Item 1. Business
General
Reckson Associates Realty Corp. was incorporated in September 1994 and commenced operations effective with the completion of its initial public offering (the "IPO") on June 2, 1995. Reckson Associates Realty Corp., together with Reckson Operating Partnership, L.P. (the "Operating Partnership"), and their affiliates (collectively, the "Company") was formed for the purpose of continuing the commercial real estate business of Reckson Associates, its affiliated partnerships and other entities ("Reckson"). For more than 35 years, Reckson has been engaged in the business of owning, developing, acquiring, constructing, managing and leasing suburban office and industrial properties in the New York metropolitan area. Based on industry surveys, management believes that the Company is one of the largest owners and operators of Class A suburban office properties and industrial properties in the New York City tri-state area (the "Tri-State Area"). The Company operates as a fully-integrated, self-administered and self-managed Real Estate Investment Trust ("REIT"). As of December 31, 1996, the Company owned 110 properties (the "Properties") (including three joint venture properties) encompassing approximately 8.8 million rentable square feet, all of which are managed by the Company. The Properties consist of 32 Class A suburban office properties (the "Office Properties") encompassing approximately 4.4 million square feet, 76 industrial properties (the "Industrial Properties") encompassing approximately 4.4 million square feet and two 10,000 square foot retail properties. In addition, as of December 31, 1996 the Company had invested approximately $50.9 million in certain mortgage indebtedness encumbering five Class A office properties encompassing approximately 881,000 square feet (the "Mortgage Note Investments"). As of December 31, 1996, the Company also owned or had contracted to acquire approximately 140 acres of land in nine separate parcels that may present future development opportunities.
The Office Properties are Class A suburban office buildings and are well-located, well-maintained and professionally managed. In addition, these properties are modern with high finishes or have been modernized to successfully compete with newer buildings and achieve among the highest rent, occupancy and tenant retention rates within their markets. The majority of the Office Properties are located in six planned office parks and are tenanted primarily by national service firms such as "Big Six" accounting firms, securities brokerage houses, insurance companies and health care providers. The Industrial Properties are utilized for distribution, warehousing, research and development and light manufacturing/assembly activities and are located primarily in three planned industrial parks developed by Reckson.
All of the Company's interests in the Properties, the Mortgage Note Investments and land are held directly or indirectly by, and substantially all of its operations relating to the Properties are conducted through, the Operating Partnership. The Company controls the Operating Partnership as the sole general partner and as of December 31, 1996, owned approximately 78% of the Operating Partnership's outstanding units of limited partnership ("Units").
The Company seeks to maintain cash reserves for normal repairs, replacements, improvements, working capital and other contingencies. The Operating Partnership has established a credit facility (the "Credit Facility") with a maximum borrowing amount of $150 million scheduled to mature on June 2, 1997. The Credit Facility requires the Company to comply with a number of financial and other covenants on an ongoing basis and, under certain circumstances, may be extended by the Operating Partnership for a period of one year.
In April 1996, the Company completed a public offering of 3,000,000 shares of Common Stock at a price of $30.50 per share (the "April 1996 Offering"). In October 1996, the Company completed a public offering of 1,725,000 shares of Common Stock at a price of $35.50 per share (the "October 1996 Offering"). Net proceeds to the Company of approximately $86 million from the April 1996 offering and approximately $60 million from the October 1996 offering were to make acquisitions of Properties and to re-pay borrowings under the Credit Facility.
There are numerous commercial properties that compete with the Company in attracting tenants and numerous companies that compete in selecting land for development and properties for acquisition.
The Company's executive offices are located at 225 Broadhollow Road, Melville, New York 11747 and its telephone number at that location is (516) 694-6900. At December 31, 1996, the Company had 185 employees.
Recent Developments
Acquisition and Leasing Activity.
During 1996, the Company acquired or contracted to acquire approximately $435 million of Class A suburban office and industrial properties encompassing approximately 6.2 million square feet located in the Tri-State Area. In that regard, the Company acquired one Class A suburban Office Property and 11 Industrial Properties encompassing approximately 187,000 and 856,000 square feet respectively, located on Long Island. In February 1996, the Company established its Westchester Division with the acquisition of a 935,000 square foot Class A office portfolio and associated management and construction operations for an aggregate purchase price of approximately $79 million. The Company currently owns 11 Class A suburban Office Properties (six in one office park) encompassing approximately 1.5 million square feet located in Westchester County, New York. In October 1996, the Company established its Southern Connecticut Division with the purchase of Landmark Square, a six building office complex encompassing approximately 800,000 square feet located in Stamford, Connecticut ("Landmark Square") for an aggregate purchase price of approximately $77 million. In addition, the Company has contracted to acquire five Class A suburban office properties encompassing approximately 500,000 square feet located in Northern New Jersey (the "New Jersey Portfolio") and, in connection with this acquisition,has established a Northern New Jersey Division. Additionally, the Company has invested approximately $50.9 million in certain mortgage indebtedness encumbering four Class A office properties on Long Island encompassing approximately 750,000 square feet and one Class A office property in New Jersey encompassing approximately 131,000 square feet. In addition, the Company is under contract to purchase one office property encompassing 221,000 square feet and 16 industrial properties encompassing 1.3 million square feet.
Set forth below is a brief description of the Company's major acquisition activity during 1996. All of these Properties are located in the Tri-State Area.
The Westchester Acquisition. During 1996, the Company acquired seven Class A suburban office properties and a 60% joint venture interest in an eighth Class A suburban office property (collectively, the "Westchester Properties") encompassing an aggregate of approximately 935,000 square feet located in Westchester County, New York, and associated management and construction operations, from affiliates of Halpern Enterprises ("Halpern") for an aggregate maximum purchase price of approximately $79 million (the "Westchester Acquisition").
On February 22, 1996, six of the Westchester Properties encompassing approximately 505,000 square feet (505 White Plains Road, Tarrytown, New York; 560 White Plains Road, Tarrytown, New York; 580 White Plains Road, Tarrytown, New York; 235 Main Street, White Plains, New York; 245 Main Street, White Plains, New York; and 2 Church Street, Ossining, New York), together with the aforementioned management and construction operations, were acquired by the Company for an aggregate maximum purchase price of approximately $48.7 million. In that regard, as part of the Westchester Acquisition, the Company effectively acquired third-party management contracts for approximately 800,000 square feet of office space. The purchase price was funded by $29.0 million of borrowings under the Credit Facility, the assumption of $9.4 million of mortgage debt and the issuance of 307,606 units of limited partnership of the Operating Partnership ("Units"). In accordance with the terms of the purchase contract, each Unit was valued at $28.11. In addition, up to $1.7 million of the $48.7 million maximum purchase price (together with interest thereon) will be paid to the selling Halpern entities within 60 days after the first anniversary of the closing date, provided that the acquired Westchester Properties generate minimum net operating income during the 12 month period following the closing date.
On April 9,1996 The Company acquired the seventh Westchester Property (660 White Plains Road, Tarrytown, New York) and the 60% joint venture interest in the eighth Westchester Property (520 White Plains Road, Tarrytown, New York) the purchase of interests in these two properties aggregated approximately $31 million. In addition, on February 22, 1996, the Company entered into a joint venture arrangement with a Halpern affiliate that will provide development advisory services to third-party clients. Also, on February 22, 1996, the Company entered into a three-year employment and noncompetition agreement with Jon L. Halpern, pursuant to which Mr. Halpern became an Executive Vice President of the Company and the President of its newly-created Westchester Division.
In making the Westchester Acquisition, the Company has entered into a new suburban market in the Tri-State Area while adhering to the strategies historically implemented in acquiring its Long Island portfolio. In that regard, the Company has historically emphasized "Anchor Acquisitions" in suburban office parks (i.e., an acquisition of a portfolio of properties in a prime location that provides the Company with a critical mass sufficient to create operating efficiencies). The Westchester Acquisition afforded the Company the opportunity to enter the Westchester market by acquiring a large portfolio of well-located Class A office properties. In addition, five of the Westchester Properties are located in the Tarrytown Corporate Center, one of Westchester's largest office parks containing more than 1.2 million square feet of office space and a 444-room Marriott Hotel. Completed in 1972, Tarrytown Corporate Center was the first office development undertaken in the Route 119 corridor in Westchester County, an area that has developed into a prime commercial location. Major tenants at the Center include Citibank, Ford Motor Credit, U.S. Philips, Xerox and the Ciba-Geigy Corporation (which maintains its corporate headquarters at the Center). Designed by the award-winning architectural firm of Warshauer, Mellusi, and Warshauer, Tarrytown Corporate Center includes seven office buildings encompassing approximately 991,000 square feet, of which the company has acquired six of such buildings encompassing approximately 876,000 square feet. Finally, as part of the Westchester Acquisition, the Company acquired the Halpern organization's in-house expertise in management, leasing and construction. The Halpern organization, which was in existence for over 25 years, was a full service commercial real estate company and one of Westchester's largest owners and operators of office properties. Acquisition of the Halpern organization enabled the Company to establish a significant local presence which management believes is essential to the successful operation of commercial real estate.
The Landmark Square Acquisition. In October 1996, The Company acquired Landmark Square, a seven acre office complex containing six buildings and encompassing 800,000 square feet located in Stamford Connecticut from the Metropolitan Life Insurance Company("Met Life") for approximately $77 million. The Company financed the acquisition with a $50 million first mortgage loan from Met Life which bears interest at a fixed rate of 8.02% and has a ten year term and proceeds from the October 1996 Offering. Landmark Square was constructed as part of and is the focal point of a major revitalization development program by the F.D.Rich Company in the 1970's and 1980's. Met Life obtained title to the property as a result of a foreclosure of their property mortgage. An affiliate of The F.D. Rich Company continued to manage Landmark Square until the time it was purchased by the Company. Landmark Square is located on seven acres in the heart of Stamford, contiguous to Stamford Town Center, a 900,000 square foot upscale shopping mall. Landmark Square offers such amenities as a full service athletic facility and the Landmark Club, one of Stamford's premier dining clubs. The Company has commenced an approximately $11.5 million, five year capital improvement program at the complex. Tenants at Landmark Square include Guiness PLC/United Distillers, Crown Theatre, McKinsey & Co. and Fleet Bank. In connection with the acquisition of Landmark Square the Company established its Southern Connecticut Division and named F.D. ("Rick") Rich III, Managing Director of that division and a Senior Vice President of the Company . Mr. Rich has over 20 years experience in all facets of real estate development and operations including operating Landmark Square for the last ten years. The Landmark Square acquisition, the establishment of the Southern Connecticut Division and employing Mr. Rich as well as his operations team is consistent with The Company's strategy of making Anchor Acquisitions in new markets and in establishing a local presence in each of the Key Suburban Markets in the Tri-State Area.
New Jersey Portfolio Acquisition. In December 1996, The Company entered into contract to acquire five Class A office buildings (the "New Jersey Portfolio") encompassing approximately 500,000 square feet from certain entities/associates with Robert Heller a New Jersey Developer for approximately $56 million. Four of the properties are located in the Executive Hill Office Park in West Orange, New Jersey. Executive Hill is a 32 acre office park that contains four buildings with approximately 392,000 square feet and is located in West Orange, New Jersey, adjacent to route 280, a major interstate highway. Executive Hill was developed between 1971 and 1984 by various entities associated with Robert Heller, a developer in Northern New Jersey. One of the properties in the office park, 10 Rooney Circle, is a vacant 70,000 square foot building that is undergoing a complete renovation including the reskinning of its facade in granite, installation of two new lobbies and development of a new entranceway. The Company anticipates that 10 Rooney Circle will be stabilized within 12 months from its acquisition. The balance of the Executive Hill Office Park is approximately 96% leased. Tenants at Executive Hill include Chase Manhattan Bank, First Wausau, Computer Science Corporation, State Farm Insurance Company and PNC Bank. The Company anticipates closing on these properties at various times during 1997 to accommodate the seller's desire to complete tax efficient transactions. The Company will finance the purchase of these properties with a combination of cash and Units. In connection with the acquisition, the Company established its Northern New Jersey Division at Executive Hill and named Mark Schaevitz as its Managing Director. Mr. Schaevitz who has acted as Chief Operating Officer, over Mr. Heller's real estate operations for the past 15 years, has joined The Company along with certain key members of his management team to lead the Company's efforts in Northern New Jersey. The acquisition of the New Jersey Portfolio, the establishment of the Northern New Jersey Division and retention of Mr. Schaevitz, and his management team are consistent with the Company's strategy of developing a local presence in the Key Suburban Markets in the Tri-State Area through Anchor Acquisitions.
The eleven Industrial Properties acquired by the Company during 1996 are single story properties encompassing an aggregate of approximately 856,000 square feet. As of December 31, 1996, eight of these properties were 100% leased to single tenants, one of these properties is 100% leased to two tenants and two properties are vacant and currently under redevelopment.
Leasing Activity
During the year ended December 31, 1996, the Company leased 181,854 square feet at the Office Properties at an average effective rent (i.e., base rent adjusted on a straight-line basis for free rent periods, tenant improvements and leasing commissions) of $21.55 per square foot and 586,315 square feet at the Industrial Properties at an average effective rent of $6.16 per square foot (excluding, in both cases, Properties acquired subsequent to the 1995 IPO). During 1996, percentage leased rates at these Office Properties increased from 90.4% to 92.3% and increased from 94.6% to 95.6% at these Industrial Properties. Included in this leasing data are newly-executed leases for approximately 14,973 square feet of space at the Omni, the Company's largest office building.
In addition to the foregoing, during 1996 the Company leased an additional 298,974 square feet of space at the Office Properties acquired during 1996. As of December 31, 1996, the percentage leased rate for the Office Properties (including the Office Properties acquired during 1996) was 91%.
Financing Activities
The New Credit Facility. The Company has obtained a commitment for a three-year $175 million unsecured credit facility from the Chase Manhattan Bank and Union Bank of Switzerland (the "New Credit Facility"). It is expected that upon syndication the New Credit Facility will provide for a maximum borrowing amount of up to $225 million and the Company's ability to borrow thereunder will be subject to the satisfaction of certain financial covenants, including covenants relating to limitations on unsecured and secured borrowings, minimum interest and fixed charge coverage ratios, a minimum equity value and a maximum dividend payout ratio. In addition, it is expected that borrowings under the New Credit Facility would bear interest at a floating rate equal to one, two, three or six month LIBOR (at the Company's election) plus a spread ranging from 1.125% to 1.50%, based on the Company's leverage ratio. The New Credit Facility would replace the Company's existing $150 million credit facility which is schedule to mature on June 2, 1997 (the "Credit Facility"). Borrowing under the Credit Facility bear interest at a floating rate equal to one-month LIBOR plus 1.75%. Consummation of the New Credit Facility arrangement is subject to completion of the lenders' due diligence and completion of documentation satisfactory to the Company and such lenders.
Other Financing Activities. In connection with the acquisition of Landmark Square the Company obtained a $50 million first mortgage loan. The loan has a 10-year maturity and bears interest at a fixed rate of 8.02% for the term.
The Company has obtained a letter commitment from a financial institution for a $58 million first mortgage loan to refinance the current outstanding mortgage indebtedness encumbering the Omni, an approximately 575,000 square foot office complex located in the Company's Nassau West Corporate Center Office Park. The loan will have a 10-year term and will bear interest at a fixed rate to be determined based on the 10 year treasury rate plus 130 basis points.
Stock Split
On February 12, 1997, the Board of Directors of the Company declared a two-for-one stock split, to be effected as a stock dividend distributable on April 15, 1997 to stockholders of record on April 4, 1997.
Recent Offering
On March 12, 1997 the Company sold 4,945,000 shares of the Company's common stock at $45.25 per share for an aggregate consideration of approximately $224 million before deducting offering expenses.
Corporate Strategies and Growth Opportunities
The Company's primary business objectives are to maximize current return to stockholders through increases in distributable cash flow per share and to increase stockholders' long-term total return through the appreciation in value of its Common Stock. The Company plans to achieve these objectives by continuing Reckson's corporate strategies and capitalizing on the internal and external growth opportunities described below.
Corporate Strategies. Management believes that throughout its 35-year operating history, Reckson has created value in its properties through a variety of market cycles by implementing the operating strategies described below. These operating strategies include the implementation of (I) a multi disciplinary leasing approach that involves architectural design and construction personnel as well as leasing professionals, (ii) innovative property marketing programs such as the Executive Center business, which was established by Reckson to provide "incubation space" for start-up companies as well as office space for satellite offices of larger companies, (iii) a comprehensive tenant service program and property amenities designed to maximize tenant satisfaction and retention, (iv) cost control management and systems that take advantage of economies of scale that arise from Reckson's market position and efficiencies attributable to the state-of-the-art energy control system at many of the Office Properties and (v) an acquisition and development strategy that is continuously adjusted in light of anticipated changes in market conditions and that seeks to capitalize on management's multidisciplinary expertise and market knowledge to modify, upgrade and reposition a property in its market place in order to maximize value.
The Company also intends to adhere to a policy of maintaining a Debt Ratio (defined as the total debt of the Company as a percentage of the market value of outstanding shares of Common Stock on a fully diluted basis) of less than 50%. As of December 31, 1996, the Company's Debt Ratio was approximately 28.8%. This calculation includes the Company's proportionate share of the debt encumbering a joint venture property. This Debt Ratio is intended to provide the Company with financial flexibility to select the optimal source of capital (whether debt or equity) with which to finance external growth.
Growth Opportunities. The Company intends to achieve its primary business objectives by applying its corporate strategies to the internal and external growth opportunities described below.
Internal Growth. As the Long Island, Westchester, New Jersey and Southern Connecticut suburban office and industrial markets continue to improve, management believes the Company is well positioned to benefit from rental revenue growth through: (i) contractual annual compounding 4% Base Rent (i.e., gross rent excluding tenant payments on account of real estate tax, operating expense escalations and base electrical charges) increases on approximately 85% of existing leases at the Long Island Properties; (ii) periodic contractual increases in Base Rent on existing leases at the Westchester Properties, the New Jersey Properties and the Southern Connecticut Properties; and (iii) the potential for increases to Base Rents as leases expire as a result of continuing tightening of the office and industrial markets with limited new supply.
External Growth. The Company seeks to acquire multi-tenant suburban Class A office and industrial properties located in the Tri-State Area. Management believes that the Tri-State Area presents opportunities to acquire properties at attractive yields. The Company believes that its (i) capital structure, in particular its New Credit Facility providing for a maximum borrowing amount of up to $225 million, (ii) ability to acquire a property for Units of the Operating Partnership and thereby defer the seller's income tax on gain, (iii) operating economies of scale, (iv) relationships with financial institutions and private real estate owners, and (v) fully integrated operations in four regional Divisions, will enhance the Company's ability to identify and capitalize on acquisition opportunities. The Company also intends selectively to develop new Class A suburban office and industrial properties and to continue to redevelop existing office and industrial properties as these opportunities arise. In the near future the Company will concentrate its development activities on build-to-suit industrial and Class A suburban office properties.
Environmental Matters
Under various Federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remidation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The cost of any required remediation and the owner's liability therefore as to any property is generally not limited under such enactments and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws govern the removal, encapsulation or disturbance of asbestos-containing materials ("ACMs") when such materials are in poor condition, or in the event of renovation or demolition. Such laws impose liability for release of ACMs into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property.
All of the Office Properties and all of the Industrial Properties have been subjected to a Phase I or similar environmental audit after April 1, 1994 (which involved general inspections without soil sampling, ground water analysis or radon testing and, for the Properties constructed in 1978 or earlier, survey inspections to ascertain the existence of ACMs were conducted) completed by independent environmental consultant companies (except for 35 Pinelawn Road which was originally developed by Reckson and subjected to a Phase 1 in April 1992). These environmental audits have not revealed any environmental liability that would have a material adverse effect on the Company's business.
Item 2.
Item 2. Properties
General
As of December 31, 1996, on a pro forma basis giving effect to acquisition of the New Jersey Portfolio, the Company owned 115 properties (including three joint venture properties) encompassing 9.3 million square feet. These properties consist of 37 Class A suburban office properties encompassing approximately 4.9 million square feet, 76 industrial properties encompassing approximately 4.4 million rentable square feet and two free-standing 10,000 square foot retail properties. The rentable square feet of each property has been determined for these purposes based on the aggregate leased square footage specified in currently effective leases and, with respect to vacant space, management's estimate. In addition, as of December 31, 1996, the Company owned or had contracted to acquire approximately 140 acres of land in nine separate parcels that may present future development opportunities.
Reckson has historically emphasized the development of large scale office and industrial parks and approximately 78% of the Office Properties (including the New Jersey Portfolio) and 63% of the Industrial Properties are located in such parks (measured by rentable square footage). The Company believes that owning properties in planned office and industrial parks provides certain strategic advantages, including the following: (i) certain tenants prefer being located in a park with other high quality companies to enhance their corporate image, (ii) parks afford tenants certain aesthetic amenities such as a common landscaping plan, standardization of signage and common dining and recreational facilities, (iii) tenants may expand (or contract) their business within a park, enabling them to centralize business functions and (iv) a park provides tenants with access to other tenants and may facilitate business relationships between tenants.
Also, as of December 31, 1996, the Company had invested approximately $50.9 million in certain mortgage indebtedness encumbering four Class A office properties on Long Island and one Class A office property in New Jersey encompassing an aggregate of approximately 881,000 square feet.
Set forth below is a summary of certain information relating to the Properties, categorized by office and industrial park, as of December 31, 1996 on a pro forma basis giving effect to the acquisition of the New Jersey Portfolio.
Office Properties
General. As of December 31, 1996, on a pro forma basis giving effect to the acquisition of the New Jersey Portfolio, the Company owned or had an interest in 37 Class A suburban office properties that encompass approximately 4.9 million rentable square feet. As of December 31, 1996, these office properties (including the New Jersey Portfolio but excluding a vacant property currently under renovation) were 91% leased to approximately 525 tenants.
The Office Properties are Class A suburban office buildings and are well-located, well-maintained and professionally managed. In addition, these properties are modern with high finishes and achieve among the highest rent, occupancy and tenant retention rates within their sub-markets. Twenty-five of the 37 office properties(including the New Jersey Portfolio) are located in the following six planned office parks: the 23 acre North Shore Atrium, the 32 acre Huntington Melville Corporate Center, the 50 acre Nassau West Corporate Center, the 29 acre Tarrytown Corporate Center, the seven acre Landmark Square and the 32 acre Executive Hill Office Park. The buildings in these office parks offer a full array of amenities including health clubs, racquetball courts, sun decks, restaurants, computer controlled HVAC access systems and conference centers. Management believes that the location, quality of construction and amenities as well as Reckson's reputation for providing a high level of tenant service have enabled Reckson to attract and retain a national tenant base. The office tenants include national service companies, such as "Big Six" accounting firms, securities brokerage houses, insurance companies and health care providers.
The Long Island Office Properties are leased to national tenants, as well as to local tenants. Leases on the Office Properties are typically written for terms ranging from five to ten years and require (i) payment of a fixed gross rental amount that excludes payments on account of real estate tax, operating expense escalations and base electrical charges ("Base Rent"), (ii) payment of a base electrical charge, (iii) payment of real estate tax escalations over a base year, (iv) payment of compounded annual increases to Base Rent in lieu of operating expense escalations (which the Company believes have historically exceeded the annual increase in actual operating expenses), (v) payment of overtime HVAC and electric and (vi) payment of electric escalations over a base year. In virtually all leases, the landlord is responsible for structural repairs. Renewal provisions typically provide for renewal rates at market rates or a percentage thereof, provided that such rates are not less than the most recent renewal rates.
The Westchester Properties, Landmark Square and the New Jersey Portfolio are also leased to national tenants, as well as to local tenants. Leases are typically for terms ranging from five to ten years and require (I) payment of Base Rent, (ii) payment of a base electrical charge, (iii) payment of real estate tax escalations over a base year, (iv) payment of periodic fixed increases in Base Rent, (v) payment of operating expense escalations over a base year, and (vi) payment of electric escalations over a base year. In virtually all leases, the landlord is responsible for structural repairs. Renewal provisions typically provide for renewal rates at market rate or a percentage thereof, provided that such rates are not less than the most recent renewal rates.
The following table sets forth certain information as of December 31, 1996 for each of the Office Properties and the New Jersey Portfolio.
Industrial Properties
General. As of December 31, 1996, the Company owned or had an interest in 76 Industrial Properties that encompass approximately 4.4 million rentable square feet. All but one of the Industrial Properties are located on Long Island. As of December 31, 1996, the Industrial Properties were 96.8% leased to approximately 160 tenants. Many of the Industrial Properties have been constructed with high ceiling heights (i.e., above 18 feet), upscale office building facades, parking in excess of zoning requirements, drive-in and/or loading dock facilities, and other features which permit them to be leased for industrial and/or office purposes.
The Industrial Properties are leased to national tenants as well as to local companies. These tenants utilize the Industrial Properties for distribu- tion, warehousing, research and development and light manufacturing/assembly activities. Leases on the Industrial Properties are typically written for terms ranging from three to seven years and require (I) payment of a Base Rent, (ii) payments of real estate tax escalations over a base year, (iii) payments of compounded annual increases to Base Rent and (iv) reimbursement of all operating expenses. Electric costs are borne and paid directly by the tenant. Certain leases are "triple net" (i.e., the tenant is required to pay in addition to annual Base Rent, all operating expenses and real estate taxes). In virtually all leases, the landlord is responsible for structural repairs. Renewal provisions typically provide for renewal rents at market rates, provided that such rates are not less than the most recent rental rates.
Approximately 63% of the Industrial Properties measured by square footage, are located in three large scale planned industrial parks that were developed by Reckson. They are (I) Vanderbilt Industrial Park, a 400-acre industrial park containing 50 buildings with approximately 3.6 million square feet.(ii) Airport International Plaza a 200-acre industrial park containing 32 buildings with approximately 1.4 million square feet, and (iii) County Line Industrial Center, a 28-acre industrial park containing six buildings and approximately one million square feet.
In addition to its industrial parks, as of December 31, 1996, the Company owned 21 stand alone Industrial Properties. As of December 31, 1996, these Properties were 96.7% leased to approximately 35 tenants.
Retail Properties
As of December 31, 1996, the Company owned two free-standing 10,000 square foot retail properties. One retail property was 100% leased as of December 31, 1996, to a single tenant and one retail property was vacant. The lease expires in 2000. The retail properties are located in Great Neck, New York and Huntington, New York.
Land Held for Development
As of December 31, 1996, the Company owned approximately 140 acres of land in nine separate parcels, five of which are located in Suffolk County, New York and one of which is located adjacent to the Industrial Property in South Plainfield, New Jersey. The Parcels have been zoned for potential industrial and retail development. The Company plans to seek "build to suit" opportunities as market conditions permit.
Historical Non-Incremental Revenue-Generating Capital Expenditures, Tenant Improvement Costs and Leasing Commissions
The following table sets forth annual and per square foot recurring, non-incremental revenue-generating capital expenditures and non-incremental revenue-generating tenant improvement costs and leasing commissions incurred by the Company to retain revenues attributable to existing leased space for the period 1992 through 1996 for the Office Properties and the Industrial Properties. As noted, revenue-generating tenant improvement costs and leasing commissions are excluded from the table set forth immediately below. The historical capital expenditures, tenant improvement costs and leasing commissions set forth below are not necessarily indicative of future recurring, non-incremental revenue-generating capital expenditures or non-incremental revenue-generating tenant improvement costs and leasing commissions.
The Option Properties
Six properties owned by Reckson (the "Reckson Option Properties") and four properties in which Reckson owns a non-controlling minority interest (the "Other Option Properties") and, together with the Reckson Option Properties, the ("Option Properties") were not contributed to the Operating Partnership upon completion of the IPO. However, the Operating Partnership was granted 10 year options to acquire interests in the Option Properties under the terms and conditions described below. As of the date hereof, the Company had acquired or contracted to acquire all but two of the Reckson Option Properties.
The two remaining Reckson Option Properties are comprised of 225 Broadhollow Road, Melville, New York, a 185,889 square foot suburban Class A office property located in the Huntington Melville Corporate Center, and, 593 Acorn Street, Babylon, New York, a 39,551 square foot stand alone industrial property both of which are managed by the Company.
The Operating Partnership has been granted options, exercisable over a 10 year period that commenced upon closing of the IPO, to acquire each of the Reckson Option Properties and Reckson's ownership interest in the Other Option Properties at a purchase price equal to the lesser of (I) a fixed price (the "Fixed Price") and (ii) the Net Operating Income attributable to such Option Property during the 12 month period preceding exercise of the option by the Operating Partnership (multiplied by Reckson's percentage ownership interest in the case of the Other Option Properties) divided by a capitalization rate of 11.5%; provided that, in no event shall the purchase price be less than the outstanding balance of the mortgage debt encumbering the Option Property (multiplied by Reckson's percentage ownership interest in the case of the Other Option Properties) on the acquisition date. Net Operating Income is defined generally for these purposes as gross income minus annual operating costs. The portion of the purchase price not required to repay mortgage debt and other transaction costs incurred in connection with the sale of such Option Property shall be payable in Units. The fixed price for 225 Broadhollow Road and 593 Acorn Street is $21,242,000 and $878,100, respectively.
The Reckson partnerships that currently own the Reckson Option Properties may sell any of these properties to a party other than the Operating Partnership, provided that the selling entity provides the Company with 30-days advance notice of such sale. Upon receiving such notice, the Company may then elect to exercise the option to acquire the Reckson Option Property and, if it so chooses, sell the property to such party.
In addition to the foregoing, in the event a sale of any Option Property to a third party is consummated, the Operating Partnership will receive "Reckson's Net After Tax Profit" from such sale. Reckson's Net After Tax Profit is defined generally for such purposes as the product of (I) Reckson's percentage ownership interest in the Option Property (100% in the case of Reckson Option Properties) multiplied by (ii) the excess of the gross sales price over the total of any outstanding mortgage or other encumbrance, the federal income tax payable by the partners as a result of the sale, as well as other transaction costs incurred in connection with the sale of such Option Property, including transfer taxes, closing adjustments, brokerage commissions, legal fees and accounting fees.
The terms of the options granted to the Operating Partnership with respect to the Option Properties have not been based on appraisals and are not the product of an arm's-length negotiation since members of the Rechler family maintain an ownership interest in such Option Properties. However, management believes that such terms are fair to the Company and a determination by the Operating Partnership to exercise an option to acquire an interest in any Option Property shall be subject to the approval of the Independent Directors and, with respect to interests in the Other Option Properties, the approval of Reckson's partners.
Mortgage Indebtedness
Item 3.
Item 3. Legal Proceedings
The Company is not presently subject to any material litigation nor, to the Company's knowledge, is any litigation threatened against the Company, other
than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations or business or financial condition of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth quarter of the year ended December 31, 1996.
Part II
Item 5.
Item 5. Market For Registrant's Common Equity and Related Stockholder matters
The Company's common stock began trading on the New York Stock Exchange ("NYSE") on May 25, 1995, under the symbol "RA." On March 18,1997, the reported closing sale price on the NYSE was $45.50 and there were approximately 267 holders of record of Common Stock. The following table sets forth the quarterly high and low closing sales prices per share of the common stock reported on the NYSE and the distributions paid by the Company with respect to each such quarter.
On September 21, 1994, prior to completion of the IPO, the Company was capitalized with the issuance to each of Donald Rechler and Roger Rechler of 50 shares of common stock for a purchase price of $10.00 per share. In addition, on June 2, 1995 (the closing date of the IPO), the Company completed a concurrent offering of 400,000 shares of common stock to members of the Rechler family at the initial public offering price of $24.25 per share. The Company issued these shares in reliance on an exception from registration under Section 4(2) of the Securities Act of 1933.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the historical financial statements of the Company and the combined financial statements of the Reckson Group and related notes thereto included elsewhere in this Form 10-K.
Overview and Background
The Reckson Group, the predecessor to the Company (the "Predecessor"), was engaged in the ownership, management, operation, leasing and development of commercial real estate properties, principally office andindustrial buildings, and also owned certain undeveloped land located primarily on Long Island, New York. On June 2, 1995, following completion of the IPO and the related formation transactions (the "Formation Transactions"), the Company owned or had an interest in 72 Properties and succeeded to the Reckson Group's real estate business.
The Company owns all of the interests in the Properties through the Operating Partnership or the Financing Partnership. At December 31, 1996, the Company's portfolio of real estate properties included 32 Office Properties containing approximately 4.4 million square feet, 76 Industrial Properties containing approximately 4.4 million square feet and two retail Properties containing 20,000 square feet.
Since the IPO, the Company has acquired or contracted to acquire approximately $490 million of class A suburban office and industrial properties encompassing approximately 7.1 million square feet located in the Tri-State Area. Since the IPO, the Company has acquired five Class A suburban Office Properties and 17 Industrial Properties encompassing approximately 547,000 and 1.5 million square feet, respectively, located on Long Island. In February 1996, the Company established its Westchester Division with the acquisition of a 935,000 square foot office portfolio and associated management and construction operations for an aggregate purchase price of approximately $79 million. The Company currently owns 11 Class A suburban Office Properties (six in one office park) encompassing approximately 1.5 million square feet located in Westchester County, New York. In October 1996, the Company established its Southern Connecticut Division with the purchase of Landmark Square, a six building office complex encompassing approximately 800,000 square feet located in Stamford, Connecticut. ("Landmark Square") for an aggregate purchase price of approximately $77 million. In addition, the Company has contracted to acquire five Class A suburban office properties encompassing approximately 500,000 square feet located in Northern New Jersey (the "New Jersey Portfolio") and, in connection with this acquisition, has established a Northern New Jersey Division. Additionally, the Company has invested approximately $50.9 million in certain mortgage indebtedness encumbering four Class A office properties on Long Island encompassing approximately 750,000 square feet and one Class A property in New Jersey encompassing approximately 131,000 square feet. Through these acquisitions and the Formation Transactions involving the Predecessor, the Company increased total assets to $543.8 million, including real estate assets of $488.1 million (net of accumulated depreciation) at December 31, 1996.
The market capitalization of the Company, based on the market value of the 15,559,682 issued and outstanding shares of Common Stock and Units (based on a share price of $42.25 as of December 31, 1996) and the $264 million (net of minority partners' 40% interest in debt encumbering the Omni) of debt outstanding at December 31, 1996, was $921.4 million. As a result, the Company's total debt to market capitalization ratio at December 31, 1996 equaled 28.8%.
On February 12, 1997, the Board of Directors of the Company declared a two-for-one stock split, to be effected as a stock dividend distributable on April 15, 1997 to stockholders of record on April 4, 1997.
Results of Operations
Comparability of Historical Financial Statements
Reckson management believes that in order for a meaningful analysis of the financial statements to be made, certain transactions which occurred in 1993, and the distribution of assets made in 1995, should be treated in a manner to make each accounting period comparable. Accordingly, the revenues and expenses of the Omni for the year ended December 31, 1994 and the period from January 1, 1995 to June 2, 1995 have been included in the following discussion as well as the elimination of the revenues and expenses of certain properties not transferred to the Company. The following sections discuss the results of operations (excluding investment and other income, as adjusted and in thousands):
Income from Operations of $23.1 million for the year ended December 31, 1996 increased by $12.8 million as compared to $10.3 million for the 1995 period. The increase in base rents of $29.9 million and $1.9 million in escalations and reimbursement is primarily attributable to additional square footage leased and the acquisition of properties during the period from June 3, 1995 to December 31, 1996.
Property operating expenses increased $6.9 million for the year ended December 31, 1996 compared to the 1995 period. This is primarily as a result of the Company operating a much larger portfolio of properties. Marketing, general and administrative expenses increased by $2.2 million for 1996, primarily as a result of the Company's new operating structure and incremental cost of being a public company. Interest expense decreased by $.4 million. The relatively small decrease in interest cost is principally due to the repayment and restructuring of debt in connection with the Formation Transactions.
Gross operating margin (defined as total operating revenues less total operating expenses as a percentage of total operating revenues) for 1996 was 63.4% as compared to 62.9% in 1995. This increase reflects the Company's ability to realize certain operating efficiencies as a result of operating a larger portfolio in its established markets and as a result of the Company establishing enhanced budgeting practices since the IPO.
Income of $10.3 million for the year ended December 31, 1995 increased by $11.1 million as compared to the loss of $.8 million for the 1994 period. The increase in base rents of $6.9 million and $1.4 million in escalations and reimbursements is primarily attributable to additional square footage leased and the acquisition of properties during the period from June 3, 1995 to December 31, 1995.
Operating expenses decreased $1.0 million for the year ended December 31, 1995 compared to the 1994 period. Included in operating expenses for the 1994 period are certain repair and maintenance costs incurred in connection with above average leasing activity. Marketing, general and administrative expenses increased by approximately $.4 million for 1995, primarily as a result of the Company's new operating structure and incremental cost of being a public company. Interest expense decreased by $5.0 million principally due to the repayment and restructuring of debt in connection with the Formation Transactions.
Liquidity and Capital Resources
Summary of Cash Flows
In June 1995, the Company completed an initial public offering of 7,438,000 shares of its common stock at $24.25 per share (including a concurrent offering of 400,000 shares and an over-allotment option of 918,000 shares). Net proceeds to the Company, after underwriting discounts and other offering costs were approximately $162 million. In conjunction with the Formation Transactions, certain investors contributing interests in properties and or property partnerships received Operating Partnerships units ("Units"). A Unit and a share of the common stock have essentially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. Holders of Units will have the opportunity beginning on the second anniversary of the consummation of the IPO to have their Units redeemed for cash equal to the fair market value thereof at the time of redemption or, at the election of the Company, shares of common stock on a one-for-one basis. Each time a Unit is redeemed, the Company's percentage interest in the Operating Partnership will be proportionately increased.
The Company used the proceeds from the IPO and an initial draw of $15 million on the Credit Facility (I) to repay certain mortgage indebtedness on the Properties in the amount of approximately $121.1 million (including repayment of $10 million of Omni's debt, prepayment costs and other related expenses); (ii) to pay approximately $6.0 million of notes payable to partners of certain of the property partnerships; (iii) to pay approximately $1.2 million of financing fees related to the Credit Facility; (iv) to pay approximately $16.0 million to purchase interests in property partnerships and or properties from the non-continuing investors; (v) to acquire certain real estate properties for approximately $25.9 million; and (vi) to establish working capital reserves.
In April 1996, the Company completed a public offering of 3,000,000 shares of common stock, at a price of $30.50 per share. Net proceeds to the Company of approximately $86 million were used to purchase certain of the Acquisition Properties including the Westchester Properties and to repay borrowings under the Credit Facility. In October 1996, the Company completed its second add-on public offering of 1,725,000 shares of common stock at a price of $35.50 per share. Net proceeds to the Company of approximately $60 million were used to purchase certain of the Acquisition Properties including Landmark Square and to repay borrowings under the Credit Facility.
During 1996, the Company made total borrowings under its $150 million Credit Facility of $144.5 million and repaid $76 million of such borrowings. Draws on the Credit Facility were used to purchase certain of the Acquisition Properties, acquire land for future development, fund certain costs relating to the Company's redevelopment properties and to fund tenant leasing costs. In October 1996, in connection with the acquisition of Landmark Square, the Company obtained a $50 million first mortgage loan, such loan has a term of 10 years and bears interest at a fixed rate of 8.02% per annum.
During 1996, the Company generated $39.4 million from operating activities. Operating cash flows were used to fund tenant leasing costs and capital expenditures, to pay dividends and for working capital.
During 1996, the Company purchased ten of the Acquisition Properties with 474,381 Units as partial consideration in the transactions.
On March 12, 1997 the Company sold 4,945,000 shares of the Company's common stock at $45.25 per share for an aggregate consideration of approximately $224 million before deducting offering expenses.
Capitalization
The Company's indebtedness at December 31, 1996 totaled $264.0 million (net of the minority partners' 40% interest in Omni's debt and including the Company's share of joint venture debt) and was comprised of $108.5 million outstanding under the Credit Facility and $155.5 million of mortgage indebtedness with an average interest rate of approximately 7.60% and an average maturity of approximately 4.5 years. Based on the Company's total market capitalization of $921.4 million at December 31, 1996, (calculated at a $42.25 stock price at December 31, 1996 and assuming the conversion of the 3,381,505 Units) the Company's debt represented 28.8% of its total market capitalization.
The Credit Facility has a two year term, with a one year extension and requires monthly payments of interest only, with the balance of all principal and accrued interest due on June 2, 1997. The loan agreement provides for a financing fee equal to 150 basis points on each draw. The loan agreement also provides for unused commitment fees, over the term of the facility. At December 31, 1996, the interest rate on the Credit Facility was equal to the one month LIBOR (approximately 5.41% plus 175 basis points).
Borrowings under the Credit Facility are guaranteed by the Financing Partnership which guarantee is secured by first mortgage liens on 64 properties (the "Collateral Properties"). At December 31, 1996, the Collateral Properties were required to maintain a debt service coverage ratio of at least 2.0. Availability under the Credit Facility is determined by taking the quotient resulting from (a) the cash flow attributable to the Collateral Properties divided by a specified level, divided by (b) the highest of three alternative interest rates (generally, the current interest rate on borrowings under the Credit Facility, a specified percentage, or the prevailing interest rate on five-year U.S. Treasury instruments plus a spread). The Company may increase its availability under the Credit Facility by adding income producing properties to the Collateral Properties. The Company is in compliance with all covenants relating to the Credit Facility.
On February 22, 1996, the Operating Partnership amended and restated the Credit Facility, pursuant to which the interest rate was reduced to 175 basis points over one-month LIBOR and the minimum debt service coverage ratio was reduced to 1.6. In addition, the Operating Partnership was given the right to convert outstanding borrowings at maturity to a five year mortgage loan at a fixed rate equal to the then prevailing interest rate on five-year U.S. Treasury instruments plus a spread, provided that certain specified conditions are satisfied and no event of default exists.
On February 25, 1997, the Company obtained a commitment for a three-year $175 million unsecured credit facility from Chase Manhattan Bank and Union Bank of Switzerland (the "New Credit Facility"). It is expected that upon syndication the New Credit Facility could provide for a maximum borrowing amount of up to $225 million. The Company's ability to borrow thereunder will be subject to the satisfaction of certain financial covenants, including covenants relating to limitations on unsecured and secured borrowings, minimum interest and fixed charge coverage ratios, a minimum equity value and a maximum dividend payout ratio. In addition, borrowings under the New Credit Facility will bear interest at a floating rate equal to one, two, three or six month LIBOR (at the Company's election) plus a spread ranging from 1.125% to 1.50%, based on the Company's leverage ratio. The New Credit Facility will replace the Company's existing $150 million secured credit facility which is scheduled to mature on June 2, 1997. Borrowings under the Credit Facility bear interest at a floating rate equal to one-month LIBOR plus 1.75%. Consummation of the New Credit Facility arrangement is subject to completion of the lenders' due diligence and completion of documentation satisfactory to the Company and such lenders.
Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service and capital expenditures, excluding non-recurring capital expenditures of the Company. In addition, construction, management, maintenance, leasing and property management fees have provided sources of cash flow. The Company expects to meet its short term liquidity requirements generally through its net cash provided by operating activities along with the New Credit Facility 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 New 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, will be adequate to meet the capital and liquidity requirements of the Company in both the short and long-term.
In connection with the acquisition of Landmark Square, the Company plans to incur approximately $11.5 million of capital improvements to refit the building to portfolio standards. At December 31, 1996, no material amounts had been incurred in connection with the refit of this building.
In order to qualify as a REIT for federal income tax purposes, the Company is required to make distributions to its stockholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to stockholders and for payment of expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments.
Inflation
The office leases generally provide for fixed base rent increases or indexed escalations. In addition, the office leases provide for separate escalations of real estate taxes and electric costs over a base amount. The industrial leases generally provide for fixed base rent increases, direct pass through of certain operating expenses and separate real estate tax escalation over a base amount. The Company believes that inflationary increases in expenses will be offset by contractual rent increases and expense escalations described above.
The Credit Facility bears interest at a variable rate, which will be influenced by changes in short-term interest rates, and is sensitive to inflation.
Funds From Operations
Management believes that funds from operations ("FFO") is an appropriate measure of performance of an equity REIT. Funds from operations is defined by the National Association of Real Estate Investment Trusts (NAREIT) as net income or loss, excluding gains or losses from debt restructurings and sales of properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not indicative of cash available to fund cash needs. Funds from operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. (See Selected Financial Information). 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.
Item 8.
Item 8. Financial Statements and Supplemental Data
The response to this item is included in a separate section of this Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information contained in the section captioned "Proposal I: Election of Directors" of the Company's definitive proxy statement for the 1997 annual meet ing of stockholders is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information contained in the section captioned "Executive Compensation" of the Company's definitive proxy statement for the 1997 annual meeting of stockholders is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the section captioned "Principal and Management Stockholders" of the Company's definitive proxy statement for the 1997 annual meeting of stockholders is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information contained in the section captioned "Certain Relationships and Related Transactions" of the Company's definitive proxy statement for the 1997 annual meeting of the stockholders is incorporated herein by reference.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1 and 2) Financial Statements and Schedules
The following consolidated financial information is included as a separate section of this annual report on Form 10-K:
Reckson Associates Realty Corp. and the Reckson Group - -----------------------------------------------------
Report of Independent Auditors . . . . . . . . . . . . . . . Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the year ended December 31, 1996 and for the period from June 3, 1995 to December 31, 1995 and the Combined Statements of Operations for the period January 1, 1995 to June 2, 1995 and for the year ended December 31, 1994 . . . . .
Consolidated Statement of Stockholders' Equity for the year ended December 31, 1996 and for the period from June 3, 1995 to December 31, 1995 and the Combined Statements of Owners' (Deficit) for the period from January 1, 1995 to June 2, 1995 and for the year ended December 31, 1994. . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the year ended December 31, 1996 and for the period from June 3, 1995 to December 31, 1995 and the Combined Statements of Cash Flows for the period January 1, 1995 to June 2, 1995 and for the year ended December 31, 1994 . . .
Notes to Financial Statements. . . . . . . . . . . . . . . .
Schedule III Real Estate and Accumulated Depreciation. . .
All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.
(3) Exhibits
Exhibit Number Description
3.1* Articles of Incorporation of Registrant 3.2** By-Laws of Registrant 3.3** Amended and Restated Articles of Incorporation 4.1* Specimen Share Certificate 10.1** Amended and Restated Agreement of Limited Partnership of Reckson Operating Partnership, L.P. 10.2** Second Amended and Restated Agreement of Limited Partnership of Omni Partners, L.P. 10.3** Omnibus Option Agreement 10.4** Registration Rights Agreement between the Company and Continuing Investors 10.5** Registration Rights Agreement relating to shares of Common Stock purchased by members of the Rechler family 10.6** Registration Rights Agreement between Registrant and Odyssey 10.7** Employment and Non-Competition Agreement between Registrant and Donald Rechler 10.8** Employment and Non-Competition Agreement between Registrant and Scott Rechler 10.9** Employment and Non-Competition Agreement between Registrant and Mitchell Rechler 10.10** Employment and Non-Competition Agreement between Registrant and Gregg Rechler 10.11** Non-Competition Agreement between Registrant and Roger Rechler 10.12** Employment and Non-Competition Agreement between Registrant and J. Michael Maturo 10.13** Employment and Non-Competition Agreement between Registrant and Jon L. Halpern 10.14** Purchase Option Agreements relating to the Reckson Option Properties 10.15** Purchase Option Agreements relating to the Other Option Properties 10.16** Amended 1995 Stock Option Plan 10.17** Registrant's Credit Facility 10.18** 1996 Employee Stock Options Plan 10.19** Executive Center Leases 10.20** Supplemental Representations and Warranties Agreement 10.21* Ground Leases for certain of the Properties 10.22** Amended and Restated Agreement of Limited Partnership of Reckson FS Limited Partnership 10.23** Indemnity Agreement relating to 100 Oser Avenue 10.24** Contribution Agreement by and among Registrant, Reckson Operating Partnership, L.P. and Tarrytown Corporate Center, Tarrytown Corporate Center IV, L.P., Tarrytown Corporate Center II, Crest Realties, 2 Church Street Associates, JAH Realties, and Jon Halpern 10.25*** Form of Members Agreement for Double D L.L.C. 10.26*** Form of Members Agreement for Halpern Real Estates Development L.L.C. 10.27** Form of Registration Rights Agreement between Registrant and certain Halpern affiliated entities 10.28** Registration Rights Agreement between Registrant and 125 Baylis Road L.L.C. 12.1 Statement Regarding Computation of Ratios 21.1 Statement of Subsidiaries 24.1 Powers of Attorney (included in Part IV of this Form 10-K) 27.0 Financial Data Schedule
* Previously filed as an exhibit to Registration Statement on Form S-11 (No. 33-84324) and incorporated herein by reference. ** Previously filed as an exhibit to the Company's Form 8-K report filed the SEC on November 25, 1996 and incorporated herein by reference. *** Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on March 8, 1996 and incorporated herein by reference.
(b) Reports on Form 8-K
On October 1, 1996, the Company filed a report on Form 8-K relating to its acquisition of Landmark Square.
On November 8, 1996, the Company filed a report on Form 8-K putting the Underwriting Agreement relating to a underwritten offing of 1,725,000 shares of common stock of the Company on file.
On November 25, 1996, the Company filed a report on Form 8-K relating to the amendment of the Company's 1995 Stock Option Plan and adoption of the 1996 Employee Stock Option Plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 28, 1997.
Reckson Associates Realty Corp.
By: /s/ Donald J. Rechler (Donald J. Rechler) Chairman of the Board, President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Reckson Associates Realty Corp., hereby severally constitute Scott H. Rechler, Mitchell D. Rechler and J. Michael Maturo, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors to enable Reckson Associates Realty Corp. to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date - --------------------- --------------------------------------- --------------
/s/ Donald J. Rechler Chairman of the Board, President, Chief (Donald J. Rechler) Executive Officer and Director March 28, 1997
/s/ Scott Rechler Executive Vice President, Chief Operating (Scott Rechler) Officer and Director March 28, 1997
/s/ Roger M. Rechler (Roger M. Rechler) Vice Chairman of the Board and Director March 28, 1997
/s/ J. Michael Maturo Executive Vice President and Chief Financial (J. Michael Maturo) Officer March 28, 1997
/s/ Mitchell D. Rechler (Mitchell D. Rechler) Executive Vice President and Director March 28, 1997
/s/ Harvey R. Blau (Harvey R. Blau) Director March 28, 1997
/s/ Leonard Feinstein (Leonard Feinstein) Director March 28, 1997
/s/ John V.N. Klein (John V.N. Klein) Director March 28, 1996
/s/ Conrad Stephenson (Conrad Stephenson) Director March 28, 1997
/s/ Herve A. Kevenides (Herve A. Kevenides) Director March 28, 1997
Report of Independent Auditors
Board of Directors and Stockholders Reckson Associates Realty Corp.
We have audited the accompanying consolidated balance sheets of Reckson Associates Realty Corp. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 1996 and for the period from June 3, 1995 (commencement of operations) to December 31, 1995 of Reckson Associates Realty Corp. and the related combined statements of operations, owners' (deficit) and cash flows for the period January 1, 1995 to June 2, 1995 and for the year ended December 31, 1994 of the Reckson Group. We have also audited the financial statement schedule listed in the Index at Item 14(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reckson Associates Realty Corp. at December 31, 1996 and 1995, and the consolidated results of operations and cash flows for the year ended December 31, 1996 and for the period June 3, 1995 (commencement of operations) to December 31, 1995 of Reckson Associates Realty Corp. and the combined results of operations and cash flows for the period January 1, 1995 to June 2, 1995 and for the year ended December 31, 1994 of the Reckson Group in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be set forth therein.
ERNST & YOUNG LLP
New York, New York February 25, 1997,
except for Note 14 as to which the date is March 12, 1997
Reckson Associates Realty Corp. and Reckson Group Notes to Financial Statements
1. Description of Business and Significant Accounting Policies
Description of Business
Reckson Associates Realty Corp. (the "Company") and the Reckson Group (the "Predecessor") are engaged in the ownership, management, operation, leasing and development of commercial real estate properties, principally office and industrial buildings and also own certain undeveloped land (collectively, the "Properties") located in the New York City tri-state area.
Organization and Formation of the Company
The Company was incorporated in Maryland in September 1994 and is the successor to the operations of the Reckson Group. On June 2, 1995, the Company completed an initial public offering of 6,120,000 shares of $.01 par value common stock ("the Offering"). The Offering price was $24.25 per share resulting in gross proceeds of $148,410,000. The Company also issued 400,000 shares in a concurrent offering to the Rechler family resulting in $9,700,000 of additional proceeds. On June 28, 1995, the underwriters exercised their over allotment option and, accordingly, the Company issued an additional 918,000 shares of common stock and received gross proceeds of $22,261,500. The aggregate proceeds to the Company, net of underwriters' discount, advisory fee and offering costs were approximately $162,000,000.
The following transactions occurred simultaneously with the completion of the Offering:
The Company consummated various purchase agreements to acquire certain properties and interests in partnerships which owned properties from certain non-continuing investors. Pursuant to such agreements the Company paid approximately $6,952,000 in cash to non-continuing investors.
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 Offering, in exchange for an approximate 73% interest in the Operating Partnership. All properties acquired by the Company are held by or through the Operating Partnership.
The Operating Partnership executed various option and purchase agreements whereby it issued 2,758,960 units in the Operating Partnership ("Units") to the continuing investors and assumed approximately $163,438,000 (net of the Omni mortgages) of indebtedness in exchange for interests in certain property partnerships, fee simple and leasehold interests in properties and development land, certain business assets of the executive center entities and 100% of the non-voting preferred stock of the management and construction companies. In addition, the Operating Partnership paid approximately $2,623,000 for costs associated with the transfer of the properties and other interests.
The Operating Partnership contributed $17,500,000 to Omni Partners, L.P. ("Omni"). Omni used $10,000,000 to repay mortgage indebtedness encumbering Omni's property and $1,000,000 to repay a loan from its existing partners. In addition, the remaining $27,214,000 balance of the first mortgage was refinanced. In July 1995, Omni distributed $6,500,000 to its minority partners to redeem a portion of their limited partnership interest. In addition, the Operating Partnership paid approximately $805,000 of financing costs, on behalf of Omni, in connection with the refinancing of Omni's debt. As a result of these transactions, the Operating Partnership has a 60% managing general partner interest in Omni. In addition, the Operating Partnership will receive a priority interest in the Omni's annual cash flow equal to 12% of $11,000,000 of the Operating Partnership's aggregate capital contributions.
The Operating Partnership used a portion of the Offering proceeds and the proceeds of certain new mortgage borrowings to repay approximately $114,016,000 of indebtedness (excluding the Omni indebtedness and including $1,500,000 of a line of credit). In conjunction with such repayment, the Operating Partnership incurred an extraordinary loss of approximately $6,022,000 (before minority interest) consisting of approximately $6,355,000 in prepayment costs and other fees, $1,742,000 of unamortized deferred financing fees written off and net of a gain on partial forgiveness of a mortgage obligation of approximately $2,075,000. In addition, the Operating Partnership used $5,000,000 of the Offering proceeds to repay notes to certain Predecessor partnerships.
The Operating Partnership borrowed $15,000,000 under a credit facility (see Note 3) to repay certain mortgage indebtedness and to fund a commercial real estate investment.
Basis of Presentation and Summary of Significant Accounting Policies
The accompanying consolidated financial statements of Reckson Associates Realty Corp. include the accounts of the Company and its subsidiaries. The Company's investments in Reckson Management Group, Inc., Reckson Construction Group, Inc. and Reckson Executive Centers, L.L.C. are accounted for on the equity method. All significant intercompany balances and transactions have been eliminated in consolidation.
The minority interests at December 31, 1996 represent approximately a 22% limited partnership interest in the Operating Partnership and a 40% minority partners' interest in the Omni.
The Reckson Group was not a legal entity but rather a combination of partnerships, an "S" corporation and affiliated real estate management and construction corporations which were under the common control of Reckson Associates (a general partnership) and affiliated entities. All significant intercompany transactions and balances were eliminated in combination. The Reckson Group used the equity method of accounting for investments in less than 50% owned entities and majority owned entities where control was temporary.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Real Estate
Depreciation is computed utilizing the straight-line method over the estimated useful lives of ten to thirty years for buildings and improvements and five to ten years for furniture, fixtures and equipment. Tenant improvements, which are included in buildings and improvements, are amortized on a straight-line basis over the term of the related leases.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three months or less when purchased, to be cash equivalents.
Deferred Costs
Lease fees and loan costs are capitalized and amortized over the life of the related lease or loan. The Company incurred costs related to the Offering which were charged to Stockholders' Equity.
Income Taxes
Prior to June 3, 1995 all of the Properties were owned by partnerships and an S-corporation, whose partners and shareholders were required to include their respective share of profits and losses in their individual tax returns.
The Company generally will not be subject to federal income taxes as long as it qualifies as a real estate investment trust ("REIT"). A REIT will generally not be subject to federal income taxation on that portion of income that qualifies as REIT taxable income and to the extent that it distributes such taxable income to its stockholders and complies with certain requirements. As a REIT, the Company is allowed to reduce taxable income by all or a portion of distributions to stockholders and must distribute at least 95% of its taxable income to qualify as a REIT. As distributions have exceeded taxable income, no Federal income tax provision has been reflected in the accompanying consolidated financial statements. State income taxes are not significant.
During 1996, the Company paid dividends of $1.78 per share all of which was considered ordinary income for federal income tax purposes. During 1995, the Company paid dividends of $1.33 per share of which approximately 38% was ordinary income and 62% was a return of capital for federal income tax purposes.
Revenue Recognition
Minimum rental income is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due are included in deferred rents receivable on the accompanying balance sheets. Contractually due but unpaid rents are included in tenant receivables on the accompanying balance sheets. Certain lease agreements provide for reimbursement of real estate taxes, insurance, common area maintenance costs and indexed rental increases, which are recorded on an accrual basis.
The Company records interest income on investments in mortgage notes on an accrual basis of accounting. The Company does not accrue interest on impaired loans where, in the judgment of management, collection of interest according to the contractual terms is considered doubtful. Among the factors the Company considers in making an evaluation of the collectibility of interest are, the status of the loan, the financial condition of the borrower, the value of the underlying real estate and anticipated future events. Loan discounts are amortized over the life of the loan using the constant interest method.
Construction Operations
Construction operations are accounted for utilizing the completed contract method. Under this method, costs and related billings are deferred until the contract is substantially complete. Estimated losses on uncompleted contracts are recorded in the period that management determines that a loss may be incurred.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," (FAS No. 123) requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, no compensation expense was recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant (see Note 5).
Per Share Data
Earnings per common share are based upon the weighted average number of common shares outstanding during the period. Primary earnings per common share are based upon the weighted average number of such shares and the assumed equivalent shares outstanding during the period. The assumed exercise of outstanding stock options, using the treasury stock method, is not materially dilutive and such amounts are not presented. The conversion of Units into common stock (see Note 5) would not have a significant effect on per share amounts as the Units share proportionately with the common stock in the results of the Operating Partnership's operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
2. Mortgage Notes Payable
At December 31, 1996, there are thirteen mortgage notes payable. Properties with an aggregate carrying value at December 31, 1996 of approximately $112 million are pledged as collateral against the mortgage notes payable which are non-recourse to the Company. The mortgage notes bear interest at rates ranging from 6.25% to 9.25%, and mature between 1999 and 2006. During 1996, the Company capitalized interest incurred on a certain mortgage note payable to fund certain development costs in the amount of $159,546. Certain of the mortgage notes payable are guaranteed by certain limited partners in the Operating Partnership.
3. Credit Facilities
On February 25, 1997, the Company obtained a commitment for a three-year $175 million unsecured credit facility from Chase Manhattan Bank and Union Bank of Switzerland (the "New Credit Facility") which upon syndication could provide for a maximum borrowing amount of up to $225 million. The Company's ability to borrow thereunder will be subject to the satisfaction of certain financial covenants, including limitations on unsecured and secured borrowings, minimum interest and fixed charge coverage ratios, a minimum equity value and a maximum dividend payout ratio. In addition, borrowings under the New Credit Facility will bear interest at a floating rate equal to one, two, three or six month LIBOR (at the Company's election) plus a spread ranging from 1.125% to 1.50%, based on the Company's leverage ratio. The New Credit Facility will replace the Company's existing $150 million secured credit facility. Consummation of the New Credit Facility arrangement is subject to completion of the lenders' due diligence and completion of documentation satisfactory to the Company and such lenders.
On June 2, 1995, the Company obtained a credit facility (the "Credit Facility") from a financial institution in the amount of $150 million, which is collateralized by a first mortgage on 64 properties (the "Collateral Properties") with an aggregate carrying value at December 31, 1996 of approximately $214 million. The Credit Facility has a two-year term, and requires monthly payments of interest only at a rate equal to the one-month LIBOR rate (approximately 5.41% on December 31, 1996) plus 175 basis points. The Company pays a financing fee equal to 150 basis points on each draw. The loan agreement also provides for unused commitment fees over the term of the facility. Outstanding borrowings under the Credit Facility and accrued interest are due on June 2, 1997. The Company has the option to extend the term of the Credit Facility one year subject to an extension fee of 1.0% of the principal indebtedness outstanding on the extension date. The Collateral Properties are required to maintain a debt service coverage ratio of at least 2.0.
On February 22, 1996, the Operating Partnership amended and restated the Credit Facility, pursuant to which the interest rate was reduced to 175 basis points over one-month LIBOR and the minimum debt service coverage ratio was reduced to 1.6. In addition, the Operating Partnership has the right to convert outstanding borrowings at maturity to a five-year mortgage loan at a fixed rate equal to the prevailing interest rate on five-year U.S. Treasury instruments plus a spread, provided that certain specified conditions are satisfied and no event of default exists. In connection with the amendment and restatement of the Credit Facility the Company wrote off approximately $1.2 million of loan costs. The Credit Facility contains a number of customary financial covenants and provides for certain limitations (as defined therein) on the amount of borrowings.
During 1996, the Company capitalized interest incurred on Credit Facility borrowings to fund certain development costs in the amount of $800,434.
4. Land Leases
The Company leases, pursuant to noncancellable operating leases, the land on which five of its buildings were constructed. The leases, which contain renewal options, expire between 2018 and 2080. The leases contain provisions for scheduled increases in the minimum rent and one of the leases additionally provides for adjustments to rent based upon the fair market value of the underlying land at specified intervals. Minimum ground rent is recognized on a straight-line basis over the terms of the leases. The excess of amounts recognized over amounts contractually due is $1,676,000 and $1,434,000 at December 31, 1996 and 1995, respectively. These amounts are included in accrued expenses and other liabilities on the accompanying balance sheets. Future minimum lease commitments relating to the land leases as of December 31, 1996 are as follows (in thousands):
5. Stockholders' Equity
A Unit and a share of common stock have essentially the same economic characteristics as they effectively share equally in the net income or loss and distributions of the Operating Partnership. Beginning on the second anniversary of the consummation of the Offering, Units may be redeemed for cash or, at the election of the Company, for shares of common stock on a one-for-one basis.
The Company established a stock option plan (the "1995 Stock Option Plan") for the purpose of attracting and retaining executive officers, directors and other key employees. In addition, during 1996, the Company established a stock option plan for non officers and new hires of the Company (the "1996 Employee Stock Option Plan"). As of December 31, 1996, 750,000 of the Company's authorized shares have been reserved for issuance under the 1995 Stock Option Plan and 200,000 of the Company's authorized shares have been reserved for issuance under the 1996 Employee Stock Option Plan. Outstanding options to purchase an aggregate of 617,584 shares have been granted at exercise prices ranging from $24.25 per share to $39.50 per share under the 1995 Stock Option Plan and outstanding options to purchase an aggregate of 87,000 shares have been granted at exercise prices ranging from $36.50 per share to $39.50 per share under the 1996 Employee Stock Option Plan. These options vest in three equal installments on the first, second and third anniversaries of the date of grant. In addition, each of the five independent directors of the Company have been granted options to purchase 4,000 shares at exercise prices ranging from $24.50 per share to $31.125 per share (the market price on the date of grant). The options granted to the independent directors were exercisable on the date of grant. During 1996, 13,977 options were exercised resulting in proceeds to the Company of approximately $338,000.
Pro forma information regarding net income and earnings per share is required by FAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995; respectively: risk-free interest rate of 5%; dividend yields of 7.26% and 9.82%; volatility factors of the expected market price of the Company's common stock of .134, and a weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The weighted average fair value of options granted for the period June 2, 1995 to December 31, 1995 and for the year ended December 31, 1996 was $.49 and $1.71, respectively. In addition, there were 15,000 options at a weighted average per share exercise price of $24.25 per option and 201,782 options at a weighted average per share exercise price of $27.89 per option exercisable at December 31, 1995 and 1996, respectively.
Exercise prices for options outstanding as of December 31, 1996 ranged from $24.25 per share to $39.50 per share. The weighted-average remaining contractual life of those options is 9.1 years.
The Company made loans to certain senior officers to purchase Units at market prices ranging from $24.25 per Unit to $43.875 per Unit based on the market price of the Company's common stock on the date of the loan. The loans bear interest at rates ranging between 8% and 8.5% and are secured by the Units purchased. Such loans will be forgiven ratably at each anniversary of employment over a four year period. The remaining loan balance of approximately $250,000 and $350,000 at December 31, 1996 and 1995, respectively has been included as a reduction of paid in capital on the accompanying consolidated balance sheets.
On February 12, 1997, the Board of Directors of the Company declared a two-for-one stock split to be effected as a stock dividend distributable on April 15, 1997 to stockholders of record on April 4, 1997.
6. Related Party Transactions
The Company, through its subsidiaries and affiliates, provides management, leasing and other tenant related services to the Properties. Certain executive officers of the Company have continuing ownership interests in the unconsolidated subsidiaries.
In connection with the IPO, the Company was granted options, exercisable over a 10 year period to acquire six properties owned by Reckson (the "Reckson Option Properties") and four properties in which Reckson owns a non-controlling minority interest (the "Other Option Properties" and, together with the Reckson Option Properties, the "Option Properties") at a purchase price equal to the lesser of (I) a fixed purchase price and (ii) the Net Operating Income, as defined, attributable to such Option Property during the 12 month period preceding the exercise of the option dividend by a capitalization rate of 11.5%, but the purchase price shall in no case be less than the outstanding balance of the mortgage debt encumbering the Option Property on the acquisition date.
During 1996, the Company made construction loan advances to fund certain redevelopment and leasing costs relating to one of the Other Option Properties. At December 31, 1996, advances due the Company is approximately $2,940,000. Such amount bears interest at the rate of 12% per annum and is due on demand.
During 1996, the Company acquired three of the Reckson Option Properties for an aggregate purchase price of approximately $26 million. In connection with the purchase of such Option Properties the Company issued 135,614 Units at prices ranging from $32.75 per Unit to $37.00 per Unit as partial consideration in the transactions. Such Units were issued to certain members of management and entities whose partners include members of management.
7. Commercial Real Estate Investments
During the period from June 3, 1995 to December 31, 1995 the Company acquired four office properties encompassing 360,000 square feet and five industrial properties encompassing 543,000 square feet for an aggregate purchase price of approximately $54.4 million.
During 1996, the Company acquired one office property encompassing 187,000 square feet and 11 industrial properties encompassing 856,308 square feet on Long Island for an aggregate purchase price of approximately $50 million.
In February 1996, the Company acquired eight office properties in Westchester County, New York, encompassing 935,000 square feet for an aggregate purchase price of approximately $79 million. In addition, during 1996, the Company acquired three office properties (including one joint venture property) located in Westchester County encompassing 547,494 square feet for an aggregate purchase price of approximately $13.5 million.
In October 1996, the Company purchased Landmark Square, a six building office complex encompassing approximately 800,000 square feet located in Stamford, Connecticut for an aggregate purchase price of approximately $77 million.
In December 1996, the Company contracted to acquire five Class A suburban office properties encompassing approximately 500,000 square feet located in Northern New Jersey for a purchase price of approximately $56 million.
In addition, the Company has invested approximately $50.9 million in certain mortgage indebtedness encumbering four Class A office buildings on Long Island encompassing approximately 750,000 square feet and one Class A office building in New Jersey encompassing approximately 131,000 square feet.
8. Fair Value of Financial Instruments
The following disclosures of estimated fair value at December 31, 1996 were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash equivalents and variable rate debt are carried at amounts which reasonably approximate their fair values.
Mortgage notes payable have an estimated aggregate fair value which approximates its carrying value. Estimated fair value is based on interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities.
9. Rental Income
The Properties are being leased to tenants under operating leases. The minimum rental amount due under the leases are generally either subject to scheduled fixed increases or indexed escalations. In addition, the leases generally also require that the tenants reimburse the Company for increases in certain operating costs and real estate taxes above base year costs.
10. Property Sales and Other Transactions
In December 1994, the Predecessor sold three parcels of land pursuant to eminent domain proceedings for aggregate proceeds of $1,126,000. The parcels of land had an aggregate cost basis of $172,000 and the Predecessor recorded a gain on sale of $954,000 which is included in investment and other income in the accompanying combined statement of operations.
The Predecessor owned a 33 1 3% and 65% interest in two affiliated entities which were accounted for under the equity method. Such entities recorded gains on extinguishment of debts of $1,041,000 and $6,288,000, respectively, during 1994. The Predecessor's share of the extraordinary gains on extinguishment of debts amounted to $347,000 and $4,087,000, respectively.
One of the partnerships ("HMCC Associates") included in the Predecessor constructed a building for which operations commenced in 1990. Effective on December 21, 1993, the following transactions occurred: (I) a new partnership was formed, Omni Partners, L.P. ("Omni") and the building was transferred to Omni, (ii) Omni admitted Reckson, Inc. and Odyli, Inc. as general partners (.5% interest each) and Odyssey Partners, L.P. ("Odyssey") as a limited partner (55.02% interest), (iii) HMCC Associates and Reckson, Inc. (Predecessor entities) made an initial capital contribution of $7,920,000 and $80,000, respectively, and Odyssey and Odyli, Inc. (the "Odyssey Group") made an initial capital contribution of $10,000,000 (additional contributions of $232,000 and $289,000, respectively, were made through December 31, 1993 to cover various costs associated with the new debt described below), (iv) the original construction loan payable ($105,190,000, including accrued but unpaid interest) was satisfied by a payment of $64,000,000 resulting in a forgiveness of debt of $41,190,000, and (v) Omni encumbered the building with a new first mortgage of $35,000,000, second mortgage of $10,000,000 and a $1,000,000 note payable (all part of the $64,000,000 payment).
11. Non-Cash Investing and Financing Activities
Additional supplemental disclosures of non-cash investing and financing activities are as follows (in thousands, except unit amounts):
(1) Assets totaling $161,610 net of liabilities of $229,504 were contri- buted to the Company as part of the Formation transaction in exchange for 2,758,960 Units
(2) In November 1995, the Company purchased a 99,000 square foot multi-tenant office building as follows:
(3) During 1996, the Company purchased eight office properties located in Westchester County and associated management and construction operations as follows:
(4) During 1996, the Company acquired three of the option properties as follows:
12. Commitments and Other Comments
The Company entered into employment agreements with its chairman and five executive officers. The agreements are for terms expiring through June 1998.
The Company sponsors a defined contribution savings plan pursuant to section 401(k) of the Internal Revenue Code. Under such plan, there are no prior service costs. All employees are eligible to participate in the plan after one year of service. Employer contributions are based on a discretionary amount determined by the Company's management. During 1995 and 1996, the Company made no contributions.
At December 31, 1996, the Company had restricted cash of $1.8 million which collateralized an outstanding letter of credit for an equal amount.
13. Quarterly Financial Data (Unaudited)
14. Subsequent Events
On March 12, 1997 the Company sold 4,945,000 shares of the Company's common stock at $45.25 per share for an aggregate consideration of approximately $224 million before deducting offering expenses.
EXHIBIT INDEX
Exhibit Number Description - ------- -----------
3.1* Articles of Incorporation of Registrant 3.2** By-Laws of Registrant 3.3** Amended and Restated Articles of Incorporation 4.1* Specimen Share Certificate 10.1** Amended and Restated Agreement of Limited Partnership of Reckson Operating Partnership, L.P. 10.2** Second Amended and Restated Agreement of Limited Partnership of Omni Partners, L.P. 10.3** Omnibus Option Agreement 10.4** Registration Rights Agreement between the Company and Continuing Investors 10.5** Registration Rights Agreement relating to shares of Common Stock purchased by members of the Rechler family 10.6** Registration Rights Agreement between Registrant and Odyssey 10.7** Employment and Non-Competition Agreement between Registrant and Donald Rechler 10.8** Employment and Non-Competition Agreement between Registrant and Scott Rechler 10.9** Employment and Non-Competition Agreement between Registrant and Mitchell Rechler 10.10** Employment and Non-Competition Agreement between Registrant and Gregg Rechler 10.11** Non-Competition Agreement between Registrant and Roger Rechler 10.12** Employment and Non-Competition Agreement between Registrant and J. Michael Maturo 10.13** Employment and Non-Competition Agreement between Registrant and Jon L. Halpern 10.14** Purchase Option Agreements relating to the Reckson Option Properties 10.15** Purchase Option Agreements relating to the Other Option Properties 10.16** Amended 1995 Stock Option Plan 10.17** Registrant's Credit Facility 10.18** 1996 Employee Stock Options Plan 10.19** Executive Center Leases 10.20** Supplemental Representations and Warranties Agreement 10.21* Ground Leases for certain of the Properties 10.22** Amended and Restated Agreement of Limited Partnership of Reckson FS Limited Partnership 10.23** Indemnity Agreement relating to 100 Oser Avenue 10.24** Contribution Agreement by and among Registrant, Reckson Operating Partnership, L.P. and Tarrytown Corporate Center, Tarrytown Corporate Center IV, L.P., Tarrytown Corporate Center II, Crest Realties, 2 Church Street Associates, JAH Realties, and Jon Halpern 10.25*** Form of Members Agreement for Double D L.L.C. 10.26*** Form of Members Agreement for Halpern Real Estates Development L.L.C. 10.27** Form of Registration Rights Agreement between Registrant and certain Halpern affiliated entities 10.28** Registration Rights Agreement between Registrant and 125 Baylis Road L.L.C. 12.1 Statement Regarding Computation of Ratios 21.1 Statement of Subsidiaries 24.1 Powers of Attorney (included in Part IV of this Form 10-K) 27.0 Financial Data Schedule
* Previously filed as an exhibit to Registration Statement on Form S-11 (No. 33-84324) and incorporated herein by reference. ** Previously filed as an exhibit to the Company's Form 8-K report filed the SEC on November 25, 1996 and incorporated herein by reference. *** Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on March 8, 1996 and incorporated herein by reference. **** Previously filed as on Exhibit to the Company's Form 8-K report filed with the SEC on November 25, 1996 and incorporated herein by reference.
Exhibit 21.1
Reckson Associates Realty Corp. Statement of Subsidiaries
Name State of Organization - ------------------------------ -----------------------------
Omni Partners, L.P. Delaware Reckson FS Limited Parntership Delaware