-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SDAVUxg3aia2ya4fSWYCYCr6QLN38C4DKg190MFDw4NqM4U4IHTA1sPR3bauUTpr J237MIdHicVUU8vnpks9pQ== 0000930548-99-000006.txt : 19990517 0000930548-99-000006.hdr.sgml : 19990517 ACCESSION NUMBER: 0000930548-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RECKSON ASSOCIATES REALTY CORP CENTRAL INDEX KEY: 0000930548 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 113233650 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13762 FILM NUMBER: 99622380 BUSINESS ADDRESS: STREET 1: 225 BROADHOLLOW RD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5166946900 MAIL ADDRESS: STREET 1: 225 BROADHOLLOW RD CITY: MELVILLE STATE: NY ZIP: 11747 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 Commission file number: 1-13762 RECKSON ASSOCIATES REALTY CORP. (Exact name of registrant as specified in its charter) Maryland 11-3233650 (State other jurisdiction of incorporation (IRS. Employer of organization) Identification Number) 225 Broadhollow Road, Melville, NY 11747 (Address of principal executive office) (zip code) (516) 694-6900 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No The company has only one class of common stock, issued at $.01 par value per share with 40,264,273 shares outstanding as of May 12, 1999. RECKSON ASSOCIATES REALTY CORP. QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 1999 TABLE OF CONTENTS INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 ..................................................... 2 Consolidated Statements of Income for the three months ended March 31, 1999 and 1998 ...................................... 3 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 ................................ 4 Notes to the Consolidated Financial Statements ............... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................ 13 Item 3. Quantitative and Qualitative Disclosures abour Market Risk ... 24 PART II OTHER INFORMATION ............................................ Item 1. Legal Proceedings 25 Item 2. Changes in Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Securities Holders 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURES 25 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Reckson Associates Realty Corp. Consolidated Balance Sheets (Dollars in thousands, except for share amounts)
March 31, December 31, 1999 1998 -------------- -------------- (Unaudited) Assets: Commercial real estate properties, at cost: Land $ 213,410 $ 212,540 Building and improvements 1,391,893 1,372,549 Developments in progress: Land 74,889 69,143 Development costs 81,497 82,901 Furniture, fixtures and equipment 6,250 6,090 -------------- -------------- 1,767,939 1,743,223 Less accumulated depreciation (172,649) (159,049) -------------- -------------- 1,595,290 1,584,174 Investment in real estate joint ventures 18,492 15,104 Investment in mortgage notes and notes receivable 106,288 99,268 Cash and cash equivalents 13,650 2,349 Tenants receivables 2,254 5,159 Investments in and advances to affiliates 61,269 53,329 Deferred rent receivable 24,309 22,526 Prepaid expenses and other assets 55,451 46,372 Contract and land deposits and pre-acquisition costs 1,620 2,253 Deferred leasing and loan costs 30,454 24,282 -------------- -------------- Total Assets $ 1,909,077 $ 1,854,816 ============== ============== Liabilities: Mortgage notes payable $ 254,246 $ 253,463 Unsecured credit facility 180,100 465,850 Unsecured term loan 75,000 20,000 Senior unsecured notes 449,262 150,000 Accrued expenses and other liabilities 37,130 48,565 Affiliate payables 1,127 2,395 Dividends and distributions payable 19,482 19,663 -------------- -------------- Total Liabilities 1,016,347 959,936 -------------- -------------- Commitments and other comments --- --- Minority interests' in consolidated partnerships 52,657 52,173 Preferred unit interest in the operating partnership 42,518 42,518 Limited partners' minority interest in the operating partnership 93,113 94,125 -------------- -------------- 188,288 188,816 -------------- -------------- Stockholders' Equity: Preferred Stock, $.01 par value, 25,000,000 shares authorized, 9,192,000 and 9,192,000 issued and outstanding, respectively 92 92 Common Stock, $.01 par value, 100,000,000 shares authorized, 40,066,964 and 40,035,419 shares issued and outstanding, respectively 401 400 Additional paid in capital 703,949 705,572 -------------- -------------- Total Stockholders' Equity 704,442 706,064 -------------- -------------- Total Liabilities and Stockholders' Equity $ 1,909,077 $ 1,854,816 ============== ============== See accompanying notes to financial statements.
Reckson Associates Realty Corp. Consolidated Statements of Income (Unaudited and in thousands, except per share and share amounts)
Three Months Ended March 31, -------------------------------- 1999 1998 --------------- --------------- Revenues: Base rents $ 62,093 $$ 47,034 Tenant escalations and reimbursements 8,542 6,052 Equity in earnings of real estate joint ventures 211 100 Equity (loss) in earnings of service companies 166 (259) Interest income on mortgage notes and notes receivable 2,808 1,681 Other 2,288 455 --------------- --------------- Total Revenues 76,108 55,063 --------------- --------------- Expenses: Property operating expenses 12,398 9,620 Real estate taxes 10,101 8,003 Ground rents 409 413 Marketing, general and administrative 4,392 3,597 Interest 13,943 10,527 Depreciation and amortization 15,091 10,806 --------------- --------------- Total Expenses 56,334 42,966 --------------- --------------- Income before preferred dividends and distributions and minority interests' 19,774 12,097 Minority partners' interests in consolidated partnerships (1,168) (533) Distributions to preferred unitholders (660) --- Limited partners' interest in the operating partnership (2,241) (1,991) --------------- --------------- Income before dividends to preferred shareholders 15,705 9,573 Dividends to preferred shareholders (4,381) --- --------------- --------------- Net income available to common shareholders $ 11,324 $ 9,573 =============== =============== Basic net income per weighted average common share $ 0.28 $ 0.25 =============== =============== Weighted average common shares outstanding 40,049,079 38,182,577 Diluted net income per weighted average common =============== =============== share $ 0.28 $ 0.25 Diluted weighted average common shares =============== =============== outstanding 40,450,296 38,767,454 =============== =============== See accompanying notes to financial statements.
Reckson Associates Realty Corp. Consolidated Statement of Cash Flows (Unaudited and in thousands)
Three Months Ended March 31, ------------------------------ 1999 1998 ------------- ------------ Cash flows from Operating Activities: Net Income available to common shareholders $ 11,324 $ 9,573 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,091 10,806 Minority partners' interests in consolidated partnerships 1,168 533 Limited partners' interest in the operating partnership 2,241 1,991 Gain on sale of securities --- (43) Equity (loss) in earnings of service companies (166) 259 Equity in earnings of real estate joint ventures (211) (100) Distributions from a real estate joint venture --- 126 Changes in operating assets and liabilities: Tenant receivables 2,905 993 Escrow reserves (901) --- Prepaid expenses and other assets (7,706) (3,141) Deferred rents receivable (1,783) (1,526) Accrued expenses and other liabilities (8,278) 14,053 ------------- ------------- Net cash provided by operating activities 13,684 33,524 ------------- ------------- Cash Flows from Investing Activities: (Increase) decrease in contract deposits and pre-acquisition costs 520 (7,590) Purchase of commercial real estate properties (6,610) (251,028) Interest receivables (850) 1,246 Investment in mortgage notes and notes receivable (6,170) 7,495 Investment in real estate joint ventures (3,177) (201) Investment in service companies --- 565 Additions to commercial real estate properties (17,610) (5,743) Purchase of furniture, fixtures and equipment (85) (328) Payment of leasing costs (4,226) (948) Proceeds from sales of property and securities --- 809 ------------- ------------- Net cash used in investing activities (38,208) (255,723) ------------- ------------- Cash Flows from Financing Activities: Proceeds from issuance of common stock net of issuance costs 471 37,472 Principal payments on secured borrowings (867) (566) Payment of loan costs (2,606) (10) Investments in and advances to affiliates (7,828) 7,106 Proceeds from issuance of senior unsecured notes net of issuance costs 299,262 --- Proceeds from unsecured credit facilities --- 173,524 Repayment of unsecured credit facilities (285,750) --- Proceeds from unsecured term loan 55,000 --- Distributions to minority partners' in consolidated partnerships (684) (449) Distributions to limited partners' in the operating partnership (2,620) (2,368) Distributions to preferred unit holders (660) --- Dividends to common shareholders (13,512) (12,147) Dividends of preferred shareholders (4,381) --- ------------- ------------- Net cash provided by financing activities 35,825 202,562 ------------- ------------- Net (decrease) increase in cash and cash equivalents 11,301 (19,637) Cash and cash equivalents at beginning of period 2,349 21,828 ------------- ------------- Cash and cash equivalents at end of period $ 13,650 $ 2,191 ============= ============= See accompanying notes to financial statements.
Reckson Associates Realty Corp. Notes to the Consolidated Financial Statements March 31, 1999 (Unaudited) 1. Organization and Formation of the Company Reckson Associates Realty Corp. (the "Company") was incorporated in Maryland in September 1994 and is the successor to the operations of the Reckson Group. In June, 1995 the Company completed an initial public offering of 7,038,000 shares (pre-split)of $.01 par value common stock (the "IPO"). The IPO price of $24.25 per common share (pre-split) resulted in gross offering proceeds of approximately $170,671,500. The Company also issued 400,000 shares (pre-split) in a concurrent offering to the Rechler family resulting in $9,700,000 in additional proceeds. The aggregate proceeds to the Company, net of underwriting discount, advisory fee and other offering expenses, were approximately $162,000,000. 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 approximately 73% interest in the Operating Partnership. All properties acquired by the Company are held by or through the Operating Partnership. The Operating Partnership executed various option and purchase agreements whereby it issued 2,758,960 common units pre-split) of limited partnership interest in the Operating Partnership ("OP Units") to certain continuing investors and assumed approximately $163,438,000 of indebtedness (net of a minority interest mortgage)in exchange for interests in certain property partnerships, fee simple and leasehold interests in properties and development land, certain business assets of executive center entities and 100% of the non-voting preferred stock of the management and construction companies. As of March 31, 1999, the Company owned and operated 73 office properties comprising approximately 10.1 million square feet, 130 industrial properties comprising approximately 11.1 million square feet and two retail properties comprising approximately 20,000 square feet, located in the New York Tri-State area (the "Tri-State Area"). In addition, the Company owned or had contracted to acquire approximately 1,012 acres of land (including approximately 306 acres under option) in 20 separate parcels of which the Company can develop approximately 9.8 million square feet of industrial and office space. The Company also has invested approximately $46.8 million in certain mortgage notes encumbering four Class A office properties encompassing approximately 577,000 square feet, a 306 acre parcel of land located in New Jersey and in a note receivable secured by a partnership interest in Omni Partner's, L.P., owner of the Omni, a 575,000 square foot Class A office property located in Uniondale, New York. During 1997, the Company formed Reckson Service Industries, Inc. ("RSI") and Reckson Strategic Venture Partners, LLC ("RSVP"). The Operating Partnership owned a 95% non voting common stock interest in RSI through June 10, 1998. On June 11, 1998, the Operating Partnership distributed its 95% common stock interest in RSI of approximately $3 million to its owners, including the Company which, in turn, distributed the common stock of RSI received from the Operating Partnership to its stockholders. Additionally, during June 1998, the Operating Partnership established a credit facility with RSI (the "RSI Facility") in the amount of $100 million for RSI's service sector operations and other general corporate purposes. As of March 31, 1999 the Company had advanced $34.7 million under the RSI Facility. In addition, the Operating Partnership has approved the funding of investments of up to $100 million with or in RSVP (the "RSVP Commitment"), through RSVP-controlled joint venture Real Estate Investment Trust ("REIT")-qualified investments or advances made to RSI under terms similar to the RSI Facility. As of March 31, 1999, approximately $24 million had been invested through the RSVP Commitment, of which $13.3 million represents RSVP-controlled joint venture REIT-qualified investments and $10.7 million represents advances to RSI under the RSVP Commitment. Such amounts have been included in investment in real estate joint ventures and investments in and advances to affiliates, respectively, on the accompanying balance sheets. RSI serves as the managing member of RSVP. RSI invests in operating companies that generally provide commercial services to properties owned by the Company and its tenants and third parties. RSVP was formed to provide the Company with a research and development vehicle to invest in alternative real estate sectors. RSVP invests primarily in real estate and real estate related operating companies generally outside of the Company's core office and industrial focus. RSVP's strategy is to identify and acquire interests in established entrepreneurial enterprises with experienced management teams in market sectors which are in the early stages of their growth cycle or offer unique circumstances for attractive investments as well as a platform for future growth. On January 6, 1998, the Company made its initial investment in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse facilities. In connection with the transaction the Morris Companies contributed 100% of their interests in certain industrial properties to Reckson Morris Operating Partnership, L. P. ("RMI") in exchange for operating partnership units in RMI. The Company has agreed to invest up to $150 million in RMI. As of March 31, 1999, the Company has invested approximately $95.5 million for an approximate 72.2% controlling interest. In addition, at March 31, 1999, the Company had advanced approximately $32.8 million to the Morris Companies primarily to fund certain construction costs related to development properties to be contributed to RMI. Such amounts have been included in investment in mortgage notes and notes receivable on the accompanying balance sheets. During July 1998, the Company formed Metropolitan Partners, LLC ("Metropolitan") for the purpose of acquiring Tower Realty Trust, Inc. ("Tower"). Tower owns and operates office properties located in New York City, Florida and Arizona. (See Note 10) 2. Basis of Presentation The accompanying consolidated financial statements include the consolidated financial position of the Company and the Operating Partnership at March 31, 1999 and December 31, 1998 and the results of their operations and cash flows for the three months ended March 31, 1999 and 1998 respectively. The Operating Partnership's investments in Metropolitan, RMI and Omni Partner's, L.P. ("Omni") are reflected in the accompanying financial statements on a consolidated basis with a reduction for minority partners' interest. The operating results of the service businesses currently conducted by Reckson Management Group, Inc., and Reckson Construction Group, Inc., are reflected in the accompanying financial statements on the equity method of accounting. The operating results of Reckson Executive Centers, L.L.C., ("REC"), a service business of the Operating Partnership were reflected in the accompanying financial statements on the equity method of accounting through March 31, 1998. On April 1, 1998, the Operating Partnership sold its 9.9% interest in REC to RSI for $200,000. Additionally, the operating results of RSI , were reflected in the accompanying financial statements on the equity method of accounting through June 10, 1998. On June 11, 1998 the Operating Partnership distributed its 95% common stock interest in RSI to its owners, including the Company which, in turn, distributed the common stock of RSI to its stockholders. The Operating Partnership also invests in real estate joint ventures where it may own less than a controlling interest, such investments are also reflected in the accompanying financial statements on the equity method of accounting. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The minority interests at March 31, 1999 represent an approximate 16.1% limited partnership interest in the Operating Partnership, an approximate 27.8% interest in RMI, a convertible preferred interest in Metropolitan and a 40% interest in Omni. The accompanying interim unaudited financial statements have been prepared by the Company's management pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with generally accepted accounting principles may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The unaudited financial statements as of March 31, 1999 and for the three month periods ended March 31, 1999 and 1998 include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth herein. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. These financial statements should be read in conjunction with the Company's audited financial statements and the notes thereto included in the Company's Form 10K for the year ended December 31, 1998. The Company intends to qualify as a REIT under Section 856 through 869 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company will not generally be subject to corporate Federal income taxes as long as it satisfies certain technical requirements of the Code relating to composition of its income and assets and requirements relating to distributions of taxable income to shareholders. In 1997, the Financial Accounting Standards Board ("FASB") issued the following Statements (i) Statement No. 128, "Earnings per Share("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. The conversion of OP Units into common stock would not have a significant effect on per share amounts as the OP Units share proportionately with the common stock in the results of the Operating Partnership's operations. (ii) Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") which is effective for fiscal years beginning after December 15, 1997. SFAS 130 established standards for reporting comprehensive income and its components in a full set of general-purpose financial statements. SFAS 130 requires that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The adoption of this standard had no impact on the Company's financial position or results of operations. (iii) Statement No. 131 "Disclosures about segments of an Enterprise and Related Information" ("SFAS 131") which is effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes standards for reporting information about operating segments in annual financial statements and in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of this standard had no impact on the Company's financial position or results of operations but did effect the disclosure of segment information. See Note 9. Certain prior period amounts have been reclassified to conform to the current period presentation. 3. Mortgage Notes Payable As of March 31, 1999, the Company had approximately $254.2 million of fixed rate mortgage notes which mature at various times between 1999 and 2012. The notes are secured by 22 properties and one parcel of land and have a weighted average interest rate of approximately 7.8%. 4. Senior Unsecured Notes As of March 31, 1999, the Operating Partnership had outstanding approximately $449.3 million (net of issuance discounts)of senior unsecured notes (the "Senior Unsecured Notes"). The following table sets forth the Operating Partnership's Senior Unsecured Notes and other related disclosures (dollars in thousands): Issuance Face Amount Coupon Rate Term Maturity -------------- ------------- ------------ ---------- --------------- August 27, 1997 $ 150,000 7.20% 10 years August 28, 2007 March 26, 1999 $ 100,000 7.40% 5 years August 15, 2004 March 26, 1999 $ 200,000 7.75% 10 years March 15, 2009 Interest on the Senior Unsecured Notes is payable semiannually with principal and unpaid interest due on the scheduled maturity dates. In addition, the five year and 10 year Senior Unsecured Notes issued on March 26, 1999 were issued at a discount of $172,000 and $566,000, respectively. Net proceeds of approximately $297.4 million received from the issuance of the March 26, 1999 Senior Unsecured Notes were used to repay outstanding borrowings under the Company's unsecured credit facility. 5. Unsecured Credit Facility and Unsecured Term Loan As of March 31, 1999, the Company had a three year $500 million unsecured revolving credit facility (the "Credit Facility") from Chase Manhattan Bank, Union Bank of Switzerland and PNC Bank as co-managers of the credit facility bank group. Interest rates on borrowings under the Credit Facility are priced off of LIBOR plus a sliding scale ranging from 112.5 basis points to 137.5 basis points based on the leverage ratio of the Company. Upon the Company receiving an investment grade rating on its senior unsecured debt by two rating agencies, the pricing is adjusted to LIBOR plus a scale ranging from 65 basis points to 90 basis points depending upon the rating. On March 16, 1999 the Company received its second investment grade rating on its senior unsecured debt. As a result, the pricing under the Credit Facility was adjusted to LIBOR plus 90 basis points. The Credit Facility replaced and restructured the Company's existing $250 million unsecured credit facility and $200 million unsecured bridge facility. The Company utilizes the Credit Facility primarily to finance the acquisitions of properties and other real estate investments, fund its development activities and for working capital purposes. At March 31, 1999, the Company had availability under the Credit Facility to borrow an additional $293.8 million (net of $26.1 million of outstanding undrawn letters of credit). As of March 31, 1999, the Company had a one year $75 million unsecured term loan (the "Term Loan") from Chase Manhattan Bank. Interest rates on borrowings under the Term Loan are priced off of LIBOR plus 150 basis points for the first nine months and 175 basis points for the remaining three months. At March 31, 1999, the Company had $75 million outstanding under the Term Loan. 6. Commercial Real Estate Investments During the three months ended March 31, 1999, the Company purchased approximately 68.1 acres of vacant land in Northern New Jersey for approximately $2.6 million which allows for approximately 1.1 million square feet of future development opportunities. In addition, RMI purchased 74.6 acres of vacant land for approximately $3.7 million which allows for approximately 1,000,000 square feet of future development opportunities. 7. Stockholders' Equity On March 30, 1999 the Board of Directors declared a dividend of $.3375 per share of common stock payable on April 28, 1999 to its shareholders of record as of April 12, 1999. The dividend declared, which related to the three months ended March 31, 1999, is based upon an annual distribution of $1.35 per share. On March 30, 1999 the Board of Directors declared a dividend on its Series A Convertible Cumulative Preferred Stock of $.4766 per share payable on April 30, 1999 to stockholders of record on April 15, 1999. The dividend declared, which relates to the three months ended April 30, 1999 is based on an annual distribution of $1.906 per share. Basic net income per share was calculated using the weighted average number of shares outstanding of 40,049,079 and 38,182,577 for the three months ended March 31, 1999 and 1998, respectively. The following table sets forth the Company's reconciliation of numerators and denominators of the basic and diluted earnings per weighted average common share and the computation of basic and diluted earnings per share as required by SFAS 128 (in thousands except for earnings per share data):
Three Months Ended March 31, -------------------------------- 1999 1998 --------------- --------------- Numerator: Income before dividends to preferred shareholders $ 15,705 $ 9,573 Dividends to preferred shareholders 4,381 ---- --------------- --------------- Numerator for basic and diluted earnings per share $ 11,324 $ 9,573 =============== =============== Denminator: Denominator for basic earnings per share- weighted-average shares 40,049 38,183 Effect of dilutive securities: Employee stock options 401 584 --------------- --------------- Denominator for diluted earnings per share- adjusted weighted-average shares and assumed conversion 40,450 38,767 =============== =============== Basic earnings per common share: Net income per common share $ 0.28 $ 0.25 =============== =============== Diluted earnings per common share: Diluted net income per common share $ 0.28 $ 0.25 =============== ===============
8. Supplemental Disclosure of Cash Flow Information (in thousands)
Three Months Ended March 31, -------------------------------- 1999 1998 --------------- --------------- Cash paid during the period for interest $ 13,329 $ 7,957 =============== =============== Interest capitalized during the period $ 2,311 $ 1,524 =============== ===============
9. Segment Disclosure The Company owns all of the interests in its real estate properties by or through the Operating Partnership. The Company's portfolio consists of Class A suburban office and industrial properties located and operated in four divisions within the Tri-State Area. In addition, the Company's portfolio also includes 23 industrial properties owned by RMI. Each of the divisions and RMI have a managing director who reports directly to the Chief Operating Officer and Chief Financial Officer who have been identified as the Chief Operating Decision Makers ("CODM") because of their final authority over resource allocation, decisions and performance assessment. The CODM evaluate the Company's operating performance based on geographic area. In addition, as the Company expects to meet its short term liquidity requirements in part through the Credit Facility and Term Loan, interest incurred on borrowings under the Credit Facility and Term Loan is not considered as part of property operating performance. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The following table sets forth the components of the Company's revenues and expenses and other related disclosures as required by SFAS 131 for the three months ended March 31, 1999 and 1998 (in thousands):
March 31, 1999 -------------------------------------------------------------------------------------- Long West- New Southern Consolidated Island chester Jersey Conn. RMI Other Total ---------- ---------- ---------- ------------ ------------ ---------- ----------- Revenues: Base rents $ 26,812 $ 14,255 $ 10,772 $ 6,397 $ 3,857 $ --- $ 62,093 Tenant escalations and reimbursements 3,203 2,303 1,387 893 756 --- 8,542 Equity in earnings of real estate joint ventures --- --- --- --- --- 211 211 Equity in earnings of service companies --- --- --- --- --- 166 166 Interest income on mortgage notes and notes receivable --- --- --- --- --- 2,808 2,808 Other income 53 3 7 6 2 2,217 2,288 ---------- ---------- ---------- ------------ ------------ ---------- ----------- Total Revenues 30,068 16,561 12,166 7,296 4,615 5,402 76,108 ---------- ---------- ---------- ------------ ------------ ---------- ----------- Expenses: Property operating expenses 5,003 3,823 1,864 1,570 138 --- 12,398 Real estate taxes 5,406 2,107 1,388 587 613 --- 10,101 Ground rents 396 --- 13 --- --- --- 409 Marketing, general and administrative 1,799 981 665 497 131 319 4,392 Interest 2,435 1,146 4 974 277 9,107 13,943 Depreciation and amortization 6,245 3,004 2,141 1,391 1,080 1,230 15,091 ---------- ---------- ---------- ------------ ------------ ---------- ----------- Total Expenses 21,284 11,061 6,075 5,019 2,239 10,656 56,334 ---------- ---------- ---------- ------------ ------------ ---------- ----------- Income before preferred dividends and distributions and minority interests's $ 8,784 $ 5,500 $ 6,091 $ 2,277 $ 2,376 $ (5,254) $ 19,774 ========== ========== ========== ============ ============ ========== =========== Total Assets $ 523,486 $ 404,988 $ 335,651 $ 170,961 $ 159,873 $ 314,118 $1,909,077 ========== ========== ========== ============ ============ ========== ===========
March 31, 1998 -------------------------------------------------------------------------------------- Long West- New Southern Consolidated Island chester Jersey Conn. RMI Other Total ---------- ---------- ---------- ------------ ------------ ---------- ---------- Revenues: Base rents $ 24,257 $ 8,923 $ 6,709 $ 4,451 $ 2,694 $ --- $ 47,034 Tenant escalations and reimbursements 3,046 964 751 760 531 --- 6,052 Equity in earnings of real estate joint ventures --- --- --- --- --- 100 100 Equity in loss of service companies --- --- --- --- --- (259) (259) Interest income on mortgage notes and notes receivable --- --- --- --- --- 1,681 1,681 Other income 28 1 4 --- --- 422 455 ---------- ---------- ---------- ------------ ------------ ---------- ---------- Total Revenues 27,331 9,888 7,464 5,211 3,225 1,944 55,063 ---------- ---------- ---------- ------------ ------------ ---------- ---------- Expenses: Property operating expenses 5,134 2,395 780 1,234 77 --- 9,620 Real estate taxes 4,894 1,351 808 485 465 --- 8,003 Ground rents 413 --- --- --- --- --- 413 Marketing, general and administrative 1,775 359 288 309 100 766 3,597 Interest 2,324 162 --- 986 255 6,800 10,527 Depreciation and amortization 5,254 1,796 1,463 832 757 704 10,806 ---------- ---------- ---------- ------------ ------------ ---------- ---------- Total Expenses 19,794 6,063 3,339 3,846 1,654 8,270 42,966 ---------- ---------- ---------- ------------ ------------ ---------- ---------- Income before preferred dividends and distributions and minority interests's $ 7,537 $ 3,825 $ 4,125 $ 1,365 $ 1,571 $ (6,326) $ 12,097 ========== ========== ========== ============ ============ ========== ==========
10. Commitments and other comments In July 1998, the Company formed a joint venture, Metropolitan Partners LLC, a Delaware limited liability company ("Metropolitan"), with Crescent Real Estate Equities Company, a Texas real estate investment trust ("Crescent"). Pursuant to a merger agreement executed on July 9, 1998 and amended and restated on August 11, 1998 (the "Initial Merger Agreement") between Metropolitan, the Company, Crescent and Tower Realty Trust, Inc., a Maryland corporation ("Tower"), Metropolitan agreed, subject to the terms and conditions of the Merger Agreement, to purchase the common stock of Tower. Prior to the execution of the Initial Merger Agreement, Metropolitan identified certain potential tax issues regarding Tower's operations. Metropolitan entered into the Initial Merger Agreement only after Tower made detailed representations and warranties purporting to address these issues. In the course of due diligence, however, Metropolitan, the Company and Crescent discovered that these representations and warranties may not be correct and discussed these concerns with Tower, specifically advising Tower that they were not terminating the Initial Merger Agreement at that time. Metropolitan, the Company and Crescent invited Tower to respond to these concerns. However, on November 2, 1998, Tower filed a complaint in the Supreme Court of the State of New York alleging Metropolitan, the Company and Crescent willfully breached the Initial Merger Agreement. Tower, in the complaint, was seeking declaratory and other relief, including damages of not less than $75 million and specific performance by Metropolitan, the Company and Crescent of their obligations under the Initial Merger Agreement. On December 8, 1998, the Company, Metropolitan and Tower executed a revised merger agreement (the "Revised Merger Agreement"), pursuant to which Tower will be merged (the "Merger") into Metropolitan, with Metropolitan surviving the Merger. Concurrently with the Merger, Tower Realty Operating Partnership, L.P. ("Tower OP") will be merged with and into a subsidiary of Metropolitan. The consideration to be issued in the mergers will be comprised of (i) 25% cash and (ii) 75% of shares of Class B Exchangeable Common Stock, par value $.01 per share, of the Company (the "Class B Common Stock"), or in certain circumstances described below, shares of Class B Common Stock and unsecured notes of the Operating Partnership. The Company controls Metropolitan and owns 100% of the common equity; Crescent owns a preferred equity investment in Metropolitan. The Revised Merger Agreement replaces the Initial Merger Agreement (which at that time was a 50/50 joint venture between the Company and Crescent) relating to the acquisition by Metropolitan of Tower for $24 per share. Pursuant to the terms of the Revised Merger Agreement, holders of shares of outstanding common stock of Tower ("Tower Common Stock"), and outstanding units of limited partnership interest of Tower OP will have the option to elect to receive cash or shares of Class B Common Stock, subject to proration. Under the terms of the transaction, Metropolitan will effectively pay for each share of Tower Common Stock and each unit of limited partnership interest of Tower OP the sum of (i) $5.75 in cash, and (ii) 0.6273 of a share of Class B Common Stock. The shares of Class B Common Stock are entitled to receive an initial annual dividend of $2.24 per share and is subject to adjustment annually. The shares of Class B Common Stock are exchangeable at any time, at the option of the holder, into an equal number of shares of common stock, par value $.01 per share, of the Company subject to customary antidilution adjustments. The Company, at its option, may redeem any or all of the Class B Common Stock in exchange for an equal number of shares of the Company's common stock at any time following the four year, six-month anniversary of the issuance of the Class B Common Stock. The Company's Board of Directors have recommended to the Company's stockholders the approval of a proposal to issue a number of shares of Class B Common Stock equal to 75% of the sum of (i) the number of outstanding shares of the Tower Common Stock and (ii) the number of Tower OP limited partnership units, in each case, at the effective time of the mergers. If the stockholders of the Company do not approve the issuance of the Class B Common Stock as proposed, the Revised Merger Agreement provides that approximately one-third of the consideration that was to be paid in the form of Class B Common Stock will be replaced by senior unsecured notes of the Operating Partnership, which notes will bear interest at the rate of 7% per annum and have a term of ten years. In addition, if the stockholders of the Company do not approve the issuance of Class B Common Stock as proposed and the Board of Directors of the Company withdraws or amends or modifies in any material respect its recommendation for, approval of such proposal, then the total principal amount of notes to be issued and distributed in the Merger will be increased by $15 million. Simultaneously with the execution of the Revised Merger Agreement, Metropolitan and Tower executed and consummated a stock purchase agreement (the "Series A Stock Purchase Agreement") pursuant to which Metropolitan purchased from Tower approximately 2.2 million shares of Series A Convertible Preferred Stock, par value $.01 per share, of Tower (the "Tower Preferred Stock"), for an aggregate purchase price of $40 million, $30 million of which was funded through a capital contribution by the Company to Metropolitan and which is included in prepaid expenses and other assets on the accompanying balance sheet. The Tower Preferred Stock has a stated value of $18.44 per share and is convertible by Metropolitan into an equal number of shares of Tower Common Stock at anytime after the termination, if any, of the Revised Merger Agreement, subject to customary antidilution adjustments. The Tower Preferred Stock is entitled to receive dividends equivalent to those paid on the Tower Common Stock. If the Revised Merger Agreement is not consummated and a court of competent jurisdiction issues a final, non-appealable judgment determining that the Company and Metropolitan are obligated to consummate the Merger but have failed to do so, or determining that the Company and Metropolitan failed to use their reasonable best efforts to take all actions necessary to cause certain closing conditions to be satisfied, Metropolitan is obligated to return to Tower $30 million of the Series A Preferred Stock. Immediately prior to the execution of the Revised Merger Agreement and consummation of the Series A Stock Purchase Agreement, the Company and Crescent executed the amended and restated operating agreement of Metropolitan (the "Metropolitan Operating Agreement") pursuant to which Crescent agreed to purchase a convertible preferred membership interest (the "Preferred Interest") in Metropolitan for an aggregate purchase price of $85 million. Ten million dollars of the purchase price was paid by Crescent to Metropolitan upon execution of the Metropolitan Operating Agreement to acquire the Tower Preferred Stock and the remaining portion is payable prior to the closing of the Merger and is expected to be used to fund a portion of the cash merger consideration. Upon closing of the Merger, Crescent's investment will accrue distributions at a rate of 7.5% per annum for a two-year period and may be redeemed by Metropolitan at any time during that period for $85 million, plus an amount sufficient to provide a 9.5% internal rate of return. If Metropolitan does not redeem the preferred interest, upon the expiration of the two-year period, Crescent must convert its interest into either (i) a common membership interest in Metropolitan or (ii) shares of the Company's common stock at a conversion price of $24.61. In connection with the revised transaction, Tower, the Company and Crescent have exchanged mutual releases for any claims relating to the Initial Merger Agreement. The Company has engaged brokers to, and anticipates that it will dispose of the Tower properties located outside the New York City metropolitan area. In addition, the Company has entered into an agreement to sell four of Tower's non-Class A New York City properties, comprising approximately 701,000 square feet, for approximately $84.5 million. The sale of the four properties is expected to be completed immediately prior to the completion of the merger. The Company and Tower have each scheduled special meetings of their stockholders for May 24, 1999 to consider approvals for the proposed merger. In addition, the Company anticipates that to the extent the necessary approvals are attained at Tower's meeting of stockholders, the acquisition of Tower will close on or about such date. There can be no assurance that such approval will be obtained. 11. Subsequent Events On May 10, 1999, the Company announced that it had entered an agreement to acquire a first mortgage note secured by a 1.4 million square foot Class A office building located at 919 Third Avenue in New York City for a purchase price of approximately $277.5 million. In addition, the Company also announced that it had agreed to sell $150 million of convertible preferred stock. Both transactions are expected to close in early June 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the accompanying Consolidated 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 or the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the Company's expectations for future periods. Certain forward-looking statements, including, without limitation, statements relating to the timing and success of acquisitions, the financing of the Company's operations, the ability to lease vacant space and the ability to renew or relet space under expiring leases, involve certain risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, the actual results may differ materially from those set forth in the forward-looking statements and the Company can give no assurance that its expectation will be achieved. Certain factors that might cause the results of the Company to differ materially from those indicated by such forward-looking statements include, among other factors, general economic conditions, general real estate industry risks, tenant default and bankruptcies, loss of major tenants, the impact of competition and acquisition, redevelopment and development risks, the ability to finance business opportunities and local real estate risks such as an oversupply of space or a reduction in demand for real estate in the Company's real estate markets. Consequently, such forward-looking statements should be regarded solely as reflections of the Company's current operating and development plans and estimates. These plans and estimates are subject to revisions from time to time as additional information becomes available, and actual results may differ from those indicated in the referenced statements. Overview and Background The Company is a self-administered and self managed real estate investment trust ("REIT") specializing in the acquisition, leasing, financing, management and development of office and industrial properties. The Company's growth strategy is focused on the suburban markets surrounding New York City. Since completion of its initial public offering in May 1995, the Company has acquired approximately $1.14 billion of properties comprising approximately 12.8 million square feet of space. The Company owns all of the interests in its real properties through Reckson Operating Partnership, L.P. (the "Operating Parntership"). As of March 31, 1999, the Company owned and operated 73 office properties comprising approximately 10.1 million square feet, 130 industrial properties comprising approximately 11.1 million square feet and two retail properties comprising approximately 20,000 square feet, located in the New York Tri-State area. In addition, the Company owned or had contracted to acquire approximately 1,012 acres of land (including approximately 306 acres under option) in 20 separate parcels of which the Company can develop approximately 9.8 million square feet of industrial and office space. The Company also has invested approximately $46.8 million in certain mortgage notes encumbering four Class A office properties encompassing approximately 577,000 square feet, a 306 acre parcel of land located in New Jersey and in a note receivable secured by a partnership interest in Omni Partner's, L.P., owner of the Omni, a 575,000 square foot Class A office property located in Uniondale, New York. During 1997, the Company formed Reckson Service Industries, Inc. ("RSI") and Reckson Strategic Venture Partners, LLC ("RSVP"). The Operating Partnership owned a 95% non voting common stock interest in RSI through June 10, 1998. On June 11, 1998, the Operating Partnership distributed its 95% common stock interest in RSI of approximately $3 million to its owners, including the Company which, in turn, distributed the common stock of RSI received from the Operating Partnership to its stockholders. Additionally, during June 1998, the Operating Partnership established a credit facility with RSI (the"RSI Facility") in the amount of $100 million for RSI's service sector operations and other general corporate purposes. As of March 31, 1999, the Company had advanced $34.7 million under the RSI Facility. In addition, the Operating Partnership has approved the funding of investments of up to $100 million with or in RSVP (the "RSVP Commitment"), through RSVP-controlled joint venture REIT-qualified investments or advances made to RSI under terms similar to the RSI Facility. As of March 31, 1999, approximately $24 million had been invested through the RSVP Commitment, of which $13.3 million represents RSVP-controlled joint venture REIT-qualified investments and $10.7 million represents advances to RSI under the RSVP Commitment. Such amounts have been included in investment in real estate joint ventures and investments in and advances to affiliates, respectively, on the Company's balance sheets. RSI serves as the managing member of RSVP. RSI invests in operating companies that generally provide commercial services to properties owned by the Company and its tenants and third parties. RSVP was formed to provide the Company with a research and development vehicle to invest in alternative real estate sectors. RSVP invests primarily in real estate and real estate related operating companies generally outside of the Company's core office and industrial focus. RSVP's strategy is to identify and acquire interests in established entrepreneurial enterprises with experienced management teams in market sectors which are in the early stages of their growth cycle or offer unique circumstances for attractive investments as well as a platform for future growth. The Operating Partnership and RSI have entered into an intercompany agreement (the "Reckson Intercompany Agreement") to formalize their relationship and to limit conflicts of interest. Under the Reckson Intercompany Agreement, RSI granted the Operating Partnership a right of first opportunity to make any REIT -qualified investment that becomes available to RSI. In addition, if a REIT - -qualified investment opportunity becomes available to an affiliate of RSI, including RSVP, the Reckson Intercompany Agreement requires such affiliate to allow the Operating Partnership to participate in such opportunity to the extent of RSI's interest. Under the Reckson Intercompany Agreement, the Operating Partnership granted RSI a right of first opportunity to provide commercial services to the Operating Partnership and its tenants. RSI will provide services to the Operating Partnership at rates and on terms as attractive as either the best available for comparable services in the market or those offered by RSI to third parties. In addition, the Operating Partnership will give RSI access to its tenants with respect to commercial services that may be provided to such tenants and, under the Reckson Intercompany Agreement, subject to certain conditions, the Operating Partnership granted RSI a right of first refusal to become the lessee of any real property acquired by the Operating Partnership if the Operating Partnership determines that, consistent with Reckson's status as a REIT, it is required to enter into a "master" lease agreement. On January 6, 1998, the Company made its initial investment in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse facilities. In connection with the transaction the Morris Companies contributed 100% of their interests in certain industrial properties to Reckson Morris Operating Partnership, L. P. ("RMI") in exchange for operating partnership units in RMI. The Company has agreed to invest up to $150 million in RMI. As of March 31, 1999, the Company has invested approximately $95.5 million for an approximate 72.2% controlling interest. In addition, at March 31, 1999, the Company had advanced approximately $32.8 million to the Morris Companies primarily to fund certain construction costs related to development properties to be contributed to RMI. In July 1998, the Company formed a joint venture, Metropolitan Partners LLC, a Delaware limited liability company ("Metropolitan"), with Crescent Real Estate Equities Company, a Texas real estate investment trust ("Crescent"). Pursuant to a merger agreement executed on July 9, 1998 and amended and restated on August 11, 1998 (the "Initial Merger Agreement") between Metropolitan, the Company, Crescent and Tower Realty Trust, Inc., a Maryland corporation ("Tower"), Metropolitan agreed, subject to the terms and conditions of the Merger Agreement, to purchase the common stock of Tower. Prior to the execution of the Initial Merger Agreement, Metropolitan identified certain potential tax issues regarding Tower's operations. Metropolitan entered into the Initial Merger Agreement only after Tower made detailed representations and warranties purporting to address these issues. In the course of due diligence, however, Metropolitan, the Company and Crescent discovered that these representations and warranties may not be correct and discussed these concerns with Tower, specifically advising Tower that they were not terminating the Initial Merger Agreement at that time. Metropolitan, the Company and Crescent invited Tower to respond to these concerns. However, on November 2, 1998, Tower filed a complaint in the Supreme Court of the State of New York alleging Metropolitan, the Company and Crescent willfully breached the Initial Merger Agreement. Tower, in the complaint, was seeking declaratory and other relief, including damages of not less than $75 million and specific performance by Metropolitan, the Company and Crescent of their obligations under the Initial Merger Agreement. On December 8, 1998, the Company, Metropolitan and Tower executed a revised merger agreement (the "Revised Merger Agreement"), pursuant to which Tower will be merged (the "Merger") into Metropolitan, with Metropolitan surviving the Merger. Concurrently with the Merger, Tower Realty Operating Partnership, L.P. ("Tower OP") will be merged with and into a subsidiary of Metropolitan. The consideration to be issued in the mergers will be comprised of (i) 25% cash and (ii) 75% of shares of Class B Exchangeable Common Stock, par value $.01 per share, of the Company (the "Class B Common Stock"), or in certain circumstances described below, shares of Class B Common Stock and unsecured notes of the Operating Partnership. The Company controls Metropolitan and owns 100% of the common equity; Crescent owns a preferred equity investment in Metropolitan. The Revised Merger Agreement replaces the Initial Merger Agreement (which at that time was a 50/50 joint venture between the Company and Crescent) relating to the acquisition by Metropolitan of Tower for $24 per share. Pursuant to the terms of the Revised Merger Agreement, holders of shares of outstanding common stock of Tower ("Tower Common Stock"), and outstanding units of limited partnership interest of Tower OP will have the option to elect to receive cash or shares of Class B Common Stock, subject to proration. Under the terms of the transaction, Metropolitan will effectively pay for each share of Tower Common Stock and each unit of limited partnership interest of Tower OP the sum of (i) $5.75 in cash, and (ii) 0.6273 of a share of Class B Common Stock. The shares of Class B Common Stock are entitled to receive an initial annual dividend of $2.24 per share and is subject to adjustment annually. The shares of Class B Common Stock are exchangeable at any time, at the option of the holder, into an equal number of shares of common stock, par value $.01 per share, of the Company subject to customary antidilution adjustments. The Company, at its option, may redeem any or all of the Class B Common Stock in exchange for an equal number of shares of the Company's common stock at any time following the four year, six-month anniversary of the issuance of the Class B Common Stock. The Company's Board of Directors have recommended to the Company's stockholders the approval of a proposal to issue a number of shares of Class B Common Stock equal to 75% of the sum of (i) the number of outstanding shares of the Tower Common Stock and (ii) the number of Tower OP limited partnership units, in each case, at the effective time of the mergers. If the stockholders of the Company do not approve the issuance of the Class B Common Stock as proposed, the Revised Merger Agreement provides that approximately one-third of the consideration that was to be paid in the form of Class B Common Stock will be replaced by senior unsecured notes of the Operating Partnership, which notes will bear interest at the rate of 7% per annum and have a term of ten years. In addition, if the stockholders of the Company do not approve the issuance of Class B Common Stock as proposed and the Board of Directors of the Company withdraws or amends or modifies in any material respect its recommendation for, approval of such proposal, then the total principal amount of notes to be issued and distributed in the Merger will be increased by $15 million. Simultaneously with the execution of the Revised Merger Agreement, Metropolitan and Tower executed and consummated a stock purchase agreement (the "Series A Stock Purchase Agreement") pursuant to which Metropolitan purchased from Tower approximately 2.2 million shares of Series A Convertible Preferred Stock, par value $.01 per share, of Tower (the "Tower Preferred Stock"), for an aggregate purchase price of $40 million, $30 million of which was funded through a capital contribution by the Company to Metropolitan and which is included in prepaid expenses and other assets on the Company's balance sheet. The Tower Preferred Stock has a stated value of $18.44 per share and is convertible by Metropolitan into an equal number of shares of Tower Common Stock at anytime after the termination, if any, of the Revised Merger Agreement, subject to customary antidilution adjustments. The Tower Preferred Stock is entitled to receive dividends equivalent to those paid on the Tower Common Stock. If the Revised Merger Agreement is not consummated and a court of competent jurisdiction issues a final, non-appealable judgment determining that the Company and Metropolitan are obligated to consummate the Merger but have failed to do so, or determining that the Company and Metropolitan failed to use their reasonable best efforts to take all actions necessary to cause certain closing conditions to be satisfied, Metropolitan is obligated to return to Tower $30 million of the Series A Preferred Stock. Immediately prior to the execution of the Revised Merger Agreement and consummation of the Series A Stock Purchase Agreement, the Company and Crescent executed the amended and restated operating agreement of Metropolitan (the "Metropolitan Operating Agreement") pursuant to which Crescent agreed to purchase a convertible preferred membership interest (the "Preferred Interest") in Metropolitan for an aggregate purchase price of $85 million. Ten million dollars of the purchase price was paid by Crescent to Metropolitan upon execution of the Metropolitan Operating Agreement to acquire the Tower Preferred Stock and the remaining portion is payable prior to the closing of the Merger and is expected to be used to fund a portion of the cash merger consideration. Upon closing of the Merger, Crescent's investment will accrue distributions at a rate of 7.5% per annum for a two-year period and may be redeemed by Metropolitan at any time during that period for $85 million, plus an amount sufficient to provide a 9.5% internal rate of return. If Metropolitan does not redeem the preferred interest, upon the expiration of the two-year period, Crescent must convert its interest into either (i) a common membership interest in Metropolitan or (ii) shares of the Company's common stock at a conversion price of $24.61. In connection with the revised transaction, Tower, the Company and Crescent have exchanged mutual releases for any claims relating to the Initial Merger Agreement. The Company has engaged brokers to, and anticipates that it will dispose of the Tower properties located outside the New York City metropolitan area. In addition, the Company has entered into an agreement to sell four of Tower's non-Class A New York City properties, comprising approximately 701,000 square feet, for approximately $84.5 million. The sale of the four properties is expected to be completed immediately prior to the completion of the merger. The Company and Tower have each scheduled special meetings of their stockholders for May 24, 1999 to consider approvals for the proposed merger. In addition, the Company anticipates that to the extent the necessary approval are attained at Tower's meeting of stockholders, the acquisition of Tower will close on or about such date. There can be no assurance that such approval will be obtained. On August 27, 1998 the Company announced the formation of a joint venture with RSVP and the Dominion Group, an Oklahoma-based, privately-owned group of companies that focuses on the development, acquisition and ownership of government occupied office buildings and correctional facilities. The new venture, Dominion Properties LLC (the "Venture"), is owned by Dominion Venture Group LLC, and by a subsidiary of the Company. The Venture will engage primarily in acquiring, developing and/or owning government-occupied office buildings and privately operated correctional facilities. Under the Venture's operating agreement, RSVP is to invest up to $100 million, some of which may be invested by a subsidiary of the Company ( the "RSVP Capital"). The initial contribution of RSVP Capital was approximately $39 million of which approximately $10.1 million was invested by a subsidiary of the Company. During the three months ended March 31, 1999, the Company's subsidiary made additional capital contributions totaling approximately $3.2 million for a total investment of approximately $13.3 million. The Company's subsidiary funded its capital contributions through the RSVP Commitment. In addition, during 1998, the Company advanced approximately $2.9 million to RSI through the RSVP Commitment for an investment in RSVP which was then invested on a joint venture basis with the Dominion Group in certain service business activities related to the real estate activities. On May 10, 1999, the Company announced that it had entered an agreement to acquire a first mortgage note secured by a 1.4 million square foot Class A office building located at 919 Third Avenue in New York City for a purchase price of approximately $277.5 million which the Company anticipates will be drawn, in part, from an advance under the Company's unsecured credit facility. In addition, the Company also announced that it had agreed to sell $150 million of convertible preferred stock. Both transactions are expected to close in early June 1999. The market capitalization of the Company at March 31, 1999 was approximately $2.2 billion. The Company's market capitalization is based on the market value of the Company's common stock and common units of limited partnership interest in the Operating Partnership ("OP Units")(assuming conversion) of $20.56 per share/unit (based on the closing price of the Company's common stock on March 31, 1999, the Company's preferred stock of $25 per share, the Operating Partnership's preferred units of $1,000 per unit and the $934.2 million (including its share of joint venture debt and net of minority partners' interests) of debt outstanding at March 31, 1999. As a result, the Company's total debt to total market capitalization ratio at March 31, 1999 equaled approximately 42.7%. Results of Operations The Company's total revenues increased by $21 million or 38.2 % for the three months ended March 31, 1999 as compared to the 1998 period. The growth in total revenues is substantially attributable to the Company's acquisition of 45 properties comprising approximately 7.0 million square feet and the development of two properties comprising approximately 147,000 square feet. Property operating revenues, which include base rents and tenant escalations and reimbursements ("Property Operating Revenues") increased by $17.5 million or 33.1% for the three months ended March 31, 1999 as compared to the 1998 period. The 1999 increase in Property Operating Revenues is comprised of approximately $1.7 million attributable to increases in rental rates and changes in occupancies and approximately $15.8 million attributable to the acquisitions and development of properties. The remaining balance of the increase in total revenues in 1999 is primarily attributable to interest income on the Company's investments in mortgage notes and notes receivable. The Company's base rent was increased by the impact of the straight-line rent adjustment by $1.4 million for the three months ended March 31, 1999 as compared to $1.5 million for the 1998 period. Property operating expenses, real estate taxes and ground rents ("Property Expenses") increased by $4.9 million or 27.0% for the three months ended March 31, 1999 as compared to the 1998 period. These increases are primarily due to the acquisition of properties. Gross operating margins (defined as Property Operating Revenues less Property Expenses, taken as a percentage of Property Operating Revenues) for 1999 and 1998 were 67.6% and 66%, respectively. The increase in gross operating margins reflects increases realized in rental rates, the Company's ability to realize certain operating efficiencies as a result of operating a larger portfolio of properties with concentrations of properties in office and industrial parks or in its established sub-markets, and increased ownership of net leased properties. Marketing, general and administrative expenses increased by $795,000 for the three months ended March 31, 1999 as compared to the 1998 period. The increase is due to the increased costs of managing the acquisition properties and the increase in corporate management and administrative costs associated with the growth of the Company. Marketing, general and administrative expenses as a percentage of total revenues were 5.8 % for the three months ended March 31, 1999 as compared to 6.5% for the 1998 period. Interest expense increased by $3.4 million for the three months ended March 31, 1999 as compared to the 1998 period. The increase is attributable to an increased cost attributable to an increased average balance on the Company's Credit Facility and Term Loan. The weighted average balance outstanding on the Company's Credit Facility and Term Loan was $506.8 million for the three months ended March 31, 1999 as compared to $316 million for the 1998 period. Liquidity and Capital Resources In June 1995, the Company completed an initial public offering of 7,438,000 shares (pre-split) of its common stock at $24.25 per share (pre-split). Net proceeds to the Company were approximately $162 million. During the three year period ended December 31, 1998, the Company completed six add-on offerings aggregating approximately 24,306,000 shares (split-adjusted) of its common stock (the "Add-on Offerings") resulting in net proceeds to the Company of approximately $481.4 million. Proceeds from the Add-on Offerings were primarily used to repay borrowings under the credit facilities and to fund the purchase of commercial real estate properties. During April 1998, the Company completed a preferred stock offering and sold 9,200,000 shares of 7.625% Series A Convertible Cumulative Preferred Stock at a price of $25.00 per share. Net proceeds from the offering were approximately $220.8 million and were used to repay borrowings under the credit facilities. The preferred stock is convertible to the Company's common stock at a conversion rate of .8769 shares of common stock for each share of preferred stock. Additionally, in connection with the acquisition of six office properties and the remaining 50% interest in a 365,000 square foot vacant office building located in the Westchester County, the Company issued series B, C and D preferred operating units in the amount of approximately $42.5 million. The series B, C and D preferred units have a current distribution rate of 6.25% and are convertible to common units at conversion prices of approximately $32.51, $29.39 and $29.12, respectively for each preferred unit. On March 26, 1999, the Operating Partnership issued $100 million of 7.4% senior unsecured notes due March 15, 2004 and $200 million of 7.75% senior unsecured notes due March 15, 2009. Net proceeds of approximately $297.4 million were used to repay outstanding borrowings under the Company's unsecured credit facility. As of March 31, 1999 the Company had a three year $500 million unsecured revolving credit facility (the "Credit Facility") with Chase Manhattan Bank, Union Bank of Switzerland and PNC Bank as co-managers of the credit facility bank group. Interest rates on borrowings under the Credit Facility are priced off of LIBOR plus a sliding scale ranging from 112.5 basis points to 137.5 basis points based on the leverage ratio of the Company. Upon the Company receiving an investment grade rating on its senior unsecured debt by two rating agencies, the pricing is adjusted to LIBOR plus a scale ranging from 65 basis points to 90 basis points depending upon the rating. On March 16, 1999 the Company received its second investment grade rating on its senior unsecured debt. As a result, the pricing under the Credit Facility was adjusted to LIBOR plus 90 basis points. The Credit Facility replaced the Company's existing $250 million unsecured credit facility and $200 million unsecured bridge facility. The Company utilizes the Credit Facility primarily to finance the acquisitions of properties and other real estate investments, fund its development activities and for working capital purposes. At March 31, 1999, the Company had availability under the Credit Facility to borrow an additional $293.8 million (net of $26.1 million of outstanding undrawn letters of credit). In addition, as of March 31, 1999, the Company had a one year $75 million unsecured term loan (the "Term Loan") from Chase Manhattan Bank. Interest rates on borrowings under the Term Loan are priced off of LIBOR plus 150 basis points for the first nine months and 175 basis points for the remaining three months. At March 31, 1999, the Company had $75 million outstanding under the Term Loan. The Company's indebtedness at March 31, 1999 totaled $934.2 million (including its share of joint venture debt and net of minority partners' interests) and was comprised of $176.4 million outstanding under the Credit Facility, $75 million outstanding under the Term Loan, $449.3 million of senior unsecured notes and approximately $233.5 million of mortgage indebtedness. Based on the Company's total market capitalization of approximately $2.2 billion at March 31, 1999 (calculated based on the market value of the Company's common stock and OP Units, assuming conversion, the stated value of the Company's preferred stock and the stated value of the Operating Partnership's preferred units), the Company's debt represented approximately 42.7 % of its total market capitalization. Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service and capital expenditures, excluding non-recurring capital expenditures of the Company. The Company expects to meet its short term liquidity requirements generally through its net cash provided by operating activities along with the Credit Facility and Term Loan previously discussed. The Company expects to meet certain of its financing requirements through long-term secured and unsecured borrowings and the issuance of debt securities and additional equity securities of the Company. The Company will refinance existing mortgage indebtedness or indebtedness under the Credit Facility at maturity or retire such debt through the issuance of additional debt securities or additional equity securities. The Company anticipates that the current balance of cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and equity offerings, will be adequate to meet the capital and liquidity requirements of the Company in both the short and long-term. In order to qualify as a REIT for federal income tax purposes, the Company is required to make distributions to its stockholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to stockholders and for payment of recurring, non-incremental revenue-generating expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments. SUPPLEMENTAL INFORMATION ON CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING COMMISSIONS The following table summarizes the expenditures incurred for non-incremental capital expenditures, tenant improvements and leasing commissions for the Company's office and industrial properties for the three month period ended March 31, 1999 and the historical average of such non-incremental capital expenditures, tenant improvements and leasing commissions for the years 1995 through 1998. Non-Incremental Revenue Generating Capital Expenditures
Three Months Ended 1995 -1998 March 31, 1995 1996 1997 1998 Average 1999 ------------------------------------------------------------------------------ Office Properties Total $364,545 $375,026 $1,108,675 $2,004,976 $963,305 $443,726 Per Square Foot 0.19 0.13 0.22 0.23 0.19 0.05 Industrial Properties Total $290,457 $670,751 $733,233 $1,205,266 $724,927 $197,800 Per Square Foot 0.08 0.18 0.15 0.12 0.13 0.02
Non-Incremental Revenue Generating Tenant Improvements and Leasing Commissions
Three Months Ended 1995 -1998 March 31, 1995 1996 1997 1998 Average 1999 ------------------------------------------------------------------------------ Long Island Office Properties Tenant Improvements $452,057 $523,574 $784,044 $1,140,251 $724,982 $117,592 Per Square Foot Improved 4.44 4.28 7.00 3.98 4.92 2.77 Leasing Commissions $144,925 $119,047 $415,822 $418,191 $274,496 $24,956 Per Square Foot Leased 1.42 0.97 4.83 1.46 2.17 0.59 ------------ ------------ ------------ ------------ ------------ ------------- Total Per Square Foot $5.86 $5.25 $11.83 $5.44 $7.09 $3.36 ============ ============ ============ ============ ============ ============= Westchester Office Properties Tenant Improvements N/A $834,764 $1,211,665 $711,160 $961,413 $257,006 Per Square Foot Improved N/A 6.33 8.90 4.45 6.67 4.48 Leasing Commissions N/A $264,388 $366,257 $286,150 $326,204 $96,672 Per Square Foot Leased N/A 2.00 2.69 1.79 2.24 1.69 ------------ ------------ ------------ ------------ ------------ ------------- Total Per Square Foot N/A $8.33 $11.59 $6.24 $8.91 $6.17 ============ ============ ============ ============ ============ ============= Connecticut Office Properties Tenant Improvements N/A $58,000 $1,022,421 $202,880 $570,356 $9,400 Per Square Foot Improved N/A 12.45 13.39 5.92 9.66 5.00 Leasing Commissions N/A $0 $256,615 $151,063 $181,190 $10,810 Per Square Foot Leased N/A 0.00 3.36 4.41 3.89 5.75 ------------ ------------ ------------ ------------ ------------ ------------- Total Per Square Foot N/A $12.45 $16.75 $10.33 $13.55 $10.75 ============ ============ ============ ============ ============ ============= New Jersey Office Properties Tenant Improvements N/A N/A N/A $654,877 $654,877 $35,661 Per Square Foot Improved N/A N/A N/A 3.78 3.78 2.24 Leasing Commissions N/A N/A N/A $396,127 $396,127 $44,263 Per Square Foot Leased N/A N/A N/A 2.08 2.08 2.33 ------------ ------------ ------------ ------------ ------------ ------------- Total Per Square Foot N/A N/A N/A $5.86 $5.86 $4.57 ============ ============ ============ ============ ============ ============= Industrial Properties Tenant Improvements $210,496 $380,334 $230,466 $283,842 $276,285 $120,797 Per Square Foot Improved 0.90 0.72 0.55 0.76 0.73 0.77 Leasing Commissions $107,351 $436,213 $81,013 $200,154 $206,183 $101,144 Per Square Foot Leased 0.46 0.82 0.19 0.44 0.48 0.65 ------------ ------------ ------------ ------------ ------------ ------------- Total Per Square Foot $1.36 $1.54 $0.74 $1.20 $1.21 $1.42 ============ ============ ============ ============ ============ ============= 1995 - 1998 average weighted to reflect October 1996 acquisition date
LEASE EXPIRATIONS The following table sets forth scheduled lease expirations for executed leases as of March 31, 1999: Long Island Office Properties (excluding Omni):
% Total of Total Per Rentable Rentable Square Per Year of Number Square Square Foot Square Lease of Feet Feet S/L Foot Expiration Leases Expiring Expiring Rent Rent - -------------------------------------------------------------------------------- 1999 29 100,940 3.6% $20.97 $22.67 2000 43 261,463 9.2% $21.67 $23.36 2001 38 182,621 6.4% $22.14 $24.03 2002 34 267,982 9.5% $22.35 $24.04 2003 52 328,196 11.6% $21.81 $23.17 2004 30 205,908 7.2% $22.74 $25.52 2005 and thereafter 76 1,487,111 52.5% --- --- ------- ------------ ------------ Total 302 2,834,221 100.0% ======= ============ ============ Per square foot rental rate represents annualized straight line rent as of the lease expiration date. Per square foot rental rate represents annualized base rent as of the lease expiration date plus non-recoverable operating expense pass-throughs.
Omni:
% Total of Total Per Rentable Rentable Square Per Year of Number Square Square Foot Square Lease of Feet Feet S/L Foot Expiration Leases Expiring Expiring Rent Rent - -------------------------------------------------------------------------------- 1999 --- --- --- --- --- 2000 4 60,316 10.3% $31.71 $36.60 2001 4 32,680 5.6% $27.36 $33.51 2002 4 129,351 22.2% $24.78 $27.11 2003 5 72,530 12.4% $29.56 $29.59 2004 4 112,414 19.3% $25.96 $33.08 2005 and thereafter 7 176,358 30.2% --- --- ------- ------------ ------------ Total 28 583,649 100.0% ======= ============ ============ Per square foot rental rate represents annualized straight line rent as of the lease expiration date. Per square foot rental rate represents annualized base rent as of the lease expiration date plus non-recoverable operating expense pass-throughs.
Industrial Properties:
% Total of Total Per Rentable Rentable Square Per Year of Number Square Square Foot Square Lease of Feet Feet S/L Foot Expiration Leases Expiring Expiring Rent Rent - -------------------------------------------------------------------------------- 1999 31 384,916 7.1% $7.78 $5.95 2000 30 1,105,940 20.3% $4.84 $5.19 2001 33 916,798 16.8% $5.86 $6.80 2002 25 151,396 2.8% $6.60 $7.36 2003 31 726,459 13.3% $5.26 $6.06 2004 23 506,458 9.3% $6.59 $7.15 2005 and thereafter 33 1,664,889 30.4% --- --- ------- ------------ ------------ Total 206 5,456,856 100.0% ======= ============ ============ Per square foot rental rate represents annualized straight line rent as of the lease expiration date. Per square foot rental rate represents annualized base rent as of the lease expiration date plus non-recoverable operating expense pass-throughs.
Research and Development Properties:
% Total of Total Per Rentable Rentable Square Per Year of Number Square Square Foot Square Lease of Feet Feet S/L Foot Expiration Leases Expiring Expiring Rent Rent - -------------------------------------------------------------------------------- 1999 9 98,324 7.7% $8.10 $8.90 2000 7 111,040 8.7% $8.20 $8.58 2001 7 96,120 7.5% $11.61 $12.43 2002 3 67,967 5.3% $10.54 $13.09 2003 4 271,042 21.2% $5.38 $5.25 2004 6 105,303 8.2% $11.94 $13.20 2005 and thereafter 10 530,321 41.4% --- --- ------- ------------ ------------ Total 46 1,280,117 100.0% ======= ============ ============ Per square foot rental rate represents annualized straight line rent as of the lease expiration date. Per square foot rental rate represents annualized base rent as of the lease expiration date plus non-recoverable operating expense pass-throughs.
Westchester Office Properties:
% Total of Total Per Rentable Rentable Square Per Year of Number Square Square Foot Square Lease of Feet Feet S/L Foot Expiration Leases Expiring Expiring Rent Rent - -------------------------------------------------------------------------------- 1999 35 173,522 6.2% $18.65 $19.00 2000 47 478,385 17.1% $23.14 $22.95 2001 46 334,819 12.0% $21.77 $21.82 2002 45 434,562 15.5% $20.79 $20.20 2003 35 245,108 8.8% $21.80 $22.93 2004 18 104,457 3.7% $20.00 $20.21 2005 and thereafter 36 1,024,317 36.7% --- --- ------- ------------ ------------ Total 262 2,795,170 100.0% ======= ============ ============ Per square foot rental rate represents annualized straight line rent as of the lease expiration date. Per square foot rental rate represents annualized base rent as of the lease expiration date plus non-recoverable operating expense pass-throughs.
Stamford Office Properties:
% Total of Total Per Rentable Rentable Square Per Year of Number Square Square Foot Square Lease of Feet Feet S/L Foot Expiration Leases Expiring Expiring Rent Rent - -------------------------------------------------------------------------------- 1999 12 26,500 2.5% $22.81 $22.99 2000 27 114,569 11.1% $22.14 $22.51 2001 21 100,942 9.7% $24.01 $25.05 2002 16 93,788 9.1% $26.96 $28.17 2003 16 99,052 9.6% $31.71 $32.46 2004 15 201,091 19.4% $20.77 $21.29 2005 and thereafter 23 399,020 38.6% --- --- ------- ------------ ------------ Total 130 1,034,962 100.0% ======= ============ ============ Per square foot rental rate represents annualized straight line rent as of the lease expiration date. Per square foot rental rate represents annualized base rent as of the lease expiration date plus non-recoverable operating expense pass-throughs.
New Jersey Office Properties:
% Total of Total Per Rentable Rentable Square Per Year of Number Square Square Foot Square Lease of Feet Feet S/L Foot Expiration Leases Expiring Expiring Rent Rent - -------------------------------------------------------------------------------- 1999 13 195,326 11.2% $18.43 $19.86 2000 37 331,347 18.9% $22.50 $22.63 2001 24 272,182 15.6% $18.02 $18.04 2002 19 164,874 9.4% $19.99 $20.11 2003 18 327,593 18.7% $18.11 $18.13 2004 11 112,259 6.4% $21.83 $21.67 2005 and thereafter 16 345,796 19.8% --- --- ------- ------------ ------------ Total 138 1,749,377 100.0% ======= ============ ============ Per square foot rental rate represents annualized straight line rent as of the lease expiration date. Per square foot rental rate represents annualized base rent as of the lease expiration date plus non-recoverable operating expense pass-throughs.
Reckson / Morris Industrial
% Total of Total Per Rentable Rentable Square Per Year of Number Square Square Foot Square Lease of Feet Feet S/L Foot Expiration Leases Expiring Expiring Rent Rent - -------------------------------------------------------------------------------- 1999 8 465,286 15.3% $4.02 $4.10 2000 6 173,768 5.7% $5.14 $5.31 2001 1 243,751 8.0% $7.50 $7.69 2002 1 610,949 20.1% $3.75 $3.96 2003 4 195,416 6.4% $4.49 $4.78 2004 4 143,790 4.7% $4.58 $5.19 2005 and thereafter 8 1,211,594 39.8% --- --- ------- ------------ ------------ Total 32 3,044,554 100.0% ======= ============ ============ Per square foot rental rate represents annualized straight line rent as of the lease expiration date. Per square foot rental rate represents annualized base rent as of the lease expiration date plus non-recoverable operating expense pass-throughs.
Inflation The office leases generally provided for fixed base rent increases or indexed escalations. In addition, the office leases provide for separate escalations of real estate taxes and electric costs over a base amount. The industrial leases 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 offset by contractual rent increases and expense escalations described above. The Credit Facility and Term Loan bear interest at a variable rate, which will be influenced by changes in short-term interest rates, and is sensitive to inflation. Impact of Year 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, or engage in similar normal business activities. The Company has completed an assessment to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Currently, the entire property management system is year 2000 compliant and has been thoroughly tested. Since the Company's accounting software is maintained and supported by an unaffiliated third party, the total year 2000 project cost as it relates to the accounting software is estimated to be minimal. The year 2000 project is estimated to be completed not later than July 31, 1999, which is prior to any anticipated impact on its operating systems. Additionally, the Company has received assurances from its contractors that all of the Company's building management and mechanical systems are currently year 2000 compliant or will be made compliant prior to any impact on those systems. However, the Company cannot guarantee that all contractors will comply with their assurances and therefore, the Company may not be able to determine year 2000 compliance of those contractors. At that time, the Company will determine the extent to which the Company will be able to replace non compliant contractors. The Company believes that with modifications to existing software and conversions to new software, the year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the year 2000 issue could have a material impact on the operations of the Company. To date, the Company has expended approximately $750,000 and expects to expend an additional $500,000 in connection with upgrading building management, mechanical and computer systems. The costs of the project and the date on which the Company believes it will complete the year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and costs of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. In a "worst case scenario", the Company believes that failure of the building management and mechanical systems to operate properly would result in inconveniences to the building tenants which might include no elevator service, lighting or entry and egress. In this case, the management of the Company would manually override such systems in order for normal operations to resume. Additionally, in a "worst case scenario" of the failure of the third party to deliver, on a timely basis, the necessary upgrades to the accounting software, the Company would be required to process transactions, such as the issuance of disbursements, manually until an alternative system was implemented. If the Company is not successful in implementing their year 2000 compliance plan, the Company may suffer a material adverse impact on their consolidated results of operations and financial condition. Because of the importance of addressing the year 2000 issue, the Company expects to develop contingency plans if they determine that the compliance plans will not be implemented by July 31, 1999. Funds from Operations Management believes that funds from operations ("FFO") is an appropriate measure of performance of an equity REIT. FFO is defined by the National Association of Real Estate Investment Trusts (NAREIT) as net income or loss, excluding gains or losses from debt restructuring and sales of properties plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principals 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. In March, 1995, NAREIT issued a "White Paper" analysis to address certain interpretive issues under its definition of FFO. The White Paper provides that amortization of deferred financing costs and depreciation of non-rental real estate assets are no longer to be added back to net income to arrive at FFO. Since all companies and analysts do not calculate FFO in a similar fashion, the 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 (unaudited and in thousands, except per share/unit data):
Three Months Ended March 31, ------------------------------- 1999 1998 ------------- ------------- Net income available to common shareholders $ 11,324 $ 9,573 Adjustments for Funds from Operations: Add: Real Estate depreciation and amortization 14,689 10,606 Minority partners' interests in consolidated partnerships 1,168 533 Limited partners' interest in the operating partnerships 2,241 1,991 Dividends and distributions on dilutive shares/units 5,041 --- ------------- ------------- 34,463 22,703 Subtract: Amount distributable to minority partners in consolidated partnerships 1,444 788 ------------- ------------- Funds From Operations (FFO) - diluted 33,019 21,915 Subtract: Straight line rents 1,336 1,464 Non-Incremental capitalized tenant improvements and leasing commissions 818 1,223 Non-Incremental capitalized improvements 642 625 ------------- ------------- Cash available for distribution (CAD) - diluted $ 30,223 $ 18,603 ============= ============= Diluted FFO and CAD calculations: Weighted average shares/units 47,759 45,892 Weighted average dilutive shares/units 9,829 585 ------------- ------------- Diluted weighted average shares/units 57,588 46,477 ============= ============= FFO per weighted average share/unit $ 0.57 $ 0.47 ============= ============= CAD per weighted average share/unit $ 0.52 $ 0.40 ============= ============= Dividends per share/unit $ 0.34 $ 0.31 ============= ============= FFO payout ratio 59.2% 66.5% ============= ============= CAD payout ratio 64.9% 78.1% ============= =============
Item 3. Quantitative and Qualitative Disclosures about market risk. The primary market risk facing the Company is interest rate risk on its long term debt, mortgage notes and notes receivable. The Company does not hedge interest rate risk using financial instruments nor is the Company subject to foreign currency risk. The Company manages its exposure to interest rate risk on its variable rate indebtedness by borrowing on a short-term basis under its Credit Facility or Term Loan until such time as it is able to retire the short-term variable rate debt with a long-term fixed rate debt offering or an equity offering through accessing the capital markets on terms that are advantageous to the Company. The following table sets forth the Company's long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value ("FMV") at March 31, 1999 (dollars in thousands):
For the Year Ended December 31, ------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total F.M.V -------- -------- --------- -------- -------- ------------- --------- ---------- Long term debt: Fixed rate $ 9,885 $32,131 $ 19,440 $14,587 $19,295 $ 608,908 $704,246 $ 704,246 Average interest rate 8.76% 7.38% 7.42% 7.81% 7.65% 7.61% 7.62% --- Variable rate $75,000 $ --- $180,100 $ --- $ --- $ --- $255,100 $ 255,100 Average interest rate 7.06% --- 6.98% --- --- --- 7.00% --- Includes unamortized issuance discounts of $738,000 on the 5 and 10 year senior unsecured notes issued on March 26, 1999 which are due at maturity.
In addition, the Company has assessed the market risk for its variable rate debt, which is based upon LIBOR, and believes that a one percent increase in the LIBOR rate would have an approximate $2.6 million annual increase in interest expense based on approximately $255.1 million outstanding at March 31, 1999. The following table sets forth the Company's mortgage notes and note receivables by scheduled maturity date, weighted average interest rates and estimated FMV at March 31, 1999 (dollars in thousands):
For the Year Ended December 31, ------------------------------------------------ 1999 2000 2001 2002 2003 Thereafter Total F.M.V -------- -------- -------- -------- -------- ------------- --------- ---------- Mortgage notes and notes receivable: Fixed rate $81,720 $ --- $ --- $ 5,585 $ --- $ 16,990 $104,295 $ 104,295 Average interest rate 9.56% --- --- 11.00% --- 11.65% 9.98% ---
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. Part II - Other Information Item 1. Legal Proceedings - Noe Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Securities Holders - None Item 5. Other information - None Item 6. Exhibits and Reports on Form 8-K a) Exhibit 27 Financial Data Schedule b) During the three months ended March 31, 1999, the registrant filed the following reports: Form 8 - K, dated February 5, 1999. Announcing that on January 12, 1999, the Company entered into a $75 million unsecured credit facility which is unconditionally guaranteed by both the Company and the Operating Partnership. Form 8 - K, dated February 5,1999. Disclosing the financial statements of Tower, including the consent of Tower's auditors, and pro forma financial statements for the Company and Metropolitan. Form 8 - K, dated March 1,1999. To file the December 31, 1998 financial statements of the Company as well as certain other material contracts and documents of the Company. Form 8 - K, dated March 26,1999. Announcing that the Operating Partnership agreed to sell $300 million aggregate principal amount of its senior unsecured notes. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RECKSON ASSOCIATES REALTY CORP. Registrant May 14, 1999 /s/ Scott H. Rechler Date Scott H. Rechler, Chief Operating Officer and Director May 14, 1999 /s/ Michael Maturo Date Michael Maturo, Executive Vice President, Treasurer and Chief Financial Officer EX-27 2
5 0000930548 RECKSON ASSOCIATES REALTY CORP 1,000 3-MOS DEC-31-1999 MAR-31-1999 13,650 0 87,832 0 0 101,482 1,767,939 (172,649) 1,909,077 57,739 958,608 0 92 401 703,949 1,909,077 70,635 76,108 0 27,300 0 0 13,943 19,774 0 19,774 0 0 0 11,324 .28 .28
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