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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal yearended December 31, 2003
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to
Commission File Number 1-13762
RECKSON ASSOCIATES REALTY CORP.
(Exact name of registrant as specified in its charter)
MARYLAND 11-3233650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 BROADHOLLOW ROAD, 11747
MELVILLE, NY (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (631) 694-6900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
Class A common stock, $.01 par value New York Stock Exchange
Series A preferred stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [ ]
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). Yes X No
--- ---
The aggregate market value of the shares of Class A common stock held
by non-affiliates was approximately $1,642 million based on the closing price
on the New York Stock Exchange for such shares on March 5, 2004.
The Company has one class of common stock, issued at $.01 par value per share,
with 60,350,658 shares outstanding on March 4, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Shareholder's
Meeting to be held June 2, 2004 are incorporated by reference into Part III.
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TABLE OF CONTENTS
ITEM PAGE
NO.
PART I
1. Business............................................................ 3
2. Properties.......................................................... 18
3. Legal Proceedings................................................... 28
4. Submission of Matters to a Vote of Security Holders................. 28
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters
and IssuerPurchases of Equity Securities........................ 29
6. Selected Financial Data............................................. 32
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 34
7a. Quantitative and Qualitative Disclosures about Market Risk ......... 64
8. Financial Statements and Supplementary Data......................... 65
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 65
9a. Controls and Procedures............................................. 65
PART III
10. Directors and Executive Officers of the Registrant.................. 66
11. Executive Compensation.............................................. 66
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters..................................... 66
13. Certain Relationships and Related Transactions...................... 66
14. Principal Accountant Fees and Services.............................. 66
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 67
2
PART I
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 (the "IPO") 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 City 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 central business district ("CBD") and suburban office 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, 2003 the Company owned 89 properties (inclusive of 10 joint venture
properties) in the Tri-State Area markets, encompassing approximately 14.7
million rentable square feet, all of which are managed by the Company. The
properties include 16 Class A CBD office properties encompassing approximately
5.3 million rentable square feet. The CBD office properties consist of five
properties located in New York City, nine properties located in Stamford, CT and
two properties located in White Plains, NY. Together the CBD office properties
comprised 42% of the Company's net operating income (property operating
revenues less property operating expenses) for the three months ended December
31, 2003. These properties also include 61 Class A suburban office properties
encompassing approximately 8.4 million rentable square feet, of which 42 of
these properties, or 75% as measured by square footage, are located within the
Company's ten office parks. Reckson has historically emphasized the development
and acquisition of its suburban office properties in large-scale suburban office
parks. The Company believes that owning properties in planned office 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. Additionally, the properties
include 11 industrial / R&D properties encompassing approximately 1.0 million
rentable square feet and one retail property comprising approximately 9,000
rentable square feet. The Company also owns a 355,000 square foot office
property located in Orlando, Florida.
In November 2003, the Company sold all but three of the properties
included in its Long Island industrial building portfolio to members of the
Rechler family for approximately $315.5 million. See "Recent Developments" for
further discussion on this sale.
Through its ownership of properties in the key CBD and suburban office
markets in the Tri-State Area, the Company believes it has a unique competitive
advantage as the trend toward the regional decentralization of the workplace
increases. Due to the events of September 11, 2001, as well as technological
advances which further enable decentralization, companies are strategically
re-evaluating the benefits and feasibility of regional decentralization and
reassessing their long-term space needs. The Company believes this
multi-location regional decentralization will continue to take place, increasing
as companies begin to have better visibility as to the future of the economy,
further validating our regional strategy of maintaining a significant market
share in the key CBD and suburban office markets in the Tri-State Area.
3
The Company also owns approximately 313 acres of land in 12 separate
parcels of which the Company can develop approximately 3.0 million square feet
of office space. The Company is currently evaluating alternative land uses for
certain of the land holdings to realize the highest economic value. These
alternatives may include rezoning certain land parcels from commercial to
residential for potential disposition. As of December 31, 2003, the Company had
invested approximately $116.8 million in these development projects. Management
has made subjective assessments as to the value and recoverability of these
investments based on current and proposed development plans, market comparable
land values and alternative use values. The Company has capitalized
approximately $10.0 million for the year ended December 31, 2003 related to real
estate taxes, interest and other carrying costs related to these development
projects. In October 2003, the Company entered into contracts to sell two land
parcels aggregating approximately 128 acres of its land holdings located in New
Jersey. The contracts provided for aggregate sales prices ranging from $23
million to $43 million. The aggregate cost basis of these land parcels was
approximately $11.8 million at December 31, 2003. These sales are contingent
upon obtaining zoning for residential use of the land and other customary
approvals. The proceeds ultimately received from such sales will be based upon
the number of residential units permitted by the rezoning. The closing is
scheduled to occur upon the rezoning which is anticipated to occur within 9 to
33 months. During February 2004, a 3.9 acre land parcel located on Long Island
was condemned by the Town of Oyster Bay (see "Recent Developments" for further
discussion).
The Company has historically opportunistically purchased underdeveloped
land, vacant buildings or buildings that were under managed or under performing.
The Company applies its real estate expertise to develop, redevelop, renovate
and reposition their assets with the goal of creating value in these real estate
assets. Since the IPO the Company has developed, redeveloped, renovated or
repositioned 17 properties encompassing approximately 2.6 million square feet
of office and industrial / R&D space.
The Company holds a $17.0 million note receivable which bears interest at
12% per annum and is secured by a minority partnership interest in Omni
Partners, L. P., owner of the Omni, a 579,000 square foot Class A office
property located in Uniondale, N.Y., effectively increasing its economic
interest in the property owning partnership (the "Omni Note"). The Company
currently owns a 60% majority partnership interest in Omni Partners, L.P. and on
March 14, 2007 may exercise an option to acquire the remaining 40% interest for
a price based on 90% of the fair market value of the property. The Company holds
a $15 million participating interest in a $30 million junior mezzanine note loan
which is secured by a pledge of an indirect ownership interest of an entity
which owns the ground leasehold estate under a 1.1 million square foot office
complex located on Long Island, NY (the " Mezz Note"). The Mezz Note matures in
September 2005, currently bears interest at 13.43%, and the borrower has the
right to extend for three additional one-year periods. The Company also holds
three other notes receivable aggregating $21.5 million which bear interest at
rates ranging from 10.5% to 12% per annum and are secured in part by a minority
partner's preferred unit interest in the Operating Partnership, an interest in
real property and a personal guarantee (the "Other Notes" and collectively with
the Omni Note, and the Mezz Note, the "Note Receivable Investments"). As of
December 31, 2003, management has made subjective assessments as to the
underlying security value on the Company's Note Receivable Investments. These
assessments indicated an excess of market value over carrying value related to
the Company's Note Receivable Investments. Based on these assessments the
Company's management believes there is no impairment to the carrying value
related to the Company's Note Receivable Investments. The Company also owns a
355,000 square foot office building in Orlando, Florida. This non-core real
estate holding was acquired in May 1999 in connection with the Company's initial
New York City portfolio acquisition. This property is cross collateralized under
a $101.0 million mortgage note payable along with one of the Company's New York
City buildings. The Company has the right to repay this note in November 2004,
prior to its maturity date.
4
The Company also owns a 60% non-controlling interest in a 172,000 square
foot office building located at 520 White Plains Road in White Plains, New York
(the "520JV"), which it manages - the remaining 40% interest is owned by JAH
Realties L.P. Jon Halpern, a director of HQ Global Workplaces, is a partner in
JAH Realties, L.P. As of December 31, 2003, the 520JV had total assets of $19.8
million, a mortgage note payable of $12.0 million and other liabilities of
$185,000. The Company's allocable share of the 520JV mortgage note payable is
approximately $7.9 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005. The operating agreement of the 520JV
requires joint decisions from all members on all significant operating and
capital decisions including sale of the property, refinancing of the property's
mortgage debt, development and approval of leasing strategy and leasing of
rentable space. As a result of the decision-making participation relative to the
operations of the property, the Company accounts for the 520JV under the equity
method of accounting.
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. Currently the Company owns, through Metropolitan, five Class A office
properties aggregating approximately 3.5 million square feet.
During September 2000, the Company formed a joint venture (the "Tri-State
JV") with Teachers Insurance and Annuity Association ("TIAA") and contributed
nine Class A suburban office properties aggregating approximately 1.5 million
square feet to the Tri-State JV for a 51% majority ownership interest. TIAA
contributed approximately $136 million for a 49% interest in the Tri-State JV
which was then distributed to the Company. In August 2003, the Company acquired
TIAA's 49% interest in the property located at 275 Broadhollow Road, Melville,
NY for approximately $12.4 million. As a result, the Tri-State JV owns eight
Class A suburban office properties aggregating approximately 1.4 million square
feet. The Company is responsible for managing the day-to-day operations and
business affairs of the Tri-State JV and has substantial rights in making
decisions affecting the properties such as leasing, marketing and financing. The
minority member has certain rights primarily intended to protect its investment.
For purposes of its financial statements the Company consolidates the Tri-State
JV.
On December 21, 2001, the Company formed a joint venture with the New York
State Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby NYSTRS
acquired a 49% indirect interest in the property located at 919 Third Avenue,
New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Company. The Company is responsible for
managing the day-to-day operations and business affairs of the 919JV and has
substantial rights in making decisions affecting the property such as developing
a budget, leasing and marketing. The minority member has certain rights
primarily intended to protect its investment. For purposes of its financial
statements the Company consolidates the 919JV.
As of December 31, 2001, the Company has invested approximately $59.8
million in REIT-qualified joint ventures with Reckson Strategic Venture
Partners, LLC ("RSVP"), a real estate venture capital fund created in 1997 as a
research and development vehicle for the Company to invest in alternative real
estate sectors outside the Company's core office and industrial focus (see
Recent Developments-Other Investing Activities).
All of the Company's interests in its properties, land held for
development, the Note Receivable Investments and joint ventures 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, 2003, owned
approximately 94.2% of the Operating Partnership's outstanding common units of
limited partnership interest ("OP Units").
5
The Company seeks to maintain cash reserves for normal repairs,
replacements, improvements, working capital and other contingencies. The Company
has established an unsecured credit facility (the "Credit Facility") with a
maximum borrowing amount of $500 million scheduled to mature on December 30,
2005. The Credit Facility requires the Company to comply with a number of
financial and other covenants on an ongoing basis.
The Company maintains access to unsecured debt markets through its
investment grade ratings on its senior unsecured debt. The Company's ratings as
of December 31, 2003 from the major rating organizations are as follows:
Rating Organization Rating Outlook
-----------------------------------------------------
Standard & Poor's BBB- Stable
Fitch BBB- Stable
Moody's Ba1 Stable
These security ratings are not a recommendation to buy, sell or hold the
Company's securities and they are subject to revision or withdrawal at any time
by the rating organization. Ratings assigned by every rating organization have
their own meaning within the organization's overall classification system. Each
rating should be evaluated independently of any other rating.
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.
In order to protect the Company's ability to qualify as a REIT, ownership
of its common stock by any single stockholder is limited to 9%, subject to
certain exceptions. The Company has announced its intention to seek shareholder
approval to amend this provision of its charter to ensure that the ownership
limit may only be used to protect the Company's REIT status.
The Company's principal 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, 2003, the Company had approximately 270
employees.
The Company makes certain filings with the Securities and Exchange
Commission, including its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports,
available free of charge through its website, www.reckson.com, as soon as
reasonably practicable after they are filed with the Securities and Exchange
Commission. The Company's annual report to shareholders, press releases and
recent presentations are also available free of charge on the website.
6
RECENT DEVELOPMENTS
Acquisitions, Dispositions and Investing Activities
In November 2003, the Company disposed of all but three of its 95 property, 5.9
million square foot, Long Island industrial building portfolio to members of the
Rechler family (the "Disposition") for approximately $315.5 million, comprised
of $225.1 million in cash and debt assumption and 3,932,111 OP Units valued at
approximately $90.4 million. Approximately $204 million of cash sales proceeds
from the Disposition were used to repay borrowings under the Credit Facility.
Two of the remaining three properties, which are subject to transfer pursuant to
Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"), are
anticipated to close during 2004. There can be no assurances that the Company
will meet the requirements of Section 1031 by identifying and acquiring
qualified replacement properties in the required time frame, in which case the
Company would incur the tax liability on the capital gain realized of
approximately $1.5million. The disposition of the other property, which is
subject to certain environmental issues, is conditioned upon the approval of the
buyer's lender, which has not been obtained. As a result, the Company may not
dispose of this property as a part of the Disposition. Management believes that
if the Company were to continue to hold this property the cost to address the
environmental issues would not have a material adverse effect on the Company,
but there can be no assurance in this regard. These three remaining properties
aggregate approximately $7.1 million of the $315.5 million sales price. In
addition, four of the five remaining options granted to the Company at the time
of the Company's IPO to purchase interests in properties owned by Rechler family
members (including three properties in which the Rechler family members hold
non-controlling interests and one industrial property) were terminated along
with management contracts relating to three of such properties.
In connection with the closing, the employment of Donald Rechler, Roger
Rechler, Gregg Rechler and Mitchell Rechler as officers of the Company
terminated and Roger Rechler, Gregg Rechler and Mitchell Rechler resigned as
members of the Board of Directors. In connection with the Disposition and the
terminations of employment, the Company incurred the following restructuring
charges: (i) approximately $7.5 million related to outstanding stock loans under
the Company's historical long term incentive program ("LTIP") were transferred
to the entity that acquired the Long Island industrial building portfolio and
approximately $642,000 of loans related to life insurance contracts were
extinguished, (ii) approximately $2.9 was million paid to the departing Rechler
family members in exchange for 127,689 of rights to receive shares of Class A
common stock that were granted in 2002 and their rights that were granted in
2003 were forfeited in their entirety and (iii) with respect to two of the
departing Rechler family members participating in the Company's March 2003 LTIP,
each received 8,681 shares of the Company's Class A common stock related to the
service component of their core award which was valued at $293,000 in the
aggregate. In addition, if the Company were to attain its annual performance
measure under the March 2003 LTIP in March 2004, these individuals will also be
entitled to each receive 26,041 shares of Class A common stock representing the
balance of the annual core award as if they remained in continuous employment
with the Company. The remainder of their core awards was forfeited as was the
entire amount of the special outperformance component of the March 2003 LTIP.
The Company also incurred additional restructure charges of approximately $1.2
million related primarily to the release and severance of approximately 25
employees. Total restructure charges of approximately $12.5 million were
mitigated by a $972,000 fee from departing Rechler family members, related to
the termination of the Company's option to acquire certain property which was
either owned by certain Rechler family members or in which the Rechler family
members own a non-controlling minority interest.
7
A number of shareholder derivative actions have been commenced purportedly
on behalf of the Company against the Board of Directors relating to the
Disposition. The complaints allege, among other things, that the process by
which the directors agreed to the transaction was not sufficiently independent
of the Rechler family and did not involve a "market check" or third party
auction process and, as a result, was not for adequate consideration. The
plaintiffs seek similar relief, including a declaration that the directors
violated their fiduciary duties and damages. The Company's management believes
that the complaints are without merit.
In January 2004, the Company sold a 104,000 square foot office property
located on Long Island for approximately $18.5 million. Net proceeds from the
sale were used to repay borrowings under the Credit Facility.
In January 2004, the Company acquired 1185 Avenue of the Americas, a
42-story, 1.1 million square foot Class A office tower, located between 46th and
47th Streets in New York City for $321 million. In connection with this
acquisition, the Company assumed a $202 million mortgage and $48 million of
mezzanine debt. The balance of the purchase price was paid through an advance
under the Credit Facility. The floating rate mortgage and mezzanine debt both
mature in August 2004 and presently have a weighted average interest rate of
4.95%. The property is also encumbered by a ground lease which has a remaining
term of approximately 40 years with rent scheduled to be re-set at the end of
2005 and then remain constant for the balance of the term.
During February 2004, a 3.9 acre land parcel located on Long Island was
condemned by the Town of Oyster Bay. As consideration for the condemnation the
Company anticipates to initially receive approximately $1.8 million. The
Company's cost basis in this land parcel at December 31, 2003 was approximately
$1.4 million. The Company is currently contesting this valuation and seeking
payment of additional consideration from the Town of Oyster Bay but there can be
no assurances that the Company will be successful in obtaining any such
additional consideration.
In February 2004, the Company signed a contract to sell a 175,000 square
foot office building located on Long Island for approximately $30 million of
which the Company owns a 51% interest. Net proceeds from the sale are
anticipated to be used to repay outstanding borrowings under the Credit
Facility.
8
Other Investing Activities
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine"), and RSVP. RSVP is a real estate venture
capital fund which invested primarily in real estate and real estate operating
companies outside the Company's core office focus and whose common equity is
held indirectly by FrontLine. In connection with the formation and spin-off of
FrontLine, the Operating Partnership established an unsecured credit facility
with FrontLine (the "FrontLine Facility") in the amount of $100 million for
FrontLine to use in its investment activities, operations and other general
corporate purposes. The Company advanced approximately $93.4 million under the
FrontLine Facility. The Operating Partnership also approved the funding of
investments of up to $100 million relating to RSVP (the "RSVP Commitment"),
through RSVP-controlled joint ventures (for REIT-qualified investments) or
advances made to FrontLine under an unsecured loan facility (the "RSVP
Facility") having terms similar to the FrontLine Facility (advances made under
the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine Loans").
During March 2001, the Company increased the RSVP Commitment to $110 million and
as of December 31, 2003 approximately $109.1 million was funded under the RSVP
Commitment, of which $59.8 million represents investments by the Company in
RSVP-controlled (REIT-qualified) joint ventures and $49.3 million represents
loans made to FrontLine under the RSVP Facility. As of December 31, 2003,
interest accrued (net of reserves) under the FrontLine Facility and the RSVP
Facility was approximately $19.6 million.
At June 30, 2001, the Company assessed the recoverability of the FrontLine
Loans and reserved approximately $3.5 million of the interest accrued during the
three-month period then ended. In addition, the Company formed a committee of
its Board of Directors, comprised solely of independent directors, to consider
any actions to be taken by the Company in connection with the FrontLine Loans
and its investments in joint ventures with RSVP. During the third quarter of
2001, the Company noted a significant deterioration in FrontLine's operations
and financial condition and, based on its assessment of value and recoverability
and considering the findings and recommendations of the committee and its
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The Company has discontinued the accrual of interest income with respect to the
FrontLine Loans. The Company has also reserved against its share of GAAP equity
in earnings from the RSVP controlled joint ventures funded through the RSVP
Commitment until such income is realized through cash distributions.
9
At December 31, 2001, the Company, pursuant to Section 166 of the Code,
charged off for tax purposes $70 million of the aforementioned reserve directly
related to the FrontLine Facility, including accrued interest. On February 14,
2002, the Company charged off for tax purposes an additional $38 million of the
reserve directly related to the FrontLine Facility, including accrued interest,
and $47 million of the reserve directly related to the RSVP Facility, including
accrued interest.
FrontLine is in default under the FrontLine Loans from the Operating
Partnership and on June 12, 2002, filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code.
In September 2003, RSVP completed the restructuring of its capital
structure and management arrangements. In connection with the restructuring,
RSVP redeemed the interest of the preferred equity holders of RSVP for an
aggregate of approximately $137 million in cash including proceeds from the
disposition of all of the privitization and medical offices assets and the
transfer to the preferred equity holders of the assets that comprised RSVP's
parking investment valued at approximately $28.5 million. RSVP also restructured
its management arrangements whereby a management company formed by its former
managing directors has been retained to manage RSVP pursuant to a management
agreement and the employment contracts of the managing directors with RSVP have
been terminated. The management agreement provides for an annual base management
fee and disposition fees equal to 2% of the net proceeds received by RSVP on
asset sales. (The base management fee and disposition fees are subject to a
maximum over the term of the agreement of $7.5 million.) In addition, the
managing directors retained a one-third residual interest in RSVP's assets which
is subordinated to the distribution of an aggregate amount of $75 million to
RSVP and/or the Company in respect of its joint ventures with RSVP. The
management agreement has a three-year term, subject to early termination in the
event of the disposition of all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of asset sales by RSVP.
As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments, is approximately $65 million, which was reassessed with no
change by management as of December 31, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
Scott H. Rechler, who serves as President, Chief Executive Officer and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP.
10
The following table sets forth the Company's original invested capital (at
cost and before valuation reserves) in RSVP controlled (REIT-qualified) joint
ventures and amounts, which were advanced under the RSVP Commitment to
FrontLine, for its investment in RSVP controlled investments (in thousands):
RSVP controlled Amounts
joint ventures advanced Total
------------------- ------------------- --------------------
Privatization $ 21,480 $ 3,520 $ 25,000
Student Housing 18,086 3,935 22,021
Medical Offices 20,185 --- 20,185
Parking --- 9,091 9,091
Resorts --- 8,057 8,057
Net leased retail --- 3,180 3,180
Other assets and overhead --- 21,598 21,598
------------------- ------------------- --------------------
$ 59,751 $ 49,381 $ 109,132
=================== =================== ====================
In September 2003, RSVP completed the restructuring of its capital
structure. In connection with the restructuring, RSVP redeemed the interest of
the preferred equity holders of RSVP for an aggregate of $137 million in cash
(including proceeds from the disposition of all of the Privitization and Medical
Offices assets) and the transfer to the preferred equity holders of the assets
that comprised RSVP's parking investments valued at approximately $28.5 million.
11
Leasing Activity
During the year ended December 31, 2003, the Company executed 222 leases
encompassing approximately 2.3 million square feet. The following table
summarizes the leasing activity by location and property type:
Average effective
Number of leases Leased square feet rent (1)
---------------- ------------------ --------
CBD office properties
---------------------
Connecticut 17 69,704 $28.20
New York City 22 305,455 $43.77
Westchester 4 12,683 $23.56
--------------- --------------
Subtotal / Weighted average 43 387,842 $40.31
--------------- --------------
Suburban office properties
--------------------------
Long Island 65 573,591 $25.22
New Jersey 30 457,315 $21.66
Westchester 46 276,867 $20.46
--------------- --------------
Subtotal / Weighted average 141 1,307,773 $22.97
--------------- --------------
Industrial properties
---------------------
Long Island 36 553,230 $ 7.28
New Jersey 2 15,675 $10.57
--------------- --------------
Subtotal / Weighted average 38 568,905 $ 7.37
--------------- --------------
Total 222 2,264,520 $22.02
=============== ==============
(1) Base rent adjusted on a straight-line basis for free rent periods, tenant
improvements and leasing commissions
Financing Activities
The Company currently has a three year $500 million unsecured revolving
credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association as syndication
agent and Citicorp North America, Inc. and Wachovia Bank, National Association
as co-documentation agents. The Credit Facility matures in December 2005,
contains options for a one year extension subject to a fee of 25 basis points
and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. In addition, borrowings under the
Credit Facility are currently priced off LIBOR plus 90 basis points and the
Credit Facility carries a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's senior unsecured credit rating
the interest rates and facility fee are subject to change. At December 31, 2003,
the outstanding borrowings under the Credit Facility aggregated $169 million and
carried a weighted average interest rate of 2.86% per annum.
12
The following table sets forth the Company's Applicable Margin, pursuant
to the Credit Facility, which indicates the additional respective percentages
per annum applied to LIBOR based-borrowings determined based on the Operating
Partnership's senior unsecured credit rating:
Applicable
Senior unsecured credit rating Margin
---------------------------------------------- ---------------
A- / A3 .600%
BBB+ / Baa1 .625%
BBB / Baa2 .700%
BBB- / Baa3 .900%
Below BBB- / Baa3
or unrated 1.20%
The Company utilizes the Credit Facility primarily to finance real estate
investments, fund its real estate development activities and for working capital
purposes. At December 31, 2003, the Company had availability under the Credit
Facility to borrow approximately an additional $331 million subject to
compliance with certain financial covenants.
On January 22, 2004, the Operating Partnership issued $150 million of
seven-year 5.15% (5.196% effective rate) senior unsecured notes. Prior to the
issuance of these notes the Company entered into several anticipatory interest
rate hedge instruments to protect itself against potentially rising interest
rates. At the time the notes were issued the Company incurred a net cost of
approximately $980,000 to settle these instruments. Such costs will be amortized
over the term of the notes. Net proceeds of approximately $148 million received
from this issuance were used to repay outstanding borrowings under the Credit
Facility.
Stock and Other Equity Offerings
On August 7, 2003, the Company issued 465,845 Class C OP Units
valued at $24.00 per unit in connection with its acquisition of a Class A office
property located in Stamford, Connecticut.
On October 24, 2003, the Company gave notice to its Class B common
stockholders that it would exercise its option to exchange 100% of its Class B
common stock outstanding (9,915,313 shares) on November 25, 2003 for an equal
number of shares of its Class A common stock. Such exchange occurred on November
25, 2003.
On November 10, 2003, as partial consideration for the Company's sale of
its Long Island industrial building portfolio to the departing Rechler family
members, the Company redeemed and retired, approximately 3.9 million OP Units
valued at approximately $90.4 million or $23.00 per share. In addition, during
the year ended December 31, 2003, certain limited partners exchanged
approximately 258,000 OP Units for an equal number of shares of the Company's
Class A common stock.
13
The Board of Directors of the Company has authorized the purchase of up to
five million shares of the Company's Class A common stock. Transactions
conducted on the New York Stock Exchange 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. During the year ended December 31, 2003,
under this buy-back program, the Company purchased 252,000 shares of Class A
common stock for an aggregate purchase price of approximately $4.5 million or
$18.01 per share.
During 2003, employees of the Company exercised 58,809 of their stock
options resulting in proceeds to the Company of approximately $1.0 million.
In January 2004, the Company exercised its option to redeem two million
shares, or 100% of its outstanding 8.85% Series B Convertible Cumulative
Preferred Stock for approximately 1,958,000 shares of its Class A common stock.
OTHER
In March of 2004, the Company received notification from the Internal
Revenue Service indicating that they have selected the 2001 tax return of the
Operating Partnership for examination. The examination process has not yet
commenced.
14
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's core business strategy is based on a
long-term outlook considering real estate is a cyclical business. The Company
seeks to accomplish long-term stability and success by developing and
maintaining an infrastructure and franchise that is modeled for success over the
long-term. This approach allows the Company to recognize different points in the
market cycle and adjust our strategy accordingly. Although the Company has
recently experienced increased leasing activity, the Company remains cautious
about the market environment. With this cautious bias we choose to maintain our
conservative strategy of focusing on retaining high occupancies, controlling
operating expenses, maintaining a high level of investment discipline and
preserving financial flexibility. 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: (i) a multidisciplinary leasing approach that
involves architectural design and construction personnel as well as leasing
professionals, (ii) innovative marketing programs that strategically position
the Company's properties and distinguish its portfolio from the competition,
increase brand equity and gain market-share. These cost-effective, high-yield
programs include electronic web-casting, targeted outdoor and print media
campaigns and sales promotion that enhances broker relationships and influences
tenant retention, (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, (v) a
fully integrated infrastructure of proprietary and property management
accounting systems which encompasses technologically advanced systems and tools
that provide meaningful information, on a real time basis, throughout the entire
organization and (vi) an acquisition, disposition 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 currently intends to adhere to a policy of maintaining a
stabilized debt ratio over time (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 not more than 50%. 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. There can be no assurances
that the Company will not adjust this policy in the future. As of December 31,
2003, the Company's debt ratio was approximately 41.2%. This calculation is net
of minority partners' proportionate share of joint venture debt and includes the
Company's share of unconsolidated joint venture debt.
15
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 New York City, the Long Island,
Westchester, New Jersey and Southern Connecticut office markets stabilize and
begin to recover with limited new supply, management believes the Company is
well positioned to benefit from rental revenue growth through: (i) contractual
annual compounding of 3-4% Base Rent increases (defined as fixed gross rental
amounts that exclude payments on account of real estate taxes, operating expense
escalations and base electrical charges) on approximately 90% of existing leases
from its Long Island properties, (ii) periodic contractual increases in Base
Rent on existing leases from its Westchester properties, the New Jersey
properties, the New York City properties and the Southern Connecticut properties
and (iii) the potential for increases to Base Rents as leases expire and space
is re-leased at the higher rents that exist in the current market environment.
Through its ownership of properties in the key CBD and suburban office
markets in the Tri-State Area, the Company believes it has a unique competitive
advantage as the trend toward the regional decentralization of the workplace
increases. Due to the events of September 11, 2001 as well as technological
advances which further enable decentralization, companies are strategically
re-evaluating the benefits and feasibility of regional decentralization and
reassessing their long-term space needs. The Company believes this
multi-location regional decentralization will continue to take place, increasing
as companies begin to have better visibility as to the future of the economy,
further validating our regional strategy of maintaining a significant market
share in the key CBD and suburban office markets in the Tri-State Area.
External Growth. The Company seeks to acquire multi-tenant Class A office
buildings in New York City and the surrounding Tri-State Area CBD and core
suburban markets located in the Tri-State Area. Management believes that the
Tri-State Area presents future 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 and access to unsecured debt markets, (ii) ability to acquire a
property for OP Units 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 substantial 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 CBD and suburban office properties and to continue to
redevelop existing properties as these opportunities arise. The Company will
concentrate its development activities on Class A CBD and suburban office
properties within the Tri-State Area. The Company's expansion into the New York
City office market has provided it with future opportunities to acquire
interests in properties at attractive yields. The Company also believes that
its New York City division provides additional leasing and operational
capabilities 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 key Tri-State Area sub-markets.
In addition, when valuations for commercial real estate properties are
high, the Company will seek to sell certain properties or interests therein to
realize value and profit created. The Company will then seek opportunities to
reinvest the capital realized from these dispositions back into value-added
assets in the Company's core Tri-State Area markets, as well as pursue its stock
repurchase program when deemed appropriate.
16
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 Company's office and industrial / R&D 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 Company's 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.
Soil, sediment and groundwater contamination, consisting of volatile
organic compounds ("VOCs") and metals, has been identified at the property at 32
Windsor Place, Central Islip, New York. The contamination is associated with
industrial activities conducted by a tenant at the property over a number of
years. The contamination, which was identified through an environmental
investigation conducted on behalf of the Company, has been reported to the New
York State Department of Environmental Conservation. The Company has notified
the tenant of the findings and has demanded that the tenant take appropriate
actions to fully investigate and remediate the contamination. Under applicable
environmental laws, both the tenant and the Company are liable for the cost of
investigation and remediation. The Company does not believe that the cost of
investigation and remediation will be material and the Company has recourse
against the tenant. However, there can be no assurance that the Company will not
incur liability that would have a material adverse effect on the Company's
business.
17
ITEM 2. PROPERTIES
GENERAL
As of December 31, 2003 the Company owned 89 properties (including 10
joint venture properties) in the Tri-State Area CBD and suburban markets,
encompassing approximately 14.7 million rentable square feet, all of which are
managed by the Company. The properties include 16 Class A CBD office properties
encompassing approximately 5.3 million rentable square feet. The CBD office
properties consist of five properties located in New York City, nine properties
located in Stamford, CT and two properties located in White Plains, NY. The CBD
office properties comprised 42% of the Company's net operating income (property
operating revenues less property operating expenses) for the three months ended
December 31, 2003. The properties also include 61 Class A suburban office
properties encompassing approximately 8.4 million rentable square feet, of which
42 of these properties, or 75% as measured by square footage, are located within
the Company's ten office parks. Reckson has historically emphasized the
development and acquisition of properties that are part of large-scale suburban
office parks. 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. The properties also include
11 industrial / R&D properties encompassing approximately 1.0 million rentable
square feet and one retail property comprising approximately 9,000 rentable
square feet. The Company also owns a 355,000 square foot office property located
in Orlando, Florida.
Set forth below is a summary of certain information relating to the
Company's properties, categorized by office and industrial / R&D properties, as
of December 31, 2003.
OFFICE PROPERTIES
General
As of December 31, 2003, the Company owned or had an interest in 16
Class A CBD office properties encompassing approximately 5.3 million square feet
and 61 Class A suburban office properties encompassing approximately 8.4 million
square feet. As of December 31, 2003, the office properties were approximately
91.5% leased (percent leased excludes properties under development) to
approximately 900 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. The 16 Class A
CBD office properties consist of five properties located in New York City, nine
properties located in Stamford, CT and two properties located in White Plains,
NY. Forty two of the 61 suburban office properties are located within the
Company's ten office parks. 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 companies representing all major industry groups
including consumer products, financial services, pharmaceuticals, health care,
telecommunication and technology and insurance and service companies, such as
"Big Four" accounting firms and major law firms.
18
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, 2003
for each of the office properties.
OWNERSHIP ANNUAL
INTEREST BASE
(GROUND RENT NUMBER
LEASE LAND NUMBER RENTABLE PER OF
PERCENTAGE EXPIRATION YEAR AREA OF SQUARE PERCENT ANNUAL BASE LEASED TENANT
OWNERSHIP DATE)(1) CONSTRUCTED (ACRES) FLOORS FEET LEASED RENT (2) SQ. FT. LEASES
-----------------------------------------------------------------------------------------------
CBD OFFICE PROPERTIES:
LANDMARK SQUARE
One Landmark Sq.,
Stamford, CT 100% Fee 1973 N/A 22 280,661 83.7% $5,825,595 $20.76 51
Two Landmark Sq.,
Stamford, CT 100% Fee 1976 N/A 3 36,889 91.7% $810,020 $21.96 8
Three Landmark Sq.,
Stamford, CT 100% Fee 1978 N/A 6 128,887 94.3% $3,234,142 $25.09 14
Four Landmark Sq.,
Stamford, CT 100% Fee 1977 N/A 5 99,446 62.9% $1,111,599 $11.18 10
Five Landmark Sq.,
Stamford, CT 100% Fee 1976 N/A 3 58,000 100.0% $314,384 $5.42 3
Six Landmark Sq.,
Stamford, CT 100% Fee 1984 N/A 10 170,080 98.4% $4,215,211 $24.78 7
-------- ------------------------------------------------
TOTAL- LANDMARK
SQUARE 7.2 773,963 87.6% $15,510,951 $20.04 93
OTHER STAMFORD PROPERTIES
1055 Washington Blvd.,
Stamford, CT 100% Fee 1987 1.5 10 178,855 76.6% $3,679,745 $20.57 16
680 Washington Blvd.,
Stamford, CT 51% Fee 1989 1.3 11 132,759 100.0% $4,085,458 $30.77 6
750 Washington Blvd.,
Stamford, CT 51% Fee 1989 2.4 11 185,671 98.2% $4,758,575 $25.63 9
-------- -------------------------------------------------
TOTAL-STAMFORD
TOWERS 5.2 497,285 90.9% $12,523,778 $25.18 31
STAND-ALONE WESTCHESTER
360 Hamilton Ave.,
White Plains, NY 100% Fee 1977 1.5 12 381,257 87.9% $8,613,036 $22.59 13
140 Grand St.,
White Plains, NY 100% Fee 1991 2.2 9 124,229 88.7% $2,652,606 $21.35 8
------- -------------------------------------------------
TOTAL-STAND-ALONE
WESTCHESTER 3.7 505,486 88.1% $11,265,642 $22.29 21
NEW YORK CITY OFFICE PROPERTIES
120 W. 45th St.,
New York, NY 100% Fee 1989 0.4 40 441,140 97.8% $18,206,283 $41.27 31
100 Wall St.,
New York, NY 100% Fee 1969 0.5 29 461,134 82.5% $13,231,149 $28.69 23
810 Seventh Ave.,
New York, NY 100% Fee(5) 1970 0.6 42 690,977 88.1% $23,391,614 $33.85 27
919 Third Ave.,
New York, NY 100% Fee(6) 1971 1.5 47 1,363,158 99.6% $58,287,632 $42.76 15
1350 Ave. of the Americas,
New York, NY 100% Fee 1966 0.6 35 543,842 95.3% $17,340,309 $31.88 67
------- --------------------------------------------------
TOTAL-NEW YORK CITY
OFFICE PROPERTIES 3.6 3,500,251 94.2% $130,456,987 $37.27 163
TOTAL CBD OFFICE PROPERTIES 19.7 5,276,985 92.3% $169,757,358 $32.17 308
SUBURBAN OFFICE PROPERTIES:
HUNTINGTON MELVILLE
CORPORATE CENTER
395 North Service Rd,
Melville, NY 100% Lease (2081) 1988 7.5 4 187,374 100.0% $5,274,218 $28.15 5
200 Broadhollow Rd,,
Melville, NY 100% Fee 1981 4.6 4 68,053 95.8% $1,526,750 $22.43 12
48 South Service Rd,
Melville, NY 100% Fee 1986 7.3 4 127,274 99.5% $2,660,558 $20.90 10
35 Pinelawn Rd,
Melville, NY 100% Fee 1980 6.0 2 108,136 100.0% $2,162,477 $20.00 34
275 Broadhollow Rd,
Melville, NY 51% Fee 1970 5.8 4 126,770 100.0% $3,088,583 $24.36 1
58 South Service Rd,
Melville, NY 100% Fee 2000 16.5 4 279,886 88.8% $7,435,773 $26.57 9
1305 Old Walt Whitman Rd,
Melville, NY 51% Fee 1998(3) 18.1 3 164,166 100.0% $4,364,216 $26.58 5
------ -------------------------------------------------
TOTAL- HUNTINGTON MEVILLE
CORPORATE CENTER 65.8 1,061,659 96.7% $26,512,575 $24.97 76
NORTH SHORE ATRIUM
6800 Jericho Turnpike,
Syosset, NY 100% Fee 1977 13.0 2 204,331 94.2% $3,847,063 $18.83 42
6900 Jericho Turnpike,
Syosset, NY 100% Fee 1982 5.0 4 94,945 100.0% $2,042,699 $21.51 14
------ -------------------------------------------------
TOTAL-NORTH SHORE ATRIUM 18.0 299,276 96.1% $5,889,762 $19.68 56
NASSAU WEST CORPORATE CENTER
50 Charles Lindbergh Blvd.,
Mitchel Field, NY 100% Lease (2082) 1984 9.1 6 215,000 88.3% $4,431,914 $20.61 19
60 Charles Lindbergh Blvd.,
Mitchel Field, NY 100% Lease (2082) 1989 7.8 2 195,570 29.6% $1,401,701 $7.17 3
51 Charles Lindbergh Blvd.,
Mitchel Field, NY 100% Lease (2084) 1989 6.6 1 108,000 100.0% $2,634,349 $24.39 1
55 Charles Lindbergh Blvd.,
Mitchel Field, NY 100% Lease (2082) 1982 10.0 2 214,581 100.0% $2,837,056 $13.22 2
333 Earl Ovington Blvd.,
Mitchel Field, NY 60% Lease (2088) 1991 30.6 10 583,337 93.2% $15,141,208 $25.96 24
90 Merrick Ave.,
Mitchel Field, NY 51% Lease (2084) 1985 13.2 9 234,996 94.1% $6,009,539 $25.57 21
------ --------------------------------------------------
TOTAL-NASSAU WEST
CORPORATE CENTER 77.3 1,551,484 86.0% $32,455,767 $20.92 70
TARRYTOWN CORPORATE CENTER
505 White Plains Rd.,
Tarrytown, NY 100% Fee 1974 1.4 2 26,319 91.1% $320,423 $12.17 20
520 White Plains Rd.,
Tarrytown, NY 60% Fee(4) 1981 6.8 6 155,162 98.3% $3,274,395 $21.10 3
555 White Plains Rd.,
Tarrytown, NY 100% Fee 1972 4.2 5 121,886 89.0% $2,195,871 $18.02 7
560 White Plains Rd.,
Tarrytown, NY 100% Fee 1980 4.0 6 124,117 93.8% $2,501,815 $20.16 19
580 White Plains Rd.,
Tarrytown, NY 100% Fee 1977 6.1 6 169,447 65.1% $2,455,550 $14.49 12
660 White Plains Rd.,
Tarrytown, NY 100% Fee 1983 10.9 6 253,226 91.7% $5,416,509 $21.39 35
------ -------------------------------------------------
TOTAL-TARRYTOWN CORPORATE
CENTER 33.4 850,157 87.5% $16,164,563 $19.01 96
RECKSON EXECUTIVE PARK
1 International Dr.,
Ryebrook, NY 100% Fee 1983 N/A 3 90,000 100.0% $1,155,000 $12.83 1
2 International Dr.,
Ryebrook, NY 100% Fee 1983 N/A 3 90,000 100.0% $1,155,000 $12.83 1
3 International Dr.,
Ryebrook, NY 100% Fee 1983 N/A 3 91,193 67.1% $1,080,224 $11.85 4
4 International Dr.,
Ryebrook, NY 100% Fee 1986 N/A 3 87,833 92.9% $1,862,929 $21.21 7
5 International Dr.,
Ryebrook, NY 100% Fee 1986 N/A 3 90,000 51.1% $0 $0.00 1
6 International Dr.,
Ryebrook, NY 100% Fee 1986 N/A 3 94,753 84.0% $1,893,621 $19.98 9
------ -------------------------------------------------
TOTAL-RECKSON EXECUTIVE
PARK 44.4 543,779 82.5% $7,146,774 $13.14 23
SUMMIT AT VALHALLA
100 Summit Dr.,
Valhalla, NY 100% Fee 1988 11.3 4 248,174 87.3% $5,527,232 $22.27 7
200 Summit Dr.,
Valhalla, NY 100% Fee 1990 18.0 4 233,391 99.4% $5,926,008 $25.39 9
500 Summit Dr.,
Valhalla, NY 100% Fee 1986 29.1 4 208,660 100.0% $5,529,490 $26.50 1
------ -------------------------------------------------
TOTAL-SUMMIT AT VALHALLA 58.4 690,225 95.2% $16,982,730 $24.60 17
MT. PLEASANT CORPORATE CENTER
115/117 Stevens Ave.,
Mt. Pleasant, NY 100% Fee 1984 5.0 3 166,191 97.3% $3,383,522 $20.36 19
------ -------------------------------------------------
Total-Mt Pleasant
Corporate Center 5.0 166,191 97.3% $3,383,522 $20.36 19
STAND-ALONE LONG ISLAND
PROPERTIES
400 Garden City Plaza,
Garden City, NY 51% Fee 1989 5.7 5 174,408 99.1% $3,880,083 $22.25 20
88 Duryea Rd.,
Melville, NY 100% Fee 1986 1.5 2 23,878 100.0% $558,371 $23.38 4
310 East Shore Rd.,
Great Neck, NY 100% Fee 1981 1.5 4 50,108 98.1% $1,216,437 $24.28 18
333 East Shore Rd.,
Great Neck, NY 100% Lease (2030) 1976 1.5 2 17,650 81.4% $348,566 $19.75 8
520 Broadhollow Rd.,
Melville, NY 100% Fee 1978 7.0 1 85,784 100.0% $1,879,121 $21.91 3
1660 Walt Whitman Rd.,
Melville, NY 100% Fee 1980 6.5 1 76,851 79.5% $1,376,469 $17.91 6
150 Motor Parkway,
Hauppauge, NY 100% Fee 1984 11.3 4 185,475 96.4% $4,084,416 $22.02 23
120 Mineola Blvd.,
Mineola, NY 100% Fee 1989 0.7 6 101,572 78.4% $1,936,735 $19.07 6
300 Motor Parkway,
Hauppauge, NY 100% Fee 1979 4.2 1 54,154 89.0% $790,543 $14.60 6
48 Harbor Pk Dr.,
Port Washington, NY 100% Fee 1976 2.7 1 35,000 100.0% $827,502 $23.64 1
50 Marcus Dr.,
Melville, NY 100% Fee 2000 12.9 2 163,762 100.0% $3,938,677 $24.05 1
------ -------------------------------------------------
TOTAL-STAND-ALONE
LONG ISLAND 55.5 968,642 94.2% $20,836,920 $21.51 96
STAND-ALONE WESTCHESTER
120 White Plains Rd.,
Tarrytown, NY 51% Fee 1984 9.7 6 206,754 96.0% $5,200,561 $25.15 12
80 Grasslands,
Elmsford, NY 100% Fee 1989 4.9 3 87,114 100.0% $1,900,643 $21.82 5
------ -------------------------------------------------
TOTAL-STAND-ALONE
WESTCHESTER 14.6 293,868 97.2% $7,101,204 $24.16 17
EXECUTIVE HILL OFFICE PARK
100 Executive Dr., Rt. 280
Corridor, NJ 100% Fee 1978 10.1 3 93,349 84.6% $1,689,771 $18.10 9
200 Executive Dr., Rt. 208
Corridor, NJ 100% Fee 1980 8.2 4 105,628 98.2% $2,271,924 $21.51 9
300 Executive Dr., Rt. 280
Corridor, NJ 100% Fee 1984 8.7 4 124,664 93.9% $2,657,216 $21.32 10
10 Rooney Circle, Rt. 280
Corridor, NJ 100% Fee 1971 5.2 3 70,716 78.9% $1,374,846 $19.44 2
------ -------------------------------------------------
TOTAL-EXECUTIVE HILL
OFFICE PARK 32.2 394,357 90.2% $7,993,757 $20.27 30
UNIVERSITY SQUARE PRINCETON
100 Campus Dr., Princeton/Rt. 1
Corridor, NJ 100% Fee 1987 N/A 1 27,888 100.0% $648,433 $23.25 3
104 Campus Dr., Princeton/Rt. 1
Corridor, NJ 100% Fee 1987 N/A 1 70,239 100.0% $1,663,171 $23.68 2
115 Campus Dr., Princeton/Rt. 1
Corridor, NJ 100% Fee 1987 N/A 1 33,600 100.0% $834,759 $24.84 1
------ -------------------------------------------------
TOTAL- UNIVERSITY SQUARE 11.0 131,727 100.0% $3,146,363 $23.89 6
SHORT HILLS OFFICE COMPLEX
101 John F. Kennedy Parkway,
Short Hills, NJ 100% Fee 1981 9.0 6 189,524 44.0% $922,826 $4.87 2
103 John F. Kennedy Parkway,
Short Hills, NJ(3) 100% Fee 1981 6.0 4 123,000 100.0% $4,182,000 $34.00 1
51 John F Kennedy Parkway,
Short Hills, NJ 51% Fee 1988 11.0 5 250,713 100.0% $8,993,253 $35.87 19
------ -------------------------------------------------
TOTAL- SHORT HILLS OFFICE 26.0 563,237 81.2% $14,098,079 $25.03 22
STAND-ALONE NEW JERSEY
PROPERTIES
99 Cherry Hill Road,
Parsippany, NJ 100% Fee 1982 8.8 3 93,396 85.6% $1,498,822 $16.05 12
119 Cherry Hill Rd,
Parsippany, NJ 100% Fee 1982 9.3 3 95,179 68.8% $1,315,148 $13.82 12
One Eagle Rock,
Hanover, NJ 100% Fee 1986 10.4 3 144,587 97.3% $2,692,295 $18.62 6
3 University Plaza,
Hackensack, NJ 100% Fee 1985 10.6 6 219,590 100.0% $5,075,500 $23.11 19
1255 Broad St.,
Clifton, NJ 100% Fee 1968 11.1 2 193,574 100.0% $4,328,639 $22.36 2
492 River Rd.,
Nutley, NJ 100% Fee 1952 17.3 13 130,009 100.0% $2,177,651 $16.75 1
------ -------------------------------------------------
TOTAL- STAND-ALONE NJ
PROPERTIES 67.5 876,335 94.6% $17,088,055 $19.50 52
TOTAL SUBURBAN OFFICE PROPERTIES 509.1 8,390,937 91.0% $178,800,071 $21.31 580
TOTAL-OFFICE PROPERTIES 528.8 13,667,922 91.5% $348,557,429 $25.50 888
(1) Ground lease expirations assume exercise of renewal options by the lessee.
(2) Represents Base Rent, net of electric reimbursement, of signed leases at
December 31, 2003 adjusted for scheduled contractual increases during the
12 months ending December 31, 2004. Total Base Rent for these purposes
reflects the effect of any lease expirations that occur during the 12-month
period ending December 31, 2004. 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) Year renovated.
(4) The actual fee interest in 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.
(5) There is a ground lease in place on a small portion of the land which
expires in 2066.
(6) There is a ground lease in place on a small portion of the land which
expires in 2066.
INDUSTRIAL / R&D PROPERTIES
As of December 31, 2003, the Company owned 11 industrial / R&D properties
that encompass approximately 1.0 million rentable square feet. As of December
31, 2003, the industrial / R&D properties were approximately 75.5% leased to 22
tenants. Three of these properties aggregating approximately 143,000
square feet are currently under contract for sale. The Company anticipates the
sale of these properties to occur during 2004.
The following table sets forth certain information as of December 31, 2003
for each of the industrial / R&D properties.
OWNERSHIP
INTEREST ANNUAL
(GROUND RESEARCH RENT NUMBER
LEASE LAND CLEARANCE AND RENTABLE ANNUAL PER OF
PERCENTAGE EXPIRATION YEAR AREA HEIGHT DEVELOPMENT SQUARE PERCENT BASE LEASED TENANTS
OWNERSHIP DATE) CONSTRUCTED (ACRES) (FEET)(1) FINISH FEET LEASED RENT (2) SQ. FT. LEASES
-----------------------------------------------------------------------------------------------------------
LONG ISLAND INDUSTRIAL
ISLIP & HAUPPAUGE LONG
ISLAND
32 Windsor Pl.,
Islip, NY 100.0% Fee 1971 2.5 18 10% 43,000 100.0% $162,123 $3.77 1
300 Kennedy Drive,
Haupauge, NY 100.0% Fee 1969 4.1 12 100% 50,000 100.0% $357,146 $7.14 1
350 Kennedy Drive,
Haupauge, NY 100.0% Fee 1970 4.5 26 50% 50,489 100.0% $344,830 $6.83 1
-------- ---------------------------------------------
ISLIP LONG ISLAND
TOTAL 11.1 143,489 100.0% $864,099 $6.02 3
NEW JERSEY INDUSTRIAL
WESTERN MORRIS AND SOUTH
PLAINFIELD
100 Forge Way,
Rockaway, NJ 100.0% Fee 1986 3.5 24 46% 20,150 92.3% $161,864 $8.03 4
200 Forge Way,
Rockaway, NJ 100.0% Fee 1989 12.7 28 53% 72,118 100.0% $634,638 $8.80 2
300 Forge Way,
Rockaway, NJ 100.0% Fee 1989 4.2 24 63% 24,200 50.4% $52,104 $2.15 1
400 Forge Way,
Rockaway, NJ 100.0% Fee 1989 12.8 28 20% 73,000 100.0% $547,768 $7.50 3
40 Cragwood Rd.,
South Plainfield, NJ 100.0% Fee 1965 13.5 16 30% 130,793 70.3% $1,299,367 $9.93 4
-------- ---------------------------------------------
W. MORRIS S. PLAINFIELD
TOTAL 46.7 320,261 83.7% $2,695,741 $8.42 14
WESTCHESTER INDUSTRIAL
ELMSFORD WESTCHESTER
100 Grasslands Rd.,
Elmsford, NY 100.0% Fee 1964 3.6 16 100% 47,690 100.0% $897,500 $18.82 3
500 Saw Mill Rd.,
Elmsford, NY 100.0% Fee 1968 7.3 22 20% 92,000 100.0% $1,002,800 $10.90 1
-------- ---------------------------------------------
ELMSFORD WESTCHESTER
TOTAL 10.9 139,690 100.0% $1,900,300 $13.60 4
CONNECTICUT INDUSTRIAL
SHELTON CONNECTICUT
710 Bridgeport,
Shelton, CT 100.0% Fee 1971-1979 36.1 22 29% 452,414 54.3% $2,032,502 $4.49 1
-------- ---------------------------------------------
SHELTON CONNECTICUT
TOTAL 36.1 452,414 54.3% $2,032,502 $4.49 1
TOTAL INDUSTRIAL 104.8 1,055,854 75.5% $7,492,642 $7.10 22
(1) Calculated as the difference from the lowest beam to floor.
(2) Represents Base Rent, net of electric reimbursement, of signed leases at
December 31, 2003 adjusted for scheduled contractual increases during the
12 months ending December 31, 2004. Total Base Rent for these purposes
reflects the effect of any lease expirations that occur during the 12 month
period ending December 31, 2004. 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.
19
RETAIL PROPERTY
As of December 31, 2003, the Company owned one free-standing retail
property encompassing approximately 9,000 square feet located in Great Neck, New
York. This property is 100% leased.
DEVELOPMENTS IN PROGRESS
As of December 31, 2003, the Company had invested approximately $66.4
million in developments in progress. In addition, the Company has invested
approximately $37.1 million relating to 12 remaining parcels of land on which it
can develop approximately 3.0 million square feet of office space. Management
has made subjective assessments as to the value and recoverability of these
investments based on current and proposed development plans, market comparable
land values and alternative use values.
During February 2003, the Company, through Reckson Construction Group, Inc.,
entered into a contract with an affiliate of First Data Corp. to sell a
19.3-acre parcel of land located in Melville, New York and was retained by the
purchaser to develop a build-to-suit 195,000 square foot office building for
aggregate consideration of approximately $47 million. This transaction closed on
March 11, 2003 and development of the aforementioned office building has
commenced and is near completion. Net proceeds from the land sale of
approximately $18.3 million were used to establish an escrow account with a
qualified intermediary for a future exchange of real property pursuant to
Section 1031 of the Code (a "Section 1031 Exchange"). A Section 1031 Exchange
allows for the deferral of taxes related to the gain attributable to the sale of
property if qualified replacement property is identified within 45 days and such
qualified replacement property is then acquired within 180 days from the initial
sale. The Company identified and acquired certain qualified replacement
properties to complete the 1031 exchange. Two of the qualified replacement
properties were subsequently contracted for sale as part of the Company's Long
Island industrial building portfolio sale. There can be no assurances that the
Company will identify or acquire additional qualified replacement properties in
which case the Company would incur the tax liability on the capital gain
realized of approximately $1.5 million.
20
THE OPTION PROPERTIES
In connection with the IPO, the Company was granted ten-year options to
acquire ten properties (the "Option Properties") which were either owned by
certain Rechler family members who were also executive officers of the Company,
or in which the Rechler family members own a non-controlling minority interest
at a price based upon an agreed upon formula. In years prior to 2001, one of
these properties was sold by the Rechler family members to a third party and
four of these properties were acquired by the Company for an aggregate purchase
price of approximately $35 million, which included the issuance of approximately
475,000 OP Units valued at approximately $8.8 million.
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, NY (the Company's current headquarters) for five years and to
release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.
21
HISTORICAL NON-INCREMENTAL REVENUE-GENERATING CAPITAL EXPENDITURES, TENANT
IMPROVEMENT COSTS AND LEASING COMMISSIONS
The following table sets forth annual and per square foot non-incremental
revenue-generating capital expenditures in which the Company paid or accrued,
during the respective periods, to retain revenues attributable to existing
leased space for the years ended 1999 through 2003 for the Company's office and
industrial / R&D properties.
--------------------------------------------------------------------------------
NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES (1)
--------------------------------------------------------------------------------
Average
1999 2000 2001 2002 1999-2002 2003 (2)
---------- ---------- ---------- ---------- ---------- ----------
Suburban Office Properties
Total $2,298,899 $3,289,116 $4,606,069 $5,283,674 $3,869,440 $6,791,336
Per Square Foot $0.23 $0.33 $0.45 $0.53 $0.39 $0.67
NYC Office Properties
Total N/A $946,718 $1,584,501 $1,939,111 $1,490,110 $1,922,209
Per Square Foot N/A $0.38 $0.45 $0.56 $0.46 $0.55
Industrial Properties
Total $1,048,688 $813,431 $711,666 $1,881,627 $1,113,853 $1,218,401
Per Square Foot $0.11 $0.11 $0.11 $0.28 $0.15 $0.23
TOTAL PORTFOLIO
---------- ---------- ---------- ---------- ----------
Total $3,347,587 $5,049,265 $6,902,236 $9,104,412 $9,931,946
Per Square Foot $0.17 $0.25 $0.34 $0.45 $0.52
--------------------------------------------------------------------------------
NOTES:
------
(1) Represents capital expenditures at 100% of cost for all consolidated
properties excluding One Orlando Center, in Orlando, FL.
(2) Excludes non-incremental capital expenditures of $435,140 incurred during
the fourth quarter 2003 for the industrial properties which were sold during
the period.
--------------------------------------------------------------------------------
22
The following table sets forth annual and per square foot non-incremental
revenue-generating tenant improvement costs and leasing commissions in which the
Company committed to perform, during the respective periods, to retain revenues
attributable to existing leased space for the years 1999 through 2003 for the
Company's office and industrial / R&D properties:
-------------------------------------------------------------------------------
NON-INCREMENTAL REVENUE GENERATING TENANT IMPROVEMENTS AND LEASING
COMMISSIONS(1)
-------------------------------------------------------------------------------
Average
1999 2000 2001 2002 1999-2002 2003 (3) New Renewal
---------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
Long Island Office
Properties
Tenant Improvements $1,009,357 $2,853,706 $2,722,457 $1,917,466 $2,125,747 $3,774,722 $2,850,868 $923,854
Per Square Foot Improved $4.73 $6.99 $8.47 $7.81 $7.00 $7.05 $10.58 $3.47
Leasing Commissions $551,762 $2,208,604 $1,444,412 $1,026,970 $1,307,937 $2,623,245 $2,110,056 $513,190
Per Square Foot Leased $2.59 $4.96 $4.49 $4.18 $4.06 $4.90 $7.83 $1.93
---------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
Total Per Square Foot $7.32 $11.95 $12.96 $11.99 $11.06 $11.95 $18.41 $5.40
========== ========== ========== =========== ========== =========== =========== ==========
Westchester Office
Properties
Tenant Improvements $1,316,611 $1,860,027 $2,584,728 $6,391,589(2) $3,038,239 $3,732,370 $3,250,244 $482,126
Per Square Foot Improved $5.62 $5.72 $5.91 $15.05 $8.08 $15.98 $22.24 $5.51
Leasing Commissions $457,730 $412,226 $1,263,012 $1,975,850 $1,027,204 $917,487 $810,491 $106,997
Per Square Foot Leased $1.96 $3.00 $2.89 $4.65 $3.13 $3.93 $5.55 $1.23
---------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
Total Per Square Foot $7.58 $8.72 $8.80 $19.70 $11.21 $19.91 $27.79 $6.74
========== ========== ========== =========== ========== =========== =========== ==========
Connecticut Office
Properties
Tenant Improvements $179,043 $385,531 $213,909 $491,435 $317,480 $588,087 $529,328 $58,759
Per Square Foot Improved $4.88 $4.19 $1.46 $3.81 $3.58 $8.44 $14.56 $1.76
Leasing Commissions $110,252 $453,435 $209,322 $307,023 $270,008 $511,360 $306,212 $205,148
Per Square Foot Leased $3.00 $4.92 $1.43 $2.38 $2.93 $7.34 $8.42 $6.15
---------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
Total Per Square Foot $7.88 $9.11 $2.89 $6.19 $6.51 $15.78 $22.98 $7.91
========== ========== ========== =========== ========== =========== =========== ==========
New Jersey Office
Properties
Tenant Improvements $454,054 $1,580,323 $1,146,385 $2,842,521 $1,505,821 $4,327,295 $3,614,058 $713,237
Per Square Foot Improved $2.29 $6.71 $2.92 $10.76 $5.67 $11.57 $24.65 $3.14
Leasing Commissions $787,065 $1,031,950 $1,602,962 $1,037,012 $1,114,747 $1,892,635 $1,142,697 $749,938
Per Square Foot Leased $3.96 $4.44 $4.08 $3.92 $4.10 $5.06 $7.80 $3.30
---------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
Total Per Square Foot $6.25 $11.15 $7.00 $14.68 $9.77 $16.63 $32.45 $6.44
========== ========== ========== =========== ========== =========== =========== ==========
New York City Office
Properties
Tenant Improvements N/A $65,267 $788,930 $4,350,106 $1,734,768 $5,810,017(4) $5,526,757 $283,260
Per Square Foot Improved N/A $1.79 $15.69 $18.39 $11.96 $32.84 $44.52 $5.37
Leasing Commissions N/A $418,185 $1,098,829 $2,019,837 $1,178,950 $2,950,330(4) $2,659,682 $290,648
Per Square Foot Leased N/A $11.50 $21.86 $8.54 $13.97 $16.68 $21.43 $5.51
---------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
Total Per Square Foot N/A $13.29 $37.55 $26.93 $25.93 $49.52 $65.95 $10.88
========== ========== ========== =========== ========== =========== =========== ==========
Industrial Properties
Tenant Improvements $375,646 $650,216 $1,366,488 $1,850,812 $1,060,791 $1,249,200 $998,972 $250,228
Per Square Foot Improved $0.25 $0.95 $1.65 $1.97 $1.20 $2.42 $3.25 $1.19
Leasing Commissions $835,108 $436,506 $354,572 $890,688 $629,218 $574,256 $500,654 $73,602
Per Square Foot Leased $0.56 $0.64 $0.43 $0.95 $0.64 $1.11 $1.63 $0.35
---------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
Total Per Square Foot $0.81 $1.59 $2.08 $2.92 $1.84 $3.53 $4.88 $1.54
========== ========== ========== =========== ========== =========== =========== ==========
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO
Tenant Improvements $3,334,711 $7,395,070 $8,822,897 $17,843,929 $9,782,846 $19,481,691 $16,770,227 $2,711,464
Per Square Foot Improved $1.53 $4.15 $4.05 $7.96 $4.75 $10.22 $16.28 $3.09
Leasing Commissions $2,741,917 $4,960,906 $5,973,109 $7,257,380 $5,528,064 $9,469,313 $7,529,792 $1,939,523
Per Square Foot Leased $1.26 $3.05 $2.75 $3.24 $2.66 $4.97 $7.31 $2.21
---------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
Total Per Square Foot $2.79 $7.20 $6.80 $11.20 $7.41 $15.19 $23.59 $5.30
========== ========== ========== =========== ========== =========== =========== ==========
-------------------------------------------------------------------------------
NOTES:
------
(1) Represents tenant improvements and leasing commissions at 100% of cost for
all consolidated properties excluding One Orlando Center, in Orlando, FL.
(2) Excludes tenant improvements and leasing commissions related to a 163,880
square foot leasing transaction with Fuji Photo Film U.S.A. Leasing
commissions on this transaction amounted to $5.33 per square foot and
tenant improvement allowance amounted to $40.88 per square foot.
(3) Excludes $1,398,626 of deferred leasing costs YTD 2003 attributable to
space marketed but not yet leased.
(4) Excludes $5.8 million of tenant improvements and $2.2 million of leasing
commissions related to a new 121,108 square foot lease to Debevoise with a
lease commencement date in 2005. Also excludes tenant improvements of $0.2
million for Sandler O'Neil & Partners (7,446 SF) for expansion space with a
lease commencement date in 2004.
-------------------------------------------------------------------------------
23
As noted, incremental revenue-generating tenant improvement costs and
leasing commissions are excluded from the tables set forth above. The historical
capital expenditures, tenant improvement costs and leasing commissions set forth
above are not necessarily indicative of future non-incremental
revenue-generating capital expenditures or non-incremental revenue-generating
tenant improvement costs and leasing commissions that may be incurred to retain
revenues on leased space.
The following table sets forth the Company's components of its paid or
accrued non-incremental and incremental revenue-generating capital expenditures,
tenant improvements and leasing costs for the year ended December 31, 2003 as
reported on its "Statements of Cash Flows - Investment Activities" contained in
its consolidated financial statements (in thousands):
Capital expendituress:
Non-incremental......................................... $ 9,931
Incremental............................................. 2,834
Tenant improvements:
Non-incremental......................................... 24,370
Incremental............................................. 6,206
----------
Additions to commercial real estate properties............. $ 43,341
----------
Leasing costs:
Non-incremental......................................... $ 12,766
Incremental............................................. 3,320
----------
Payment of deferred leasing costs.......................... $ 16,086
----------
Acquisition and development costs.......................... $ 64,891
----------
24
The following table sets forth the Company's top 25 tenants based on base rental
revenue as of December 31, 2003:
-------------------------------------------------------------------------------------------------------------
PERCENT OF PRO-RATA PERCENT OF CONSOLIDATED
TOTAL SHARE OF ANNUALIZED ANNUALIZED BASE
TENANT NAME (1) TENANT TYPE SQUARE FEET BASE RENTAL REVENUE RENTAL REVENUE
----------------------------------------------------------------------------
* Debevoise & Plimpton Office 465,420 3.7% 6.2%
Verizon Communications Inc. Office 210,426 1.8% 1.5%
* Schulte Roth & Zabel Office 287,177 1.6% 2.7%
* Fuji Photo Film USA Office 186,484 1.4% 1.3%
Dun & Bradstreet Corp. Office 123,000 1.3% 1.1%
United Distillers Office 137,918 1.3% 1.1%
* WorldCom/MCI Office 245,030 1.3% 1.2%
Arrow Electronics, Inc. Office 163,762 1.3% 1.1%
T.D. Waterhouse Office 103,381 1.1% 0.9%
* Banque Nationale De Paris Office 145,834 1.0% 1.7%
North Fork Bank Office 126,770 1.0% 0.8%
D.E. Shaw Office 70,104 1.0% 0.8%
* Kramer Levin Nessen Kamin Office 158,144 1.0% 1.6%
Heller Ehrman White Office 64,526 1.0% 0.8%
Vytra Healthcare Office 105,613 0.9% 0.8%
Practicing Law Institute Office 77,500 0.9% 0.8%
* Prudential Office 116,910 0.9% 0.9%
P.R. Newswire Associates Office 67,000 0.9% 0.7%
* Draft Worldwide Inc. Office 124,008 0.8% 1.4%
Hoffmann-La Roche Inc. Office 120,736 0.8% 0.7%
Laboratory Corp. of America Office 108,000 0.8% 0.7%
* State Farm Office 164,013 0.8% 1.2%
* HQ Global Office 126,487 0.8% 0.8%
EMI Entertainment World Office 65,844 0.8% 0.7%
Lockheed Martin Corp. Office 123,554 0.8% 0.7%
--------------------------------------------------------------------------------
(1) Ranked by pro rata share of annualized base rental revenue adjusted for
pro rata share of joint venture interests.
* Part or all of space occupied by tenant is in a 51% or more owned joint
venture building.
--------------------------------------------------------------------------------
25
The following tables set forth the Company's lease expiration table, as of
January 1, 2004 for its total portfolio of properties, its office properties and
its industrial / R&D portfolio:
TOTAL PORTFOLIO
--------------------------------------------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
--------------------------------------------------------------------------------------------------------------------------
2004 155 996,801 6.8% 6.8%
2005 196 1,667,233 11.4% 18.3%
2006 184 1,686,741 11.6% 29.8%
2007 104 1,123,286 7.7% 37.5%
2008 115 983,926 6.7% 44.3%
2009 78 1,092,960 7.5% 51.8%
2010 and thereafter 236 5,542,515 38.1% 89.7%
--------------------------------------------------------------------------------------------------------------------------
Total/Weighted Average 1,068 13,093,462 89.7%
--------------------------------------------------------------------------------------------------------------------------
Total Portfolio Square Feet 14,589,628
--------------------------------------------------------------------------------------------------------------------------
OFFICE PORTFOLIO
--------------------------------------------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Office % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
--------------------------------------------------------------------------------------------------------------------------
2004 151 952,981 7.0% 7.0%
2005 194 1,571,083 11.5% 18.5%
2006 180 1,589,775 11.6% 30.1%
2007 100 1,053,794 7.7% 37.8%
2008 112 941,113 6.9% 44.7%
2009 77 1,047,979 7.7% 52.4%
2010 and thereafter 232 5,274,095 38.6% 91.0%
--------------------------------------------------------------------------------------------------------------------------
Total/Weighted Average 1,046 12,430,820 91.0%
--------------------------------------------------------------------------------------------------------------------------
Total Office Portfolio Square Feet 13,667,922
--------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL/R&D PORTFOLIO
--------------------------------------------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Industrial/R&D % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
--------------------------------------------------------------------------------------------------------------------------
2004 4 43,820 4.8% 4.8%
2005 2 96,150 10.4% 15.2%
2006 4 96,966 10.5% 25.7%
2007 4 69,492 7.5% 33.2%
2008 3 42,813 4.6% 37.9%
2009 1 44,981 4.9% 42.8%
2010 and thereafter 4 268,420 29.1% 71.9%
--------------------------------------------------------------------------------------------------------------------------
Total/Weighted Average 22 662,642 71.9%
--------------------------------------------------------------------------------------------------------------------------
Total Industrial/R&D Portfolio Square Feet 921,706
--------------------------------------------------------------------------------------------------------------------------
26
MORTGAGE INDEBTEDNESS
The following table sets forth certain information regarding the mortgage
debt of the Company, as of December 31, 2003.
Principal Amortization
Property Amount Interest Rate Maturity Date Schedule
Outstanding
------------------------------------------------- -------------- -------------- ------------------ --------------
(in thousands)
395 North Service Road, Melville, NY............. $ 19,301 6.45% October 26, 2005 (2)
200 Summit Lake Drive, Valhalla, NY.............. 18,937 9.25% January 1, 2006 25 year
1350 Avenue of the Americas, NY, NY.............. 73,779 6.52% June 1, 2006 30 year
Landmark Square, Stamford, CT (4)................ 44,029 8.02% October 7, 2006 25 year
100 Summit Lake Drive, Valhalla, NY.............. 17,718 8.50% April 1, 2007 15 year
333 Earl Ovington Blvd., Mitchell Field, NY (1).. 52,869 7.72% August 14, 2007 25 year
810 7th Avenue, NY, NY (6)....................... 81,314 7.73% August 1, 2009 25 year
100 Wall Street, NY, NY (6)...................... 35,236 7.73% August 1, 2009 25 year
6800 Jericho Turnpike, Syosset, NY............... 7,229 8.07% July 1, 2010 25 year
6900 Jericho Turnpike, Syosset, NY............... 13,696 8.07% July 1, 2010 25 year
580 White Plains Road, Tarrytown, NY............. 12,476 7.86% September 1, 2010 25 year
919 3rd Avenue, NY, NY (5)....................... 244,047 6.867% August 1, 2011 30 year
120 West 45th Street, NY, NY (7)................. 63,245 6.82% (3) November 1, 2027 28 year
One Orlando Center, Orlando, FL (7).............. 37,759 6.82% (3) November 1, 2027 28 year
--------------
Total / Weighted average......................... $ 721,635 7.24%
==============
-------
(1) The Company has a 60% general partnership interest in this property and
its proportionate share of the aggregate principal amount of the mortgage
debt is approximately $31.7 million.
(2) Principal payments of $34,000 per month.
(3) Subject to interest rate adjustment on November 1, 2004 to the greater of
8.82% per annum or the yield of non-callable U.S. Treasury obligations
with a term of fifteen years plus 2% per annum. The Company has the
ability to prepay the loan at that time.
(4) Encompasses six Class A office properties.
(5) The Company has a 51% membership interest in this property and its
proportionate share of the aggregate principal amount of the mortgage debt
is approximately $124.5 million.
(6,7) These properties are cross-collateralized.
In addition, the Company has a 60% interest in an unconsolidated joint
venture property. The Company's pro-rata share of the mortgage debt at December
31, 2003 is approximately $7.9 million. This mortgage note payable bears
interest at 8.85% per annum and matures on September 1, 2005 at which time the
Company's share of the mortgage debt will be approximately $6.9 million.
27
ITEM 3. LEGAL PROCEEDINGS
A number of shareholder derivative actions have been commenced purportedly
on behalf of the Company against the Board of Directors in the Supreme Court of
the State of New York, County of Nassau (Lowinger v. Rechler et al., Index No.
01 4162/03 (9/16/03)), the Supreme Court of the State of New York, County of
Suffolk (Steiner v. Rechler et al., Index No. 03 32545 (10/2/03) and Lighter v.
Rechler et al., Index No. 03 23593 (10/3/03)), the United States District Court,
Eastern District of New York (Tucker v. Rechler et al., Case No. cv 03 4917
(9/26/03), Clinton Charter Township Police and Fire Retirement System v. Rechler
et al., Case No. cv 03 5008 (10/1/03) and Teachers' Retirement System of
Louisiana v. Rechler et al., Case No. cv 03 5178 (10/14/03) which have been
consolidated into a single action on 10/3/03 and the Circuit Court for Baltimore
County (Sekuk Global Enterprises Profit Sharing Plan v. Rechler et al., Civil
No. 24-C-03007496 (10/16/03), Hoffman v. Rechler et al., 24-C-03-007876
(10/27/03) and Chirko v. Rechler et al., 24-C-03-008010 (10/30/03) which have
been consolidated into a single action on 1/20/04, relating to the sale of the
Long Island Industrial Building Portfolio to certain members of the Rechler
family. The complaints allege, among other things, that the process by which the
directors agreed to the transaction was not sufficiently independent of the
Rechler family and did not involve a "market check" or third party auction
process and as a result was not for adequate consideration. The Plaintiffs seek
similar relief, including a declaration that the directors violated their
fiduciary duties, equitable relief and damages. The Company believes that
complaints are without merit.
Except as provided above, 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. 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, 2003.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
CLASS A COMMON STOCK
The Company's Class A common stock began trading on the New York Stock
Exchange ("NYSE") on May 25, 1995, under the symbol "RA". On March 4, 2004, the
reported closing price per share of the Company's Class A common stock on the
NYSE was $27.65, and there were approximately 528 holders of record of the
Company's Class A common stock.
The following table sets forth the quarterly high and low closing prices
per share of the Company's Class A common stock as reported on the NYSE and the
distributions paid by the Company for each respective quarter ended.
High Low Distribution
---- --- ------------
March 31, 2002................. $24.68 $22.54 $ .4246
June 30, 2002.................. $26.00 $24.18 $ .4246
September 30, 2002............. $24.92 $21.08 $ .4246
December 31, 2002.............. $22.95 $20.10 $ .4246
High Low Distribution
---- --- ------------
March 31, 2003................. $21.40 $17.94 $ .4246
June 30, 2003.................. $21.24 $18.40 $ .4246
September 30, 2003............. $23.47 $20.85 $ .4246
December 31, 2003.............. $24.47 $22.22 $ .4246
29
CLASS B COMMON STOCK
The Company's Class B common stock began trading on the NYSE on May 25,
1999 under the symbol "RA.B". On November 25, 2003, the Company elected to
exchange all of its Class B common stock for an equal number of shares of its
Class A common stock. As a result, the Class B common stock ceased trading.
The following table sets forth the quarterly high and low closing prices
per share of the Company's Class B common stock as reported on the NYSE and the
distributions paid by the Company for each respective quarter ended.
High Low Distribution
---- --- ------------
March 31, 2002.................. $25.76 $23.86 $.6492
June 30, 2002................... $27.07 $25.30 $.6485 (1)
September 30, 2002.............. $25.95 $22.30 $.6471
December 31, 2002............... $23.88 $20.70 $.6471
High Low Distribution
---- --- ------------
March 31, 2003.................. $22.50 $18.40 $ .6471
June 30, 2003................... $21.61 $19.00 $ .6471
September 30, 2003.............. $23.45 $20.83 $ .6471
December 31, 2003............... $24.08 $22.35 $ .6471
(1) Commencing with the distribution for the three month period ended July 31,
2002, the Board of Directors of the Company decreased the quarterly
distribution to $.6471 per share, which is equivalent to an annual
distribution of $2.5884 per share.
30
The following table sets forth the Company's stock option plan information at
December 31, 2003:
(a) (b) (c)
--------------------- ------------------- -------------------
Number of securities
remaining available
for future issuance
Number of securities under equity
to be issued upon Weighted-average compensation plans
exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in
Plan Category warrants and rights warrants and rights column (a))
------------------------------------------------- --------------------- ------------------- --------------------
Stock option plans approved by security holders... (1) 5,703,862 $ 22.70 648,252
===================
Stock option plan not approved by security holders. (2) 82,250 $ 23.55 174,584
--------------------- =================== --------------------
Total 5,786,112 $ 22.71 822,836
===================== =================== ====================
------------------------
(1) Includes 879,858 shares available in connection with the core
component of the Company's 2003 long-term incentive program. Some or
all of the remaining shares may also be utilized for payments of the
special component of such plan. Such special component will be
determined after December 31, 2006 based upon the Company's
performance over the prior four years. (see Management's Discussion
and Analysis of Financial Condition and Results of Operations,
Liquidity and Capital Resources - Other Matters).
(2) Includes information relating to the Company's 1996 Employee Stock
Option Plan.
THE 1996 EMPLOYEE STOCK OPTION PLAN (THE "1996 PLAN")
The 1996 Plan was adopted by the Board of Directors of the Company on November
7, 1996, and provides for the grant of awards of up to an aggregate of 200,000
shares of Class A common stock. The 1996 Plan is administered by the
Compensation Committee. Existing officers and directors of the Company are not
eligible to participate in the 1996 Plan. The 1996 Plan authorizes (i) the grant
of stock options that qualify as incentive stock options under Section 422 of
the Code, (ii) the grant of "nonqualified" stock options, (iii) the grant of
shares of Class A common stock subject to certain restrictions on transfer and
certain risks of forfeiture, and (iv) grants of unrestricted shares of Class A
common stock. The exercise price of stock options is determined by the
Compensation Committee, but may not be less than 100% of the fair market value
of the shares of Class A common stock on the date of grant. In any calendar
year, a person eligible for awards under the 1996 Plan may not be granted
options covering more than 75,000 shares of Class A common stock. The 1996 Plan
shall terminate 10 years after its effective date. Additional information
related to the 1996 Plan is set forth in the Company's consolidated financial
statements and the notes thereto that are part of this Form 10-K.
31
ITEM 6. SELECTED FINANCIAL DATA (in thousands except per share data and
property count)
The following table sets forth our selected financial data and should be
read in conjunction with our Financial Statements and notes thereto included in
Item 8, "Financial Statements and Supplementary Data" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-K.
In connection with this Annual Report on Form 10-K, we are restating our
historical audited consolidated financial statements as a result of Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). During 2003, we classified the
Company's Long Island industrial building portfolio and a office property
located on Long Island as held for sale and, in compliance with SFAS 144, have
reported revenues and expenses from these properties as discontinued operations,
net of limited partners' minority interest, for each period presented in our
Annual Report on Form 10-K. This reclassification has no effect on our reported
net income or funds from operations.
We are also providing updated summary selected financial information,
which is included below reflecting the prior period reclassification as
discontinued operations of the properties classified as held for sale during
2003.
Reckson Associates Realty Corp. for the Year Ended December 31,
------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------- ------------- -------------- ------------- -------------
OPERATING DATA:
Total revenues........................... $ 470,282 $ 458,069 $ 467,819 $ 442,383 $ 351,654
Total expenses........................... 416,463 377,998 359,036 335,128 265,495
Income before minority interests,
preferred dividends and distributions,
valuation reserves, equity in earnings
of real estate joint ventures and
service companies, gain on sales of real
estate and discontinued operations...... 53,819 80,071 108,783 107,255 86,159
Minority interests....................... 19,464 22,953 8,519 20,459 15,527
Preferred dividends and distributions.... 22,360 23,123 23,977 28,012 27,001
Valuation reserves on investments in
affiliate loans and joint ventures and
other investments...................... -- -- 166,101 -- --
Equity in earnings of real estate
joint ventures and service companies.... 30 1,113 2,087 4,383 2,148
Gain on sales of real estate............. -- 537 20,173 18,669 10,052
Discontinued operations (net of minority
interests' share):
Income from discontinued operations.. 14,458 14,621 9,687 4,194 4,446
Gain on sales of real estate......... 115,771 4,267 -- -- --
Net income (loss) allocable to Class A
common shareholders..................... 124,966 41,604 (44,243) 62,989 47,529
Net income (loss) allocable to Class B
common shareholders..................... 17,288 12,929 (13,624) 23,041 12,748
PER SHARE DATA:
Basic:
Class A common........................... $ .18 $ .54 $ (1.36) $ 1.11 $ .92
Gain on sales of real estate............. -- .01 .29 .28 .17
Discontinued operations.................. 2.37 .29 .15 .07 .09
Basic net income (loss).................. 2.55 .84 (.92) 1.46 1.18
Weighted average shares outstanding...... 49,092 49,669 48,121 43,070 40,270
Cash dividends declared.................. $ 1.70 $ 1.70 $ 1.66 $ 1.53 $ 1.45
Diluted:
Class A common........................... $ .18 $ .53 $ (1.36) $ 1.10 $ .91
Gain on sales of real estate............. -- .01 .29 .28 .17
Discontinued operations.................. 2.36 .29 .15 .07 .09
Diluted net income (loss)................ 2.54 .83 (.92) 1.45 1.17
Diluted weighted average shares
outstanding............................. 49,262 49,968 48,121 43,545 40,676
PER SHARE DATA:
Basic:
Class B common (1)....................... $ .39 $ .83 $ (1.97) $ 1.70 $ 1.48
Gain on sales of real estate............. -- .01 .42 .43 .27
Discontinued operations.................. 1.55 .44 .23 .11 .14
Basic net Income (loss).................. 1.94 1.28 (1.32) 2.24 1.89
Weighted average shares outstanding...... 8,910 10,122 10,284 10,284 6,744
Cash dividends declared.................. $ 2.12 $ 2.59 $ 2.55 $ 2.35 $ 1.54
Diluted:
Class B common (1)....................... $ .37 $ .83 $ (1.97) $ 1.50 $ 1.21
Gain on sales of real estate............. -- -- .42 .07 .03
Discontinued operations.................. 1.53 .07 .23 .02 .02
Diluted net income (loss)................ 1.90 .90 (1.32) 1.59 1.26
Diluted weighted average shares
outstanding............................. 8,910 10,122 10,284 10,284 6,744
(1) On November 25 2003, the Company elected to exchange all of its
Class B common stock for an equal number of shares of its Class A
common stock. As a result, the Class B common stock ceased trading.
32
ITEM 6 SELECTED FINANCIAL DATA (in thousands except per share data and
property count) (continued)
Reckson Associates Realty Corp.
For the Year Ended December 31,
-------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA (PERIOD END):
Commercial real estate properties,
before accumulated depreciation....... $ 2,796,789 $ 2,707,878 $ 2,643,045 $ 2,537,193 $ 2,017,170
Cash and cash equivalents (4)........... 22,887 30,827 121,975 17,843 21,368
Total assets............................ 2,746,995 2,907,920 2,994,218 2,998,030 2,733,878
Mortgage notes payable.................. 721,635 733,761 744,613 722,312 452,338
Unsecured credit facility (4)........... 169,000 267,000 271,600 216,600 297,600
Unsecured term loan..................... -- -- -- -- 75,000
Senior unsecured notes.................. 499,445 499,305 449,463 449,385 449,313
Market value of equity (1) ............. 1,792,895 1,681,372 1,915,587 2,016,390 1,726,845
Total market capitalization including
debt (1 and 2)......................... 3,050,142 3,052,818 3,251,599 3,397,204 2,993,756
OTHER DATA:
Funds from operations (basic) (3)....... $ 134,889 $ 158,420 $ 176,789 $ 167,782 $ 130,820
Funds from operations (diluted) (3)..... $ 135,982 $ 181,543 $ 206,390 $ 202,169 $ 161,681
Total square feet (at end of period).... 14,733 20,284 20,611 21,291 21,385
Number of properties (at end of period) 89 178 182 188 189
(1) Based on the sum of:
(i) the market value of the Company's Class A common stock and
operating partnership units (assuming conversion) of
61,825,925, 55,522,307, 57,469,595, 53,046,928 and 48,076,648
at December 31, 2003, 2002, 2001, 2000, and 1999, respectively
(based on a per share/unit price of $24.30, $21.05, $23.36,
$25.06, and $20.50 at December 31, 2003, 2002, 2001, 2000 and
1999, respectively),
(ii) the market value of the Company's Class B common stock of
9,915,313, 10,283,513, 10,283,513 and 10,283,763 shares at
December 31, 2002, 2001, 2000 and 1999, respectively (based on
a per share price of $22.40, $25.51, $27.19 and $22.75 at
December 31, 2002, 2001, 2000 and 1999, respectively),
(iii) the liquidation preference value of 10,834,500, 10,834,500,
11,192,000, 11,192,000 and 15,192,000 shares of the Company's
preferred stock at December 31, 2003, 2002, 2001, 2000 and
1999, respectively (based on a per share value of $25.00),
(iv) the liquidation preference value of 19,662, 19,662, 30,965,
42,518 and 42,518 of the operating partnership's preferred
units at December 31, 2003, 2002, 2001, 2000 and 1999,
respectively (based on a per unit value of $1,000) and
(v) at December 31, 2000 and December 31, 1999, the contributed
value of a minority partners' preferred interest of $85
million.
(2) Debt amount is net of minority partners' proportionate share of
joint venture debt plus the Company's share of unconsolidated joint
venture debt.
(3) Management believes that funds from operations ("FFO") is an
appropriate measure of performance of an equity REIT. Although FFO
is a non-GAAP measure, the Company believes it provides useful
information to its shareholders, potential investors and management.
The Company computes FFO in accordance with standards established by
the National Association of Real Estate Investment Trusts ("NAREIT")
as net income or loss, excluding gains or losses from sales of
depreciable properties plus real estate 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. FFO for the year ended December 31, 2003 includes a
gain from the sale of land and build-to-suit transaction in the
amount of $18.8 million. For the years ended December 31, 2002 and
2001, pursuant to the Company's adoption of FASB Statement No. 145,
which addresses reporting for gains and losses from extinguishment
of debt, the Company has reduced previously reported FFO by
approximately $2.6 million and $2.9 million, respectively, related
to the write-off of certain deferred loan costs incurred in
connection with the Company's refinancing of its debt. These costs
were previously recorded as an extraordinary loss and therefore
excluded from the Company's calculation of FFO. In addition, FFO for
the year ended December 31, 2001 excludes $163 million of valuation
reserves on investments in affiliate loans and joint ventures. Since
all companies and analysts do not calculate FFO in a similar
fashion, the Company's calculation of FFO may not be comparable to
similarly titled measures as reported by other companies. A
reconciliation of FFO to net income allocable to common
shareholders, the GAAP measure the Company believes to be the most
directly comparable, is contained in Item 7 of this Form 10-K.
33
(4) On January 4, 2002, approximately $85 million of the cash proceeds
received from the sale of a 49% interest in the property located at
919 Third Avenue, New York, NY, was used to pay down the Company's
unsecured credit facility.
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 thereto.
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 and the completion of
development or redevelopment of properties, 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 risks and uncertainties. Many of the
forward-looking statements can be identified by the use of words such as
"believes", "may", "expects", "anticipates", "intends" or similar expressions.
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. Among those risks, trends and uncertainties are: the general economic
climate, including the conditions affecting industries in which our principal
tenants compete; changes in the supply of and demand for office in the New York
Tri-State area; changes in interest rate levels; changes in the Company's credit
ratings; changes in the Company's cost and access to capital; downturns in
rental rate levels in our markets and our ability to lease or re-lease space in
a timely manner at current or anticipated rental rate levels; the availability
of financing to us or our tenants; financial condition of our tenants; changes
in operating costs, including utility, security, real estate tax and insurance
costs; repayment of debt owed to the Company by third parties (including
FrontLine Capital Group); risks associated with joint ventures; liability for
uninsured losses or environmental matters; and other risks associated with the
development and acquisition of properties, including risks that development may
not be completed on schedule, that the tenants will not take occupancy or pay
rent, or that development or operating costs may be greater than anticipated.
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.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Company include accounts of
the Company and all majority-owned and controlled subsidiaries. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States ("GAAP") requires management to make estimates and
assumptions in certain circumstances that affect amounts reported in the
Company's consolidated financial statements and related notes. In preparing
these financial statements, management has utilized information available
including its past history, industry standards and the current economic
environment, among other factors, in forming its estimates and judgments of
certain amounts included in the consolidated financial statements, giving due
consideration to materiality. It is possible that the ultimate outcome as
anticipated by management in formulating its estimates inherent in these
financial statements may not materialize. However, application of the critical
accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of the Company's results of operations
to those of companies in similar businesses.
34
Revenue Recognition and Accounts Receivable
Minimum rental revenue is recognized on a straight line basis, which
averages minimum rents over the terms of the leases. The excess of rents
recognized over amounts contractually due are included in deferred rents
receivable on the Company's balance sheets. The leases also typically provide
for tenant reimbursements of common area maintenance and other operating
expenses and real estate taxes. Ancillary and other property related income is
recognized in the period earned.
The Company makes estimates of the collectibility of its accounts
receivables related to base rents, tenant escalations and reimbursements and
other revenue or income. The Company specifically analyzes tenant receivables
and analyzes historical bad debts, customer credit worthiness, current economic
trends and changes in customer payment terms when evaluating the adequacy of its
allowance for doubtful accounts. In addition, when tenants are in bankruptcy the
Company makes estimates of the expected recovery of pre-petition administrative
and damage claims. In some cases, the ultimate resolution of those claims can
exceed a year. These estimates have a direct impact on the Company's net income,
because a higher bad debt reserve results in less net income.
The Company incurred approximately $4.7 million and $6.3 million of bad
debt expense for the years ended December 31, 2003 and 2002, respectively,
related to tenant receivables and deferred rents receivable which accordingly
reduced total revenues and reported net income during the period.
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: (i) the status of the loan, (ii) the value of the underlying
collateral, (iii) the financial condition of the borrower and (iv) anticipated
future events.
Reckson Construction Group, Inc., Reckson Construction and Development
LLC, the successor to Reckson Construction Group, Inc., and Reckson Construction
Group New York, Inc. use the percentage-of-completion method for recording
amounts earned on their contracts. This method records amounts earned as revenue
in the proportion that actual costs incurred to date bear to the estimate of
total costs at contract completion.
Gain on 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 and the Company having no substantial continuing
involvement with the buyer.
The Company follows the guidance provided for under the Financing
Accounting Standards Board ("FASB") Statement No. 66 "Accounting for Sales of
Real Estate" ("Statement No. 66"), which provides guidance on sales contracts
that are accompanied by agreements which require the seller to develop the
property in the future. Under Statement No. 66 profit is recognized and
allocated to the sale of the land and the later development or construction work
on the basis of estimated costs of each activity; the same rate of profit is
attributed to each activity. As a result, profits are recognized and reflected
over the improvement period on the basis of costs incurred (including land) as a
percentage of total costs estimated to be incurred. The Company uses the
percentage of completion method, as future costs of development and profit are
reliably estimated.
35
Real Estate
Land, buildings and improvements, furniture, fixtures and equipment are
recorded at cost. Tenant improvements, which are included in buildings and
improvements, are also stated at cost. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are incurred. Renovations and / or
replacements, which improve or extend the life of the asset, are capitalized and
depreciated over their estimated useful lives.
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 are
amortized on a straight-line basis over the term of the related leases.
The Company is required to make subjective assessments as to the useful
lives of its properties for purposes of determining the amount of depreciation
to reflect on an annual basis with respect to those properties. These
assessments have a direct impact on the Company's net income. Should the Company
lengthen the expected useful life of a particular asset, it would be depreciated
over more years, and result in less depreciation expense and higher annual net
income.
Assessment by the Company of certain other lease related costs must be
made when the Company has a reason to believe that the tenant will not be able
to execute under the term of the lease as originally expected.
On July 1, 2001 and January 1, 2002, the Company adopted FASB Statement
No.141 "Business Combinations" and FASB Statement No. 142, "Goodwill and Other
Intangibles", respectively. As part of the acquisition of real estate assets,
the fair value of the real estate acquired is allocated to the acquired tangible
assets, consisting of land, building and building improvements, and identified
intangible assets and liabilities, consisting of the value of above-market and
below-market leases, other value of in-place leases, and value of tenant
relationships, based in each case on their fair values. The Company assesses
fair value based on estimated cash flow projections that utilize appropriate
discount and capitalization rates and available market information. Estimates of
future cash flows are based on a number of factors including the historical
operating results, known trends, and market / economic conditions that may
affect the property. If the Company incorrectly estimates the values at
acquisition or the undiscounted cash flows, initial allocation of purchase price
and future impairment charges may be different.
Long Lived Assets
On a periodic basis, management assesses whether there are any indicators
that the value of the real estate properties may be impaired. A property's value
is impaired only if management's estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by the property are
less than the carrying value of the property. Such cash flows consider factors
such as expected future operating income, trends and prospects, as well as the
effects of demand, competition and other factors. To the extent impairment has
occurred, the loss will be measured as the excess of the carrying amount of the
property over the fair value of the property.
36
The Company is required to make subjective assessments as to whether there
are impairments in the value of its real estate properties and other
investments. These assessments have a direct impact on the Company's net income,
because taking an impairment results in an immediate negative adjustment to net
income. In determining impairment, if any, the Company has adopted FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets".
Stock-Based Compensation
Effective January 1, 2002 the Company has elected to follow FASB Statement
No. 123, "Accounting for Stock Based Compensation" ("Statement No. 123").
Statement No. 123 requires the use of option valuation models which determine
the fair value of the option on the date of the grant. All future employee stock
option grants will be expensed over the options' vesting periods based on the
fair value at the date of the grant in accordance with Statement No. 123. To
determine the fair value of the stock options granted, the Company uses a
Black-Scholes option pricing model. Historically, the Company had applied
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option plans and reported pro forma disclosures in its
Form 10-K filings by estimating the fair value of options issued and the related
expense in accordance with Statement No. 123. Accordingly, no compensation cost
had been recognized for its stock option plans prior to the Company's adoption
of Statement No. 123.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure" ("Statement No. 148").
Statement No. 148 amends Statement No. 123 to provide alternative methods of
transition for an entity that voluntarily adopts the fair value recognition
method of recording stock option expense. Statement No. 148 also amends the
disclosure provisions of Statement 123 and Accounting Principles Board Opinion
No. 28, "Interim Financial Reporting" to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock options on reported net income and earnings per share in
annual and interim financial statements.
Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which explains how to identify variable
interest entities ("VIE") and how to assess whether to consolidate such
entities. The initial determination of whether an entity qualifies as a VIE
shall be made as of the date at which a primary beneficiary becomes involved
with the entity and reconsidered as of the date of a triggering event, as
defined. The provisions of this interpretation are immediately effective for
VIEs formed after January 31, 2003. In December 2003 the FASB issued FIN 46R,
deferring the effective date until the period ending March 31, 2004 for
interests held by public companies in variable interest entities created before
February 1, 2003 which were non-special purpose entities. Management has not yet
determined whether any of its consolidated or unconsolidated subsidiaries
represent VIEs pursuant to such interpretation. Such determination could result
in a change in the Company's consolidation policy related to such entities.
37
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 / R&D 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") engaged in the ownership, operation, acquisition, leasing,
financing, management and development of primarily office and to a lesser extent
industrial / R&D properties and also owns land for future development. The
Company's growth strategy is focused on the commercial real estate markets in
and around the New York City tri-state area (the "Tri-State Area"). The Company
owns all of its interests in its real properties, directly or indirectly,
through Reckson Operating Partnership, L.P. (the "Operating Partnership").
In connection with the IPO, the Company was granted ten year options to
acquire ten properties (the "Option Properties") which were either owned by
certain Rechler family members who were also executive officers of the Company,
or in which the Rechler family members owned a non-controlling minority interest
at a price based upon an agreed upon formula. In years prior to 2001, one Option
Property was sold by the Rechler family members to a third party and four of the
Option Properties were acquired by the Company for an aggregate purchase price
of approximately $35 million, which included the issuance of approximately
475,000 common units of limited partnership interest in the Operating
Partnership ("OP Units") valued at approximately $8.8 million.
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated along with management contracts relating to three such properties. In
return the Company received an aggregate payment from the Rechler family members
of $972,000. Rechler family members have also agreed to extend the term of the
remaining option on the property located at 225 Broadhollow Road, Melville, NY
(the Company's current headquarters) for five years and to release the Company
from approximately 15,500 square feet under its lease at this property. In
connection with the restructuring of the remaining option the Rechler family
members paid the Company $1 million in return for the Company's agreement not to
exercise the option during the next three years. As part of the agreement, the
exercise price of the option payable by the Company was increased by $1 million.
As part of the Company's REIT structure it is provided management, leasing
and construction related services through taxable REIT subsidiaries as defined
by the Internal Revenue Code of 1986, as amended (the "Code"). These services
are currently provided by Reckson Management Group, Inc., RANY Management Group,
Inc., Reckson Construction and Development LLC, the successor to Reckson
Construction Group, Inc., and Reckson Construction Group New York, Inc. (the
"Service Companies") in which, as of September 30, 2002 the Operating
Partnership owned a 97% non-controlling interest. An entity which is
substantially owned by certain Rechler family members who are also executive
officers of the Company owned a 3% controlling interest in the Service
Companies. In order to minimize the potential for corporate conflicts of
interests, which became possible as a result of changes to the Code that permit
REITs to own 100% of taxable REIT subsidiaries, the independent directors of the
Company approved the purchase by the Operating Partnership of the remaining 3%
interests in the Service Companies. On October 1, 2002, the Operating
Partnership acquired such 3% interests in the Service Companies for an aggregate
purchase price of approximately $122,000. Such amount was less than the total
amount of capital contributed by the Rechler family members. As a result of the
acquisition of the remaining interests in the Service Companies, the Operating
Partnership commenced consolidating the operations of the Service Companies.
During the year ended December 31, 2003, Reckson Construction Group, Inc. billed
38
approximately $775,000 of market rate services and Reckson Management Group,
Inc. billed approximately $279,000 of market rate management fees to the
Remaining Option Properties. In addition, for the year ended December 31, 2003,
Reckson Construction Group, Inc. performed market rate services, aggregating
approximately $207,000, for a property in which certain former executive
officers of the Company maintain an equity interest.
Reckson Management Group, Inc. leases approximately 28,000 square feet of
office and storage space at a Remaining Option Property located at 225 Broad
Hollow Road, Melville, NY for its corporate offices at an annual base rent of
approximately $785,000. The Company had also entered into a short term license
agreement at the property for 6,000 square feet of temporary space which expired
in January 2004. Reckson Management Group, Inc. also leases 10,722 square feet
of warehouse space used for equipment, materials and inventory storage at a
property owned by certain members of the Rechler family at an annual base rent
of approximately $75,000.
A company affiliated with an independent director of the Company leases
15,566 square feet in a property owned by the Company at an annual base rent of
approximately $447,000. Reckson Strategic Venture Partners, LLC ("RSVP") leased
5,144 square feet in one of the Company's joint venture properties at an annual
base rent of approximately $176,000. On June 15, 2003, this lease was mutually
terminated and RSVP vacated the premises.
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. Currently the Company owns, through Metropolitan, five Class A office
properties aggregating approximately 3.5 million square feet.
During September 2000, the Company formed a joint venture (the "Tri-State
JV") with Teachers Insurance and Annuity Association ("TIAA") and contributed
nine Class A suburban office properties aggregating approximately 1.5 million
square feet to the Tri-State JV for a 51% majority ownership interest. TIAA
contributed approximately $136 million for a 49% interest in the Tri-State JV
which was then distributed to the Company. In August 2003, the Company acquired
TIAA's 49% interest in the property located at 275 Broadhollow Road, Melville,
NY, for approximately $12.4 million. As a result, the Tri-State JV owns eight
Class A suburban office properties aggregating approximately 1.4 million square
feet. The Company is responsible for managing the day-to-day operations and
business affairs of the Tri-State JV and has substantial rights in making
decisions affecting the properties such as leasing, marketing and financing. The
minority member has certain rights primarily intended to protect its investment.
For purposes of its financial statements the Company consolidates the Tri-State
JV.
On December 21, 2001, the Company formed a joint venture with the New York
State Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby NYSTRS
acquired a 49% indirect interest in the property located at 919 Third Avenue,
New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Company. The Company is responsible for
managing the day-to-day operations and business affairs of the 919JV and has
substantial rights in making decisions affecting the property such as developing
a budget, leasing and marketing. The minority member has certain rights
primarily intended to protect its investment. For purposes of its financial
statements the Company consolidates the 919JV.
39
In November 2003, the Company disposed of all but three of its 95
property, 5.9 million square foot, Long Island industrial building portfolio to
members of the Rechler family (the "Disposition") for approximately $315.5
million, comprised of $225.1 million in cash and debt assumption and 3,932,111
OP Units valued at approximately $90.4 million. Approximately $204 million of
cash sales proceeds from the Disposition were used to repay borrowings under the
Company's Credit Facility. Two of the remaining three properties, which are
subject to transfer pursuant to Section 1031 of the Code, are anticipated to
close during 2004. There can be no assurances that the Company will meet the
requirements of Section 1031 by identifying and acquiring qualified replacement
properties in the required time frame, in which case the Company would incur the
tax liability on the capital gain realized of approximately $1.5 million. The
disposition of the other property, is subject to certain environmental issues,
is conditioned upon the approval of the buyer's lender, which has not been
obtained. As a result, the Company may not dispose of this property as a part of
the Disposition. Management believes that if the Company were to continue to
hold this property the cost to address the environmental issues would not have a
material adverse effect on the Company, but there can be no assurance in this
regard. These three remaining properties aggregate approximately $7.1 million of
the $315.5 million sales price.
In connection with the closing, the employment of Donald Rechler, Roger
Rechler, Gregg Rechler and Mitchell Rechler as officers of the Company
terminated and Roger Rechler, Gregg Rechler and Mitchell Rechler resigned as
members of the Board of Directors. In connection with the Disposition and the
terminations of employment, the Company incurred the following restructuring
charges: (i) approximately $7.5 million related to outstanding stock loans under
the Company's historical long term incentive program ("LTIP") were transferred
to the entity that acquired the Long Island industrial building portfolio and
approximately $642,000 of loans related to life insurance contracts were
extinguished, (ii) approximately $2.9 was million paid to the departing Rechler
family members in exchange for 127,689 of rights to receive shares of Class A
common stock that were granted in 2002 and their rights that were granted in
2003 were forfeited in their entirety and (iii) with respect to two of the
departing Rechler family members participating in the Company's March 2003 LTIP,
each received 8,681 shares of the Company's Class A common stock related to the
service component of their core award which was valued at $293,000 in the
aggregate. In addition, if the Company were to attain its annual performance
measure under the March 2003 LTIP in March 2004, these individuals will also be
entitled to each receive 26,041 shares of Class A common stock representing the
balance of the annual core award as if they remained in continuous employment
with the Company. The remainder of their core awards was forfeited as was the
entire amount of the special outperformance component of the March 2003 LTIP.
The Company also incurred additional restructure charges of approximately $1.2
million related primarily to the release and severance of approximately 25
employees. Total restructure charges of approximately $12.5 million were
mitigated by a $972,000 fee from departing Rechler family members, related to
the termination of the Company's option to acquire certain property which was
either owned by certain Rechler family members or in which the Rechler family
members own a non-controlling minority interest.
40
As of December 31, 2003 the Company owned 89 properties (inclusive of 10
joint venture properties) in the Tri-State Area Central Business District
("CBD") and suburban markets, encompassing approximately 14.7 million rentable
square feet, all of which are managed by the Company. The properties include 16
Class A CBD office properties encompassing approximately 5.3 million rentable
square feet. The CBD office properties consist of five properties located in New
York City, nine properties located in Stamford, CT and two properties located in
White Plains, NY. The CBD office properties comprised 42% of the Company's net
operating income (property operating revenues less property operating expenses)
for the three months ended December 31, 2003. These properties also include 61
Class A suburban office properties encompassing approximately 8.4 million
rentable square feet, of which 42 of these properties, or 75% as measured by
square footage, are located within the Company's ten office parks. Reckson has
historically emphasized the development and acquisition of properties that are
part of large-scale suburban office parks. The Company believes that owning
properties in planned office 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.
Additionally, the properties include 11 industrial / R&D properties encompassing
approximately 1.0 million rentable square feet and one retail property
comprising approximately 9,000 rentable square feet. The Company also owns a
355,000 square foot office property located in Orlando, Florida.
As of December 31, 2003, the Company also owned approximately 313 acres of
land in 12 separate parcels of which the Company can develop approximately 3.0
million square feet of office space. The Company is currently evaluating
alternative land uses for certain of the land holdings to realize the highest
economic value. These alternatives may include rezoning certain land parcels
from commercial to residential for potential disposition. As of December 31,
2003, the Company had invested approximately $116.8 million in these development
projects. Management has made subjective assessments as to the value and
recoverability of these investments based on current and proposed development
plans, market comparable land values and alternative use values. The Company has
capitalized approximately $10.0 million for the year ended December 31, 2003,
related to real estate taxes, interest and other carrying costs related to these
development projects. In October 2003, the Company entered into contracts to
sell two land parcels aggregating approximately 128 acres of its land holdings
located in New Jersey. The contracts provided for aggregate sales prices ranging
from $23 million to $43 million. The aggregate cost basis of these land parcels
at December 31, 2003 was approximately $11.8 million. These sales are contingent
upon obtaining zoning for residential use of the land and other customary
approvals. The proceeds ultimately received from such sales will be based upon
the number of residential units permitted by the rezoning. The closing is
scheduled to occur upon the rezoning which is anticipated to occur within 9 to
33 months. In addition, during February 2004, a 3.9 acre land parcel located on
Long Island was condemned by the Town of Oyster Bay. As consideration for the
condemnation the Company anticipates to initially receive approximately $1.8
million. The Company's cost basis in this land parcel at December 31, 2003 was
approximately $1.4 million. The Company is currently contesting this valuation
and seeking payment of additional consideration from the Town of Oyster Bay but
there can be no assurances that the Company will be successful in obtaining any
such additional consideration.
41
The Company holds a $17.0 million interest in a note receivable which
bears interest at 12% per annum and is secured by a minority partnership
interest in Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class
A office property located in Uniondale, NY (the "Omni Note"). The Company
currently owns a 60% majority partnership interest in Omni Partnership, L.P. and
on March 14, 2007 may exercise an option to acquire the remaining 40% interest
for a price based on 90% of the fair market value of the property. The Company
holds a $15 million participating interest in a $30 million junior mezzanine
note loan which is secured by a pledge of an indirect ownership interest of an
entity which owns the ground leasehold estate under a 1.1 million square foot
office complex located on Long Island, NY (the "Mezz Note"). The Mezz Note
matures in September 2005, currently bears interest at 13.43%, and the borrower
has the right to extend for three additional one-year periods. The Company also
holds three other notes receivable aggregating $21.5 million bearing interest at
rates ranging from 10.5% to 12% per annum. These notes are secured in part by a
minority partner's preferred unit interest in the Operating Partnership, an
interest in real property and a personal guarantee (the "Other Notes" and
collectively with the Omni Note, and the Mezz Note, the "Note Receivable
Investments"). Management has made subjective assessments as to the underlying
security value on the Company's Note Receivable Investments. These assessments
indicated an excess of market value over carrying value related to the Company's
Note Receivable Investments. Based on these assessments, the Company's
management believes there is no impairment to the carrying value related to the
Company's Note Receivable Investments. The Company also owns a 355,000 square
foot office building in Orlando, Florida. This non-core real estate holding was
acquired in May 1999 in connection with the Company's initial New York City
portfolio acquisition. This property is cross collateralized under a $101.0
million mortgage note along with one of the Company's New York City buildings.
The Company has the right to pre-pay this note in November 2004, prior to its
maturity date.
The Company also owns a 60% non-controlling interest in a 172,000 square
foot office building located at 520 White Plains Road in White Plains, New York
(the "520JV"), which it manages - the remaining 40% interest is owned by JAH
Realties L.P. Jon Halpern, a director of HQ Global Workplaces, is a partner in
JAH Realties, L.P. As of December 31, 2003, the 520JV had total assets of $19.8
million, a mortgage note payable of $12.0 million and other liabilities of
$185,000. The Company's allocable share of the 520JV mortgage note payable is
approximately $7.9 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005. During the second quarter of 2003,
HQ Global Workplaces, a tenant of the 520JV surrendered approximately one-third
of its premises. As a result, the 520JV incurred a write-off of $633,000
relating to its deferred rents receivable. The operating agreement of the 520JV
requires joint decisions from all members on all significant operating and
capital decisions including sale of the property, refinancing of the property's
mortgage debt, development and approval of leasing strategy and leasing of
rentable space. As a result of the decision-making participation relative to the
operations of the property, the Company accounts for the 520JV under the equity
method of accounting. In accordance with the equity method of accounting the
Company's proportionate share of the 520JV income was approximately $30,000,
$648,000 and $478,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
Through its ownership of properties in the key CBD and suburban office
markets in the Tri-State Area, the Company believes it has a unique competitive
advantage as the trend toward the regional decentralization of the workplace
increases. Due to the events of September 11, 2001, as well as technological
advances which further enable decentralization, companies are strategically
re-evaluating the benefits and feasibility of regional decentralization and
reassessing their long-term space needs. The Company believes this
multi-location regional decentralization will continue to take place, increasing
as companies begin to have better visibility as to the future of the economy,
further validating our regional strategy of maintaining a significant market
share in key CBD and suburban office markets in the Tri-State Area.
42
The Company's core business strategy is based on a long-term outlook
considering real estate as a cyclical business. The Company seeks to accomplish
long-term stability and success by developing and maintaining an infrastructure
and franchise that is modeled for success over the long-term. This approach
allows the Company to recognize different points in the market cycle and adjust
our strategy accordingly. Currently, the Company remains cautious about the
market environment. With this cautious bias we choose to maintain our
conservative operating strategy of focusing on retaining high occupancies,
controlling operating expenses, maintaining a high level of investment
discipline and preserving financial flexibility.
The market capitalization of the Company at December 31, 2003 was
approximately $3.1 billion. The Company's market capitalization is based on the
sum of (i) the market value of the Company's Class A common stock and OP Units
(assuming conversion) of $24.30 per share / unit (based on the closing price of
the Company's Class A common stock on December 31, 2003), (ii) the liquidation
preference value of the Company's preferred stock of $25.00 per share, (iii) the
liquidation preference value of the Operating Partnership's preferred units of
$1,000 per unit and (iv) approximately $1.3 billion (including its share of
joint venture debt and net of minority partners' interests share of joint
venture debt) of debt outstanding at December 31, 2003. As a result, the
Company's total debt to total market capitalization ratio at December 31, 2003
equaled approximately 41.2%.
43
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine"), and RSVP. RSVP is a real estate venture
capital fund which invested primarily in real estate and real estate operating
companies outside the Company's core office focus and whose common equity is
held indirectly by FrontLine. In connection with the formation and spin-off of
FrontLine, the Operating Partnership established an unsecured credit facility
with FrontLine (the "FrontLine Facility") in the amount of $100 million for
FrontLine to use in its investment activities, operations and other general
corporate purposes. The Company advanced approximately $93.4 million under the
FrontLine Facility. The Operating Partnership also approved the funding of
investments of up to $100 million relating to RSVP (the "RSVP Commitment"),
through RSVP-controlled joint ventures (for REIT-qualified investments) or
advances made to FrontLine under an unsecured loan facility (the "RSVP
Facility") having terms similar to the FrontLine Facility (advances made under
the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine Loans").
During March 2001, the Company increased the RSVP Commitment to $110 million and
as of December 31, 2003 approximately $109.1 million was funded under the RSVP
Commitment, of which $59.8 million represents investments by the Company in
RSVP-controlled (REIT-qualified) joint ventures and $49.3 million represents
loans made to FrontLine under the RSVP Facility. As of December 31, 2003,
interest accrued (net of reserves) under the FrontLine Facility and the RSVP
Facility was approximately $19.6 million.
At June 30, 2001, the Company assessed the recoverability of the FrontLine
Loans and reserved approximately $3.5 million of the interest accrued during the
three-month period then ended. In addition, the Company formed a committee of
its Board of Directors, comprised solely of independent directors, to consider
any actions to be taken by the Company in connection with the FrontLine Loans
and its investments in joint ventures with RSVP. During the third quarter of
2001, the Company noted a significant deterioration in FrontLine's operations
and financial condition and, based on its assessment of value and recoverability
and considering the findings and recommendations of the committee and its
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The Company has discontinued the accrual of interest income with respect to the
FrontLine Loans. The Company has also reserved against its share of GAAP equity
in earnings from the RSVP controlled joint ventures funded through the RSVP
Commitment until such income is realized through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code,
charged off for tax purposes $70 million of the aforementioned reserve directly
related to the FrontLine Facility, including accrued interest. On February 14,
2002, the Company charged off for tax purposes an additional $38 million of the
reserve directly related to the FrontLine Facility, including accrued interest,
and $47 million of the reserve directly related to the RSVP Facility, including
accrued interest.
FrontLine is in default under the FrontLine Loans from the Operating
Partnership and on June 12, 2002, filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code.
44
In September 2003, RSVP completed the restructuring of its capital
structure and management arrangements. In connection with the restructuring,
RSVP redeemed the interest of the preferred equity holders of RSVP for an
aggregate of approximately $137 million in cash and the transfer to the
preferred equity holders of the assets that comprised RSVP's parking investment
valued at approximately $28.5 million. RSVP also restructured its management
arrangements whereby a management company formed by its former managing
directors has been retained to manage RSVP pursuant to a management agreement
and the employment contracts of the managing directors with RSVP have been
terminated. The management agreement provides for an annual base management fee
and disposition fees equal to 2% of the net proceeds received by RSVP on asset
sales. (The base management fee and disposition fees are subject to a maximum
over the term of the agreement of $7.5 million.) In addition, the managing
directors retained a one-third residual interest in RSVP's assets which is
subordinated to the distribution of an aggregate amount of $75 million to RSVP
and/or the Company in respect of its joint ventures with RSVP. The management
agreement has a three-year term, subject to early termination in the event of
the disposition of all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of asset sales by RSVP.
As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments, is approximately $65 million, which was reassessed with no
change by management as of December 31, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
Scott H. Rechler, who serves as President, Chief Executive Officer and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP.
45
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible
officing solutions in the world and which was formerly controlled by FrontLine,
previously operated eleven executive office centers comprising approximately
205,000 square feet at the Company's properties, including two operated at the
Company's joint venture properties. On March 13, 2002, as a result of
experiencing financial difficulties, HQ voluntarily filed a petition for relief
under Chapter 11 of the U.S. Bankruptcy Code and subsequently rejected three of
its leases with the Company and surrendered approximately an additional 20,500
square feet from two other leases. The Company has since re-leased 100% of the
rejected space. In September 2003, the Bankruptcy Court approved the assumption
and amendment by HQ of its remaining eight leases with the Company. The assumed
leases expire between 2007 and 2011, encompass approximately 150,000 square feet
and provide for current annual base rents totaling approximately $3.5 million. A
committee designated by the Board and chaired by an independent director
conducted all negotiations with HQ.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company,
which leased approximately 527,000 square feet in thirteen of the Company's
properties located throughout the Tri-State Area voluntarily filed a petition
for relief under Chapter 11 of the U.S. Bankruptcy Code on July 21, 2002. The
Bankruptcy Court granted WorldCom's petition to reject four of its leases with
the Company. The four rejected leases aggregated approximately 282,000 square
feet and were to provide for contractual base rents of approximately $7.2
million for the 2003 calendar year. The Company has agreed to restructure five
of the remaining leases. Pursuant to WorldCom's Plan of Reorganization which has
been confirmed by the Bankruptcy Court, WorldCom must assume or reject the
remaining leases prior to the effective date of the Plan. The effective date of
the Plan is estimated to occur during the first quarter of 2004. All of
WorldCom's leases are current on base rental charges through March 31, 2004,
other than under the four rejected leases, and the Company currently holds
approximately $195,000 in security deposits relating to the non-rejected leases.
There can be no assurance as to whether WorldCom will affirm or reject any or
all of its remaining leases with the Company.
As of December 31, 2003, WorldCom occupied approximately 245,000 square feet of
office space with aggregate annual base rental revenues of approximately $4.1
million, or 1.1% of the Company's total 2003 annualized rental revenue based on
base rental revenue earned on a consolidated basis.
46
RESULTS OF OPERATIONS
The following table is a comparison of the results of operations for
the year ended December 31, 2003 to the year ended December 31, 2002:
Year ended December 31,
-----------------------------------------------------
Change
-------------------------
2003 2002 Dollars Percent
-----------------------------------------------------
PROPERTY OPERATING REVENUES:
Base rents 385,225 395,308 -10,083 -2.6%
Tenant escalations and
reimbursements 60,556 55,441 5,115 9.2%
--------------------------- -------------
TOTAL PROPERTY OPERATING REVENUES 445,781 450,749 -4,968 -1.1%
--------------------------- -------------
PROPERTY OPERATING EXPENSES:
Operating expenses 108,152 97,253 10,899 11.2%
Real estate taxes 72,259 65,778 6,481 9.9%
--------------------------- -------------
TOTAL PROPERTY OPERATING EXPENSES 180,411 163,031 17,380 10.7%
--------------------------- -------------
OTHER INCOME 24,501 7,320 17,181 234.7%
--------------------------- -------------
OTHER EXPENSES
Interest expense 82,487 83,309 -822 -1.0%
Marketing, general and administrative 32,746 29,214 3,532 12.1%
--------------------------- -------------
TOTAL OTHER EXPENSES 115,233 112,523 2,710 2.4%
--------------------------- -------------
The Company's property operating revenues, which include base rents and
tenant escalations and reimbursements ("Property Operating Revenues") decreased
by $5.0 million from 2002 to 2003. The Company's base rent reflects the positive
impact of the straight-line rent adjustment of $16.7 million in 2003 as compared
to $26.8 million in 2002, a decrease of $10.1 million. The 2003 and 2002
straight-line adjustment includes $6.9 million and $10.9 million respectively,
generated from the property located at 919 Third Avenue, New York, NY, which is
primarily attributable to rental abatement periods for the three largest
tenants. In addition, Property Operating Revenues increased by $6.1 million
attributable to lease up of newly developed and redeveloped assets and $7.5
million in built in rent increases for existing tenants in our same store
properties. These increases were offset by $4.3 million of revenue attributable
to properties that were sold during the year, including 92 properties in the
Long Island Industrial Building Portfolio, $2.9 million in reduced termination
fees and $6.4 million of revenue lost due to weighted average occupancy decrease
in our same store properties.
The 2003 increase in property operating expenses, real estate taxes and
ground rents ("Property Expenses") is primarily due to a $9.2 million increase
in operating expenses and a $6.7 million increase in real estate taxes related
to the Company's "same store" properties. Development properties going into
service increased property expenses by an additional $1.5 million. Included in
the $9.2 million increase in operating expenses is $1.7 million and $.5 million
of increased insurance and security costs, respectively. Increases in insurance
and security costs result primarily from implications of the events that
occurred on September 11, 2001. The security cost increases relate primarily to
our New York City properties. Also included in the $9.2 million increase are
property operating expenses of the Company's same store properties which
represent a $4.2 million increase in repairs and maintenance and a $2.8 million
increase in utility costs. Increases in utility costs primarily relates to rate
increases per energy unit. Increases in real estate taxes is attributable to the
significant increases levied by certain municipalities, particularly in New York
City and Nassau County, New York which have experienced severe fiscal budget
issues.
Other income increased by $17.2 million. This increase is primarily
attributable to the gain recognized on the First Data land sale and
build-to-suit construction contract.
47
Gross operating margins (defined as Property Operating Revenues less Property
Expenses, taken as a percentage of Property Operating Revenues) for 2003 and
2002 were 59.5% and 63.8%, respectively. The decrease from 2002 to 2003 in gross
operating margin percentages resulted primarily from portfolio wide increases in
real estate taxes, utilities and property and liability insurance costs as well
as decreases to revenues primarily as a result of decreased portfolio occupancy.
The following table is a comparison of the results of operations for the year
ended December 31,2002 to the year ended December 31,2001:
Year ended December 31,
---------------------------------------------------------
Change
--------------------------
2002 2001 Dollars Percent
---------------------------------------------------------
PROPERTY OPERATING REVENUES:
Base rents 395,308 392,824 2,484 0.6%
Tenant escalations and reimbursements 55,441 54,739 702 1.3%
---------------------------- --------------
TOTAL PROPERTY OPERATING REVENUES 450,749 447,563 3,186 0.7%
---------------------------- --------------
PROPERTY OPERATING EXPENSES:
Operating expenses 97,253 94,411 2,842 3.0%
Real estate taxes 65,778 61,566 4,212 6.8%
---------------------------- --------------
TOTAL PROPERTY OPERATING EXPENSES 163,031 155,977 7,054 4.5%
---------------------------- --------------
OTHER INCOME 7,320 20,256 -12,936 -63.9%
---------------------------- --------------
OTHER EXPENSES
Interest expense 83,309 82,639 670 0.8%
Marketing, general and administrative 29,214 28,242 972 3.4%
---------------------------- --------------
TOTAL OTHER EXPENSES 112,523 110,881 1,642 1.5%
---------------------------- --------------
The Company's Property Operating Revenues increased by $3.2 million
from 2001 to 2002. The Company's base rent reflects the positive impact of the
straight-line rent adjustment of $26.8 million in 2002 as compared to $41.6
million in 2002, a decrease of $14.8 million. The 2002 and 2001 straight-line
adjustment includes $10.9 million and $26.9 million respectively, generated from
the property located at 919 Third Avenue, New York, NY, which is primarily
attributable to rental abatement periods for the three largest tenants. The net
increase in base rents is attributable to fixed increases to base rent in
certain of the Company's leases.
The 2002 increase in Property Expenses consists of a $2.8 million
increase in operating expenses and a $4.2 million increase in real estate taxes.
Included in the $2.8 million increase in operating expenses is $1.4 million and
$ .7 million of increased insurance and security costs, respectively. These
increases result primarily from implications of the events that occurred on
September 11, 2001. The security cost increases relate primarily to our New York
City properties.
Other income decreased by $12.9 million. This decrease is primarily due
to a decrease of $11.6 million related to interest earned on advances made under
the Front Line Loans.
Gross operating margins (defined as Property Operating Revenues less Property
Operating Expenses, taken as a percentage of Property Operating Revenues) for
2002 and 2001 were 63.8% and 65.1%, respectively. The decrease from 2001 to 2002
in gross operating margin percentages resulted primarily from portfolio wide
increases in real estate taxes, utilities and property and liability insurance
costs.
Marketing, general and administrative expenses were $32.7 million in
2003, $29.2 million in 2002 and $28.2 million in 2001. The increase in
marketing, general and administrative expenses is primarily due
48
to the increased costs of maintaining offices and infrastructure in each of the
Company's five divisional markets, increased directors and officers insurance
costs and other costs associated with complying with the provisions of Sarbanes
Oxley legislation including additional directors and independent accounting and
legal fees. The Company's business strategy has been to expand further into the
Tri-State Area CBD and suburban office markets, to create a superior franchise
value by applying its standards for high quality office space and premier tenant
service to its five operating divisions. Over the past three years the Company
has supported this effort by increasing its marketing programs and strengthening
its resources and operating systems. The cost of these efforts is reflected in
marketing, general and administrative expenses. Marketing, general and
administrative expenses as a percentage of total revenues from continuing
operations were 7.0% in 2003, 6.4% in 2002 and 6.0% in 2001. The competitive
market environment has resulted in decreased portfolio occupancies and market
rental rates and has negatively impacted the Company's revenues. As a result,
marketing, general and administrative expenses as a percentage of total revenues
from continuing operations has increased.
Interest expense was $82.5 million in 2003, $83.3 million in 2002 and
$82.6 million in 2001. The decrease of approximately $822,000 from 2003 to 2002
was primarily a result of the Company's adoption of FASB Statement No. 145,
"Reporting Gains and Losses from Extinguishment of Debt" which caused the
reclassification of approximately $2.3 million, net of limited partners'
minority interest, of previously reported extraordinary losses to interest
expense. The 2002 extraordinary loss was the result of the Company's refinancing
its unsecured credit facility in December 2002 and writing off the related
unamortized deferred loan costs. This decrease was mitigated by an increase in
interest expense of approximately $1.5 million on the Company's $50 million, 6%
senior unsecured notes issued in June 2002. The increase of approximately
$670,000 from 2001 to 2002 is attributable to (i) increased interest expense of
$1.7 million on the Company's senior unsecured notes resulting from the issuance
of $50 million of five-year notes in June 2002, which was used to repay lower
internal cost borrowings under the Company's floating rate credit facility, (ii)
a net increase in mortgage interest expense of approximately $520,000 which was
primarily attributable to the $50 million principal increase on the debt of 919
Third Avenue in July 2001 and the satisfaction of three mortgage notes payable
aggregating approximately $24.3 million during 2001 (iii) approximately a $2.0
million decrease in capitalized interest attributable to a decrease in the level
of development projects and (v) a decrease of $5.4 million of interest expense
allocated to discontinued operations in connection with the Company's adoption
of FASB Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002. These resulting increases aggregating
approximately $9.6 million were mitigated primarily by an overall decrease in
interest rates on the Company's unsecured credit facility amounting to
approximately $8.7 million.
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio the settlement of the employment contracts
of the departing Rechler family members, and the cost of certain other
organizational changes, the Company incurred net restructuring charges of
approximately $11.6 million during the three months ended December 31, 2003.
Included in depreciation and amortization expense is amortized financing
costs of $3.3 million in 2003, $4.5 million in 2002 and $4.5 million in 2001.
For the year ended December 31, 2001, the Company's consolidated statement
of operations includes valuation reserve charges of $166.1 million primarily
consisting of $163 million related to the Company's investments in the FrontLine
Loans and joint ventures with RSVP (see Overview and Background for a further
discussion of this valuation reserve charge).
49
LIQUIDITY AND CAPITAL RESOURCES
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and non-incremental capital expenditures,
excluding incremental capital expenditures of the Company. The Company expects
to meet its short-term liquidity requirements generally through its net cash
provided by operating activities along with its unsecured credit facility
described below. The credit facility contains several financial covenants with
which the Company must be in compliance in order to borrow funds thereunder.
During certain quarterly periods, the Company may incur significant leasing
costs as a result of increased market demands from tenants and high levels of
leasing transactions that result from the re-tenanting of scheduled expirations
or early terminations of leases. The Company is currently experiencing high
tenanting costs including tenant improvement costs, leasing commissions and free
rent in all of its markets. For the year ended December 31, 2003, the Company
paid $50.3 million for tenanting costs including tenant improvement costs and
leasing commissions. This compares to $49.7 million paid for the year ended
December 31, 2002. As a result of these and / or other operating factors, the
Company's cash flow from operating activities was not sufficient to pay 100% of
the dividends paid on its common stock during 2003. To meet the short-term
funding requirements relating to these leasing costs, the Company has used
proceeds of property sales or borrowings under its credit facility. Based on the
Company's anticipated leasing for 2004 it may incur similar shortfalls. The
Company currently intends to fund any shortfalls with proceeds from non-income
producing asset sales or borrowings under its credit facility. The Company
periodically reviews its dividend policy to determine the appropriateness of the
Company's dividend rate relative to the Company's cash flows. The Company
adjusts its dividend rate based on forecasted increases and decreases in its
cash flow as well as required distributions of taxable income to maintain REIT
status. There can be no assurance that the Company will maintain the current
quarterly distribution level on its common stock. The Company expects to meet
certain of its financing requirements through long-term secured and unsecured
borrowings and the issuance of debt and equity securities of the Company. There
can be no assurance that there will be adequate demand for the Company's equity
at the time or at the price in which the Company desires to raise capital
through the sale of additional equity. Similarly, there can be no assurance that
the Company will be able to access the unsecured debt markets at the time when
the Company desires to sell its unsecured notes. In addition, when valuations
for commercial real estate properties are high, the Company will seek to sell
certain land inventory to realize value and profit created. The Company will
then seek opportunities to reinvest the capital realized from these dispositions
back into value-added assets in the Company's core Tri-State Area markets. The
Company will refinance existing mortgage indebtedness, senior unsecured notes or
indebtedness under its 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, equity offerings and proceeds from sales of land and non-income
producing assets, will be adequate to meet the capital and liquidity
requirements of the Company in both the short and long-term. The Company's
senior unsecured debt is currently rated "BBB-" by Fitch, "BBB-" by Standard &
Poors and "Ba1" by Moody's . The rating agencies review the ratings assigned to
an issuer such as the Company on an ongoing basis. Negative changes in the
Company's ratings would result in increases in the Company's borrowing costs,
including borrowings under the Company's unsecured credit facility.
As a result of current economic conditions, certain tenants have either
not renewed their leases upon expiration or have paid the Company to terminate
their leases. In addition, a number of U.S. companies have filed for protection
under federal bankruptcy laws. Certain of these companies are tenants of the
Company. The Company is subject to the risk that other companies that are
tenants of the Company may file for bankruptcy protection. This may have an
adverse impact on the financial results and condition of the Company. In
addition, vacancy rates in our markets are at the higher end of the range of
historical cycles and in some instances our asking rents in our markets have
trended lower and landlords are being required to grant greater concessions such
as free rent and tenant improvements. Our markets have also
50
been experiencing higher real estate taxes and utility rates. Additionally, the
Company carries comprehensive liability, fire, extended coverage and rental loss
insurance on all of its properties. Six of the Company's properties, including
1185 Avenue of the Americas which was purchased in January 2004, are located in
New York City. As a result of the events of September 11, 2001, insurance
companies are limiting coverage for acts of terrorism in "all risk" policies. In
November 2002, the Terrorism Risk Insurance Act of 2002 was signed into law
which, among other things, requires insurance companies to offer coverage for
losses resulting from defined "acts of terrorism" through 2004. The Company's
current insurance coverage provides for full replacement cost of its properties,
(other than its two largest properties), including for acts of terrorism up to
$500 million on a per occurrence basis. The two largest properties are covered
for up to $200 million on such policies and are covered under separate policies,
which include coverage for acts of terrorism, up to the estimated replacement
cost for these properties.
The impact of the terrorist attacks of September 11, 2001, in New York City
may adversely effect the value of the Company's New York City properties and its
ability to generate cash flow. There may be a decrease in demand for office
space in metropolitan areas that are considered at risk for future terrorist
attacks, and this decrease may reduce the Company's revenues from property
rentals.
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 90% of REIT
taxable income. The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of recurring,
non-incremental revenue-generating expenditures. The Company intends to invest
amounts accumulated for distribution in short-term investments.
Summary of Cash Flows
Net cash provided by operating activities totaled $160.7 million in 2003,
$196.1 million in 2002, and $186.0 million in 2001. The decrease in 2003 is
attributable to a more competitive operating environment in which the Company
made a limited number of commercial property acquisitions as well as a decrease
in market rental rates and lower occupancies in the Company's portfolio. The
2002 increase is primarily attributable to the growth in cash flow provided by
increased occupancy levels of the Company's development properties and as a
result of fixed increases in certain of the Company's leases.
Net cash provided by investing activities totaled $109.5 million in 2003,
net cash used in investing activities totaled $85.1 million in 2002 and $87.5
million in 2001. Cash provided by investing activities in 2003 is primarily
attributable to proceeds from the sale of the Long Island industrial building
portfolio, which was offset by the purchase of assets and investments in
developments and commercial real estate properties. Cash flows used in investing
activities during 2002 related primarily to the Company's ongoing development of
its properties, the acquisition of approximately 52.7 acres of development land
located in Valhalla, NY and costs associated with creating tenant space
including the payment of leasing costs. Cash used in investing activities during
2001 related primarily to investments in real estate properties including
development costs. Included in these investing activities for the 2001 period is
the Company's investment of approximately $18.7 million in RSVP-controlled (REIT
qualified) joint ventures. Cash used in investing activities for the 2001 period
was offset by proceeds from the redemption of the Company's preferred equity
investments in Keystone Property Trust as well as from sales of real estate,
securities and mortgage note receivable repayments.
51
Net cash used in financing activities totaled $278.2 million in 2003 and
$202.2 million in 2002. Net cash provided by financing activities totaled $5.7
million in 2001. Cash used in financing activities for 2003 primarily resulted
from secured debt amortization payments and the repayment of outstanding
borrowings on the Company's unsecured credit facility from proceeds from the
sale of the Long Island Industrial building portfolio. Cash used in financing
activities during 2002 related primarily to the Company's stock buy-back program
and repurchases of its Series A preferred stock aggregating approximately $75
million. These uses of cash were offset by the Company issuing $50 million of
five-year senior unsecured notes. Cash provided by financing activities during
2001 related primarily to proceeds from secured debt financings, minority
partner contributions and advances under the Company's unsecured credit
facility. Cash provided by financing activities for 2001 was offset by advances
made under the FrontLine Loans of approximately $7.2 million. In each of the
years ended December 31, cash was used in financing activities by principal
payments on secured borrowings and the unsecured credit facility as well as loan
and equity issuance costs and dividends and distributions.
52
Investing Activities
During February 2003, the Company, through Reckson Construction Group,
Inc., entered into a contract with an affiliate of First Data Corp. to sell a
19.3-acre parcel of land located in Melville, New York and was retained by the
purchaser to develop a build-to-suit 195,000 square foot office building for
aggregate consideration of approximately $47 million. This transaction closed on
March 11, 2003 and development of the aforementioned office building has
commenced and is near completion. Net proceeds from the land sale of
approximately $18.3 million were used to establish an escrow account with a
qualified intermediary for a future exchange of real property pursuant to
Section 1031 of the Code (a "Section 1031 Exchange"). A Section 1031 Exchange
allows for the deferral of taxes related to the gain attributable to the sale of
property if qualified replacement property is identified within 45 days and such
qualified replacement property is then acquired within 180 days from the initial
sale. As described below, the Company identified and acquired certain qualified
replacement properties. In accordance with Statement No. 66, the Company has
estimated its book gain on this land sale and build-to-suit transaction to be
approximately $22.4 million, of which $18.8 million has been recognized during
the year ended December 31, 2003 and is included in investment and other income
on the Company's statement of operations. Approximately $3.6 million is
estimated to be earned in 2004 as the development is completed.
On May 22, 2003, the Company, through Reckson Construction Group, Inc.,
acquired two industrial redevelopment properties in Hauppauge, Long Island
encompassing approximately 100,000 square feet for total consideration of
approximately $6.5 million. On August 27, 2003, the Company, through Reckson
Construction Group, Inc., acquired the remaining 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, from the Company's joint venture
partner, TIAA, for approximately $12.4 million. These acquisitions were financed
from the sales proceeds being held by the aforementioned qualified intermediary
and the properties acquired were qualified replacement properties. As a result
of these acquisitions, the Company successfully completed the exchange of real
property pursuant to Section 1031 and thereby deferred the taxes related to the
gain recognized on the proceeds received from the land sale to First Data Corp.
Two of the qualified replacement properties were subsequently contracted for
sale as part of the Company's Long Island industrial building portfolio sale.
There can be no assurances that the Company will identify or acquire additional
qualified replacement properties in which case the Company would incur the tax
liability on the capital gain realized of approximately $1.5 million.
On August 7, 2003, the Company acquired a ten story, 181,800 square foot
Class A office property located in Stamford, Connecticut. This acquisition was
financed, in part, through an advance under the Company's unsecured credit
facility of $21.6 million and the issuance of 465,845 Class C OP Units valued at
$24.00 per unit. In accordance with FASB Statement No. 141 "Business
Combinations", the Company allocated and recorded a net deferred intangible
lease asset of approximately $1.5 million, representing the net value of
acquired above and below market leases, assumed lease origination costs and
other value of in-place leases. The net value of the above and below market
leases is amortized over the remaining terms of the respective leases to rental
income and such amortization amounted to approximately $331,000 during the 2003
period of ownership. In addition, amortization expense on the value of lease
origination costs was approximately $114,000 during the 2003 period of
ownership. At acquisition, there were 16 in-place leases aggregating
approximately 136,000 square feet with a weighted average remaining lease term
of approximately 21 months.
53
On September 5, 2003, the Company acquired the Mezz Note which is
comprised of three tranches based upon priority: a $14 million A tranche, a $14
million B tranche and a $2 million C tranche. The Company acquired a 25%
interest in the A tranche, a 75% interest in the B tranche and a 50% interest in
the C tranche. Interest is payable on the tranches at 9.5%, 12.5% and 12.5%,
respectively, over the greater of one month LIBOR or 1.63%. As a result, the
minimum weighted average interest rate accruing to the Company is 13.43% per
annum. In addition, as part of the Company's participation it received a 1%
origination fee amounting to $150,000. Such fee is being recognized over a three
year period.
On November 24 2003, the Company sold a 181,000 square foot office
property located on Long Island for approximately $24.4 million. Net proceeds
from the sale were used to pay outstanding borrowings under the Company's
unsecured credit facility.
In January 2004, the Company sold a 104,000 square foot office property
located on Long Island for approximately $18.5 million. Net proceeds from the
sale were used to repay borrowings under the Company's unsecured credit
facility.
In January 2004, the Company acquired 1185 Avenue of the Americas, a
42-story, 1.1 million square foot Class A office tower, located between 46th and
47th Streets in New York City for $321 million. In connection with this
acquisition, the Company assumed a $202 million mortgage and $48 million of
mezzanine debt. The balance of the purchase price was paid through an advance
under the Company's unsecured Credit Facility. The floating rate mortgage and
mezzanine debt both mature in August 2004 and presently have a weighted average
interest rate of 4.95%. The property is also encumbered by a ground lease which
has a remaining term of approximately 40 years with rent scheduled to be re-set
at the end of 2005 and then remain constant for the balance of the term.
During February 2004, a 3.9 acre land parcel located on Long Island was
condemned by the Town of Oyster Bay. As consideration for the condemnation the
Company anticipates to initially receive approximately $1.8 million. The
Company's cost basis in this land parcel at December 31, 2003 was approximately
$1.4 million. The Company is currently contesting this valuation and seeking
payment of additional consideration from the Town of Oyster Bay but there can be
no assurances that the Company will be successful in obtaining any such
additional consideration.
In February 2004, the Company signed a contract to sell a 175,000 square
foot office building located on Long Island for approximately $30 million of
which the Company owns a 51% interest. Net proceeds from the sale are
anticipated to be used to pay outstanding borrowings under the Company's
unsecured credit facility.
54
The following table sets forth the Company's original invested capital (at
cost and before valuation reserves) in RSVP controlled (REIT-qualified) joint
ventures and amounts, which were advanced under the RSVP Commitment to
FrontLine, for its investment in RSVP controlled investments (in thousands):
RSVP controlled Amounts advanced
joint ventures Total
------------------- ------------------- --------------------
Privatization $ 21,480 $ 3,520 $ 25,000
Student Housing 18,086 3,935 22,021
Medical Offices 20,185 -- 20,185
Parking -- 9,091 9,091
Resorts -- 8,057 8,057
Net leased retail -- 3,180 3,180
Other assets and overhead -- 21,598 21,598
------------------- ------------------- --------------------
$ 59,751 $ 49,381 $ 109,132
=================== =================== ====================
In September 2003, RSVP completed the restructuring of its capital
structure. In connection with the restructuring, RSVP redeemed the interest
of the preferred equity holders of RSVP for an aggregate of $137 million in
cash (including proceeds from the disposition of all of the Privitization
and Medical Offices assets) and the transfer to the preferred equity holders
of the assets that comprised RSVP's parking investments valued at approximately
$28.5 million.
55
Financing Activities
During 2003, the Company paid cash dividends on its Class A common stock of
approximately $1.70 per share and approximately $2.59 per share on its Class B
common stock.
The Board of Directors of the Company has authorized the purchase of up to
five million shares of the Company's Class A common stock. Transactions
conducted on the New York Stock Exchange 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. During the year ended December 31, 2003,
under this buy-back program, the Company purchased 252,000 shares of Class A
common stock at an average price of $18.01 per share for an aggregate purchase
price of approximately $4.5 million.
The following table sets forth the Company's historical activity under its
current common stock buy-back program (dollars in thousands except per share
data):
SHARES AVERAGE AGGREGATE
PURCHASED PRICE PER SHARE PURCHASE PRICE
-------------------- ---------------------- --------------------
Current program:
Class A common 2,950,400 $ 21.30 $ 62,830
Class B Common 368,200 $ 22.90 8,432
-------------------- --------------------
3,318,600 $ 71,262
==================== ====================
The Board of Directors of the Company formed a pricing committee to
consider purchases of up to $75 million of the Company's outstanding preferred
securities.
On December 31, 2003, the Company had issued and outstanding 8,834,500
shares of 7.625% Series A Convertible Cumulative Preferred Stock (the "Series A
preferred stock"). The Series A preferred stock is redeemable by the Company on
or after April 13, 2003 at a price of approximately $25.95 per share with such
price decreasing, at annual intervals, to $25.00 per share over a five year
period. In addition, the Series A preferred stock, at the option of the holder,
is convertible at any time into the Company's Class A common stock at a price of
$28.51 per share. On October 14, 2002, the Company purchased and retired 357,500
shares of the Series A preferred stock at $22.29 per share for approximately
$8.0 million. As a result of this purchase, annual preferred dividends decreased
by approximately $682,000.
On November 10, 2003, as partial consideration for the Company's sale of
its Long Island industrial building portfolio, to the departing Rechler family
members, the Company redeemed and retired, approximately 3.9 million OP Units
valued at approximately $90.4 million or $23.00 per share. In addition, during
the year ended December 31, 2003, certain limited partners exchanged
approximately 258,000 OP Units for an equal number of shares of the Company's
Class A common stock.
During the year ended December 31, 2002, certain limited partners
exchanged approximately 11,303 preferred units of limited partnership interest
in the Operating Partnership, with a liquidation preference value of
approximately $11.3 million, for 451,934 OP Units at an average price of $24.66
per OP Unit. In addition, certain limited partners exchanged 666,468 OP Units
for an equal number of shares of the Company's Class A common stock.
On August 7, 2003, in conjunction with the Company's acquisition of a
Class A office property located in Stamford, Connecticut, it issued 465,845
Class C OP Units to the sellers of the property. The Class C OP Units will
receive an initial annual distribution of $1.87 per unit, which amount will
increase or decrease pro-rata based upon changes in the dividend paid on the
Company's Class A common stock.
56
The Company currently has a three year $500 million unsecured revolving
credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association as syndication
agent and Citicorp North America, Inc. and Wachovia Bank, National Association
as co-documentation agents. The Credit Facility matures in December 2005,
contains options for a one year extension subject to a fee of 25 basis points
and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. At December 31, 2003, borrowings under
the Credit Facility were priced off LIBOR plus 120 basis points and the Credit
Facility carried a facility fee of 30 basis points per annum. On January 28,
2004, the Company received an investment grade rating on its senior unsecured
debt from Fitch Ratings of BBB-. This rating along with the Company's existing
investment grade rating of BBB- from Standard & Poors, resulted in the pricing
on outstanding borrowings to decrease to LIBOR plus 90 basis points and the
facility fee to decrease to 20 basis points per annum. In the event of a change
in the Operating Partnership's senior unsecured credit rating the interest rates
and facility fee are subject to change. At December 31, 2003, the outstanding
borrowings under the Credit Facility aggregated $169 million and carried a
weighted average interest rate of 2.86% per annum.
The Company utilizes the Credit Facility primarily to finance real estate
investments, fund its real estate development activities and for working capital
purposes. At December 31, 2003, the Company had availability under the Credit
Facility to borrow approximately an additional $331 million subject to
compliance with certain financial covenants.
In January 2004, the Company exercised its option to redeem two million
shares, or 100% of its outstanding Series B preferred stock for approximately
1,958,000 shares of its Class A common stock.
On January 22, 2004, the Operating Partnership issued $150 million of
seven-year 5.15% (5.196% effective rate) senior unsecured notes. Prior to the
issuance of these notes the Company entered into several anticipatory interest
rate hedge instruments to protect itself against potentially rising interest
rates. At the time the notes were issued the Company incurred a net cost of
approximately $980,000 to settle these instruments. Such costs will be amortized
over the term of the notes. Net proceeds of approximately $148 million received
from this issuance were used to repay outstanding borrowings under the Credit
Facility.
57
Capitalization
The Company's indebtedness at December 31, 2003 totaled approximately
$1.3 billion (including its share of joint venture debt and net of minority
partners' interests share of joint venture debt) and was comprised of $169.0
million outstanding under the Credit Facility, approximately $499.4 million of
senior unsecured notes and approximately $588.8 million of mortgage indebtedness
with a weighted average interest rate of approximately 7.32% and a weighted
average maturity of approximately 8.1 years. Based on the Company's total market
capitalization of approximately $3.1 billion at December 31, 2003 (calculated
based on the sum of (i) the market value of the Company's Class A common stock
and OP Units, assuming conversion, (ii) the liquidation preference value of the
Company's preferred stock, (iii) the liquidation preference value of the
Operating Partnership's preferred units and (iv) the $1.3 billion of debt), the
Company's debt represented approximately 41.2% of its total market
capitalization.
During 2003, the Company repurchased 252,000 shares of its Class A
common stock for approximately $4.5 million or $18.01 per share.
On October 16, 2000, the Company's Board of Directors announced that it
adopted a Shareholder Rights Plan (the "Rights Plan") designed to protect
shareholders from various abusive takeover tactics, including attempts to
acquire control of the Company at an inadequate price, depriving shareholders of
the full value of their investment. A description of the Rights Plan is included
in the Notes to Financial Statements of the Company.
Contractual Obligations and Commercial Commitments
The following table sets forth the Company's significant debt
obligations by scheduled principal cash flow payments and maturity date and its
commercial commitments by scheduled maturity at December 31, 2003 (in
thousands):
MATURITY DATE
---------------------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
--------- ---------- ---------- ---------- ----------- ---------- ------------
Mortgage notes payable (1) $ 12,853 $ 13,887 $ 13,478 $ 10,969 $ 9,989 $ 105,178 $ 166,354
Mortgage notes payable (2)(3) -- 18,553 129,920 60,539 -- 346,269 555,281
Senior unsecured notes 100,000 -- -- 200,000 -- 200,000 500,000
Unsecured credit facility -- 169,000 -- -- -- -- 169,000
Land lease obligations 2,993 2,995 2,961 2,888 2,888 47,309 62,034
Air rights lease obligations (4) 333 333 333 333 333 3,680 5,345
Operating leases 785 813 842 870 370 -- 3,680
--------- ---------- ---------- ---------- ----------- ---------- ------------
$116,964 $205,581 $147,534 $275,599 $ 13,580 $ 702,436 $1,461,694
========= ========== ========== ========== =========== ========== ============
(1) Scheduled principal amortization payments.
(2) Principal payments due at maturity.
(3) In addition, the Company has a 60% interest in an unconsolidated
joint venture property. The Company's pro rata share of the mortgage
debt at December 31, 2003 is approximately $7.9 million. This
mortgage note payable bears interest at 8.85% per annum and matures
on September 1, 2005 at which time the Company's share of the
mortgage debt will be approximately $6.9 million.
(4) Excludes approximately $453,000 in aggregate payments due under a
Long Island office property which was sold in January 2004
Certain of the mortgage notes payable are guaranteed by certain limited
partners in the Operating Partnership and / or the Company. In addition,
consistent with customary practices in non-recourse lending, certain
non-recourse mortgages may be recourse to the Company under certain limited
circumstances including environmental issues and breaches of material
representations.
At December 31, 2003, the Company had approximately $1.0 million in
outstanding undrawn standby letters of credit issued under the Credit Facility.
In addition, approximately $44 million, or 6.1%, of the Company's mortgage debt
is recourse to the Company.
58
Other Matters
Seven of the Company's office properties which were acquired by the
issuance of OP Units are subject to agreements limiting the Company's ability to
transfer them prior to agreed upon dates without the consent of the limited
partner who transferred the respective property to the Company. In the event the
Company transfers any of these properties prior to the expiration of these
limitations, the Company may be required to make a payment relating to taxes
incurred by the limited partner. These limitations expire between 2007 and 2013.
Two of the Company's office properties are held in joint ventures which
contain certain limitations on transfer. These limitations include requiring the
consent of the joint venture partner to transfer a property prior to various
specified dates ranging from 2003 to 2005, rights of first offer, and buy / sell
provisions.
On May 29, 2003, the Board of Directors appointed Mr. Peter Quick as Lead
Director and Chairman of the Nominating/Governance Committee. The
Nominating/Governance Committee as well as the Audit Committee and Compensation
Committee are comprised solely of independent directors.
In addition, in May 2003, the Company revised its policy with respect to
compensation of its independent directors to provide that a substantial portion
of the independent director's compensation shall be in the form of Class A
common stock of the Company. Such common stock may not be sold until such time
as the director is no longer a member of the Company's Board.
In February 2004, the Board of Directors appointed Douglas Crocker II,
Stanley Steinberg and Elizabeth McCaul as new independent directors. In
addition, Herve Kevenides resigned from the Board of Directors.
The Company has also announced certain other corporate governance
enhancements. The Company is proposing to de-stagger its Board of Directors and
to modify the ownership limit currently in its charter relating to the "five or
fewer rule" under the REIT qualification provisions of the Code at its 2004
meeting of its stockholders. In addition, the Company has determined to opt out
of certain State anti-takeover provisions.
A number of shareholder derivative actions have been commenced purportedly
on behalf of the Company against the Board of Directors relating to the
Disposition. The complaints allege, among other things, that the process by
which the directors agreed to the transaction was not sufficiently independent
of the Rechler family and did not involve a "market check" or third party
auction process and, as a result, was not for adequate consideration. The
plaintiffs seek similar relief, including a declaration that the directors
violated their fiduciary duties and damages. The Company's management believes
that the complaints are without merit.
In connection with the Disposition, the employment of Donald Rechler,
Roger Rechler, Gregg Rechler and Mitchell Rechler as officers of the Company
terminated and Roger Rechler, Gregg Rechler and Mitchell Rechler resigned as
members of the Board of Directors. In connection with the Disposition and the
terminations of employment, the Company incurred the following restructuring
charges: (i) approximately $7.5 million related to outstanding stock loans under
the Company's historical long term incentive program ("LTIP") were transferred
to the entity that acquired the Long Island industrial building portfolio and
approximately $642,000 of loans related to life insurance contracts were
extinguished, (ii) approximately $2.9 million paid to the departing Rechler
family members in exchange for 127,689 of rights to receive shares of Class A
common stock that were granted in 2002 and their rights that were granted in
2003 were forfeited in their entirety and (iii) with respect to two of the
departing Rechler family members participating
59
in the Company's March 2003 LTIP, each received 8,681 shares of the Company's
Class A common stock related to the service component of their core award which
was valued at $293,000 in the aggregate. In addition, if the Company were to
attain its annual performance measure under the March 2003 LTIP in March 2004,
these individuals will also be entitled to each receive 26,041 shares of Class A
common stock representing the balance of the annual core award as if they
remained in continuous employment with the Company. The remainder of their core
awards was forfeited as was the entire amount of the special outperformance
component of the March 2003 LTIP. The Company also incurred additional
restructure charges of approximately $1.2 million related primarily to the
release and severance of approximately 25 employees. Total restructure charges
of approximately $12.5 million were mitigated by a $972,000 fee from the
departing Rechler family members related to the termination of the Company's
option to acquire certain property which was either owned by certain Rechler
family members or in which the Rechler family members own a non-controlling
interest
In July 2002, as a result of certain provisions of the Sarbanes Oxley
legislation, the Company discontinued the use of stock loans in its LTIP. In
connection with LTIP grants made prior to the enactment of the Sarbanes Oxley
legislation the Company made stock loans to certain executive and senior
officers to purchase 1,372,393 shares of its Class A common stock at market
prices ranging from $18.44 per share to $27.13 per share. The stock loans were
set to bear interest at the mid-term Applicable Federal Rate and were secured by
the shares purchased. Such stock loans (including accrued interest) were
scheduled to vest and be ratably forgiven each year on the anniversary of the
grant date based upon vesting periods ranging from four to ten years based on
continued service and in part on attaining certain annual performance measures.
These stock loans had an initial aggregate weighted average vesting period of
approximately nine years. As of December 31, 2003, and giving effect to the
settlement of the employment contracts of certain executive officers, there
remains 264,144 shares of common stock subject to the original stock loans which
are anticipated to vest between 2004 and 2011. Approximately $3.1 million and
$4.5 million of compensation expense was recorded for the years ended December
31, 2003 and 2002, respectively, related to these LTIP. Such amounts have been
included in marketing, general and administrative expenses on the accompanying
consolidated statements of operations.
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $5.6 million and $17.0 million at December 31, 2003 and
December 31, 2002, respectively, and have been included as a reduction of
additional paid in capital on the accompanying consolidated balance sheets.
Other outstanding loans to executive and senior officers at December 31, 2003
and December 31, 2002 amounted to approximately $2.9 million and $2.0 million,
respectively primarily related to tax payment advances on stock compensation
awards and life insurance contracts made to certain executive and non-executive
officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively and collectively, the "Rights"). Each Right represents the right to
receive, upon vesting, one share of Class A common stock if shares are then
available for grant under one of the Company's stock option plans or, if shares
are not so available, an amount of cash equivalent to the value of such stock on
the vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 190,524 shares of the Company's Class A common stock and the
2003 Rights aggregate 60,760 shares of Class A common stock. As of December 31,
2003, and giving effect to the settlement of the employment contracts of certain
executive officers, there remains 47,126 shares of Class A common stock related
to the 2002 Rights and 26,040 shares of Class A common stock related to the 2003
rights. During the year ended December 31, 2003, the Company recorded
approximately $855,000 of compensation expense related to the Rights. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of operations.
60
In March 2003, the Company established a new LTIP for its executive and
senior officers. The four-year plan has a core award which provides for annual
stock based compensation based upon continued service and in part based on
attaining certain annual performance measures. The plan also has a special
outperformance award which provides for compensation to be earned at the end of
a four year period if the Company attains certain four year cumulative
performance measures. Amounts earned under the special outperformance award may
be paid in cash or stock at the discretion of the Compensation Committee of the
Board. Performance measures are based on total shareholder returns on a relative
and absolute basis. On March 13, 2003, the Company made available 1,384,102
shares of its Class A common stock under its existing stock option plans in
connection with the core award of this LTIP for twelve of its executive and
senior officers. During May 2003, two of the Company's executive officers waived
these awards under this LTIP in their entirety, which aggregated 277,778 shares
or 20% of the core awards granted. In addition, the special outperformance
awards of the LTIP were amended to increase the per share base price above which
the four year cumulative return is measured from $18.00 to $22.40. As of
December 31, 2003 and giving effect to the settlement of the employment
contracts of certain executive officers, there remains 879,858 shares of Class A
common stock reserved for future issuance under the core award of this LTIP.
With respect to the core award of this LTIP, the Company recorded approximately
$2.6 million of compensation expense for the year ended December 31, 2003. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of operations. Further, no provision
will be made for the special outperformance award of this LTIP until such time
as achieving the requisite performance measures is determined to be probable.
61
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements except for its 60%
non-controlling interest in the 520 JV and its joint venture interest in RSVP.
(for a more detailed description of these arrangements see "Overview and
Background" of this Item 7)
INFLATION
The office leases generally provide for fixed base rent increases or
indexed escalations. In addition, the office leases provide for separate
escalations of real estate taxes, operating expenses and electric costs over a
base amount. The industrial / R&D leases generally provide for fixed base rent
increases, direct pass through of certain operating expenses and separate real
estate tax escalations over a base amount. The Company believes that
inflationary increases in expenses will be mitigated by contractual rent
increases and expense escalations described above. As a result of the impact of
the events of September 11, 2001, the Company has realized increased insurance
costs, particularly relating to property and terrorism insurance, and security
costs. The Company has included these costs as part of its escalatable expenses
and has billed them to its tenants consistent with the terms of the underlying
leases. To the extent the Company's properties contain vacant space, the Company
will bear such inflationary increases in expenses.
The Credit Facility bears interest at a variable rate, which will be
influenced by changes in short-term interest rates, and is sensitive to
inflation.
62
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") is an appropriate
measure of performance of an equity REIT. Although FFO is a non-GAAP measure,
the Company believes it provides useful information to its shareholders,
potential investors and management. The Company computes FFO in accordance with
the standards established by the National Association of Real Estate Investment
Trusts ("NAREIT") as net income or loss, excluding gains or losses from sales of
depreciable properties plus real estate 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). FFO for the year ended December 31,
2003 includes a gain from the sale of land and build-to-suit transaction in the
amount of $18.8 million. For the years ended December 31, 2002 and 2001,
pursuant to the Company's adoption of FASB Statement No. 145, which addresses
reporting for gains and losses from extinguishment of debt, the Company has
reduced previously reported FFO by approximately $2.6 million and $2.9 million,
respectively, related to the write-off of certain deferred loan costs incurred
in connection with the Company's refinancing of its debt. These costs were
previously recorded as an extraordinary loss and therefore excluded from the
Company's calculation of FFO. In addition, FFO for the year ended December 31,
2001 excludes $163 million of valuation reserves on investments in affiliate
loans and joint ventures.
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):
2003 2002 2001
----------------- ----------------- -----------------
Income before minority interests, preferred dividends and
distributions, equity in earnings of real estate joint
ventures and service companies, gain on sales of real estate,
valuation reserves and discontinued operations................. $ 53,819 $ 80,071 $ 108,783
Add:
Equity in earnings of real estate joint ventures and service
Companies .............................................. 30 1,113 2,087
Gain on sales of real estate................................. -- 537 20,173
Discontinued operations (net of limited partners' minority
interest)............................................... 130,229 18,888 9,687
Limited partners' minority interest.......................... -- -- 7,456
Less:
Minority partners' interests in consolidated partnerships.... 17,972 18,730 15,975
Limited partners' minority interest ......................... 1,492 4,223 --
Preferred dividends and distributions........................ 22,360 23,123 23,977
Valuation reserves on investments in affiliate loans and
joint ventures and other investments.................... -- -- 166,101
----------------- ----------------- -----------------
Net income (loss) allocable to common shareholders............... 142,254 54,533 (57,867)
Adjustments for basic Funds From Operations
Add:
Limited partners' minority interest.......................... 14,110 6,680 --
Real estate depreciation and amortization.................... 113,940 108,906 100,967
Minority partners' interests in consolidated partnerships.... 17,972 18,730 15,975
Valuation reserves on investments in affiliate loans and
joint ventures.......................................... -- -- 163,000
Less:
Limited partners' minority interest.......................... -- -- 6,030
Gain on sales of real estate................................. 126,789 5,433 20,173
Amounts distributable to minority partners in consolidated
partnerships............................................ 26,598 24,996 19,083
----------------- ----------------- -----------------
Basic Funds From Operations...................................... 134,889 158,420 176,789
Add:
Dividends and distributions on dilutive shares and units..... 1,093 23,123 26,601
----------------- ----------------- -----------------
Diluted Funds From Operations.................................... $ 135,982 $ 181,543 $ 203,390
================= ================= =================
Weighted Average Shares/OP Units outstanding (1)................. 64,884 67,180 66,057
================= ================= =================
Diluted Weighted Average Shares/OP Units outstanding (1)......... 65,715 78,133 79,027
================= ================= =================
(1) Assumes conversion of limited partnership units of the Operating
Partnership.
63
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 will, when
advantageous, hedge its interest rate risk using financial instruments. The
Company is not 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
until such time as it is able to retire the short-term variable rate debt with
either a long-term fixed rate debt offering, long term mortgage debt, equity
offerings or through sales or partial sales of assets.
The Company will recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges will be adjusted to fair value through
income. If a derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against the
change in fair value of the hedged asset, liability or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. As of December 31, 2003, the
Company had certain derivatives outstanding related to the Company's January
2004 issuance of senior unsecured notes. At December 31, 2003 the fair value of
these instruments reasonably approximated their carrying value.
The fair market value ("FMV") 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 reflect the risks associated with
long term debt, mortgage notes and notes receivable of similar risk and
duration.
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 FMV at December 31, 2003 (dollars in thousands):
For the Year Ended December 31
-------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) F M V
-----------------------------------------------------------------------------------------
Long term debt:
Fixed rate....................... $ 112,853 $ 32,440 $ 143,398 $ 271,508 $ 9,989 $.651,447 $ 1,221,635 $ 1,306,303
Weighted average interest rate... 7.41% 6.90% 7.37% 7.14% 7.23% 7.32% 7.28%
Variable rate.................. $ -- $ 169,000 $ -- $ -- $ -- $ -- $ 169,000 $ 169,000
Weighted average interest rate... --% 2.86% --% --% --% --% 2.86%
(1) Includes aggregate unamortized issuance discounts of approximately
$555,000 on the senior unsecured notes issued during March 1999 and
June 2002, 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
$1.7 million annual increase in interest expense based on $169
million of variable rate debt outstanding at December 31, 2003.
64
The following table sets forth the Company's mortgage notes and notes
receivable by scheduled maturity date, weighted average interest rates and
estimated FMV at December 31, 2003 (dollars in thousands):
For the Year Ended December 31
-------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) F M V
-----------------------------------------------------------------------------------------
Mortgage notes and
notes receivable:
Fixed rate....................... $ 21,500 $ -- $ -- $ 16,990 $ -- $ -- $ 38,490 $ 39,368
Weighted average interest rate... 10.85% --% --% 12.0% --% --% 11.36%
Variable rate.................... $ -- $ 15,000 $ -- $ -- $ -- $ -- $ 15,000 $ 15,000
Weighted average interest rate... --% 13.43% --% --% --% --% 13.43%
(1) Excludes interest receivables aggregating approximately $1.5 million.
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is reported within the time periods specified in the SEC's
rules and forms. In this regard, the Company has formed a Disclosure Committee
currently comprised of all of the Company's executive officers as well as
certain other employees with knowledge of information that may be considered in
the SEC reporting process. The Committee has responsibility for the development
and assessment of the financial and non-financial information to be included in
the reports filed by the Company with the SEC and assists the Company's Chief
Executive Officer and Chief Financial Officer in connection with their
certifications contained in the Company's SEC reports. The Committee meets
regularly and reports to the Audit Committee, with the participation of the
Company's management, on a quarterly or more frequent basis. Our principal
executive and financial officers have evaluated, with the participation of the
Company's management, our disclosure controls and procedures as of the end of
the period covered by this Annual Report on Form 10-K. Based upon the
evaluation, our principal executive and financial officers concluded that such
disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the section captioned "Proposal I: Election
of Directors" and "Section 16 Beneficial Ownership Reporting Compliance" of the
Company's definitive proxy statement for the 2004 annual meeting of stockholders
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section captioned "Executive
Compensation" of the Company's definitive proxy statement for the 2004 annual
meeting of stockholders is incorporated herein by reference, provided, however,
that the report on Executive Compensation set forth therein shall not be
incorporated by reference herein, in any of the Company's prior or future
filings under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent the Company specifically incorporates such report by
reference therein and shall not be otherwise deemed filed under either of such
Acts.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained in the section captioned "Principal and
Management Stockholders" of the Company's definitive proxy statement for the
2004 annual meeting of stockholders is incorporated herein by reference.
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
2004 annual meeting of the stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the section captioned "Proposal II:
Ratification of Selection of Independent Auditors" of the Company's definitive
proxy statement for the 2004 annual meeting of stockholders is incorporated
herein by reference.
66
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1 and 2) Financial Statement Schedules
The following consolidated financial information is included as a separate
section of this annual report on Form 10-K:
PAGE
--------
RECKSON ASSOCIATES REALTY CORP.
Report of Independent Auditors...................................... 77
Consolidated Balance Sheets as of December 31, 2003 and
December 31, 2002................................................ 78
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001................................ 79
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2003, 2002, and 2001.......................... 81
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001................................ 82
Notes to Consolidated Financial Statements.......................... 83
Schedule III - Real Estate and Accumulated Depreciation............. 128
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
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
3.1 a Amended and Restated Articles of Incorporation of the
Registrant
3.2 p Amended and Restated ByLaws of the Registrant
3.3 e Articles Supplementary of the Registrant Establishing and
Fixing the Rights and Preferences of a Series of Shares of
Preferred Stock filed with the Maryland State Department
of Assessments and Taxation on April 9, 1998
3.4 h Articles Supplementary of the Registrant Establishing and
Fixing the Rights and Preferences of a Class of Shares of
Common Stock filed with the Maryland State Department of
Assessments and Taxation on May 24, 1999
3.5 g Articles Supplementary of the Registrant Establishing and
Fixing the Rights and Preferences of a Series of Shares of
Preferred Stock filed with the Maryland State Department
of Assessments and Taxation on May 28, 1999
3.6 h Articles of Amendment of the Registrant filed with the
Maryland State Department of Assessments and Taxation on
January 4, 2000
3.7 h Articles Supplementary of the Registrant filed with the
Maryland State Department of Assessments and Taxation on
January 11, 2000
3.8 m Articles Supplementary of the Registrant Establishing and
Fixing the Rights and Preferences of a Series of Shares of
Preferred Stock filed with the Maryland State Department
of Assessments and Taxation on November 2, 2000 4.1 b
Specimen Share Certificate of Class A Common Stock
4.3 e Specimen Share Certificate of Series A Preferred Stock
4.4 f Form of 7.40% Notes due 2004 of Reckson Operating
Partnership, L.P. (the "Operating Partnership")
4.5 f Form of 7.75% Notes due 2009 of the Operating Partnership
67
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
4.6 f Indenture, dated March 26, 1999, among the Operating
Partnership, the Registrant, and The Bank of New York, as
trustee
4.7 i Rights Agreement, dated as of October 13, 2000, between
the Registrant and American Stock Transfer & Trust
Company, as Rights Agent, which includes, as Exhibit A
thereto, the Form of Articles Supplementary, as Exhibit B
thereto, the Form of Right Certificate, and as Exhibit C
thereto, the Summary of Rights to Purchase Preferred
Shares
4.8 o Form of 6.00% Notes due 2007 of the Operating Partnership
4.9 d Note Purchase Agreement for the Senior Unsecured Notes
4.10 w Form of 5.15% Notes due 2011 of the Operating Partnership
10.1 a Amended and Restated Agreement of Limited Partnership of
the Operating Partnership
10.2 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series A Preferred Units of Limited
Partnership Interest
10.3 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series B Preferred Units of Limited
Partnership Interest
10.4 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series C Preferred Units of Limited
Partnership Interest
10.5 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series D Preferred Units of Limited
Partnership Interest
10.6 h Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series B Common Units of Limited Partnership
Interest
10.7 h Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series E Preferred Partnership Units of
Limited Partnership Interest
10.8 j Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing the Series F Junior Participating Preferred
Partnership Units
68
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
10.9 t Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing the Series C Common Units of Limited
Partnership Interest
10.10 d Third Amended and Restated Agreement of Limited
Partnership of Omni Partners, L.P.
10.11 i Amendment and Restatement of Employment and Noncompetition
Agreement, dated as of August 15, 2000, between the
Registrant and Scott Rechler
10.12 i Amendment and Restatement of Employment and Noncompetition
Agreement, dated as of August 15, 2000, between the
Registrant and Michael Maturo
10.13 i Amendment and Restatement of Employment and Noncompetition
Agreement, dated as of August 15, 2000, between the
Registrant and Jason Barnett
10.14 Employment and Noncompetition Agreement, dated as of July
16, 2001, between the Company and F.D. Rich
10.15 Employment and Noncompetition Agreement, dated as of
November 20, 2002, among the Company, Metropolitan
Partners LLC and Philip Waterman III
10.16 a Purchase Option Agreement relating to 225 Broadhollow Road
10.17 t Amended and Restated 1995 Stock Option Plan
10.18 c 1996 Employee Stock Option Plan
10.19 b Ground Leases for certain of the properties
10.20 t Amended and Restated 1997 Stock Option Plan
10.21 d 1998 Stock Option Plan
10.22 i Amendment and Restatement of Severance Agreement, dated as
of August 15, 2000, between the Registrant and Scott
Rechler
10.23 i Amendment and Restatement of Severance Agreement, dated as
of August 15, 2000, between the Registrant and Michael
Maturo
10.24 i Amendment and Restatement of Severance Agreement, dated as
of August 15, 2000, between the Registrant and Jason
Barnett
69
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
10.25 h Amended and Restated Credit Agreement dated as of August
4, 1999 between Reckson Service Industries, Inc., as
borrower, and the Operating Partnership, as Lender,
relating to Reckson Strategic Venture Partners, LLC ("RSVP
Credit Agreement")
10.26 h Amended and Restated Credit Agreement dated as of
August 4, 1999 between Reckson Service Industries, Inc.,
as borrower, and the Operating Partnership, as Lender,
relating to the operations of Reckson Service Industries,
Inc. ("RSI Credit Agreement")
10.27 h Letter Agreement, dated November 30, 1999, amending the
RSVP Credit Agreement and the RSI Credit Agreement
10.28 k Second Amendment to the Amended and Restated Credit
Agreement, dated March 30, 2001, between the Operating
Partnership and FrontLine Capital Group
10.29 l Loan Agreement, dated as of June 1, 2001, between 1350
LLC, as Borrower, and Secore Financial Corporation, as
Lender
10.30 l Loan Agreement, dated as of July 18, 2001, between
Metropolitan 919 3rd Avenue, LLC, as Borrower, and Secore
Financial Corporation, as Lender
10.31 i Operating Agreement dated as of September 28, 2000 between
Reckson Tri-State Member LLC (together with its permitted
successors and assigns) and TIAA Tri-State LLC
10.32 j Agreement of Spreader, Consolidation and Modification of
Mortgage Security Agreement among Metropolitan 810 7th
Ave., LLC, 100 Wall Company LLC and Monumental Life
Insurance Company
10.33 j Consolidated, Amended and Restated Secured Promissory Note
relating to Metropolitan 810 7th Ave., LLC and 100 Wall
Company LLC
10.34 n Amended and Restated Operating Agreement of 919 JV LLC
10.35 t Amended and Restated 2002 Stock Option Plan
10.36 p Indemnification Agreement, dated as of May 23, 2002,
between the Registrant and Donald J. Rechler*
70
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
10.37 q Second Amended and Restated Credit Agreement, dated as of
December 30, 2002, among the Operating Partnership, the
institutions from time to time party thereto as Lenders
and JPMorgan Chase Bank, as Administrative Agent
10.38 q Form of Guarantee Agreement to the Second Amended and
Restated Credit Agreement, between and among the Operating
Partnership, the institutions from time to time party
thereto as Lenders and JPMorgan Chase Bank, as
Administrative Agent
10.39 q Form of Promissory Note to the Second Amended and Restated
Credit Agreement, between and among the Operating
Partnership, the institutions from time to time party
thereto as Lenders and JPMorgan Chase Bank, as
Administrative Agent
10.40 q First Amendment to Second Amended and Restated Credit
Agreement, dated as of January 24, 2003, among the
Operating Partnership, JPMorgan Chase Bank, as
Administrative Agent for the institutions from time to
time party thereto as Lenders and Key Bank, N.A., as New
Lender
10.41 s Amended and Restated Long-Term Incentive Award Agreement,
dated as of March 13, 2003, between the Registrant and
Scott H. Rechler**
10.42 r Award Agreement, dated November 14, 2002, between the
Registrant and Scott H. Rechler***
10.43 r Award Agreement, dated March 13, 2003, between the
Registrant and Scott H. Rechler****
10.44 u Redemption Agreement, dated as of September 10, 2003, by
and among the Operating Partnership, Reckson FS Limited
Partnership and Rechler Equity Partners I LLC, as
transferee
10.45 u Property Sale Agreement, dated as of September 10, 2003,
by and among the Operating Partnership, Reckson FS Limited
Partnership, RCG Kennedy Drive LLC and Rechler Equity
Partners II LLC
10.46 u Transition Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Donald Rechler
10.47 u Transition Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Roger Rechler
71
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
10.48 u Transition Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Mitchell Rechler
10.49 u Transition Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Gregg Rechler
10.50 u Amendment Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Scott Rechler
10.51 v Purchase and Sale Agreement, dated as of November 10,
2003, between Reckson 1185 Avenue of the Americas LLC and
1185 Sixth LLC
12.1 Statement of Ratios of Earnings to Fixed Charges
14.1 Reckson Associates Realty Corp. Code of Ethics and
Business Conduct
21.1 Statement of Subsidiaries
23.1 Consent of Independent Auditors
24.1 Power of Attorney (included in Part IV of the Form 10-K)
31.1 Certification of Scott H. Rechler, Chief Executive Officer
and President of the Registrant, pursuant to Rule
13a-14(a) or Rule 15(d)-14(a)
31.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of the Registrant,
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
32.1 Certification of Scott H. Rechler, Chief Executive Officer
and President of the Registrant, pursuant to Section 1350
of Chapter 63 of Title 18 of the United States Code
32.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of the Registrant,
pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code
-------------
(a) Previously filed as an exhibit to the Registrant's Registration
Statement Form S-11 (No. 333-1280) and incorporated herein by
reference.
72
(b) Previously filed as an exhibit to the Registrant's Registration
Statement Form S-11 (No. 33-84324) and incorporated herein by
reference.
(c) Previously filed as an exhibit to the Registrant'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 Registrant's Form 10-K filed
with the SEC on March 26, 1998 and incorporated herein by reference.
(e) Previously filed as an exhibit to the Registrant's Form 8-K report
filed with the SEC on March 1, 1999 and incorporated herein by
reference.
(f) Previously filed as an exhibit to the Registrant's Form 8-K filed with
SEC on March 26, 1999 and incorporated herein by reference.
(g) Previously filed as an exhibit to the Registrant's Form 8-K filed with
SEC on June 7, 1999 and incorporated herein by reference.
(h) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 17, 2000 and incorporated herein by reference.
(i) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on October 17, 2000 and incorporated herein by reference.
(j) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 21, 2001 and incorporated herein by reference.
(k) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on May 14, 2001 and incorporated herein by reference.
(l) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on August 14, 2001 and incorporated herein by reference.
(m) Included as an exhibit to Exhibit 4.7.
73
(n) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on January 8, 2002 and incorporated herein by reference.
(o) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on June 18, 2002 and incorporated herein by reference.
(p) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on November 12, 2002 and incorporated herein by reference.
(q) Previously filed as an exhibit to the Registrant's Current Report on
8-K filed with the SEC on January 27, 2003 and incorporated herein by
reference.
(r) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 24, 2003 and incorporated herein by reference.
(s) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on May 15, 2003 and incorporated herein by reference.
(t) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on August 13, 2003 and incorporated herein by reference.
(u) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on September 18, 2003 and incorporated herein by reference.
(v) Previously filed as an exhibit to the Registrant's Form 8-K filed on
November 21, 2003 and incorporated herein by reference.
(w) Previously filed as an exhibit to the Registrant's Form 8-K filed on
January 21, 2004 and incorporated herein by reference.
* Each of Scott H. Rechler, Michael Maturo, Jason M. Barnett, John V.N.
Klein, Lewis S. Ranieri and Conrad D. Stephenson has entered into an
Indemnification Agreement with the Registrant, dated as of May 23,
2002. Each of Ronald H. Menaker and Peter Quick has entered into an
Indemnification Agreement with the Registrant dated as of May 1, 2002.
Each of Douglas Crocker and Stanley Steinberg has entered into an
Indemnification Agreement with the Registrant dated as of February 5,
2004. Elizabeth McCaul has entered into an Indemnification Agreement
with the Registrant dated as of February 25, 2004. These Agreements are
identical in all material respects to the Indemnification Agreement for
Donald J. Rechler incorporated by reference herein.
74
** Each of Michael Maturo and Jason M. Barnett has entered into an Amended
and Restated Long-Term Incentive Award Agreement with the Registrant,
dated as of March 13, 2003. These Agreements are identical in all
material respects to the Amended and Restated Long-Term Incentive Award
Agreement for Scott H. Rechler incorporated by reference herein.
*** Michael Maturo has been awarded certain rights to shares of Class A
Common Stock of the Registrant, pursuant to Award Agreements dated
November 14, 2002. This Agreement is identical in all material respects
to the Agreement for Scott H. Rechler incorporated by reference herein,
except that Michael Maturo received rights to 27,588 shares.
**** Each of Michael Maturo and Jason M. Barnett has been awarded certain
rights to shares of Class A Common Stock of the Registrant pursuant to
Award Agreements dated March 13, 2003. These Agreements are identical
in all material respects to the Agreement for Scott H. Rechler
incorporated by reference herein.
(b) REPORTS ON FORM 8-K:
On October 1, 2003, the Registrant submitted a report on Form 8-K under Item 5
thereof in order to describe (i) the restructuring of the capital structure and
management of RSVP and (ii) the shareholder litigation concerning the
Registrant's proposed sale of its industrial building portfolio.
On October 22, 2003, the Registrant submitted a report on Form 8-K under Items 2
and 7 thereof in connection with the Registrant's disposition of its industrial
building portfolio.
On November 5, 2003, the Registrant submitted a report on Form 8-K under Items 7
and 12 thereof in order to file a press release announcing its consolidated
financial results for the quarter ended September 30, 2003.
On November 21, 2003, the Registrant submitted a report on Form 8-K under Items
2, 5 and 7 thereof in connection with (i) disposition of the Registrant's
industrial building portfolio and (ii) the acquisition of 1185 Avenue of the
Americas.
75
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 8, 2004.
RECKSON ASSOCIATES REALTY CORP.
By: /s/ Scott H. Rechler
------------------------
Scott H. Rechler,
Chief Executive Officer, President and Director
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Reckson Associates Realty Corp., hereby severally constitute and
appoint Scott H. Rechler and Michael Maturo, and each of them singly, our true
and lawful attorneys-in-fact 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 8, 2004.
Signature Title
--------- -----
/s/ Donald J. Rechler Chairman of the Board
---------------------------------
Donald J. Rechler
/s/ Scott H. Rechler Chief Executive Officer, President and Director
---------------------------------
Scott H. Rechler
/s/ Michael Maturo Executive Vice President, Treasurer and Chief Financial Officer
--------------------------------- (Principal Financial Officer and Principal Accounting Officer)
Michael Maturo
/s/ Ronald Menaker Director
---------------------------------
Ronald Menaker
/s/ Peter Quick Director
---------------------------------
Peter Quick
/s/ John V.N. Klein Director
---------------------------------
John V.N. Klein
Director
---------------------------------
Lewis S. Ranieri
/s/ Conrad D. Stephenson Director
---------------------------------
Conrad D. Stephenson
/s/ Douglas Crocker III Director
---------------------------------
Douglas Crocker III
/s/ Stanley Steinberg Director
---------------------------------
Stanley Steinberg
/s/ Elizabeth McCaul Director
---------------------------------
Elizabeth McCaul
76
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, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2003. We have also
audited the financial statement schedule listed in the index at item 15(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, 2003 and 2002, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2003, 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 17, 2004
77
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
--------------------------------------
2003 2002
----------------- -----------------
ASSETS
Commercial real estate properties, at cost: (Notes 2, 3, 5 and 6)
Land.................................................................................. $ 386,501 $ 386,747
Buildings and improvements............................................................ 2,251,455 2,199,896
Developments in progress:
Land.................................................................................. 90,706 92,924
Development costs..................................................................... 68,127 28,311
Furniture, fixtures and equipment.......................................................... 11,338 12,203
----------------- -----------------
2,808,127 2,720,081
Less accumulated depreciation....................................................... (469,642) (382,022)
----------------- -----------------
2,338,485 2,338,059
Properties and related assets held for sale, net of accumulated depreciation (Note 6)...... 6,920 196,954
Investments in real estate joint ventures.................................................. 5,904 6,116
Investment in mortgage notes and notes receivable (Note 6)................................. 54,986 54,547
Cash and cash equivalents.................................................................. 22,887 30,827
Tenant receivables......................................................................... 12,034 12,529
Investments in service companies and affiliate loans and joint ventures (Note 8).......... 71,614 73,332
Deferred rents receivable.................................................................. 113,601 97,145
Prepaid expenses and other assets.......................................................... 35,501 32,966
Contract and land deposits and pre-acquisition costs....................................... 20,203 240
Deferred leasing and loan costs, less accumulated amortization of $56,108 and $41,502,
respectively.......................................................................... 64,860 65,205
----------------- -----------------
Total Assets........................................................... $ 2,746,995 $ 2,907,920
================= =================
LIABILITIES
Mortgage notes payable (Note 2)............................................................ $ 721,635 $ 733,761
Mortgage notes payable and other liabilities associated with properties held for sale
(Note 6).............................................................................. 333 10,722
Unsecured credit facility (Note 3)......................................................... 169,000 267,000
Senior unsecured notes (Note 4)............................................................ 499,445 499,305
Accrued expenses and other liabilities..................................................... 94,433 89,312
Dividends and distributions payable........................................................ 28,290 31,575
----------------- -----------------
Total Liabilities...................................................... 1,513,136 1,631,675
----------------- -----------------
Minority partners' interests in consolidated partnerships.................................. 233,070 242,934
Preferred unit interest in the operating partnership....................................... 19,662 19,662
Limited partners' minority interest in the operating partnership .......................... 44,518 71,420
----------------- -----------------
297,250 334,016
----------------- -----------------
Commitments and contingencies (Notes 10 and 13)............................................ -- --
STOCKHOLDERS' EQUITY (Note 7)
Preferred Stock, $.01 par value, 25,000,000 shares authorized
Series A preferred stock, 8,834,500 shares issued and outstanding..................... 88 88
Series B preferred stock, 2,000,000 shares issued and outstanding..................... 20 20
Common Stock, $.01 par value, 100,000,000 shares authorized
Class A common stock, 58,275,367 and 48,246,083 shares issued and outstanding,
respectively....................................................................... 583 482
Class B common stock, 0 and 9,915,313 shares issued and outstanding, respectively..... -- 99
Treasury Stock, 3,318,600 and 3,066,600 shares, respectively............................... (68,492) (63,954)
Retained earnings.......................................................................... 35,757 --
Additional paid in capital................................................................. 968,653 1,005,494
----------------- -----------------
Total Stockholders' Equity............................................. 936,609 942,229
----------------- -----------------
Total Liabilities and Stockholders' Equity............................. $ 2,746,995 $ 2,907,920
================= =================
(see accompanying notes to financial statements)
78
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
For the year ended December 31,
------------------------------------------------------------
2003 2002 2001
------------------ ----------------- ---------------
REVENUES (Note 10):
Property operating revenues:
Base Rents............................................ $ 385,225 $ 395,308 $ 392,824
Tenant escalations and reimbursements................. 60,556 55,441 54,739
------------------ ----------------- ---------------
Total property operating revenues........................ 445,781 450,749 447,563
Interest income on mortgage notes and notes receivable
(including $3,865, $4,287 and $4,196, respectively
from related parties)................................. 6,568 6,279 6,238
Investment and other income (including $0, $85 and
$5,164, respectively from related parties)............ 17,933 1,041 14,018
------------------ ----------------- ---------------
Total revenues....................................... 470,282 458,069 467,819
------------------ ----------------- ---------------
EXPENSES:
Property operating expenses.............................. 180,411 163,031 155,977
Marketing, general and administrative.................... 32,746 29,214 28,242
Interest................................................. 82,487 83,309 82,639
Restructure charges - net (Note 7)....................... 11,580 -- --
Depreciation and amortization............................ 109,239 102,444 92,178
------------------ ----------------- ---------------
Total expenses...................................... 416,463 377,998 359,036
------------------ ----------------- ---------------
Income before minority interests, preferred dividends
and distributions, equity in earnings of real estate
joint ventures and service companies, gain on sales
of real estate, valuation reserves and discontinued
operations............................................ 53,819 80,071 108,783
Minority partners' interests in consolidated
partnerships.......................................... (17,972) (18,730) (15,975)
Limited partners' minority interest in the operating
partnership........................................... (1,492) (4,223) 7,456
Distributions to preferred unit holders.................. (1,093) (1,288) (2,111)
Equity in earnings of real estate joint ventures and
service companies (including $0, $465 and $1,450,
respectively from related parties).................... 30 1,113 2,087
Gain on sales of real estate............................. -- 537 20,173
Valuation reserves on investments in affiliate loans
and joint ventures and other investments (Notes 8
and 13)............................................... -- -- (166,101)
------------------ ----------------- ---------------
Income (loss) before discontinued operations and
dividends to preferred shareholders..... ............. 33,292 57,480 (45,688)
Discontinued operations (net of limited partners'
minority interest):
Income from discontinued operations................... 14,458 14,621 9,687
Gain on sales of real estate.......................... 115,771 4,267 --
------------------ ----------------- ---------------
Net Income (loss)........................................ 163,521 76,368 (36,001)
Dividends to preferred shareholders...................... (21,267) (21,835) (21,866)
------------------ ----------------- ---------------
Net income (loss) allocable to common shareholders....... $ 142,254 $ 54,533 $ (57,867)
================== ================= ===============
Net income (loss) allocable to:
Class A common shareholders........................... $ 124,966 $ 41,604 $ (44,243)
Class B common shareholders........................... 17,288 12,929 (13,624)
------------------ ----------------- ---------------
Total.................................................... $ 142,254 $ 54,533 $ (57,867)
================== ================= ===============
(see accompanying notes to financial statements)
79
Basic net income (loss) per weighted average common share:
Class A common........................................ $ .18 $ .54 $ (1.36)
Gain on sales of real estate.......................... -- .01 .29
Discontinued operations............................... 2.37 .29 .15
------------------- ------------------ ------------------
Basic net income (loss) per Class A common............ 2.55 $ .84 $ (.92)
=================== ================== ==================
Class B common........................................ $ .39 $ .83 $ (1.97)
Gain on sales of real estate.......................... -- .01 .42
Discontinued operations............................... 1.55 .44 .23
------------------- ------------------ ------------------
Basic net income (loss) per Class B common............ $ 1.94 $ 1.28 $ (1.32)
=================== ================== ==================
Basic weighted average common shares outstanding:
Class A common........................................ 49,092,000 49,669,000 48,121,000
Class B common........................................ 8,910,000 10,122,000 10,284,000
Diluted net income (loss) per weighted average common share:
Class A common........................................ $ 2.54 $ 83 $ (.92)
Class B common........................................ $ 1.90 $ 90 $ (1.32)
Diluted weighted average common shares outstanding:
Class A common........................................ 49,262,000 49,968,000 48,121,000
Class B common........................................ 8,910,000 10,122,000 10,284,000
(see accompanying notes to financial statements)
80
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Limited
Preferred Stock Common Stock Additional Total Partners'
--------------- ------------ Treasury Paid in Retained Stockholders' Minority
Series A Series B Class A Class B Stock Capital Earnings Equity Interest
--------------------- -------------------- -------- ---------- --------- ------------- --------
Stockholders'equity
January 1, 2001......... $ 92 $ 20 $ 454 $ 103 $ -- $ 1,111,990 $ -- $ 1,112,659 $ 97,353
Issuance of OP Units -- -- -- -- -- -- -- -- 11,557
Redemption of OP Units -- -- 6 -- -- 15,412 -- 15,418 (15,577)
Net proceeds from long
term compensation
issuances............... -- -- 5 -- -- 6,423 -- 6,428 --
Issuance of Class A
common stock............ -- -- 35 -- -- 77,777 -- 77,812 7,188
Repurchases of Class A
common stock............ -- -- -- -- -- (1,421) -- (1,421) --
Net loss.................. -- -- -- -- -- -- (57,867) (57,867) (6,030)
Dividends and
distributions
paid and payable........ -- -- -- -- -- (165,039) 57,867 (107,172) (12,604)
-------- -------- --------- --------- ---------- ----------- ---------- ---------- ---------
Stockholders' equity
December 31, 2001....... 92 20 500 103 -- 1,045,142 -- 1,045,857 81,887
Issuance of OP Units...... -- -- -- -- -- 5,274 -- 5,274 6,135
Redemption of OP Units.... -- -- 7 -- -- 7,148 -- 7,155 (7,173)
Net proceeds from long
term compensation
issuances............... -- -- (2) -- -- 3,988 -- 3,986 --
Issuance of Class A
common stock.............. -- -- 4 -- -- 7,065 -- 7,069 --
Repurchases of Class A
and Class B common
stock................... -- -- (27) (4) (63,954) -- -- (63,985) (2,738)
Repurchases of Series A
preferred stock......... (4) -- -- -- -- (7,041) -- (7,045) (924)
Net income................ -- -- -- -- -- -- 54,533 54,533 6,682
Dividends and
distributions paid
and payable............ -- -- -- -- -- (56,082) (54,533) (110,615) (12,449)
-------- -------- --------- --------- ---------- ----------- ---------- ---------- ---------
Stockholders' equity
December 31, 2002...... 88 20 482 99 (63,954) 1,005,494 -- 942,229 71,420
Issuance of OP Units..... -- -- -- -- -- -- -- -- 11,180
Redemption of OP Units... -- -- -- -- (42,805) -- (42,805) (40,189)
Net proceeds from long
term compensation
issuances.............. -- -- 2 -- -- 3,939 -- 3,941 --
Issuance of Class A
common stock........... -- -- -- -- -- 2,025 -- 2,025 --
Repurchases of Class A
common stock........... -- -- -- -- (4,538) -- -- (4,538) --
Class B common stock
exchange............... -- -- 99 (99) -- -- -- -- --
Net income............... -- -- -- -- -- -- 142,254 142,254 14,110
Dividends and
distributions paid and
payable................ -- -- -- -- -- (106,497) (106,497) (12,003)
-------- -------- --------- --------- ---------- ----------- ---------- ---------- ----------
Stockholders' equity
December 31, 2003...... $ 88 $ 20 $ 583 $ -- $ (68,492) $ 968,653 $ 35,757 $ 936,609 $ 44,518
======== ======== ========= ========= ========== =========== ========== ========== ==========
(see accompanying notes to financial statements)
81
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
---------------------------------------------
2003 2002 2001
---------------- ------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS).............................................................. $ 163,521 $ 76,368 $ (36,001)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization (including discontinued operations) 116,633 112,341 102,931
Write off of deferred loan costs, net of limited partners' minority
interest............................................................... -- 2,335 2,595
Minority partners' interests in consolidated partnerships................ 17,972 18,730 15,975
Limited partners' minority interest in the operating partnership......... 14,110 6,238 (5,727)
Gain on sales of real estate, securities and mortgage repayment.......... (126,789) (4,804) (20,173)
Valuation reserves on investments in affiliate loans and joint
ventures and other investments......................................... -- -- 166,101
Equity in earnings of real estate joint ventures and service companies... (30) (1,113) (2,087)
Changes in operating assets and liabilities:
Deferred rents receivable................................................ (6,444) (26,277) (38,186)
Prepaid expenses and other assets........................................ (5,263) 4,870 (4,925)
Tenant and affiliate receivables......................................... 1,919 (4,417) 1,878
Accrued expenses and other liabilities................................... (14,884) 11,878 3,607
------------ ----------- -----------
Net cash provided by operating activities...................................... 160,745 196,149 185,988
------------ ----------- -----------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Purchases of commercial real estate properties........................... (40,500) -- --
Increase in contract and land deposits and pre-acquisition costs......... (20,000) -- (3,267)
Increase in mortgage notes receivable.................................... (15,000) -- --
Additions to developments in progress.................................... (24,391) (41,896) (8,260)
Additions to commercial real estate properties........................... (43,341) (48,052) (152,074)
Payment of deferred leasing costs........................................ (16,086) (16,414) (10,513)
Distributions from investments in real estate joint ventures............. 243 276 82
Acquisition of controlling interests in service companies................ -- (122) --
Additions to furniture, fixtures and equipment........................... (196) (2,414) (635)
Investments in affiliate joint ventures.................................. -- -- (25,056)
Proceeds from redemption of preferred securities......................... -- 1,528 35,700
Proceeds from sales of real estate, securities and mortgage note
receivable repayments.................................................. 268,757 22,022 76,503
------------ ----------- -----------
Net cash provided by (used in) investing activities............................ 109,486 (85,072) (87,520)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured borrowings......................................... -- -- 325,000
Principal payments on secured borrowings................................. (12,300) (11,065) (302,894)
Proceeds from issuance of senior unsecured notes, net of issuance
costs.................................................................. -- 49,432 --
Payment of loan and equity issuance costs................................ (156) (1,568) (6,252)
Investments in affiliate loans and service companies..................... -- -- (12,388)
Proceeds from unsecured credit facility.................................. 132,000 158,000 153,000
Principal payments on unsecured credit facility.......................... (230,000) (162,600) (98,000)
Repurchases of common stock.............................................. (4,538) (66,723) (1,421)
Repurchase of Series A preferred stock................................... -- (7,969) --
Proceeds from issuance of common stock and exercise of
options, net of issuance costs......................................... 1,028 6,310 2,813
Contributions by minority partners in consolidated partnerships.......... -- 1,343 101,832
Distributions to minority partners in consolidated partnerships.......... (22,189) (20,051) (16,458)
Distributions to limited partners in the operating partnership........... (12,353) (12,540) (12,395)
Distributions to preferred unit holders.................................. (1,093) (1,320) (2,231)
Dividends to common shareholders......................................... (107,303) (111,525) (103,118)
Dividends to preferred shareholders...................................... (21,267) (21,949) (21,824)
------------ ----------- -----------
Net cash (used in) provided by financing activities............................ (278,171) (202,225) 5,664
------------ ----------- -----------
Net decrease in cash and cash equivalents...................................... (7,940) (91,148) 104,132
Cash and cash equivalents at beginning of period............................... 30,827 121,975 17,843
------------ ----------- -----------
Cash and cash equivalents at end of period..................................... $ 22,887 $ 30,827 $ 121,975
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, including
interest capitalized................................................... $ 97,644 $ 98,083 $ 105,087
============ =========== ===========
(see accompanying notes to financial statements)
82
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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 to a lesser extent industrial buildings and
also owns land for future development (collectively, the "Properties") located
in the New York City 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 Company became the sole general partner of Reckson Operating
Partnership, L.P. (the "Operating Partnership") by contributing substantially
all of the net proceeds of the IPO, in exchange for an approximate 73% interest
in the Operating Partnership. All Properties acquired by the Company are held by
or through the Operating Partnership. In conjunction with the IPO, the Operating
Partnership executed various option and purchase agreements whereby it issued
common units of limited partnership interest in the Operating Partnership ("OP
Units") to certain continuing investors and assumed certain indebtedness in
exchange for (i) interests in certain property partnerships, (ii) fee simple and
leasehold interests in properties and development land, (iii) certain other
business assets and (iv) 100% of the non-voting preferred stock of the
management and construction companies. The Company's ownership percentage in the
Operating Partnership was approximately 94.2% and 89.5% at December 31, 2003 and
2002, respectively.
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,
2003 and 2002 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003. The
Operating Partnership's investments in majority owned and controlled real estate
joint ventures are reflected in the accompanying financial statements on a
consolidated basis with a reduction for the minority partners' interest. The
Operating Partnership also invests in real estate joint ventures where it may
own less than a controlling interest. Such investments are reflected in the
accompanying financial statements on the equity method of accounting. The
operating results of Reckson Management Group, Inc., RANY Management Group,
Inc., Reckson Construction Group New York, Inc. and Reckson Construction Group,
Inc. (collectively, the "Service Companies"), in which the Operating Partnership
owned a 97% non-controlling interest are reflected in the accompanying financial
statements on the equity method of accounting through September 30, 2002. On
October 1, 2002, the Operating Partnership acquired the remaining 3% interests
in the Service Companies for an aggregate purchase price of approximately
$122,000. As a result, the Operating Partnership commenced consolidating the
operations of the Service Companies. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
83
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Minority partners' interests in consolidated partnerships represent a 49%
non-affiliated interest in RT Tri-State LLC, owner of an eight property suburban
office portfolio, a 40% non-affiliated interest in Omni Partners, L.P., owner of
a 579,000 square foot suburban office property and a 49% non-affiliated interest
in Metropolitan 919 Third Avenue, LLC, owner of the property located at 919
Third Avenue, New York, NY. Limited partners' minority interest in the Operating
Partnership was approximately 5.8% and 10.5% at December 31, 2003 and 2002,
respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("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
Land, buildings and improvements, furniture, fixtures and equipment are
recorded at cost. Tenant improvements, which are included in buildings and
improvements, are also stated at cost. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are incurred. Renovations and / or
replacements, which improve or extend the life of the asset, are capitalized and
depreciated over their estimated useful lives.
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. Depreciation expense,
net of discontinued operations, for each of the three years ended December 31,
2003 amounted to $65.6 million, $67.0 million and $63.7 million, respectively.
The Company is required to make subjective assessments as to the useful
lives of its properties for purposes of determining the amount of depreciation
to reflect on an annual basis with respect to those properties. These
assessments have a direct impact on the Company's net income. Should the Company
lengthen the expected useful life of a particular asset, it would be depreciated
over more years and result in less depreciation expense and higher annual net
income.
Assessment by the Company of certain other lease related costs must be
made when the Company has a reason to believe that the tenant will not be able
to execute under the term of the lease as originally expected.
84
Long Lived Assets
On a periodic basis, management assesses whether there are any indicators
that the value of the real estate properties may be impaired. A property's value
is impaired only if management's estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by the property are
less than the carrying value of the property. Such cash flows consider factors
such as expected future operating income, trends and prospects, as well as the
effects of demand, competition and other factors. To the extent impairment has
occurred, the loss will be measured as the excess of the carrying amount of the
property over the fair value of the property.
In October 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("Statement No. 144"). Statement No. 144 provides accounting
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets. Statement No. 144 supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. It also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
related to the disposal of a segment of a business. The Company adopted
Statement No. 144 on January 1, 2002. The adoption of this statement did not
have a material effect on the results of operations or the financial position of
the Company. The adoption of Statement No. 144 does not have an impact on net
income (loss) allocable to common shareholders. Statement No. 144 only impacts
the presentation of the results of operations and gain on sales of depreciable
real estate assets for those properties sold during the period within the
consolidated statements of operations. In accordance with the provisions of
Statement No. 144, the Company allocated approximately $7.6 million, $7.3
million and $12.7 million of its unsecured corporate interest expense to
discontinued operations for the three annual periods ended December 31, 2003,
respectively. Such allocation was based upon the Company's weighted average
interest rate incurred under its unsecured credit facility which was applied to
the portion of the proceeds received from its asset sales as if such asset sales
occurred at the beginning of each reported period.
On July 1, 2001 and January 1, 2002, the Company adopted FASB Statement
No.141 "Business Combinations" and FASB Statement No. 142, "Goodwill and Other
Intangibles", respectively. As part of the acquisition of real estate assets,
the fair value of the real estate acquired is allocated to the acquired tangible
assets, consisting of land, building and building improvements, and identified
intangible assets and liabilities, consisting of the value of above-market and
below-market leases, other value of in-place leases, and value of tenant
relationships, based in each case on their fair values. The Company assesses
fair value based on estimated cash flow projections that utilize appropriate
discount and capitalization rates and available market information. Estimates of
future cash flows are based on a number of factors including the historical
operating results, known trends, and market / economic conditions that may
affect the property. If the Company incorrectly estimates the values at
acquisition or the undiscounted cash flows, initial allocation of purchase price
and future impairment charges may be different.
85
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Tenant's lease security deposits aggregating approximately $4.9 million
and $5.6 million at December 31, 2003 and 2002, respectively, have been included
in cash and cash equivalents on the accompanying balance sheets.
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 in obtaining financing are capitalized
and amortized over the term of the related loan.
Costs incurred in connection with equity offerings are charged to
stockholders' equity when incurred.
Income Taxes
Commencing with its taxable year ended December 31, 1995, the Company
elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a REIT, the Company must meet a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 90% of its adjusted taxable income to its
stockholders. It is management's current intention to adhere to these
requirements and maintain the Company's REIT status. As a REIT, the Company
generally will not be subject to corporate level federal income tax on taxable
income it distributes currently to its stockholders. If the Company fails to
qualify as a REIT in any taxable year, it will be subject to federal income
taxes at regular corporate rates (including any applicable alternative minimum
tax) and may not be able to qualify as a REIT for the subsequent four taxable
years. Even if the Company qualifies for taxation as a REIT, the Company may be
subject to certain state and local taxes on its income and property, and to
federal income and excise taxes on its undistributed taxable income. In
addition, taxable income from non-REIT activities managed through the Service
Companies as taxable REIT subsidiaries are subject to federal, state and local
income taxes. (See Note 14 for the Company's reconciliation of GAAP net income
to taxable income, its reconciliation of cash distributions to the dividends
paid deduction and its characterization of taxable distributions).
86
Revenue Recognition & Accounts Receivable
Minimum rental revenue is recognized on a straight-line basis over the
term of a 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 makes estimates of the collectibility of its accounts
receivables related to base rents, tenant escalations and reimbursements and
other revenue or income. The Company specifically analyzes tenant receivables
and analyzes historical bad debts, customer credit worthiness, current economic
trends and changes in customer payment terms when evaluating the adequacy of its
allowance for doubtful accounts. In addition, when tenants are in bankruptcy the
Company makes estimates of the expected recovery of pre-petition administrative
and damage claims. In some cases, the ultimate resolution of those claims can
exceed a year. These estimates have a direct impact on the Company's net income,
because a higher bad debt reserve results in less net income.
The Company incurred approximately $4.7 million and $6.3 million of bad
debt expense for the years ended December 31, 2003 and 2002, respectively,
related to tenant receivables and deferred rents receivable which accordingly
reduced total revenues and reported net income during the period.
87
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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: (i) the status of the loan, (ii) the value of
the underlying collateral, (iii) the financial condition of the borrower and
(iv) anticipated future events.
Gain on 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 and the Company having no substantial continuing
involvement with the buyer.
Earnings Per Share
In 1997, the FASB issued Statement No. 128, "Earnings per Share"
("Statement No. 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. The conversion of OP Units into Class A common stock would not have a
significant effect on per share amounts as the OP Units share proportionately
with the Class A common stock in the results of the Operating Partnership's
operations.
Stock Options
Effective January 1, 2002 the Company has elected to follow FASB
Statement No. 123, "Accounting for Stock Based Compensation" ("Statement No.
123"). Statement No. 123 requires the use of option valuation models which
determine the fair value of the option on the date of the grant. All future
employee stock option grants will be expensed over the options' vesting periods
based on the fair value at the date of the grant in accordance with Statement
No. 123. To determine the fair value of the stock options granted, the Company
uses a Black-Scholes option pricing model. Historically, the Company had applied
Accounting Principles Board Opinion No. 25 ("APB No. 25") and related
interpretations in accounting for its stock option plans and reported pro forma
disclosures in its Form 10-K filings by estimating the fair value of options
issued and the related expense in accordance with Statement No. 123 (see Note
7). Accordingly, no compensation cost had been recognized for its stock option
plans prior to the Company's adoption of Statement No. 123.
88
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure" ("Statement No. 148").
Statement No. 148 amends Statement No. 123 to provide alternative methods of
transition for an entity that voluntarily adopts the fair value recognition
method of recording stock option expense. Statement No. 148 also amends the
disclosure provisions of Statement 123 and Accounting Principles Board Opinion
No. 28, "Interim Financial Reporting" to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock options on reported net income and earnings per share in
annual and interim financial statements.
The following table sets forth the Company's pro forma information for
its Class A common stockholders for the years ended December 31 (in thousands
except earnings per share data):
2003 2002 2001
------------- -------------- -------------
Net income (loss) as reported...................................... $ 124,966 $ 41,604 $ (44,243)
Add: Stock option expense included in net income (loss)........... 5 94 --
Less: Stock option expense determined under fair value
recognition method for all awards....................... (253) (495) (476)
------------- -------------- -------------
Pro forma net income (loss)........................................ $ 124,718 $ 41,203 $ (44,719)
============= ============== =============
Net income (loss) per share as reported:
Basic......................................................... $ 2.55 $ .84 $ (.92)
============= ============== =============
Diluted....................................................... $ 2.54 $ .83 $ (.92)
============= ============== =============
Pro forma net income (loss) per share:
Basic......................................................... $ 2.54 $ .83 $ (.93)
============= ============== =============
Diluted....................................................... $ 2.53 $ .82 $ (.93)
============= ============== =============
The fair value for those options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the three annual periods ended December 31:
2003 2002 2001
------------ ------------- -------------
Risk free interest rate............................................ 3.0% 3.0% 5.0%
Dividend yield .................................................... 7.36% 7.38% 7.52%
Volatility factor of the expected market price of the
Company's Class A common stock................................ .193 .198 .202
Weighted average expected option life (in years)................... 5 5 5
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
89
Derivative Instruments
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which became effective January 1, 2001, requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in accumulated other comprehensive income ("OCI") until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.
90
Extinguishment of Debt
In April 2002, the FASB issued Statement No. 145, ("Statement No.
145"), which rescinded Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt". Statement No. 145 is effective for fiscal years
beginning after May 15, 2002. The Company adopted Statement No. 145 on January
1, 2003. As a result of the adoption of Statement No. 145, previously reported
extraordinary losses resulting from the write-off of certain deferred loan costs
related to debt refinancings reported in 2002 and 2001 have been reclassed to
interest expense on the accompanying consolidated statements of operations. Such
amounts, net of limited partners' minority interest, totaled approximately $2.3
million and $2.6 million, respectively. The adoption of Statement No. 145 does
not have an impact on net income (loss) allocable to common shareholders.
Statement No. 145 only impacts the presentation of the results of operations
within the consolidated statements of operations.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes
the current practice in the accounting for, and disclosure of, guarantees.
Guarantees and indemnification agreements meeting the characteristics described
in FIN 45 are required to be initially recorded as a liability at fair value.
FIN 45 also requires a guarantor to make significant new disclosures for
virtually all guarantees even if the likelihood of the guarantor having to make
payment under the guarantee is remote. The disclosure requirements within FIN 45
are effective for financial statements for annual or interim periods ending
after December 15, 2002. The initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did not have a material
effect on the results of operations or the financial position of the Company.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which explains how to identify variable
interest entities ("VIE") and how to assess whether to consolidate such
entities. The initial determination of whether an entity qualifies as a VIE
shall be made as of the date at which a primary beneficiary becomes involved
with the entity and reconsidered as of the date of a triggering event, as
defined. The provisions of this interpretation are immediately effective for
VIEs formed after January 31, 2003. In December 2003 the FASB issued FIN 46R,
deferring the effective date until the period ending March 31, 2004 for
interests held by public companies in variable interest entities created before
February 1, 2003 which were non-special purpose entities. Management has not yet
determined whether any of its consolidated or unconsolidated subsidiaries
represent VIEs pursuant to such interpretation. Such determination could result
in a change in the Company's consolidation policy related to such entities.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("Statement 150"). Statement 150 is effective for financial instruments entered
into or modified after May 15, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
The adoption of Statement 150 did not have a material effect the Company's
financial position or results of operations.
91
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
92
2. MORTGAGE NOTES PAYABLE
At December 31, 2003, there were 14 fixed rate mortgage notes payable with
an aggregate outstanding principal amount of approximately $721.6 million. These
mortgage notes are secured by properties with an aggregate carrying value at
December 31, 2003 of approximately $1.5 billion and which are pledged as
collateral against the mortgage notes payable. In addition, approximately $44.0
million of the $721.6 million is recourse to the Company. The mortgage notes
bear interest at rates ranging from 6.45% to 9.25%, and mature between 2005 and
2027. The weighted average interest rates on the outstanding mortgage notes
payable at December 31, 2003, 2002 and 2001 were approximately 7.2%, 7.3% and
7.3%, respectively. Certain of the mortgage notes payable are guaranteed by
certain limited partners in the Operating Partnership and / or the Company.
The following table sets forth the Company's mortgage notes payable at
December 31, 2003, by scheduled maturity date (dollars in thousands):
Principal Interest Maturity Amortization
Property Outstanding Rate Date Term (Years)
----------------------------------------------- -------------- ----------- --------------- --------------
395 North Service Road, Melville, NY $ 19,301 6.45% October, 2005 $34 per month
200 Summit Lake Drive, Valhalla, NY 18,937 9.25% January, 2006 25
1350 Avenue of the Americas, NY, NY 73,779 6.52% June, 2006 30
Landmark Square, Stamford, CT (a) 44,029 8.02% October, 2006 25
100 Summit Lake Drive, Valhalla, NY 17,718 8.50% April, 2007 15
333 Earle Ovington Blvd., Mitchel Field, NY (b) 52,869 7.72% August, 2007 25
810 Seventh Avenue, NY, NY (e) 81,314 7.73% August, 2009 25
100 Wall Street, NY, NY (e) 35,236 7.73% August, 2009 25
6800 Jericho Turnpike, Syosset, NY 7,229 8.07% July 1, 2010 25
6900 Jericho Turnpike, Syosset, NY 13,696 8.07% July 1, 3010 25
580 White Plains Road, Tarrytown, NY 12,476 7.86% September, 2010 25
919 Third Avenue, NY, NY (c) 244,047 6.867% August, 2011 30
One Orlando Center, Orlando, FL (d) 37,759 6.82% November, 2027 28
120 West 45th Street, NY, NY (d) 63,245 6.82% November, 2027 28
--------------
Total / Weighted average $ 721,635 7.24%
==============
----------------------
(a) Encompasses six Class A office properties.
(b) The Company has a 60% general partnership interest in this property and
its proportionate share of the aggregate principal amount is a
pproximately $31.7 million.
(c) The Company has a 51% membership interest in this property and its
proportionate share of the aggregate principal amount is approximately
$124.5 million.
(d) Subject to interest rate adjustment on November 1, 2004 to the greater
of 8.82% per annum or the yield on non-callable U.S. Treasury
obligations with a term of fifteen years plus 2% per annum.
The Company has the ability to prepay the loan at that time. In
addition, these properties are cross-collateralized.
(e) These properties are cross-collateralized.
In addition, the Company has a 60% interest in an unconsolidated joint
venture property. The Company's pro rata share of the mortgage debt at December
31, 2003 is approximately $7.9 million. This mortgage note payable bears
interest at 8.85% per annum and matures on September 1, 2005 at which time the
Company's share of the mortgage debt will be approximately $6.9 million.
93
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Scheduled principal repayments to be made during the next five years and
thereafter, for mortgage notes payable outstanding at December 31, 2003, are as
follows (in thousands):
Scheduled principal Due at maturity Total
------------------- --------------- -----
2004............. $ 12,853 $ -- $ 12,853
2005............. 13,887 18,553 32,440
2006............. 13,478 129,920 143,398
2007............. 10,969 60,539 71,508
2008............. 9,989 -- 9,989
Thereafter....... 105,178 346,269 451,447
-------------------- ---------------- ---------------
$ 166,354 $ 555,281 $ 721,635
==================== ================= ================
3 UNSECURED CREDIT FACILITY
The Company currently has a three year $500 million unsecured revolving
credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association as syndication
agent and Citicorp North America, Inc. and Wachovia Bank, National Association
as co-documentation agents. The Credit Facility matures in December 2005,
contains options for a one year extension subject to a fee of 25 basis points
and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. At December 31, 2003, borrowings under
the Credit Facility were priced off LIBOR plus 120 basis points and the Credit
Facility carried a facility fee of 30 basis points per annum. On January 28,
2004, the Company received an investment grade rating on its senior unsecured
debt from Fitch ratings of BBB-. This rating along with the Company's existing
investment grade rating of BBB- from Standard & Poors, resulted in the pricing
on outstanding borrowings to decrease to LIBOR plus 90 basis points and the
facility fee to decrease to 20 basis points per annum. In the event of a change
in the Operating Partnership's senior unsecured credit rating the interest
rates and facility fee are subject to change. At December 31, 2003, the
outstanding borrowings under the Credit Facility aggregated $169 million and
carried a weighted average interest rate of 2.86% per annum.
The Company utilizes the Credit Facility primarily to finance real estate
investments, fund its real estate development activities and for working capital
purposes. At December 31, 2003, the Company had availability under the Credit
Facility to borrow approximately an additional $331 million subject to
compliance with certain financial covenants.
The Company capitalized interest incurred on borrowings to fund certain
development projects in the amount of $8.0 million, $8.3 million and $10.2
million for the years ended December 31, 2003, 2002 and 2001, respectively.
94
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. SENIOR UNSECURED NOTES
As of December 31, 2003, the Operating Partnership had outstanding
approximately $499.4 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 by
scheduled maturity date (dollars in thousands):
FACE COUPON
ISSUANCE AMOUNT RATE TERM MATURITY
------------------------------ ---------------- ------------------- --------------- --------------------
March 26, 1999 $100,000 7.40% 5 years March 15, 2004
June 17, 2002 $ 50,000 6.00% 5 years June 15, 2007
August 27, 1997 $150,000 7.20% 10 years August 28, 2007
March 26, 1999 $200,000 7.75% 10 years March 15, 2009
Interest on the Senior Unsecured Notes is payable semiannually with
principal and unpaid interest due on the scheduled maturity dates. In addition,
the Senior Unsecured Notes issued on March 26, 1999 and June 17, 2002 were
issued at aggregate discounts of $738,000 and $267,500, respectively. Such
discounts are being amortized over the term of the Senior Unsecured Notes to
which they relate.
On January 22, 2004, the Operating Partnership issued $150 million of
seven-year 5.15% (5.196% effective rate) senior unsecured notes. Prior to the
issuance of these notes the Company entered into several anticipatory interest
rate hedge instruments to protect itself against potentially rising interest
rates. At the time the notes were issued the Company incurred a net cost of
approximately $980,000 to settle these instruments. Such costs will be amortized
over the term of the notes. Net proceeds of approximately $148 million received
from this issuance were used to repay outstanding borrowings under the Credit
Facility.
95
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. LAND LEASES, AIR RIGHTS AND OPERATING LEASES
The Company leases, pursuant to noncancellable operating leases, the land
on which eleven of its buildings were constructed. The leases, certain of which
contain renewal options at the direction of the Company, expire between 2006 and
2090. The leases either contain provisions for scheduled increases in the
minimum rent at specified intervals or 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 was approximately $3.2 million and $3.3 million at December 31, 2003 and
2002, respectively. These amounts are included in accrued expenses and other
liabilities on the accompanying balance sheets.
In addition, the Company, through the acquisition of certain properties,
is subject to an air rights lease agreement. This lease agreement has a term
expiring 2048, including renewal options.
Reckson Management Group, Inc. is subject to operating leases for certain
of its management offices and warehouse storage space. These operating leases
expire 2009.
Future minimum lease commitments relating to the land leases, air rights
lease agreements and operating leases during the next five years and thereafter
are as follows (in thousands):
Year ended December 31, Land Leases Air Rights (1) Operating Leases
---------------------------------------- -------------------- ----------------- -----------------------
2004 $ 2,993 $ 333 $ 785
2005 2,995 333 813
2006 2,961 333 842
2007 2,888 333 870
2008 2,888 333 370
Thereafter 47,309 3,680 --
-------------------- ----------------- -----------------------
$ 62,034 $ 5,345 $ 3,680
==================== ================= =======================
(1) Excludes approximately $453,000 in aggregate payments due under a Long
Island office property which was sold in January 2004.
In addition, aggregate expense contractually due under the Company's land
leases, air rights and operating leases for each of the three years ended
December 31, 2003 amounted to $3.4 million, $3.5 million and $4.9 million.
96
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. COMMERCIAL REAL ESTATE INVESTMENTS
As of December 31, 2003, the Company owned and operated 77 office
properties (inclusive of 10 office properties owned through joint ventures)
comprising approximately 13.7 million square feet, 11 industrial properties
comprising approximately 1.0 million square feet and one retail property
comprising approximately 9,000 square feet located in the Tri-State Area.
The Company also owns approximately 313 acres of land in 12 separate
parcels of which the Company can develop approximately 3.0 million square feet
of office space. The Company is currently evaluating alternative land uses for
certain of the land holdings to realize the highest economic value. These
alternatives may include rezoning certain land parcels from commercial to
residential for potential disposition. As of December 31, 2003, the Company had
invested approximately $116.8 million in these development projects. Management
has made subjective assessments as to the value and recoverability of these
investments based on current and proposed development plans, market comparable
land values and alternative use values. The Company has capitalized
approximately $10.0 million for the year ended December 31, 2003 related to real
estate taxes, interest and other carrying costs related to these development
projects. In October 2003, the Company entered into contracts to sell two land
parcels aggregating approximately 128 acres of its land holdings located in New
Jersey. The contracts provided for aggregate sales prices ranging from $23
million to $43 million. The aggregate cost basis of these assets at December 31,
2003 was approximately $11.8 million. These sales are contingent upon obtaining
zoning for residential use of the land and other customary approvals. The
proceeds ultimately received from such sales will be based upon the number of
residential units permitted by the rezoning. The closing is scheduled to occur
upon the rezoning which is anticipated to occur within 9 to 33 months. During
February 2004, a 3.9 acre land parcel located on Long Island was condemned by
the Town of Oyster Bay. As consideration from the condemnation the Company
anticipates to initially receive approximately $1.8 million. The Company's cost
basis in this land parcel at December 31, 2003 was approximately $1.4 million.
The Company is currently contesting this valuation and seeking payment of
additional consideration from the Town of Oyster Bay but there can be no
assurances that the Company will be successful in obtaining any such additional
consideration.
The Company holds a $17.0 million note receivable which bears
interest at 12% per annum and is secured by a minority partnership interest in
Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class A office
property located in Uniondale, N.Y. (the "Omni Note"). The Company currently
owns a 60% majority partnership interest in Omni Partners, L.P. and on March 14,
2007 may exercise an option to acquire the remaining 40% interest for a price
based on 90% of the fair market value of the property. The Company holds a $15
million participating interest in a $30 million junior mezzanine note loan which
is secured by a pledge of an indirect ownership interest of an entity which owns
the ground leasehold estate under a 1.1 million square foot office complex
located on Long Island, NY (the "Mezz Note"). The Mezz Note matures in September
2005, currently bears interest at 13.43%, and the borrower has the right to
extend for three additional one-year periods. The Company also holds three other
notes receivable aggregating $21.5 million which bear interest at rates ranging
from 10.5% to 12% per annum. These notes are secured in part by a minority
partner's preferred unit interest in the Operating Partnership, an interest in
real property and a personal guarantee (the "Other Notes" and collectively with
the Omni Note, the Mezz Note, the "Note Receivable Investments"). As of December
31, 2003, management has made subjective assessments as to the underlying
security value on the Company's Note Receivable Investments. These assessments
indicate an
97
excess of market value over the carrying value related to the Company's Note
Receivable Investments. Based on these assessments the Company's management
believes there is no impairment to the carrying value related to the Company's
Note Receivable Investments. The Company also owns a 355,000 square foot office
building in Orlando, Florida. This non-core real estate holding was acquired in
May 1999 in connection with the Company's initial New York City portfolio
acquisition. This property is cross collateralized under a $101.0 million
mortgage note payable along with one of the Company's New York City buildings.
The Company has the right to prepay this note in November 2004, prior to its
maturity.
98
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. COMMERCIAL REAL ESTATE INVESTMENTS (CONTINUED)
The Company also owns a 60% non-controlling interest in a 172,000 square
foot office building located at 520 White Plains Road in White Plains, New York
(the "520JV"), which it manages - the remaining 40% interest is owned by JAH
Realties L.P. Jon Halpern, a director of HQ Global Workplaces, is a partner in
JAH Realties, L.P. As of December 31, 2003, the 520JV had total assets of $19.8
million, a mortgage note payable of $12.0 million and other liabilities of
$185,000. The Company's allocable share of the 520JV mortgage note payable is
approximately $7.9 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005. During the second quarter of 2003,
HQ Global Workplaces, a tenant of the 520JV surrendered approximately one-third
of its premises. As a result, the 520JV incurred a write-off of $633,000
relating to its deferred rents receivable. The operating agreement of the 520JV
requires joint decisions from all members on all significant operating and
capital decisions including sale of the property, refinancing of the property's
mortgage debt, development and approval of leasing strategy and leasing of
rentable space. As a result of the decision-making participation relative to the
operations of the property, the Company accounts for the 520JV under the equity
method of accounting. In accordance with the equity method of accounting the
Company's proportionate share of the 520JV income was approximately $30,000,
$648,000 and $478,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
During September 2000, the Company formed a joint venture (the "Tri-State
JV") with Teachers Insurance and Annuity Association ("TIAA") and contributed
nine Class A suburban office properties aggregating approximately 1.5 million
square feet to the Tri-State JV for a 51% majority ownership interest. TIAA
contributed approximately $136 million for a 49% interest in the Tri-State JV
which was then distributed to the Company. In August 2003, the Company acquired
TIAA's 49% interest in the property located at 275 Broadhollow Road, Melville,
NY for approximately $12.4 million. As a result, the Tri-State JV owns eight
Class A suburban office properties aggregating approximately 1.4 million square
feet. The Company is responsible for managing the day-to-day operations and
business affairs of the Tri-State JV and has substantial rights in making
decisions affecting the properties such as leasing, marketing and financing. The
minority member has certain rights primarily intended to protect its investment.
For purposes of its financial statements the Company consolidates the Tri-State
JV.
On December 21, 2001, the Company formed a joint venture with the New York
State Teachers' Retirement System ("NYSTRS") (the "919JV") whereby NYSTRS
acquired a 49% indirect interest in the property located at 919 Third Avenue,
New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Company. The Company is responsible for
managing the day-to-day operations and business affairs of the 919JV and has
substantial rights in making decisions affecting the property such as developing
a budget, leasing and marketing. The minority member has certain rights
primarily intended to protect its investment. For purposes of its financial
statements the Company consolidates the 919JV.
99
During February 2003, the Company, through Reckson Construction Group,
Inc., entered into a contract with an affiliate of First Data Corp. to sell a
19.3-acre parcel of land located in Melville, New York and was retained by the
purchaser to develop a build-to-suit 195,000 square foot office building for
aggregate consideration of approximately $47 million. This transaction closed on
March 11, 2003 and development of the aforementioned office building has
commenced and is near completion. Net proceeds from the land sale of
approximately $18.3 million were used to establish an escrow account with a
qualified intermediary for a future exchange of real property pursuant to
Section 1031 of the Code (a "Section 1031 Exchange"). A Section 1031 Exchange
allows for the deferral of taxes related to the gain attributable to the sale of
property if qualified replacement property is identified within 45 days and such
qualified replacement property is then acquired within 180 days from the initial
sale. As described below, the Company identified and acquired certain qualified
replacement properties. In accordance with Statement No. 66, the Company has
estimated its book gain on this land sale and build-to-suit transaction to be
approximately $22.4 million, of which $18.8 million has been recognized during
the year ended December 31, 2003 and is included in investment and other income
on the Company's statement of operations. Approximately $3.6 million is
estimated to be earned in 2004 as the development is completed.
100
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. COMMERCIAL REAL ESTATE INVESTMENTS (CONTINUED)
On May 22, 2003, the Company, through Reckson Construction Group, Inc.,
acquired two industrial redevelopment properties in Hauppauge, Long Island
encompassing approximately 100,000 square feet for total consideration of
approximately $6.5 million. On August 27, 2003, the Company, through Reckson
Construction Group, Inc., acquired the remaining 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, from the Company's joint venture
partner, TIAA, , for approximately $12.4 million. These acquisitions were
financed from the sales proceeds being held by the aforementioned qualified
intermediary and the properties acquired were qualified replacement properties.
As a result of these acquisitions, the Company successfully completed the
exchange of real property pursuant to Section 1031 and thereby deferred the
taxes related to the gain recognized on the sale proceeds received from the land
sale to First Data Corp. Two of the qualified replacement properties were
subsequently contracted for sale as part of the Company's Long Island industrial
building portfolio sale. There can be no assurances that the Company will
identify or acquire additional qualified replacement properties in which case
the Company would incur the tax liability on the capital gain realized of
approximately $1.5 million.
On August 7, 2003, the Company acquired a ten story, 181,800 square foot
Class A office property located in Stamford, Connecticut. This acquisition was
financed, in part, through an advance under the Company's unsecured credit
facility of $21.6 million and the issuance of 465,845 Class C OP Units
valued at $24.00 per unit. In accordance with FASB Statement No. 141 "Business
Combinations", the Company allocated and recorded a net deferred intangible
lease asset of approximately $1.5 million, representing the net value of
acquired above and below market leases, assumed lease origination costs and
other value of in-place leases. The net value of the above and below market
leases is amortized over the remaining terms of the respective leases to rental
income and such amortization amounted to approximately $331,000 during the 2003
period of ownership. In addition, amortization expense on the value of lease
origination costs was approximately $114,000 during the 2003 period of
ownership. At acquisition, there were 16 in-place leases aggregating
approximately 136,000 square feet with a weighted average remaining lease term
of approximately 21 months.
On September 5, 2003, the Company acquired the Mezz Note which is
comprised of three tranches based upon priority: a $14 million A tranche, a $14
million B tranche and a $2 million C tranche. The Company acquired a 25%
interest in the A tranche, a 75% interest in the B tranche and a 50% interest in
the C tranche. Interest is payable on the tranches at 9.5%, 12.5% and 12.5%,
respectively, over the greater of one month LIBOR or 1.63%. As a result, the
minimum weighted average interest rate accruing to the Company is 13.43% per
annum. In addition, as part of the Company's participation it received a 1%
origination fee amounting to $150,000. Such fee is being recognized over a three
year period.
101
In November 2003, the Company disposed of all but three of its 95
property, 5.9 million square foot, Long Island industrial building portfolio to
members of the Rechler family (the "Disposition") for approximately $315.5
million, comprised of $225.1 million in cash and debt assumption and 3,932,111
OP Units valued at approximately $90.4 million. Approximately $204 million of
cash sales proceeds from the Disposition were used to repay borrowings under the
Company's Credit Facility. Two of the remaining three properties, which are
subject to transfer pursuant to Section 1031 of the Code, are anticipated to
close during 2004. There can be no assurances that the Company will meet the
requirements of Section 1031 by identifying and acquiring qualified replacement
properties in the required time frame, in which case the Company would incur the
tax liability on the capital gain realized of approximately $1.5 million. The
disposition of the other property, which is subject to certain environmental
issues, is conditioned upon the approval of the buyer's lender, which has not
been obtained. As a result, the Company may not dispose of this property as a
part of the Disposition. Management believes that if the Company were to
continue to hold this property the cost to address the environmental issues
would not have a material adverse effect on the Company, but there can be no
assurance in this regard. The three remaining properties aggregate approximately
$7.1 million of the $315.5 million sales price. In addition, four of the five
remaining options granted to the Company at the time of the Company's IPO to
purchase interests in properties owned by Rechler family members (including
three properties in which the Rechler family members hold non-controlling
interests and one industrial property) were terminated along with management
contracts relating to three of such properties (see Note 8).
On November 24 2003, the Company sold a 181,000 square foot office
property located on Long Island for approximately $24.4 million. Net proceeds
from the sale were used to pay outstanding borrowings under the Credit Facility.
In January 2004, the Company sold a 104,000 square foot office property
located on Long Island for approximately $18.5 million. Net proceeds from the
sale were used to repay borrowings under the Company's unsecured Credit
Facility.
In January 2004, the Company acquired 1185 Avenue of the Americas, a
42-story, 1.1 million square foot Class A office tower, located between 46th and
47th Streets in New York City for $321 million. In connection with this
acquisition, the Company assumed a $202 million mortgage and $48 million of
mezzanine debt. The balance of the purchase price was paid through an advance
under the Credit Facility. The floating rate mortgage and mezzanine debt both
mature in August 2004 and presently have a weighted average interest rate of
4.95%. The property is also encumbered by a ground lease which has a remaining
term of approximately 40 years with rent scheduled to be re-set at the end of
2005 and then remain constant for the balance of the term.
In February 2004, the Company signed a contract to sell a 175,000 square
foot office building located on Long Island for approximately $30 million of
which the Company owns a 51% interest. Net proceeds from the sale are
anticipated to be used to pay outstanding borrowings under the Credit Facility.
102
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. STOCKHOLDERS' EQUITY
An OP Unit and a share of Class A 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, OP Units may either be redeemed for cash or, at the election of the
Company, for shares of Class A common stock on a one-for-one basis.
The limited partners' minority interest in the Operating Partnership
("Limited Partner Equity"), which is reflected in the accompanying balance
sheets, is reported at an amount equal to the limited partners' ownership
percentage of the net equity of the Operating Partnership at the end of
reporting period. The Limited Partner Equity is adjusted at the end of the
period to reflect the ownership percentages at that time. The Limited Partner
Equity was 5.8% and 10.5% at December 31, 2003 and 2002, respectively.
The following table sets forth the Company's annual dividend rates and
dividends paid on each class of its common and preferred stock for each of the
years ended December 31:
2003 2002 2001
---- ---- ----
Class A common stock:
Dividend rate......................... $ 1.698 $ 1.698 $ 1.621
============== ================ =================
Dividends paid (in thousands)......... $ 81,638 $ 85,102 $ 77,426
============== ================ =================
Class B common stock:
Dividend rate......................... $ 2.588 $ 2.593 $ 2.498
============== ================ =================
Dividends paid (in thousands)......... $ 25,665 $ 26,423 $ 25,692
============== ================ =================
Series A preferred stock:
Dividend rate......................... $ 1.906 $ 1.906 $ 1.906
============== ================ =================
Dividends paid (in thousands)......... $ 16,842 $ 17,524 $ 17,524
============== ================ =================
Series B preferred stock:
Dividend rate......................... $ 2.213 $ 2.213 $ 2.171
============== ================ =================
Dividends paid (in thousands)......... $ 4,425 $ 4,425 $ 4,300
============== ================ =================
On January 1, 2003, the Company had issued and outstanding 9,915,313 shares
of Class B Exchangeable Common Stock, par value $.01 per share (the "Class B
common stock"). The shares of Class B common stock were exchangeable at any
time, at the option of the holder, into an equal number of shares of Class A
common stock, subject to customary antidilution adjustments. The Company, at its
option, could have redeemed any or all of the Class B common stock in exchange
for an equal number of shares of the Company's Class A common stock at any time
following November 23, 2003.
On October 24, 2003, the Company gave notice to its Class B common
stockholders that it would exercise its option to exchange all of its Class B
common stock outstanding on November 25, 2003 for an equal number of shares of
Class A common stock. The Board of Directors declared a final cash dividend on
the Company's Class B common stock to holders of record on November 25, 2003 in
the amount of
103
$.1758 per share, which was paid on January 12, 2004. The payment covered the
period from November 1, 2003 through November 25, 2003 and was based on the
previous quarterly Class B common stock dividend rate of $.6471 per share. In
order to align the regular quarterly dividend payment schedule of the former
holders of Class B common stock with the schedule of the holders of Class A
common stock for periods subsequent to the exchange date for the Class B common
stock, the Board of Directors also declared a cash dividend with regard to the
Class A common stock to holders of record on October 14, 2003 in the amount of
$.2585 per share, which was paid on January 12, 2004. This payment covered the
period from October 1, 2003 through November 25, 2003 and was based on the
current quarterly Class A common stock dividend rate of $.4246 per share. As a
result, the Company has declared dividends through November 25, 2003 to all
holders of Class A common stock and Class B common stock. The Board of Directors
also declared the Class A common stock cash dividend for the portion of the
fourth quarter subsequent to November 25, 2003. The holders of record of Class A
common stock on January 2, 2004, giving effect to the exchange transaction,
received a Class A common stock dividend in the amount of $.1661 per share, on
January 12, 2004. This payment covered the period from November 26, 2003 through
December 31, 2003 and was based on the current quarterly Class A common stock
dividend rate of $.4246 per share.
The Board of Directors of the Company authorized the purchase of up to
five million shares of the Company's Class A common stock. Transactions
conducted on the New York Stock Exchange 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. During the year ended December 31, 2003,
under this buy-back program, the Company purchased 252,000 shares of Class A
common stock at an average price of $18.01 per Class A share for an aggregate
purchase price of approximately $4.5 million.
104
The following table sets forth the Company's historical activity under its
current common stock buy-back program (dollars in thousands except per share
data):
SHARES AVERAGE AGGREGATE
PURCHASED PRICE PER SHARE PURCHASE PRICE
-------------------- ---------------------- --------------------
Current program:
Class A common 2,950,400 $ 21.30 $ 62,830
Class B Common 368,200 $ 22.90 8,432
-------------------- --------------------
3,318,600 $ 71,262
==================== ====================
The Board of Directors of the Company formed a pricing committee to
consider purchases of up to $75 million of the Company's outstanding preferred
securities.
On December 31, 2003, the Company had issued and outstanding 8,834,500
shares of 7.625% Series A Convertible Cumulative Preferred Stock (the "Series A
preferred stock"). The Series A preferred stock is redeemable by the Company on
or after April 13, 2003 at a price of approximately $25.95 per share with such
price decreasing, at annual intervals, to $25.00 per share over a five year
period. In addition, the Series A preferred stock, at the option of the holder,
is convertible at any time into the Company's Class A common stock at a price of
$28.51 per share. On October 14, 2002, the Company purchased and retired 357,500
shares of the Series A preferred stock at $22.29 per share for approximately
$8.0 million. As a result of this purchase, annual preferred dividends decreased
by approximately $682,000.
As of December 31, 2003, the Company had issued and outstanding two
million shares of 8.85% Series B Convertible Cumulative Preferred Stock (the
"Series B preferred stock"). The Series B preferred stock was redeemable by the
Company as follows: (i) on or after March 2, 2002 to and including June 2, 2003,
at an amount which provides an annual rate of return in respect to such share of
15%, (ii) on or after June 3, 2003 to and including June 2, 2004, $25.50 per
share and (iii) on or after June 3, 2004 and thereafter, $25.00 per share. The
Series B preferred stock, at the option of the holder, was convertible at any
time into the Company's Class A common stock at a price of $26.05 per share. In
January 2004, the Company exercised its option to redeem the two million shares
of outstanding Series B preferred stock for approximately 1,958,000 shares of
its Class A common stock. As a result of this redemption, based on current
common dividend rates, net dividends will decrease by approximately $1.1
million.
On November 10, 2003, as partial consideration for the Company's sale of
its Long Island industrial building portfolio, to the departing Rechler family
members, the Company redeemed and retired approximately 3.9 million OP Units
valued at approximately $90.4 million or $23.00 per share. In addition, during
the year ended December 31, 2003, certain limited partners exchanged
approximately 258,000 OP Units for an equal number of shares of the Company's
Class A common stock.
During the year ended December 31, 2002, certain limited partners exchanged
approximately 11,303 preferred units of limited partnership interest in the
Operating Partnership, with a liquidation preference value of approximately
$11.3 million, for 451,934 OP Units at an average price of $24.66 per OP Unit.
In addition, certain limited partners exchanged 666,468 OP Units for an equal
number of shares of the Company's Class A common stock.
105
On August 7, 2003, in conjunction with the Company's acquisition of a Class
A office property located in Stamford, Connecticut (see Note 6), it issued
465,845 Class C OP Units to the sellers of the property. The Class C OP Units
will receive an initial annual distribution of $1.87 per unit, which amount will
increase or decrease pro-rata based upon changes in the dividend paid on the
Company's Class A common stock.
In October 2000, the Company instituted a Shareholder Rights Plan (the
"Rights Plan") designed to protect shareholders from various abusive takeover
tactics, including attempts to acquire control of the Company at an inadequate
price. Under the Rights Plan, each shareholder receives one Right to acquire one
one-thousandth of a share of a series of junior participating preferred stock at
an initial purchase price of $84.44 for each share of the Company's outstanding
Class A common stock owned. The Rights will be exercisable only if a person or
group acquires, or announces an intention to acquire, 15% or more of the
Company's Class A common stock, or announces a tender offer which would result
in beneficial ownership by a person or group of 15% or more of the Class A
common stock. If any person acquires 15% or more of the outstanding shares of
Class A common stock or if the Company is acquired in a merger after such an
acquisition, all Rights holders except the acquiring person will be entitled to
purchase the Company's Class A common stock at a discounted price. The Rights
will expire at the close of business on October 13, 2010, unless earlier
redeemed by the Company.
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. In May 2001, a minority partner that owned an $85 million preferred
equity investment in Metropolitan converted its preferred equity investment into
3,453,881 shares of the Company's Class A common stock based on a conversion
price of $24.61 per share. As a result of the minority partner's conversion of
their preferred equity investment, the Company owns 100% of Metropolitan.
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio and the settlement of the employment
contracts of the departing Rechler family members, the Company incurred the
following restructuring charges: (i) approximately $7.5 million related to
outstanding stock loans under the Company's historical LTIP program were
transferred to the purchaser and approximately $642,000 of loans related to life
insurance contracts were extinguished, (ii) approximately $2.9 million paid to
the departing Rechler family members in exchange for 127,689, or 100%, of their
2002 Rights and their 2003 Rights were forfeited in their entirety and (iii)
with respect to two of the departing Rechler family members participating in the
Company's March 2003 LTIP, each received 8,681 shares of the Company's Class A
common stock related to the service component of their core award which was
valued at $293,000 in the aggregate. In addition, if the Company attains its
annual performance measure in March 2004, these individuals will also be
entitled to each receive 26,041 shares of Class A common stock representing the
balance of the annual core award as if they had remained in continuous
employment with the Company. The remainder of their core awards, aggregating
208,334 shares of Class A common stock, was forfeited. The Company also incurred
additional restructure charges of approximately $1.2 million related primarily
to the release and severance of approximately 25 employees. Total restructure
charges of approximately $12.5 million were mitigated by a $972,000 fee from
the departing Rechler family members related to the termination of the Company's
option to acquire certain property which was either owned by certain Rechler
family members or in which the Rechler family members own a non-controlling
interest (see Note 8).
106
On May 29, 2003, the Board of Directors appointed Mr. Peter Quick as Lead
Director and Chairman of the Nominating/Governance Committee. The
Nominating/Governance Committee as well as the Audit Committee and Compensation
Committee are comprised solely of independent directors.
In addition, in May 2003, the Company revised its policy with respect to
compensation of its independent directors to provide that a substantial portion
of the independent directors' compensation shall be in the form of Class A
common stock of the Company. Such common stock may not be sold until such time
as the director is no longer a member of the Company's Board.
107
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company had historically structured long term incentive programs
("LTIP") using restricted stock and stock loans. In July 2002, as a result of
certain provisions of the Sarbanes Oxley legislation, the Company discontinued
the use of stock loans in its LTIP. In connection with LTIP grants made prior to
the enactment of the Sarbanes Oxley legislation the Company made stock loans to
certain executive and senior officers to purchase 1,372,393 shares of its Class
A common stock at market prices ranging from $18.44 per share to $27.13 per
share. The stock loans were set to bear interest at the mid-term Applicable
Federal Rate and were secured by the shares purchased. Such stock loans
(including accrued interest) were scheduled to vest and be ratably forgiven each
year on the anniversary of the grant date based upon vesting periods ranging
from four to ten years based on continued service and in part on attaining
certain annual performance measures. These stock loans had an initial aggregate
weighted average vesting period of approximately nine years. As of December 31,
2003, and giving effect to the settlement of the employment contracts of certain
executive officers, there remains 264,144 shares of common stock subject to the
original stock loans which are anticipated to vest between 2004 and 2011.
Approximately $3.1 million and $4.5 million of compensation expense was recorded
for the years ended December 31, 2003 and 2002, respectively, related to these
LTIP. Such amounts have been included in marketing, general and administrative
expenses on the accompanying consolidated statements of operations.
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $5.6 million and $17.0 million at December 31, 2003 and
December 31, 2002, respectively, and have been included as a reduction of
additional paid in capital on the accompanying consolidated balance sheets.
Other outstanding loans to executive and senior officers at December 31, 2003
and December 31, 2002 amounted to approximately $2.9 million and $2.0 million,
respectively primarily related to tax payment advances on stock compensation
awards and life insurance contracts made to certain executive and non-executive
officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively, and collectively, the "Rights"). Each Right represents the right
to receive, upon vesting, one share of Class A common stock if shares are then
available for grant under one of the Company's stock option plans or, if shares
are not so available, an amount of cash equivalent to the value of such stock on
the vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 190,524 shares of the Company's Class A common stock and the
2003 Rights aggregate 60,760 shares of Class A common stock. As of December 31,
2003, and giving effect to the settlement of the employment contracts of certain
executive officers, there remains 47,126 shares of Class A common stock related
to the 2002 Rights and 26,040 shares of Class A common stock related to the 2003
rights. During the year ended December 31, 2003, the Company recorded
approximately $855,000 of compensation expense related to the Rights. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of operations.
108
In March 2003, the Company established a new LTIP for its executive and
senior officers. The four-year plan has a core award which provides for annual
stock based compensation based upon continued service and in part based on
attaining certain annual performance measures. The plan also has a special
outperformance award which provides for compensation to be earned at the end of
a four year period if the Company attains certain four year cumulative
performance measures. Amounts earned under the special outperformance award may
be paid in cash or stock at the discretion of the Compensation Committee of the
Board. Performance measures are based on total shareholder returns on a relative
and absolute basis. On March 13, 2003, the Company made available 1,384,102
shares of its Class A common stock under its existing stock option plans in
connection with the core award of this LTIP for twelve of its executive and
senior officers. During May 2003, two of the Company's executive officers waived
these awards under this LTIP in their entirety, which aggregated 277,778 shares
or 20% of the core awards granted. In addition, the special outperformance
awards of the LTIP were amended to increase the per share base price above which
the four year cumulative return is measured from $18.00 to $22.40. As of
December 31, 2003 and giving effect to the settlement of the employment
contracts of certain executive officers, there remains 879,858 shares of Class A
common stock reserved for future issuance under the core award of this LTIP.
With respect to the core award of this LTIP, the Company recorded approximately
$2.6 million of compensation expense for the year ended December 31, 2003. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of operations. Further, no provision
will be made for the special outperformance award of this LTIP until such time
as achieving the requisite performance measures is determined to be probable.
109
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 net income (loss) per weighted
average share for the Company's Class A common stock as required by Statement
No. 128 for the years ended December 31 (in thousands except for earnings per
share data):
2003 2002 2001
---------------- --------------- ---------------
Numerator:
Income (loss) before dividends to preferred
shareholders, discontinued operations and income
allocated to Class B shareholders.............................. $ 33,292 $ 57,480 $ (45,688)
Dividends to preferred shareholders.............................. (21,267) (21,835) (21,866)
Discontinued operations (net of share applicable to limited
partners and Class B common shareholders)...................... 116,379 14,422 7,319
(Income) loss allocated to Class B common
shareholders................................................... (3,438) (8,463) 15,992
---------------- --------------- ---------------
Numerator for basic and diluted net income (loss) per Share.......... $ 124,966 $ 41,604 $ (44,243)
================ =============== ===============
Denominator:
Denominator for basic net income (loss) per share-
weighted average Class A common shares......................... 49,092 49,669 48,121
Effect of dilutive securities:
Common stock equivalents....................................... 170 299 --
---------------- --------------- ---------------
Denominator for diluted net income (loss) per Class A
common share-adjusted weighted average
shares and assumed conversions................................. 49,262 49,968 48,121
================ =============== ===============
Basic net income (loss) per Class A common share:
Basic net income (loss)........................................ $ .18 $ .54 $ (1.36)
Gain on sales of real estate................................... -- .01 .29
Discontinued operations........................................ 2.37 .29 .15
---------------- --------------- ---------------
Basic net income (loss) per Class A common share............... $ 2.55 $ .84 $ (.92)
================ =============== ===============
Diluted net income (loss) per Class A common share:
Diluted net income (loss)...................................... $ .18 $ .53 $ (1.36)
Gain on sales of real estate................................... -- .01 .29
Discontinued operations........................................ 2.36 .29 .15
---------------- --------------- ---------------
Diluted net income (loss) per Class A common share............. $ 2.54 $ .83 $ (.92)
================ =============== ===============
110
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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 net income (loss) per weighted
average share for the Company's Class B common stock as required by Statement
No. 128 for the years ended December 31 (in thousands except for earnings per
share data):
2003 2002 2001
------------ ------------- -------------
Numerator:
Income (loss) before dividends to preferred shareholders,
discontinued operations and income allocated to Class A
common shareholders............................................. $ 33,292 $ 57,480 $ (45,688)
Dividends to preferred shareholders............................... (21,267) (21,835) (21,866)
Discontinued operations (net of share applicable to limited
partners and Class A common shareholders)....................... 13,851 4,465 2,367
(Income) loss allocated to Class A common shareholders............ (8,588) (27,181) 51,563
------------ ------------- -------------
Numerator for basic net income (loss) per share....................... 17,288 12,929 (13,624)
Add back:
Net income allocated to Class A common shareholders -- 41,604 --
Limited partners' minority interest in the operating partnership -- 6,238 --
------------ ------------- -------------
Numerator for diluted net income (loss) per share $ 17,288 $ 60,771 $ (13,624)
============ ============= =============
Denominator:
Denominator for basic net income (loss) per share- weighted
average Class B common shares................................... 8,910 10,122 10,284
Effect of dilutive securities:
Weighted average Class A common shares outstanding.............. -- 49,669 --
Weighted average OP Units outstanding........................... -- 7,389 --
Common stock equivalents........................................ 170 299 --
------------ ------------- -------------
Denominator for diluted net income (loss) per Class B common share-
adjusted weighted average shares and assumed conversions........ 9,080 67,479 10,284
============ ============= =============
Basic net income (loss) per Class B common share:
Basic net income (loss)........................................... $ .39 $ .83 $ (1.97)
Gain on sales of real estate...................................... -- .01 .42
Discontinued operations........................................... 1.55 .44 .23
------------ ------------- -------------
Basic net income (loss) per Class B common share.................. $ 1.94 $ 1.28 $ (1.32)
============ ============= =============
Diluted net income (loss) per Class B common share:
Diluted net income (loss)......................................... $ .37 $ .83 $ (1.97)
Gain on sales of real estate...................................... -- -- .42
Discontinued operations........................................... 1.53 .07 .23
------------ ------------- -------------
Diluted net income (loss) per Class B common share................ $ 1.90 $ .90 $ (1.32)
============ ============= =============
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 into the Company's Class A common stock.
111
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Employee Stock Option Plans and Related Disclosures
The Company has five outstanding stock option plans (the "Plans") for the
purpose of attracting and retaining executive officers, directors and other key
employees.
The following table sets forth the authorized shares of Class A common
stock which have been reserved for issuance under the Plans, the options granted
under the Plans and their corresponding exercise price range per share as of
December 31, 2003:
Exercise price range
Class A Common Options granted --------------------
shares reserved (1) (2) from (1) to (1)
------------------- ------------------- ------------ ------------
Amended and Restated 1995
Stock Option Plan 1,500,000 1,545,038 $ 12.04 $ 25.56
1996 Employee Stock Option Plan 400,000 269,600 $ 19.67 $ 26.13
Amended and Restated 1997
Stock Option Plan 3,000,000 2,525,965 $ 22.67 $ 27.04
1998 Stock Option Plan 3,000,000 2,280,501 $ 17.75 $ 25.67
Amended and Restated 2002
Stock Option Plan 1,500,000 -- -- --
------------------- -------------------
Total......................... 9,400,000 6,621,104
=================== ===================
-------------------
(1) Exercise prices have been split adjusted, where applicable.
(2) Inclusive of options subsequently forfeited by grantees and exclusive of
share grants.
Options granted to employees generally vest in three equal installments on
the first, second and third anniversaries of the date of the grant.
The independent directors of the Company have been granted options to
purchase 116,000 shares of Class A common stock pursuant to the Amended and
Restated 1995 Stock Option Plan at exercise prices ranging from $12.04 to $25.56
per share and options to purchase 43,000 shares of Class A common stock pursuant
to the Amended and Restated 1997 Stock Option Plan at exercise prices ranging
from $24.70 to $25.23 per share. The options granted to the independent
directors were exercisable on the date of the grant.
Two former independent directors of the Company were previously granted
options to purchase 62,500 shares of Class A common stock pursuant to the
Amended and Restated 1995 Stock Option Plan. During 2002, these former
independent directors exercised 26,000 options resulting in proceeds to the
Company of approximately $422,000.
During 2003 and 2002, employees exercised 58,809 and 389,283 options,
respectively, resulting in proceeds to the Company of approximately $1.0 million
and $5.9 million, respectively.
112
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Prior to 2002, the Company applied APB No. 25 and related interpretations
in accounting for its Plans and reported only pro forma information regarding
net income and earnings per share determined as if the Company had accounted for
its Plans under the fair value method as required by Statement No. 123 in the
footnotes to its financial statements.
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 Plans 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.
113
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following table summarizes the Company's stock option activity and
related information:
Weighted-average
Options exercise price
------- --------------
Outstanding - January 1, 2001.................. 5,486,584 $ 22.70
Granted........................................ 177,500 $ 22.61
Exercised...................................... (182,596) $ 15.41
Forfeited...................................... (118,133) $ 22.84
-----------------
Outstanding - December 31, 2001................ 5,363,355 $ 23.16
Granted........................................ 47,500 $ 24.87
Exercised...................................... (415,283) $ 15.20
Forfeited...................................... (82,002) $ 23.95
-----------------
Outstanding - December 31, 2002................ 4,913,570 $ 24.17
Granted........................................ -- --
Exercised...................................... (58,809) $ 17.57
Forfeited...................................... (90,917) $ 24.65
-----------------
Outstanding - December 31, 2003................ 4,763,844 $ 24.26
=================
.The following table sets forth the weighted average fair value of options
granted for the years ended December 31, and the weighted average per share
exercise price and vested options exercisable at December 31:
2003 2002 2001
---------------- ---------------- ---------------
Weighted average fair value of options granted.... $ 1.37 $ 1.43 $ 1.94
Weighted average per share exercise price......... $ 23.82 $ 22.85 $ 22.70
Vested options exercisable........................ 4,715,511 4,575,181 4,498,828
.Exercise prices for options outstanding, under all Plans, as of December
31, 2003 ranged from $12.04 per share to $27.04 per share. The weighted average
remaining contractual life of those options is approximately 4.77 years.
114
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. RELATED PARTY TRANSACTIONS
In connection with the IPO, the Company was granted ten year options to acquire
ten properties (the "Option Properties") which were either owned by certain
Rechler family members who were also executive officers of the Company, or in
which the Rechler family members owned a non-controlling minority interest at a
price based upon an agreed upon formula. In years prior to 2001, one Option
Property was sold by the Rechler family members to a third party and four of the
Option Properties were acquired by the Company for an aggregate purchase price
of approximately $35 million, which included the issuance of approximately
475,000 OP Units valued at approximately $8.8 million.
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, NY (the Company's current headquarters) for five years and to
release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.
As part of the Company's REIT structure it is provided management, leasing and
construction related services through taxable REIT subsidiaries as defined by
the Code. These services are currently provided by the Service Companies in
which, as of September 30, 2002, the Operating Partnership owned a 97%
non-controlling interest. An entity which is substantially owned by certain
Rechler family members who are also executive officers of the Company owned a 3%
controlling interest in the Service Companies. In order to minimize the
potential for corporate conflicts of interests, which became possible as a
result of changes to the Code that permit REITs to own 100% of taxable REIT
subsidiaries, the independent directors of the Company approved the purchase by
the Operating Partnership of the remaining 3% interests in the Service
Companies. On October 1, 2002, the Operating Partnership acquired such 3%
interests in the Service Companies for an aggregate purchase price of
approximately $122,000. Such amount was less than the total amount of capital
contributed by the Rechler family members. During the year ended December 31,
2003, Reckson Construction Group, Inc. billed approximately $775,000 of market
rate services and Reckson Management Group, Inc. billed approximately $279,000
of market rate management fees to the Remaining Option Properties. In addition,
for the year ended December 31, 2003, Reckson Construction Group, Inc. performed
market rate services, aggregating approximately $207,000, for a property in
which certain former executive officers of the Company maintain an equity
interest.
115
Reckson Management Group, Inc. leases approximately 28,000 square feet of office
and storage space at a Remaining Option Property located at 225 Broad Hollow
Road, Melville, NY for its corporate offices at an annual base rent of
approximately $785,000. The Company had also entered into a short term license
agreement at the property for 6,000 square feet of temporary space which expired
in January 2004. Reckson Management Group, Inc. also leases 10,722 square feet
of warehouse space used for equipment, materials and inventory storage at a
property owned by certain members of the Rechler family at an annual base rent
of approximately $75,000.
A company affiliated with an independent director of the Company leases 15,566
square feet in a property owned by the Company at an annual base rent of
approximately $447,000. Reckson Strategic Venture Partners, LLC ("RSVP") leased
5,144 square feet in one of the Company's joint venture properties at an annual
base rent of approximately $176,000. On June 15, 2003, this lease was mutually
terminated and RSVP vacated the premises.
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc. ("FrontLine"), and RSVP. RSVP is a real estate venture
capital fund which invested primarily in real estate and real estate operating
companies outside the Company's core office focus and whose common equity is
held indirectly by FrontLine. In connection with the formation and spin-off of
FrontLine, the Operating Partnership established an unsecured credit facility
with FrontLine (the "FrontLine Facility") in the amount of $100 million for
FrontLine to use in its investment activities, operations and other general
corporate purposes. The Company advanced approximately $93.4 million under the
FrontLine Facility. The Operating Partnership also approved the funding of
investments of up to $100 million relating to RSVP (the "RSVP Commitment"),
through RSVP-controlled joint ventures (for REIT-qualified investments) or
advances made to FrontLine under an unsecured loan facility (the "RSVP
Facility") having terms similar to the FrontLine Facility (advances made under
the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine Loans").
During March 2001, the Company increased the RSVP Commitment to $110 million and
as of December 31, 2003 approximately $109.1 million was funded under the RSVP
Commitment, of which $59.8 million represents investments by the Company in
RSVP-controlled (REIT-qualified) joint ventures and $49.3 million represents
loans made to FrontLine under the RSVP Facility. As of December 31, 2003,
interest accrued (net of reserves) under the FrontLine Facility and the RSVP
Facility was approximately $19.6 million.
At June 30, 2001, the Company assessed the recoverability of the FrontLine Loans
and reserved approximately $3.5 million of the interest accrued during the
three-month period then ended. In addition, the Company formed a committee of
its Board of Directors, comprised solely of independent directors, to consider
any actions to be taken by the Company in connection with the FrontLine Loans
and its investments in joint ventures with RSVP. During the third quarter of
2001, the Company noted a significant deterioration in FrontLine's operations
and financial condition and, based on its assessment of value and recoverability
and considering the findings and recommendations of the committee and its
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The Company has discontinued the accrual of interest income with respect to the
FrontLine Loans. The Company has also reserved against its share of GAAP equity
in earnings from the RSVP controlled joint ventures funded through the RSVP
Commitment until such income is realized through cash distributions.
116
At December 31, 2001, the Company, pursuant to Section 166 of the Code, charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest, and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
In September 2003, RSVP completed the restructuring of its capital structure and
management arrangements. In connection with the restructuring, RSVP redeemed the
interest of the preferred equity holders of RSVP for an aggregate of
approximately $137 million in cash including proceeds from the disposition of
all of the privitization and medical offices assets and the transfer to the
preferred equity holders of the assets that comprised RSVP's parking investment
valued at approximately $28.5 million. RSVP also restructured its management
arrangements whereby a management company formed by its former managing
directors has been retained to manage RSVP pursuant to a management agreement
and the employment contracts of the managing directors with RSVP have been
terminated. The management agreement provides for an annual base management fee
and disposition fees equal to 2% of the net proceeds received by RSVP on asset
sales. (The base management fee and disposition fees are subject to a maximum
over the term of the agreement of $7.5 million.) In addition, the managing
directors retained a one-third residual interest in RSVP's assets which is
subordinated to the distribution of an aggregate amount of $75 million to RSVP
and/or the Company in respect of its joint ventures with RSVP. The management
agreement has a three-year term, subject to early termination in the event of
the disposition of all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of asset sales by RSVP.
As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments, is approximately $65 million, which was reassessed with no
change by management as of December 31, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
Scott H. Rechler, who serves as President, Chief Executive Officer and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP.
117
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, 2003 as required by FASB Statement No. 107.
Cash equivalents, accounts receivable, accounts payable and accrued
expenses 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. At December
31, 2003, the estimated aggregate fair value of the Company's notes and mortgage
notes receivable exceeded their carrying value by approximately $878,000 and the
aggregate fair value of the Company's long term debt exceeded its carrying value
by approximately $84.7 million.
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 Company's 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.
Expected future minimum rents to be received over the next five years and
thereafter from leases in effect at December 31, 2003 are as follows (in
thousands):
2004............................ $ 365,498
2005............................ 333,839
2006............................ 299,722
2007............................ 268,567
2008............................ 240,758
Thereafter...................... 1,269,856
----------------
$ 2,778,240
================
118
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. SEGMENT DISCLOSURE
The Company owns all of the interests in its real estate properties
directly or indirectly through the Operating Partnership. The Company's
portfolio consists of Class A office properties located within the New York City
metropolitan area and Class A suburban office and industrial / R&D properties
located and operated within the Tri-State Area (the "Core Portfolio"). The
Company's portfolio also includes one office property located in Orlando,
Florida. The Company has formed an Operating Committee that reports directly to
the President and Chief Financial Officer who have been identified as the Chief
Operating Decision Makers due to their final authority over resource allocation,
decisions and performance assessment.
The Company does not consider (i) interest incurred on its Credit Facility
and Senior Unsecured Notes, (ii) the operating performance of the office
property located in Orlando, Florida, (iii) the operating performance of those
properties reflected as discontinued operations on the Company's consolidated
statements of operations, (iv) the operating results of the Service Companies
and (v) restructure charges as part of its Core Portfolio's property operating
performance for purposes of its component disclosure set forth below.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. In addition,
amounts reflected have been adjusted to give effect to the Company's
discontinued operations in accordance with Statement No. 144.
119
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following tables set forth the components of the Company's revenues
and expenses and other related disclosures, as required by FASB Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information", for
the years ended December 31 (in thousands):
2003
--------------------------------------------------------------
Core Portfolio Other CONSOLIDATED TOTALS
-------------------- ------------------ --------------------
REVENUES:
Base rents, tenant escalations and
reimbursements................................ $ 438,684 $ 7,097 $ 445,781
Other income..................................... 3,165 21,336 24,501
-------------------- ------------------ --------------------
Total Revenues............................... 441,849 28,433 470,282
-------------------- ------------------ --------------------
EXPENSES:
Property expenses................................ 176,748 3,663 180,411
Marketing, general and administrative............ 16,078 16,668 32,746
Interest......................................... 51,098 31,389 82,487
Restructure charges - net........................ -- 11,580 11,580
Depreciation and amortization.................... 102,867 6,372 109,239
-------------------- ------------------ --------------------
Total Expenses............................... 346,791 69,672 416,463
-------------------- ------------------ --------------------
Income (loss) before minority interests,
preferred dividends
and distributions, equity in earnings of
real estate joint ventures and service
companies, gain on sales of real estate and
discontinued operations....................... $ 95,058 $ (41,239) $ 53,819
==================== ================== ====================
Total assets..................................... $ 2,494,769 $ 252,226 $ 2,746,995
==================== ================== ====================
2002
--------------------------------------------------------------
Core Portfolio Other CONSOLIDATED TOTALS
-------------------- ------------------ --------------------
REVENUES:
Base rents, tenant escalations and
reimbursements................................ $ 442,485 $ 8,264 $ 450,749
Other income..................................... 380 6,940 7,320
-------------------- ------------------ --------------------
Total Revenues............................... 442,865 15,204 458,069
-------------------- ------------------ --------------------
EXPENSES:
Property expenses................................ 158,713 4,318 163,031
Marketing, general and administrative............ 16,322 12,892 29,214
Interest......................................... 44,028 39,281 83,309
Depreciation and amortization.................... 94,167 8,277 102,444
-------------------- ------------------ --------------------
Total Expenses............................... 313,230 64,768 377,998
-------------------- ------------------ --------------------
Income (loss) before minority interests,
preferred dividends and distributions,
equity in earnings of real estate joint
ventures and service companies, gain on
sales of real estate and discontinued
operations.................................... $ 129,635 $ (49,564) $ 80,071
==================== ================== ====================
Total assets..................................... $ 2,488,863 $ 419,057 $ 2,907,920
==================== ================== ====================
120
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2001
--------------------------------------------------------------
Core Portfolio Other CONSOLIDATED TOTALS
-------------------- ------------------ --------------------
REVENUES:
Base rents, tenant escalations and reimbursements... $ 438,307 $ 9,256 $ 447,563
Other income........................................ 4,133 16,123 20,256
-------------------- ------------------ --------------------
Total Revenues................................... 442,440 25,379 467,819
-------------------- ------------------ --------------------
EXPENSES:
Property expenses................................... 153,043 2,934 155,977
Marketing, general and administrative............... 18,155 10,087 28,242
Interest............................................ 38,047 44,592 82,639
Depreciation and amortization....................... 84,550 7,628 92,178
-------------------- ------------------ --------------------
Total Expenses................................... 293,795 65,241 359,036
-------------------- ------------------ --------------------
Income (loss) before minority interests, preferred
dividends and distributions, valuation reserves,
equity in earnings of real estate joint ventures
and service companies, gain on sales of real
estate and discontinued operations............... $ 148,645 $ (39,862) $ 108,783
==================== ================== ====================
Total assets........................................ $ 2,569,774 $ 424,444 $ 2,994,218
==================== ================== ====================
121
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional supplemental disclosures of non-cash investing and financing
activities are as follows:
On August 7, 2003, the Company issued 465,845 Class C OP Units valued at
$24.00 per unit in connection with its acquisition of a Class A office property
located in Stamford, Connecticut.
On October 24, 2003, the Company gave notice to its Class B common
stockholders that it would exercise its option to exchange 100% of its Class B
common stock outstanding (9,915,313 shares) on November 25, 2003 for an equal
number of shares of its Class A common stock. Such exchange occurred on November
25, 2003.
On November 10, 2003, as partial consideration for the Company's sale of
its Long Island industrial building portfolio, to the departing
Rechler family members, the Company redeemed and retired approximately 3.9
million OP Units valued at approximately $90.4 million or $23.00 per share. In
addition, as further consideration, the Company assigned approximately $6.0
million of mortgage indebtedness to the purchaser.
During the year ended December 31, 2003, certain limited partners
exchanged approximately 258,000 OP Units for an equal number of shares of the
Company's Class A common stock.
During the year ended December 31, 2002, certain limited partners
exchanged approximately 11,303 preferred units of limited partnership interest
in the Operating Partnership, with a liquidation preference value of
approximately $11.3 million, for 451,934 OP Units at an average price of $24.66
per OP Unit. In addition, certain limited partners exchanged 666,468 OP Units
for an equal number of shares of the Company's Class A common stock.
122
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into amended and restated employment and
noncompetition agreements with three executive officers. The agreements are for
five years and expire on August 15, 2005. The Company has also entered into
employment agreements with two additional officers prior to their appointments
as executive officers. These agreements expire in July 2004 and December of
2006, respectively.
The Company had outstanding undrawn letters of credit against its Credit
Facility of approximately $1.0 million at December 31, 2003 and 2002.
The Company, through its Service Companies, sponsors a defined
contribution savings plan pursuant to Section 401(k) of the Code. Under such
plan, there are no prior service costs. Employees are generally eligible to
participate in the plan after three months of service. Employer contributions
are based on a discretionary amount determined by the Company's management. As
of December 31, 2003, the Company has not made any contributions to the plan.
Commencing with the calendar year beginning January 1, 2004, the Company has
elected to match 50% to eligible participants deferral contribution up to 3% of
their annual compensation, as defined, up to an aggregate of $1,000 per employee
per year.
A number of shareholder derivative actions have been commenced purportedly
on behalf of the Company against the Board of Directors relating to the
Disposition. The complaints allege, among other things, that the process by
which the directors agreed to the transaction was not sufficiently independent
of the Rechler family and did not involve a "market check" or third party
auction process and, as a result, was not for adequate consideration. The
plaintiffs seek similar relief, including a declaration that the directors
violated their fiduciary duties and damages. The Company's management believes
that the complaints are without merit.
123
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible
officing solutions in the world and which was formerly controlled by FrontLine,
previously operated eleven executive office centers comprising approximately
205,000 square feet at the Company's properties, including two operated at the
Company's joint venture properties. On March 13, 2002, as a result of
experiencing financial difficulties, HQ voluntarily filed a petition for relief
under Chapter 11 of the U.S. Bankruptcy Code and subsequently rejected three of
its leases with the Company and surrendered approximately an additional 20,500
square feet from two other leases. The Company has since re-leased 100% of the
rejected space. In September 2003, the Bankruptcy Court approved the assumption
and amendment by HQ of its remaining eight leases with the Company. The assumed
leases expire between 2007 and 2011, encompass approximately 150,000 square feet
and provide for current annual base rents totaling approximately $3.5 million. A
committee designated by the Board and chaired by an independent director
conducted all negotiations with HQ.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company,
which leased approximately 527,000 square feet in thirteen of the Company's
properties located throughout the Tri-State Area voluntarily filed a petition
for relief under Chapter 11 of the U.S. Bankruptcy Code on July 21, 2002. The
Bankruptcy Court granted WorldCom's petition to reject four of its leases with
the Company. The four rejected leases aggregated approximately 282,000 square
feet and were to provide for contractual base rents of approximately $7.2
million for the 2003 calendar year. The Company has agreed to restructure five
of the remaining leases. Pursuant to WorldCom's Plan of Reorganization which has
been confirmed by the Bankruptcy Court, WorldCom must assume or reject the
remaining leases prior to the effective date of the Plan. The effective date of
the Plan is estimated to occur during the first quarter of 2004. All of
WorldCom's leases are current on base rental charges through March 31, 2004,
other than under the four rejected leases, and the Company currently holds
approximately $195,000 in security deposits relating to the non-rejected leases.
There can be no assurance as to whether WorldCom will affirm or reject any or
all of its remaining leases with the Company.
As of December 31, 2003, WorldCom occupied approximately 245,000 square feet of
office space with aggregate annual base rental revenues of approximately $4.1
million, or 1.1% of the Company's total 2003 annualized rental revenue based on
base rental revenue earned on a consolidated basis.
124
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
14. INCOME TAXES
The following table sets forth the Company's reconciliation of GAAP net
income to taxable income for the years ended December 31 (in thousands and
unaudited):
2003 (estimated) 2002 2001
-------------------- ---------------- ----------------
GAAP net income (loss) ............................. $ 163,521 $ 76,368 $ (36,001)
Minority interests and distributions to preferred
unit holders..................................... 20,557 24,241 10,630
Add: GAAP depreciation and amortization............. 116,636 112,341 102,108
Less: Tax depreciation and amortization........... (76,309) (76,001) (73,330)
GAAP / tax difference on gains / losses from capital
transactions..................................... (111,257) 5,024 (5,828)
Straight-line rental income adjustment.............. (16,743) (26,567) (41,489)
GAAP / tax difference on reserve charge-off......... -- (85,000) 97,056
Other GAAP / tax differences, net................... 596 3,126 12,636
-------------------- ---------------- ----------------
Taxable income before minority interests............ 97,001 33,532 65,782
Minority interests.................................. (25,359) (20,786) (20,451)
-------------------- ---------------- ----------------
Taxable income to REIT.............................. 71,642 $ 12,746 $ 45,331
==================== ================ ================
The following table sets forth the Company's reconciliation of cash
distributions to the dividends paid deduction for the years ended December 31
(in thousands):
2003 (estimated) 2002 2001
-------------------- ----------------- ----------------
Total cash distributions............................ $ 129,675 $ 134,976 $ 124,942
Less: Cash distributions on restricted shares (1,105) (1,476) (1,560)
Return of capital................................... (56,687) (123,450) (74,691)
-------------------- -----------------
Cash dividends paid................................. 71,883 10,050 48,691
Less: dividends designated to prior year......... -- -- --
Add: dividends designated from following year.... -- -- --
-------------------- ----------------- ----------------
Dividends paid deduction............................ 71,883 $ 10,050 $ 48,691
==================== ================= ================
The following tables set forth the characterization of the Company's
taxable distributions per share on its Class A common stock and Class B common
stock for the years ended December 31:
Class A common stock 2003 (estimated) 2002 2001
------------------------------------- ------------------------ ------------------------ ---------------------
Ordinary income....................... $ .640 37.7% $ -- -- $ .349 21.5%
Return of capital..................... .897 52.8% 1.698 100.0% 1.192 73.5%
Long-term rate capital gains.......... .105 6.2% -- -- .019 1.2%
Unrecaptured Section 1250 gain........ .056 3.3% -- -- .061 3.8%
Totals................................ $ 1.698 100.0% $ 1.698 100.0% $ 1.621 100.0%
========== ========== ========== ========== ========== =========
Class B common stock 2003 (estimated) 2002 2001
------------------------------------- ------------------------ ------------------------ ---------------------
Ordinary income....................... $ .976 37.7% $ -- -- $ .537 21.5%
Return of capital..................... 1.367 52.8% 2.593 100.0% 1.838 73.5%
Long-term rate capital gains.......... .160 6.2% -- -- .029 1.2%
Unrecaptured Section 1250 gain........ .085 3.3% -- -- .094 3.8%
Totals................................ $ 2.588 100.0% $ 2.593 100.0% $ 2.498 100.0%
========== ========== ========== ========== ========== =========
125
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. QUARTERLY FINANCIAL DATA (Unaudited)
The following summary represents the Company's results of operations for
each fiscal quarter during 2003 and 2002 (in thousands, except share amounts):
2003
--------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- ------------------ ------------------- ----------------
Total revenues as previously reported............... $ 130,760 $ 127,412 $ 118,105 $ 118,679
Revenues from discontinued operations............... (a) (12,440) (12,234) -- --
----------------- ------------------ ----------------- -------------
Total revenues...................................... (b) $ 118,320 $ 115,178 $ 118,105 118,679
================= ================== ================= =============
Income before preferred dividends and distributions,
minority interests, equity (loss) in earnings
of real estate joint ventures and service
companies, gain on sales of real estate and
discontinued operations........................ $ 16,795 $ 15,101 $ 16,149 $ 5,774
Preferred dividends and distributions............... (5,590) (5,591) (5,589) (5,590)
Minority interests.................................. (5,373) (4,843) (5,057) (4,191)
Equity (loss) in earnings of real estate joint
ventures and service companies................. 106 (270) 134 60
Discontinued operations (net of limited partners'
minority interest)............................. 2,725 3,188 4,372 119,944
----------------- ------------------ ------------------- -------------
Net income allocable to common shareholders......... $ 8,663 $ 7,585 $ 10,009 $ 115,997
================= ================== =================== =============
Net income allocable to:
Class A common shareholders.................... $ 6,595 $ 5,769 $ 7,613 $ 104,989
Class B common shareholders.................... 2,068 1,816 2,396 11,008
----------------- ------------------ ------------------- -------------
Total............................................... $ 8,663 $ 7,585 $ 10,009 $ 115,997
================= ================== =================== =============
Basic net income per weighted average common share:
Class A common.................................. $ .10 $ .07 $ .09 $ (.07)
Discontinued operations......................... .04 .05 .07 2.08
----------------- ------------------ ------------------- -------------
Basic net income per weighted average Class A
common....................................... $ .14 $ .12 $ .16 $ 2.01
================= ================== =================== =============
Class B common.................................. $ .14 $ .11 $ .13 $ (.06)
Discontinued operations......................... .07 .07 .11 1.92
----------------- ------------------ ------------------- -------------
Basic net income per weighted average Class B
common....................................... $ .21 $ .18 $ .24 $ 1.86
================= ================== =================== =============
Basic weighted average common shares outstanding:
Class A common.................................. 48,200,946 48,000,995 48,009,138 52,124,705
Class B common.................................. 9,915,313 9,915,313 9,915,313 5,927,633
Diluted net income per weighted average common share:
Class A common.................................. $ .14 $ .12 $ .16 $ 2.00
Class B common.................................. $ .15 $ .13 $ .17 $ 1.77
Diluted weighted average common shares outstanding:
Class A common.................................. 48,320,129 48,188,172 48,179,428 52,400,068
Class B common.................................. 9,915,313 9.915,313 9,915,313 5,927,633
--------------------------------------------------
(a) excludes revenues from discontinued operations which were previously
excluded from total revenues as previously reported
(b) amounts have been adjusted to give effect to the Company's discontinued
operations in accordance with Statement No. 144.
126
RECKSON ASSOCIATES REALTY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. QUARTERLY FINANCIAL DATA (Unaudited) (continued)
2002
--------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- ------------------ ------------------- -----------------
Total revenues as previously reported............... $ 125,467 $ 125,635 $ 128,782 $ 128,842
Revenues from discontinued operations............... (a) (12,361) (12,920) (11,815) (12,426)
Gain on sales of real estate and equity in earnings
of real estate joint ventures and service
companies....................................... (872) (159) (104) --
----------------- ------------------ ------------------- -------------
Total revenues...................................... (b) $ 112,234 $ 112,556 $ 116,863 $ 116,416
================= ================== =================== =============
Income before preferred dividends and distributions,
minority interests, equity in earnings of real
estate joint ventures and service companies,
gain on sales of real estate and discontinued
operations...................................... $ 24,210 $ 21,403 $ 19,000 $ 15,458
Preferred dividends and distributions............... (5,948) (5,767) (5,760) (5,648)
Minority interests.................................. (6,628) (5,988) (5,292) (5,045)
Equity in earnings of real estate joint ventures
and service companies........................... 335 159 104 515
Gain on sales of real estate........................ 537 -- -- --
Discontinued operations (net of limited partners'
minority interest).............................. 3,476 3,998 8,082 3,332
----------------- ------------------- ------------------- ---------------
Net income allocable to common shareholders......... $ 15,982 $ 13,805 $ 16,134 $ 8,612
================= =================== =================== ===============
Net income allocable to:
Class A common shareholders..................... $ 12,159 $ 10,548 $ 12,334 $ 6,563
Class B common shareholders..................... 3,823 3,257 3,800 2,049
----------------- ------------------- ------------------- ---------------
Total............................................... $ 15,982 $ 13,805 $ 16,134 $ 8,612
================= =================== =================== ===============
Basic net income per weighted average common share:
Class A common.................................. $ .18 .15 $ .13 $ .09
Gain on sales of real estate.................... .01 -- -- --
Discontinued operations......................... .05 .06 .12 .05
----------------- ------------------- ------------------- ---------------
Basic net income per weighted average Class A
common....................................... $ .24 $ .21 $ .25 $ .14
================= =================== =================== ===============
Class B common.................................. $ .28 $ .23 $ .19 $ .13
Gain on sales of real estate.................... .01 -- -- --
Discontinued operations......................... .08 .09 .19 .08
----------------- ------------------- ------------------- ---------------
Basic net income per weighted average Class B
common....................................... $ .37 $ .32 $ .38 $ .21
================= =================== =================== ===============
Basic weighted average common shares outstanding:
Class A common.................................. 50,013,140 50,775,300 49,525,372 48,383,554
Class B common.................................. 10,283,513 10,283,513 10,010,423 9,915,313
Diluted net income per weighted average common share:
Class A common.................................. $ .24 $ .21 $ .25 $ .14
Class B common.................................. $ .26 $ .22 $ .26 $ .15
Diluted weighted average common shares outstanding:
Class A common.................................. 50,350,189 51,164,788 49,825,400 48,551,222
Class B common.................................. 10,283,513 10,283,513 10,010,423 9,915,313
----------------------------
(a) excludes revenues from discontinued operations which were previously
excluded from total revenues as previously reported.
(b) amounts have been adjusted to give effect to the Company's
discontinued operations in accordance with Statement No. 144.
127
RECKSON ASSOCIATES REALTY CORP.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
COST CAPITALIZED,
INITIAL COST SUBSEQUENT TO ACQUISITION
---------------------------- ------------------------
BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- ----------- ---- ------------- ---- -------------
1170 Northern Blvd.,
N. Great Neck, New York ........... -- 30 99 -- 347
50 Charles Lindbergh Blvd.,
Mitchel Field, New York ........... -- (A) 12,089 -- 6,351
200 Broadhollow Road
Melville, New York ................ -- 338 3,354 -- 3,583
48 South Service Road
Melville, New York ................ -- 1,652 10,245 -- 5,848
395 North Service Road
Melville, New York ................ 19,301 (A) 15,551 -- 7,480
6800 Jericho Turnpike
Syosset, New York ................. 13,696 582 6,566 -- 10,456
6900 Jericho Turnpike
Syosset, New York ................. 7,228 385 4,228 -- 4,243
300 Motor Parkway
Hauppauge, New York ............... -- 276 1,136 -- 1,838
88 Duryea Road
Melville, New York ................ -- 200 1,565 -- 846
333 Earl Ovington Blvd., (Omni)
Mitchel Field, New York ........... 52,869 (A) 67,221 -- 23,436
40 Cragwood Road
South Plainfield, New Jersey ...... -- 725 7,131 -- 6,483
333 East Shore Road
Great Neck, New York .............. -- (A) 564 -- 606
310 East Shore Road
Great Neck, New York .............. -- 485 2,009 -- 2,607
35 Pinelawn Road
Melville, New York ................ -- 999 7,073 -- 3,219
520 Broadhollow Road
Melville, New York ................ -- 457 5,572 (1) 2,888
1660 Walt Whitman Road
Melville, New York ................ -- 370 5,072 -- 1,393
48 Harbor Park Drive
Port Washington, New York ......... -- 1,304 2,247 -- 570
60 Charles Lindbergh
Mitchel Field, New York ........... -- (A) 20,800 -- 2,107
505 White Plains Road
Tarrytown, New York ............... -- 210 1,332 -- 417
555 White Plains Road
Tarrytown, New York ............... -- 712 4,133 51 4,775
560 White Plains Road
Tarrytown, New York ............... -- 1,521 8,756 (1) 5,213
580 White Plains Road
Tarrytown, New York ............... 12,476 2,414 14,595 -- 3,714
660 White Plains Road
Tarrytown, New York ............... -- 3,929 22,640 45 6,565
Landmark Square
Stamford, Connecticut ............. 44,029 11,603 64,466 832 33,174
One Eagle Rock,
East Hanover, New Jersey .......... -- 803 7,563 -- 5,159
710 Bridgeport Avenue
Shelton, Connecticut .............. -- 5,405 21,620 7 1,054
10 Rooney Circle
West Orange, New Jersey ........... -- 1,302 4,615 1 1,168
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-------- -------- -------- -------- -------- --------
GROSS AMOUNT AT WHICH CARRIED AT
CLOSE OF PERIOD
--------------------------------- LIFE ON WHICH
BUILDINGS AND ACCUMULATED DATE OF DATE DEPRECIATION IS
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
----------- ---- ------------- ----- ------------ ------------ -------- ---------------
1170 Northern Blvd.,
N. Great Neck, New York ........... 30 446 476 176 1947 1962 10 - 30 Years
50 Charles Lindbergh Blvd.,
Mitchel Field, New York ........... -- 18,440 18,440 12,247 1984 1984 10 - 30 Years
200 Broadhollow Road
Melville, New York ................ 338 6,937 7,275 5,041 1981 1981 10 - 30 Years
48 South Service Road
Melville, New York ................ 1,652 16,093 17,745 9,647 1986 1986 10 - 30 Years
395 North Service Road
Melville, New York ................ -- 23,031 23,031 13,979 1988 1988 10 - 30 Years
6800 Jericho Turnpike
Syosset, New York ................. 582 17,022 17,604 11,837 1977 1978 10 - 30 Years
6900 Jericho Turnpike
Syosset, New York ................. 385 8,471 8,856 5,506 1982 1982 10 - 30 Years
300 Motor Parkway
Hauppauge, New York ............... 276 2,974 3,250 1,882 1979 1979 10 - 30 Years
88 Duryea Road
Melville, New York ................ 200 2,411 2,611 1,572 1980 1980 10 - 30 Years
333 Earl Ovington Blvd., (Omni)
Mitchel Field, New York ........... -- 90,657 90,657 34,347 1990 1995 10 - 30 Years
40 Cragwood Road
South Plainfield, New Jersey ...... 725 13,614 14,339 9,005 1970 1983 10 - 30 Years
333 East Shore Road
Great Neck, New York .............. -- 1,170 1,170 768 1976 1976 10 - 30 Years
310 East Shore Road
Great Neck, New York .............. 485 4,616 5,101 2,559 1981 1981 10 - 30 Years
35 Pinelawn Road
Melville, New York ................ 999 10,292 11,291 3,263 1980 1995 10 - 30 Years
520 Broadhollow Road
Melville, New York ................ 456 8,460 8,916 3,090 1978 1995 10 - 30 Years
1660 Walt Whitman Road
Melville, New York ................ 370 6,465 6,835 1,701 1980 1995 10 - 30 Years
48 Harbor Park Drive
Port Washington, New York ......... 1,304 2,817 4,121 657 1976 1996 10 - 30 Years
60 Charles Lindbergh
Mitchel Field, New York ........... -- 22,907 22,907 6,386 1989 1996 10 - 30 Years
505 White Plains Road
Tarrytown, New York ............... 210 1,749 1,959 569 1974 1996 10 - 30 Years
555 White Plains Road
Tarrytown, New York ............... 763 8,908 9,671 3,932 1972 1996 10 - 30 Years
560 White Plains Road
Tarrytown, New York ............... 1,520 13,969 15,489 4,385 1980 1996 10 - 30 Years
580 White Plains Road
Tarrytown, New York ............... 2,414 18,309 20,723 6,052 1997 1996 10 - 30 Years
660 White Plains Road
Tarrytown, New York ............... 3,974 29,205 33,179 9,148 1983 1996 10 - 30 Years
Landmark Square
Stamford, Connecticut ............. 12,435 97,640 110,075 23,208 1973-1984 1996 10 - 30 Years
One Eagle Rock,
East Hanover, New Jersey .......... 803 12,722 13,525 3,804 1986 1997 10 - 30 Years
710 Bridgeport Avenue
Shelton, Connecticut .............. 5,412 22,674 28,086 5,245 1971-1979 1997 10 - 30 Years
10 Rooney Circle
West Orange, New Jersey ........... 1,303 5,783 7,086 1,330 1971 1997 10 - 30 Years
128
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
COST CAPITALIZED,
INITIAL COST SUBSEQUENT TO ACQUISITION
---------------------------- ------------------------
BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- ----------- ---- ------------- ---- -------------
Executive Hill Office Park
West Orange, New Jersey ........... -- 7,629 31,288 4 4,227
3 University Plaza
Hackensack, New Jersey ............ -- 7,894 11,846 -- 3,186
150 Motor Parkway
Hauppauge, New York ............... -- 1,114 20,430 -- 4,278
Reckson Executive Park
Ryebrook, New York ................ -- 18,343 55,028 -- 6,759
University Square
Princeton, New Jersey ............. -- 3,288 8,888 (1) 1,827
80 Grasslands
Elmsford, New York ................ -- 1,208 6,728 -- 616
100 Forge Way
Rockaway, New Jersey .............. -- 315 902 -- 120
200 Forge Way
Rockaway, New Jersey .............. -- 1,128 3,228 -- 546
300 Forge Way
Rockaway, New Jersey .............. -- 376 1,075 -- 281
400 Forge Way
Rockaway, New Jersey .............. -- 1,142 3,267 -- 250
51 - 55 Charles Lindbergh Blvd
Mitchel Field, New York ........... -- (A) 27,975 -- 4,315
100 Summit Drive
Valhalla, New York ................ 17,718 3,007 41,351 -- 5,322
115/117 Stevens Avenue
Valhalla, New York ................ -- 1,094 22,490 -- 2,003
200 Summit Lake Drive
Valhalla, New York ................ 18,937 4,343 37,305 -- 11,111
140 Grand Street
White Plains, New York ............ -- 1,932 18,744 (1) 370
500 Summit Lake Drive
Valhalla, New York ................ -- 7,052 37,309 -- 7,837
99 Cherry Hill Road
Parsippany, New Jersey ............ -- 2,360 7,508 5 1,784
119 Cherry Hill Road
Parsippany, New Jersey ............ -- 2,512 7,622 6 1,646
500 Saw Mill River Road
Elmsford, New York ................ -- 1,542 3,796 -- 205
120 W.45th Street
New York, New York ................ 63,245 28,757 162,809 7,680 (B) 6,233
1255 Broad Street
Clifton, New Jersey ............... -- 1,329 15,869 -- 4,930
810 7th Avenue
New York, New York ................ 81,315 26,984 (A) 152,767 117 15,698
120 Mineola Blvd
Mineola, New York ................. -- 1,869 10,603 5 1,054
100 Wall Street
New York, New York ................ 35,237 11,749 66,517 93 13,195
One Orlando
Orlando, Florida .................. 37,758 9,386 51,136 32 7,067
1350 Avenue of the Americas
New York, New York ................ 73,779 19,222 109,168 -- 19,170
919 3rd. Avenue
New York, New York ................ 244,047 101,644 (A) 205,736 12,795 87,254
360 Hamilton Avenue
White Plains, New York ............ -- 2,838 34,606 -- 23,100
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-------- -------- -------- -------- -------- --------
GROSS AMOUNT AT WHICH CARRIED AT
CLOSE OF PERIOD
--------------------------------- LIFE ON WHICH
BUILDINGS AND ACCUMULATED DATE OF DATE DEPRECIATION IS
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
----------- ---- ------------- ----- ------------ ------------ -------- ---------------
Executive Hill Office Park
West Orange, New Jersey ........... 7,633 35,515 43,148 7,783 1978-1984 1997 10 - 30 Years
3 University Plaza
Hackensack, New Jersey ............ 7,894 15,032 22,926 3,832 1985 1997 10 - 30 Years
150 Motor Parkway
Hauppauge, New York ............... 1,114 24,708 25,822 6,001 1984 1997 10 - 30 Years
Reckson Executive Park
Ryebrook, New York ................ 18,343 61,787 80,130 12,570 1983-1986 1997 10 - 30 Years
University Square
Princeton, New Jersey ............. 3,287 10,715 14,002 2,246 1987 1997 10 - 30 Years
80 Grasslands
Elmsford, New York ................ 1,208 7,344 8,552 1,653 1989/1964 1997 10 - 30 Years
100 Forge Way
Rockaway, New Jersey .............. 315 1,022 1,337 231 1986 1998 10 - 30 Years
200 Forge Way
Rockaway, New Jersey .............. 1,128 3,774 4,902 803 1989 1998 10 - 30 Years
300 Forge Way
Rockaway, New Jersey .............. 376 1,356 1,732 404 1989 1998 10 - 30 Years
400 Forge Way
Rockaway, New Jersey .............. 1,142 3,517 4,659 697 1989 1998 10 - 30 Years
51 - 55 Charles Lindbergh Blvd
Mitchel Field, New York ........... -- 32,290 32,290 8,248 1981 1998 10 - 30 Years
100 Summit Drive
Valhalla, New York ................ 3,007 46,673 49,680 10,096 1988 1998 10 - 30 Years
115/117 Stevens Avenue
Valhalla, New York ................ 1,094 24,493 25,587 4,870 1984 1998 10 - 30 Years
200 Summit Lake Drive
Valhalla, New York ................ 4,343 48,416 52,759 9,014 1990 1998 10 - 30 Years
140 Grand Street
White Plains, New York ............ 1,931 19,114 21,045 3,632 1991 1998 10 - 30 Years
500 Summit Lake Drive
Valhalla, New York ................ 7,052 45,146 52,198 8,946 1986 1998 10 - 30 Years
99 Cherry Hill Road
Parsippany, New Jersey ............ 2,365 9,292 11,657 1,783 1982 1998 10 - 30 Years
119 Cherry Hill Road
Parsippany, New Jersey ............ 2,518 9,268 11,786 1,819 1982 1998 10 - 30 Years
500 Saw Mill River Road
Elmsford, New York ................ 1,542 4,001 5,543 806 1968 1998 10 - 30 Years
120 W.45th Street
New York, New York ................ 36,437 169,042 205,479 25,953 1998 1999 10 - 30 Years
1255 Broad Street
Clifton, New Jersey ............... 1,329 20,799 22,128 3,883 1999 1999 10 - 30 Years
810 7th Avenue
New York, New York ................ 27,101 168,465 195,566 25,946 1970 1999 10 - 30 Years
120 Mineola Blvd
Mineola, New York ................. 1,874 11,657 13,531 1,940 1977 1999 10 - 30 Years
100 Wall Street
New York, New York ................ 11,842 79,712 91,554 12,582 1969 1999 10 - 30 Years
One Orlando
Orlando, Florida .................. 9,418 58,203 67,621 8,778 1987 1999 10 - 30 Years
1350 Avenue of the Americas
New York, New York ................ 19,222 128,338 147,560 17,174 1966 2000 10 - 30 Years
919 3rd. Avenue
New York, New York ................ 114,439 292,990 407,429 27,572 1970 2000 10 - 30 Years
360 Hamilton Avenue
White Plains, New York ............ 2,838 57,706 60,544 8,930 2000 2000 10 - 30 Years
129
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
COST CAPITALIZED,
INITIAL COST SUBSEQUENT TO ACQUISITION
---------------------------- ------------------------
BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS
----------- ----------- ---- ------------- ---- -------------
492 River Road
Nutley, New Jersey ................ -- 2,615 5,102 1 4,354
275 Broadhollow Road
Melville, New York ................ -- 3,850 12,958 972 8,345
400 Garden City Plaza
Garden City, New York ............. -- 9,081 17,004 -- 804
90 Merrick Avenue
East Meadow, New York ............. -- (A) 23,804 -- 1,231
120 White Plains Road
Tarrytown, New York ............... -- 3,852 24,861 -- 902
100 White Plains Road
Tarrytown, New York ............... -- 79 472 -- 79
51 JFK Parkway
Short Hills, New Jersey ........... -- 10,053 62,504 1 1,065
680 Washington Blvd
Stamford, Connecticut ............. -- 4,561 23,698 -- 275
750 Washington Blvd
Stamford, Connecticut ............. -- 7,527 31,940 -- 193
1305 Walt Whitman Road
Melville, New York ................ -- 3,934 24,040 -- 433
50 Marcus Drive
Melville, New York ................ -- 930 13,600 65 6,568
100 Grasslands Road
Elmsford, New York ................ -- 289 3,382 -- 982
58 South Service Road
Melville, New York ................ -- 1,061 6,886 46,113
103 JFK Parkway
Short Hills, New Jersey ........... -- 3,098 18,011 219 11,192
1055 Washington Blvd
Stamford, Connecticut ............. -- -- 31,637 -- 37
Land held for development .............. -- 90,706 -- -- --
Developments in progress ............... -- -- 68,127 -- --
Other property ......................... -- -- -- -- 17,711
--------- --------- ---------- ------ ---------
Total .................................. $ 721,635 $ 447,395 $1,839,373 29,813 $ 480,208
========= ========= ========== ====== =========
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-------- -------- -------- -------- -------- --------
GROSS AMOUNT AT WHICH CARRIED AT
CLOSE OF PERIOD
--------------------------------- LIFE ON WHICH
BUILDINGS AND ACCUMULATED DATE OF DATE DEPRECIATION IS
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
----------- ---- ------------- ----- ------------ ------------ -------- ---------------
492 River Road
Nutley, New Jersey ................ 2,616 9,456 12,072 1,427 2000 2000 10 - 30 Years
275 Broadhollow Road
Melville, New York ................ 4,822 21,303 26,125 2,286 1970 1997 10 - 30 Years
400 Garden City Plaza
Garden City, New York ............. 9,081 17,808 26,889 2,875 1989 1997 10 - 30 Years
90 Merrick Avenue
East Meadow, New York ............. -- 25,035 25,035 4,591 1985 1997 10 - 30 Years
120 White Plains Road
Tarrytown, New York ............... 3,852 25,763 29,615 3,995 1984 1997 10 - 30 Years
100 White Plains Road
Tarrytown, New York ............... 79 551 630 58 1984 1997 10 - 30 Years
51 JFK Parkway
Short Hills, New Jersey ........... 10,054 63,569 73,623 9,886 1988 1998 10 - 30 Years
680 Washington Blvd
Stamford, Connecticut ............. 4,561 23,973 28,534 3,753 1989 1998 10 - 30 Years
750 Washington Blvd
Stamford, Connecticut ............. 7,527 32,133 39,660 4,842 1989 1998 10 - 30 Years
1305 Walt Whitman Road
Melville, New York ................ 3,934 24,473 28,407 4,117 1999 1999 10 - 30 Years
50 Marcus Drive
Melville, New York ................ 995 20,168 21,163 1,963 2001 1998 10 - 30 Years
100 Grasslands Road
Elmsford, New York ................ 289 4,364 4,653 600 2001 1997 10 - 30 Years
58 South Service Road
Melville, New York ................ 7,947 46,113 54,060 3,447 2001 1998 10 - 30 Years
103 JFK Parkway
Short Hills, New Jersey ........... 3,317 29,203 32,520 4,094 2002 1997 10 - 30 Years
1055 Washington Blvd
Stamford, Connecticut ............. -- 31,674 31,674 440 1987 2003 10 - 30 Years
Land held for development .............. 90,706 -- 90,706 -- N/A Various N/A
Developments in progress ............... -- 68,127 68,127 --
Other property ......................... -- 17,711 17,711 12,242
--------- ---------- ---------- ---------
Total .................................. $ 477,208 $2,319,581 $2,796,789 $ 460,144
========= ========== ========== =========
A These land parcels, or a portion of the land parcels, on which the building
and improvements were constructed are subject to a ground lease.
B Includes costs incurred to acquire the lessor's rights to an air rights lease
agreement.
The aggregate cost of Federal Income Tax purposes was approximately $
2,067 million at December 31, 2003.
130
RECKSON ASSOCIATES REALTY CORP.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
The changes in real estate for each of the periods in the three years
ended December 31, 2003 are as follows:
2003 2002 2001
----------------- ----------------- -----------------
Real estate balance at beginning of period........... $ 2,707,878 $ 2,643,045 $ 2,537,193
Improvements / revaluations ......................... 71,770 83,085 189,072
Disposal, including write-off of fully
depreciated building improvements.................. (14,496) (18,252) (83,220)
Acquisitions......................................... 31,637 -- ---
----------------- ----------------- -----------------
Balance at end of period............................. $ 2,796,789 $ 2,707,878 $ 2,643,045
================= ================= =================
The changes in accumulated depreciation, exclusive of amounts relating to
discontinued operations, equipment, autos, furniture and fixtures, for each of
the periods in the three years ended December 31, 2003 are as follows:
2003 2002 2001
----------------- ----------------- ------------------
Balance at beginning of period....................... $ 374,420 $ 294,901 $ 231,040
Depreciation for period.............................. 87,369 83,542 74,380
Disposal, including write-off of fully depreciated
building improvements.............................. (1,645) (4,023) (10,519)
----------------- ----------------- ------------------
Balance at end of period............................. $ 460,144 $ 374,420 $ 294,901
================= ================= ==================
131
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
3.1 a Amended and Restated Articles of Incorporation of the
Registrant
3.2 p Amended and Restated ByLaws of the Registrant
3.3 e Articles Supplementary of the Registrant Establishing and
Fixing the Rights and Preferences of a Series of Shares of
Preferred Stock filed with the Maryland State Department
of Assessments and Taxation on April 9, 1998
3.4 h Articles Supplementary of the Registrant Establishing and
Fixing the Rights and Preferences of a Class of Shares of
Common Stock filed with the Maryland State Department of
Assessments and Taxation on May 24, 1999
3.5 g Articles Supplementary of the Registrant Establishing and
Fixing the Rights and Preferences of a Series of Shares of
Preferred Stock filed with the Maryland State Department
of Assessments and Taxation on May 28, 1999
3.6 h Articles of Amendment of the Registrant filed with the
Maryland State Department of Assessments and Taxation on
January 4, 2000
3.7 h Articles Supplementary of the Registrant filed with the
Maryland State Department of Assessments and Taxation on
January 11, 2000
3.8 m Articles Supplementary of the Registrant Establishing and
Fixing the Rights and Preferences of a Series of Shares of
Preferred Stock filed with the Maryland State Department
of Assessments and Taxation on November 2, 2000 4.1 b
Specimen Share Certificate of Class A Common Stock
4.3 e Specimen Share Certificate of Series A Preferred Stock
4.4 f Form of 7.40% Notes due 2004 of Reckson Operating
Partnership, L.P. (the "Operating Partnership")
4.5 f Form of 7.75% Notes due 2009 of the Operating Partnership
132
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
4.6 f Indenture, dated March 26, 1999, among the Operating
Partnership, the Registrant, and The Bank of New York, as
trustee
4.7 i Rights Agreement, dated as of October 13, 2000, between
the Registrant and American Stock Transfer & Trust
Company, as Rights Agent, which includes, as Exhibit A
thereto, the Form of Articles Supplementary, as Exhibit B
thereto, the Form of Right Certificate, and as Exhibit C
thereto, the Summary of Rights to Purchase Preferred
Shares
4.8 o Form of 6.00% Notes due 2007 of the Operating Partnership
4.9 d Note Purchase Agreement for the Senior Unsecured Notes
4.10 w Form of 5.15% Notes due 2011 of the Operating Partnership
10.1 a Amended and Restated Agreement of Limited Partnership of
the Operating Partnership
10.2 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series A Preferred Units of Limited
Partnership Interest
10.3 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series B Preferred Units of Limited
Partnership Interest
10.4 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series C Preferred Units of Limited
Partnership Interest
10.5 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series D Preferred Units of Limited
Partnership Interest
10.6 h Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series B Common Units of Limited Partnership
Interest
10.7 h Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing Series E Preferred Partnership Units of
Limited Partnership Interest
10.8 j Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing the Series F Junior Participating Preferred
Partnership Units
133
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
10.9 t Supplement to the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership
Establishing the Series C Common Units of Limited
Partnership Interest
10.10 d Third Amended and Restated Agreement of Limited
Partnership of Omni Partners, L.P.
10.11 i Amendment and Restatement of Employment and Noncompetition
Agreement, dated as of August 15, 2000, between the
Registrant and Scott Rechler
10.12 i Amendment and Restatement of Employment and Noncompetition
Agreement, dated as of August 15, 2000, between the
Registrant and Michael Maturo
10.13 i Amendment and Restatement of Employment and Noncompetition
Agreement, dated as of August 15, 2000, between the
Registrant and Jason Barnett
10.14 Employment and Noncompetition Agreement, dated as of July
16, 2001, between the Company and F.D. Rich
10.15 Employment and Noncompetition Agreement, dated as of
November 20, 2002, among the Company, Metropolitan
Partners LLC and Philip Waterman III
10.16 a Purchase Option Agreement relating to 225 Broadhollow Road
10.17 t Amended and Restated 1995 Stock Option Plan
10.18 c 1996 Employee Stock Option Plan
10.19 b Ground Leases for certain of the properties
10.20 t Amended and Restated 1997 Stock Option Plan
10.21 d 1998 Stock Option Plan
10.22 i Amendment and Restatement of Severance Agreement, dated as
of August 15, 2000, between the Registrant and Scott
Rechler
10.23 i Amendment and Restatement of Severance Agreement, dated as
of August 15, 2000, between the Registrant and Michael
Maturo
10.24 i Amendment and Restatement of Severance Agreement, dated as
of August 15, 2000, between the Registrant and Jason
Barnett
134
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
10.25 h Amended and Restated Credit Agreement dated as of August
4, 1999 between Reckson Service Industries, Inc., as
borrower, and the Operating Partnership, as Lender,
relating to Reckson Strategic Venture Partners, LLC ("RSVP
Credit Agreement")
10.26 h Amended and Restated Credit Agreement dated as of
August 4, 1999 between Reckson Service Industries, Inc.,
as borrower, and the Operating Partnership, as Lender,
relating to the operations of Reckson Service Industries,
Inc. ("RSI Credit Agreement")
10.27 h Letter Agreement, dated November 30, 1999, amending the
RSVP Credit Agreement and the RSI Credit Agreement
10.28 k Second Amendment to the Amended and Restated Credit
Agreement, dated March 30, 2001, between the Operating
Partnership and FrontLine Capital Group
10.29 l Loan Agreement, dated as of June 1, 2001, between 1350
LLC, as Borrower, and Secore Financial Corporation, as
Lender
10.30 l Loan Agreement, dated as of July 18, 2001, between
Metropolitan 919 3rd Avenue, LLC, as Borrower, and Secore
Financial Corporation, as Lender
10.31 i Operating Agreement dated as of September 28, 2000 between
Reckson Tri-State Member LLC (together with its permitted
successors and assigns) and TIAA Tri-State LLC
10.32 j Agreement of Spreader, Consolidation and Modification of
Mortgage Security Agreement among Metropolitan 810 7th
Ave., LLC, 100 Wall Company LLC and Monumental Life
Insurance Company
10.33 j Consolidated, Amended and Restated Secured Promissory Note
relating to Metropolitan 810 7th Ave., LLC and 100 Wall
Company LLC
10.34 n Amended and Restated Operating Agreement of 919 JV LLC
10.35 t Amended and Restated 2002 Stock Option Plan
10.36 p Indemnification Agreement, dated as of May 23, 2002,
between the Registrant and Donald J. Rechler*
135
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
10.37 q Second Amended and Restated Credit Agreement, dated as of
December 30, 2002, among the Operating Partnership, the
institutions from time to time party thereto as Lenders
and JPMorgan Chase Bank, as Administrative Agent
10.38 q Form of Guarantee Agreement to the Second Amended and
Restated Credit Agreement, between and among the Operating
Partnership, the institutions from time to time party
thereto as Lenders and JPMorgan Chase Bank, as
Administrative Agent
10.39 q Form of Promissory Note to the Second Amended and Restated
Credit Agreement, between and among the Operating
Partnership, the institutions from time to time party
thereto as Lenders and JPMorgan Chase Bank, as
Administrative Agent
10.40 q First Amendment to Second Amended and Restated Credit
Agreement, dated as of January 24, 2003, among the
Operating Partnership, JPMorgan Chase Bank, as
Administrative Agent for the institutions from time to
time party thereto as Lenders and Key Bank, N.A., as New
Lender
10.41 s Amended and Restated Long-Term Incentive Award Agreement,
dated as of March 13, 2003, between the Registrant and
Scott H. Rechler**
10.42 r Award Agreement, dated November 14, 2002, between the
Registrant and Scott H. Rechler***
10.43 r Award Agreement, dated March 13, 2003, between the
Registrant and Scott H. Rechler****
10.44 u Redemption Agreement, dated as of September 10, 2003, by
and among the Operating Partnership, Reckson FS Limited
Partnership and Rechler Equity Partners I LLC, as
transferee
10.45 u Property Sale Agreement, dated as of September 10, 2003,
by and among the Operating Partnership, Reckson FS Limited
Partnership, RCG Kennedy Drive LLC and Rechler Equity
Partners II LLC
10.46 u Transition Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Donald Rechler
10.47 u Transition Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Roger Rechler
136
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
10.48 u Transition Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Mitchell Rechler
10.49 u Transition Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Gregg Rechler
10.50 u Amendment Agreement, dated as of September 10, 2003, by
and between the Registrant, the Operating Partnership and
Scott Rechler
10.51 v Purchase and Sale Agreement, dated as of November 10,
2003, between Reckson 1185 Avenue of the Americas LLC and
1185 Sixth LLC
12.1 Statement of Ratios of Earnings to Fixed Charges
14.1 Reckson Associates Realty Corp. Code of Ethics and
Business Conduct
21.1 Statement of Subsidiaries
23.1 Consent of Independent Auditors
24.1 Power of Attorney (included in Part IV of the Form 10-K)
31.1 Certification of Scott H. Rechler, Chief Executive Officer
and President of the Registrant, pursuant to Rule
13a-14(a) or Rule 15(d)-14(a)
31.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of the Registrant,
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
32.1 Certification of Scott H. Rechler, Chief Executive Officer
and President of the Registrant, pursuant to Section 1350
of Chapter 63 of Title 18 of the United States Code
32.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of the Registrant,
pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code
-------------
(a) Previously filed as an exhibit to the Registrant's Registration
Statement Form S-11 (No. 333-1280) and incorporated herein by
reference.
137
(b) Previously filed as an exhibit to the Registrant's Registration
Statement Form S-11 (No. 33-84324) and incorporated herein by
reference.
(c) Previously filed as an exhibit to the Registrant'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 Registrant's Form 10-K filed
with the SEC on March 26, 1998 and incorporated herein by reference.
(e) Previously filed as an exhibit to the Registrant's Form 8-K report
filed with the SEC on March 1, 1999 and incorporated herein by
reference.
(f) Previously filed as an exhibit to the Registrant's Form 8-K filed with
SEC on March 26, 1999 and incorporated herein by reference.
(g) Previously filed as an exhibit to the Registrant's Form 8-K filed with
SEC on June 7, 1999 and incorporated herein by reference.
(h) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 17, 2000 and incorporated herein by reference.
(i) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on October 17, 2000 and incorporated herein by reference.
(j) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 21, 2001 and incorporated herein by reference.
(k) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on May 14, 2001 and incorporated herein by reference.
(l) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on August 14, 2001 and incorporated herein by reference.
(m) Included as an exhibit to Exhibit 4.7.
138
(n) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on January 8, 2002 and incorporated herein by reference.
(o) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on June 18, 2002 and incorporated herein by reference.
(p) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on November 12, 2002 and incorporated herein by reference.
(q) Previously filed as an exhibit to the Registrant's Current Report on
8-K filed with the SEC on January 27, 2003 and incorporated herein by
reference.
(r) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 24, 2003 and incorporated herein by reference.
(s) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on May 15, 2003 and incorporated herein by reference.
(t) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on August 13, 2003 and incorporated herein by reference.
(u) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on September 18, 2003 and incorporated herein by reference.
(v) Previously filed as an exhibit to the Registrant's Form 8-K filed on
November 21, 2003 and incorporated herein by reference.
(w) Previously filed as an exhibit to the Registrant's Form 8-K filed on
January 21, 2004 and incorporated herein by reference.
* Each of Scott H. Rechler, Michael Maturo, Jason M. Barnett, John V.N.
Klein, Lewis S. Ranieri and Conrad D. Stephenson has entered into an
Indemnification Agreement with the Registrant, dated as of May 23,
2002. Each of Ronald H. Menaker and Peter Quick has entered into an
Indemnification Agreement with the Registrant dated as of May 1, 2002.
Each of Douglas Crocker and Stanley Steinberg has entered into an
Indemnification Agreement with the Registrant dated as of February 5,
2004. Elizabeth McCaul has entered into an Indemnification Agreement
with the Registrant dated as of February 25, 2004. These Agreements are
identical in all material respects to the Indemnification Agreement for
Donald J. Rechler incorporated by reference herein.
139
** Each of Michael Maturo and Jason M. Barnett has entered into an Amended
and Restated Long-Term Incentive Award Agreement with the Registrant,
dated as of March 13, 2003. These Agreements are identical in all
material respects to the Amended and Restated Long-Term Incentive Award
Agreement for Scott H. Rechler incorporated by reference herein.
*** Michael Maturo has been awarded certain rights to shares of Class A
Common Stock of the Registrant, pursuant to Award Agreements dated
November 14, 2002. This Agreement is identical in all material respects
to the Agreement for Scott H. Rechler incorporated by reference herein,
except that Michael Maturo received rights to 27,588 shares.
**** Each of Michael Maturo and Jason M. Barnett has been awarded certain
rights to shares of Class A Common Stock of the Registrant pursuant to
Award Agreements dated March 13, 2003. These Agreements are identical
in all material respects to the Agreement for Scott H. Rechler
incorporated by reference herein.
140