per share and options to purchase 3,000 shares pursuant to the 1997 Employee Stock Option Plan at an exercise price of $25.23 per share. The options granted to the independent directors were exercisable on the date of the grant.
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. STOCKHOLDERS' EQUITY - (CONTINUED)
During 1999 and 1998, employees exercised 88,308 and 74,837 options, respectively resulting in proceeds to the Company of approximately $1.2 million and $1.1 million, respectively.
Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rate of 5%; dividend yields of 7.25 %, 6.19% and 5.59%; volatility factors of the expected market price of the Company's common stock of .197 and a weighted-average expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
The following table sets forth the Company's pro forma information for the years ended December 31:
The following table summarizes the Company's stock option activity and related information:
- ---------- (1) Exercise prices have been split adjusted, where applicable.
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. STOCKHOLDERS' EQUITY - (CONTINUED)
The weighted average fair value of options granted for the years ended December 31, 1997, 1998 and 1999 was $1.47, $2.06 and $2.10, respectively. In addition, there were 1,758,534 options at a weighted average per share exercise price of $20.16, 4,527,144 options at a weighted average per share exercise price of $22.22 and 5,137,588 options at a weighted average per share exercise price of $22.17 exercisable at December 31, 1997, 1998 and 1999, respectively.
Exercise prices for options outstanding as of December 31, 1999 ranged from $12.04 per share to $27.04 per share. The weighted-average remaining contractual life of those options is approximately 7.74 years.
The following table sets forth the Company's reconciliation of numerators and denominators of the basic and diluted earnings per weighted average common share and the computation of basic and diluted earnings per share for the Company's common stock as required by Statement 128 for the years ended December 31, (in thousands except for earnings per share data):
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. STOCKHOLDERS' EQUITY - (CONTINUED)
The following table sets forth the Company's reconciliation of numerators and denominators of the basic and diluted earnings per weighted average Class B common share and the computation of basic and diluted earnings per share for the Company's Class B Common Stock as required by Statement 128. (in thousands except for earnings per share data):
The Company's computation for purposes of calculating the diluted weighted average Class B common shares outstanding is based on the assumption that the Class B Common Stock is converted to the Company's common stock.
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
8. RELATED PARTY TRANSACTIONS
The Company, through its subsidiaries and affiliates, provides management, leasing and other tenant related services to the Properties. Certain executive officers of the Company have continuing ownership interests in the unconsolidated service companies.
In connection with the IPO, the Company was granted a ten year option period to acquire ten properties which are either owned by the Reckson Group, the predecessor to the Company, or in which the Reckson Group owns a non-controlling minority interest. During 1998, one of these properties was sold by the Reckson Group to a third party. In addition, as of December 31, 1999, the Company has acquired four of these properties for a aggregate purchase price of approximately $35 million, which included the issuance of approximately 475,000 Units valued at approximately $8.8 million.
The Operating Partnership and FrontLine have entered into an intercompany agreement (the "Reckson Intercompany Agreement") to formalize their relationship and to limit conflicts of interest. Under the Reckson Intercompany Agreement, FrontLine granted the Operating Partnership a right of first opportunity to make any REIT -qualified investment that becomes available to FrontLine. In addition, if a REIT-qualified investment opportunity becomes available to an affiliate of FrontLine, including RSVP, the Reckson Intercompany Agreement requires such affiliate to allow the Operating Partnership to participate in such opportunity to the extent of FrontLine's interest.
Under the Reckson Intercompany Agreement, the Operating Partnership granted FrontLine a right of first opportunity to provide commercial services to the Operating Partnership and its tenants. FrontLine will provide services to the Operating Partnership at rates and on terms as attractive as either the best available for comparable services in the market or those offered by FrontLine to third parties. In addition, the Operating Partnership will give FrontLine access to its tenants with respect to commercial services that may be provided to such tenants and, under the Reckson Intercompany Agreement, subject to certain conditions, the Operating Partnership granted FrontLine a right of first refusal to become the lessee of any real property acquired by the Operating Partnership if the Operating Partnership determines that, consistent with the Company's status as a REIT, it is required to enter into a "master" lease agreement.
On August 27, 1998 the Company announced the formation of a joint venture with RSVP and the Dominion Group, an Oklahoma-based, privately-owned group of companies that focuses on the development, acquisition and ownership of government occupied office buildings and correctional facilities. The new venture, Dominion Properties LLC (the "Dominion Venture"), is owned by Dominion Venture Group LLC, and by a subsidiary of the Company. The Dominion Venture is primarily engaged in acquiring, developing and/or owning government-occupied office buildings and privately operated correctional facilities. Under the Dominion Venture's operating agreement, RSVP is to invest up to $100 million, some of which may be invested by the Company ( the "RSVP Capital"). The initial contribution of RSVP Capital was approximately $39 million of which approximately $10.1 million was invested by a subsidiary of the Company. The Company's investment was funded through the RSVP Commitment. In addition, the Company advanced approximately $2.9 million to FrontLine through the RSVP Commitment for an investment in RSVP which was then invested on a joint venture basis with the Dominion Group in certain service business activities related to the real estate activities. As of December 31, 1999, the Company had invested approximately $17.6 million in the Dominion Venture which had investments in 13 government office buildings and three correctional facilities.
During 1998, the Company made investments in and advances to RMG of approximately $29.5 million. Such investments and advances were used by RMG in connection with RMG's acquisition of an approximate 64% ownership interest in an executive office suite business. Concurrently with RMG's investment, FrontLine received an option to purchase RMG's interest at cost plus 8%. RMG is owned 97% by the Company and 3% by an entity owned by certain officers of the Company. On November 9,
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
8. RELATED PARTY TRANSACTIONS - (CONTINUED)
1998, FrontLine exercised its option and, as a result, RMG earned income during the period of ownership of approximately $707,000. In addition, FrontLine assumed the outstanding debt plus accrued interest owing to the Company.
During July 1999, the Company sold its interest in a 852,000 square foot development property to RCG in exchange for a $12.3 million note. The note accrues interest annually at the rate of 12%, has a five year maturity and is prepayable in whole or in part. During October 1999, RCG made a payment to the Company, in the form of 97 shares of its preferred stock, valued at approximately $4.0 million, towards accrued interest and principal due under the note.
In 1999 the Company invested approximately $7.2 million, through a subsidiary, in RAP Student Housing Properties, LLC ("RAP - SHP"), a company that engages primarily in the acquisition and development of off-campus student housing projects. The Company's investment was funded through the RSVP Commitment. In addition, the Company has advanced approximately $3.2 million to FrontLine through the RSVP Commitment for an additional investment in RSVP which was invested in certain service business activities related to student housing. As of December 31, 1999, RAP - SHP had investments in 4 off -- campus student housing projects.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments", management has made the following disclosures of estimated fair value at December 31, 1999 as required by FASB Statement No. 107.
Cash equivalents and variable rate debt are carried at amounts which reasonably approximate their fair values.
The fair value of the Company's long term debt, mortgage notes and notes receivable is estimated based on discounting future cash flows at interest rates that management believes reflects the risks associated with long term debt, mortgage notes and notes receivable of similar risk and duration. In addition, management believes that the estimated aggregate fair value of these assets and liabilities approximates their carrying values.
Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
10. RENTAL INCOME
The Properties are being leased to tenants under operating leases. The minimum rental amount due under certain leases are generally either subject to scheduled fixed increases or indexed escalations. In addition, the leases generally also require that the tenants reimburse the Company for increases in certain operating costs and real estate taxes above base year costs.
Included in base rents and tenant escalations and reimbursements in the accompanying statements of income are amounts from Reckson Executive Centers, LLC, a service business of the Company through March 31, 1998 and, a related party as follows (in thousands):
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
10. RENTAL INCOME - (CONTINUED)
Expected future minimum rents to be received over the next five years and thereafter from leases in effect at December 31, 1999 are as follows (in thousands):
2000 ......................... $ 312,654 2001 ......................... 295,862 2002 ......................... 293,714 2003 ......................... 257,655 2004 ......................... 230,477 Thereafter ................... 1,286,533 ---------- $2,676,895 ==========
11. SEGMENT DISCLOSURE
The Company's portfolio consists of Class A office properties located within the New York City metropolitan area and Class A suburban office and industrial properties located and operated within the Tri-State Area (the "Core Portfolio"). In addition, the Company's portfolio also includes one office property located in Orlando, Florida and for the period commencing January 6, 1998 and ending September 26, 1999, industrial properties which were owned by RMI. The Company has managing directors who report directly to the Chief Operating Officer and Chief Financial Officer who have been identified as the Chief Operating Decision Makers because of their final authority over resource allocation, decisions and performance assessment.
In addition, as the Company expects to meet its short term liquidity requirements in part through the Credit Facility and Term Loan, interest incurred on borrowings under the Credit Facility and Term Loan is not considered as part of property operating performance. Further, the Company does not consider the property operating performance of the office property located in Orlando, Florida as a part of its Core Portfolio.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
The following tables set forth the components of the Company's revenues and expenses and other related disclosures, as required by Statement 131, for the years ended December 31, 1999 and 1998 (in thousands):
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
12. NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional supplemental disclosures of non-cash investing and financing activities are as follows:
During 1998, the Company issued 584,062 Units in connection with the acquisition of three office and two industrial properties encompassing approximately 580,000 square feet for a total non cash investment of approximately $13.7 million. In addition, in connection with the acquisitions of the Cappelli portfolio and 360 Hamilton Avenue located in White Plains, New York, the Company assumed approximately $47.1 million of indebtedness and issued 42,518 preferred units with a stated value of approximately $42.5 million for a total non cash investment of approximately $89.6 million.
On June 11, 1998, the Operating Partnership distributed its 95% common stock interest in FrontLine of approximately $3 million to its owners, including the Company which, in turn, distributed the common stock of FrontLine to its shareholders.
During 1998, in connection with the Company's investment in the Morris Companies, the Company assumed approximately $23 million of indebtedness ($16.9 million net of minority partners interest). In addition, the Morris Companies contributed net assets of approximately $36 million to the Company in exchange for an approximate 28.2% minority partners interest in RMI.
On May 24, 1999, in conjunction with the Tower portfolio acquisition, the Company issued 11,694,567 shares of Class B Common Stock which were valued for GAAP purposes at approximately $304.1 million and assumed approximately $133.4 million of indebtedness for a total non cash investment of approximately $437.5 million.
During June 1999, in connection with the sale of an office property, the Company obtained a $1.2 million purchase money mortgage as partial consideration for the sale.
During July 1999, the Company sold its interest in a 852,000 square foot development property to RCG in exchange for a $12.3 million note. During October 1999, the Company accepted 97 shares of preferred stock of RCG as payment of $4.0 million of principal and interest due under the note.
During September 1999, in connection with the Matrix Sale and the first stage closing of RMI, the Company received as partial consideration for the sale $41.5 million of common and preferred stock of KTR and approximately $10.2 million in purchase money mortgages from Matrix. In addition, the Company was also relieved of approximately $26.7 million of secured indebtedness.
During November 1999, the Company received approximately $3.6 million of common stock of FrontLine as consideration for amending the FrontLine Facility and the RSVP Commitment.
13. COMMITMENTS AND OTHER COMMENTS
The Company has entered into employment agreements with its chairman and five executive officers. The agreements are for five years and expire on May 31, 2003.
The Company sponsors a defined contribution savings plan pursuant to section 401(k) of the Internal Revenue Code. Under such plan, there are no prior service costs. Employees are generally eligible to participate in the plan after six months of service. Employer contributions are based on a discretionary amount determined by the Company's management. During 1999 and 1998 the Company made no contributions.
The Company had outstanding undrawn letters of credit against its Credit Facility of approximately $52.3 million and $26.1 million at December 31, 1999 and 1998, respectively.
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summary represents the Company's results of operations for each quarter during 1999 and 1998 (in thousands, except share amounts):
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RECKSON ASSOCIATES REALTY CORP. NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED) - (CONTINUED)
15. PRO FORMA RESULTS (UNAUDITED)
The following unaudited pro forma operating results of the Company for the year ended December 31, 1999 have been prepared as if the property acquisitions made during 1999 had occurred on January 1, 1999. Unaudited pro forma financial information is presented for informational purposes only and may not be indicative of what the actual results of operations of the Company would have been had the events occurred as of January 1, 1999, nor does it purport to represent the results of operations for future periods (in thousands except per share data):
16. SUBSEQUENT EVENT
On January 13, 2000, the Company acquired 1350 Avenue of the Americas, a 540,000 square foot, 35 story, Class A office property, located in New York City, for a purchase price of approximately $126.5 million. This acquisition was financed through a $70 million secured debt financing and a draw under the Credit Facility.
IV-29
RECKSON ASSOCIATES REALTY CORP. SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (IN THOUSANDS)
Continued
IV-30
RECKSON ASSOCIATES REALTY CORP. SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (CONTINUED) (IN THOUSANDS)
Continued
IV-31
RECKSON ASSOCIATES REALTY CORP. SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (CONTINUED) (IN THOUSANDS)
Continued
IV-32
RECKSON ASSOCIATES REALTY CORP. SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999 (CONTINUED) (IN THOUSANDS)
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A These land parcels are leased (see Note 4). B There are no encumbrances on these properties. C The Encumbrance of $2,616 is related to one property. The aggregate cost for Federal Income Tax purposes was approximately $1,728 million at December 31, 1999.
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RECKSON ASSOCIATES REALTY CORP. SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) (IN THOUSANDS)
The changes in real estate for each of the periods in the three years ended December 31, 1999 are as follows:
The changes in accumulated depreciation, exclusive of amounts relating to equipment, autos, furniture and fixtures, for each of the periods in the three years ended December 31, 1999 are as follows:
IV-34
- ---------- (a) Previously filed as an exhibit to Registration Statement Form S-11 (No. 333-1280) and incorporated herein by reference.
(b) Previously filed as an exhibit to Registration Statement Form S-11 (No. 33-84324) and incorporated herein by reference.
(c) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on November 25, 1996 and incorporated herein by reference.
(d) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on August 14, 1998 and incorporated herein by reference.
(e) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on February 5, 1999 and incorporated herein by reference.
(f) Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 26, 1998 and incorporated herein by reference.
(g) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on December 22, 1998 and incorporated herein by reference.
(h) Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on March 1, 1999 and incorporated herein by reference.
(i) Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 16, 1999 and incorporated herein by reference.
(j) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on March 26, 1999 and incorporated herein by reference.
(k) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on June 7, 1999 and incorporated herein by reference.
(l) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on June 25, 1999 and incorporated herein by reference.
(m) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on August 25, 1999 and incorporated herein by reference.
(n) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on October 25, 1999 and incorporated herein by reference.
(o) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on January 14, 2000 and incorporated herein by reference.
(p) Previously filed as an exhibit to the Company's Form 8-K filed with SEC on February 8, 2000 and incorporated herein by reference.