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 40 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, 1997, the Company owned 155 properties (the "Properties") (including three joint venture properties) encompassing approximately 13.6 million rentable square feet, all of which are managed by the Company. The Properties consist of 58 Class A suburban office properties (the "Office Properties") encompassing approximately 7.6 million square feet, 95 industrial properties (the "Industrial Properties") encompassing approximately 6.0 million square feet and two 10,000 square foot retail properties. In addition, as of December 31, 1997 the Company had invested approximately $72.5 million in certain mortgage indebtedness encumbering five Class A office properties encompassing approximately 927,000 square feet, a 400 acre parcel of land and a 586,000 square foot industrial property in New Jersey (the "Mortgage Note Investments"). As of December 31, 1997, the Company also owned or had contracted to acquire approximately 847 acres of land in 17 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 eight 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, 1997, owned approximately 84% 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 an unsecured credit facility (the "Unsecured Credit Facility") with a maximum borrowing amount of $250 million scheduled to mature on April 30, 2000. The Unsecured 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 (pre-split) of Common Stock at a price of $30.50 per share (pre-split) (the "April 1996 Offering"). In October 1996, the Company completed a public offering of 1,725,000 shares (pre-split) of Common Stock at a price of $35.50 per share (pre-split) (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 used to make acquisitions of Properties and to re-pay borrowings.
In March 1997, the Company completed a public offering and sold 4,945,000 common shares (pre-split) at a price of $45.25 (pre-split) (including 645,000 common shares related to the exercise of the underwriter over allotment option) (the "March 1997 Offering"). In December 1997, the Company completed a public offering and sold 3,081,777 common shares at a price of $26 per share (the "December 1997 Offering"). In February 1998, the Company completed a public stock offering and sold 791,152 common shares at a price of $25.44 per share. Net proceeds to the Company of approximately $212 million from the March 1997 Offering, $80 million from the December 1997 Offering and $19 million from the February 1998 Offering were used to make acquisitions of Properties and to re-pay borrowings.
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, 1997, the Company had approximately 210 employees.
Recent Developments
Acquisition and Sales Activity.
Set forth below is a brief description of the Company's major acquisition activity during 1997. All of these Properties are located in the Tri-State Area.
During 1997, the Company acquired or contracted to acquire approximately $431 million of Class A suburban office and industrial properties encompassing approximately 4.9 million square feet located in the Tri-State Area. In addition, the Company acquired approximately 335 acres of land for an aggregate purchase price of approximately $24.2 million.
In that regard, during 1997, the Company acquired five Class A suburban Office Properties and 15 Industrial Properties encompassing approximately 881,000 and 968,000 square feet respectively, located on Long Island.
During 1997, the Company acquired eight office properties encompassing approximately 830,000 square feet and three industrial properties encompassing approximately 163,000 square feet in Westchester for an aggregate purchase price of approximately $117 million. In addition, the Company acquired approximately 32 acres of land for a purchase price of approximately $8 million.
During 1997, the Company acquired one industrial property encompassing approximately 452,000 square feet in Connecticut for a purchase price of approximately $27 million.
During 1997, the Company acquired 13 office properties encompassing approximately 1.5 million square feet and one industrial property encompassing approximately 128,000 square feet in New Jersey for an aggregate purchase price of approximately $156 million. Included in these acquisitions is the New Jersey Portfolio acquisition as described below. In addition, the Company acquired approximately 303 acres of land for an aggregate purchase price of approximately $16.2 million.
In October 1997, the Company entered into an agreement to invest $150 million in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse facilities. The Morris Companies' properties include twenty-three industrial buildings encompassing approximately 4.0 million square feet. The Company's investment will be used to acquire a controlling interest in Reckson Morris Operating Partnership, L.P. ("RMI"). In connection with the transaction the Morris Companies will contribute 100% of their interests in certain industrial properties to RMI in exchange for operating partnership units in RMI. on January 6, 1998, the Company made its initial investment into RMI of approximately $65 million. In addition, at December 31, 1997, the Company had advanced approximately $12 million to the Morris Companies primarily to fund certain construction costs related to development properties to be contributed to RMI.
In October 1997, the Company sold 671 Old Willets Path in Hauppauge, New York for approximately $725,000 and recorded a gain on the sale of $672,000.
In addition, during 1997, the Company invested approximately $29 million in certain mortgage indebtedness encumbering one Class A office building on Long Island encompassing approximately 177,000 square feet, a 400 acre parcel of land located in New Jersey and a 586,000 square foot industrial property located in New Jersey. In addition, on March 13, 1997 the Company loaned approximately $17 million to its minority partner in Omni, its flagship Long Island office building, and effectively increased its economic interest in the property owning partnership.
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. During 1996 the Company's emphasis focused on "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).
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 $56.9 million. These properties were acquired during 1997. Four of the properties are located in the Executive Hill Office Park 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. One of the properties in the office park, 10 Rooney Circle, was a vacant 70,000 square foot building at acquisition that has undergone a complete renovation including the reskinning of its facade in granite, installation of two new lobbies and development of a new entranceway. The property is now fully leased to two tenants. Tenants at Executive Hill include Chase Manhattan Bank, International Business Machines, Computer Science Corporation, and State Farm Insurance Company. In connection with this acquisition, the Company established its Northern New Jersey Division and named Mark Schaevitz as its Managing Director. Mr. Schaevitz, who acted as Chief Operating Officer over Mr. Heller's real estate operations for the prior 15 years, 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 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, contiguous to Stamford Town Center, a 900,000 square foot upscale shopping mall, 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 $12.0 million, five year capital improvement and repositioning 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.
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, 560 and 580 White Plains Road, Tarrytown, New York; 235 and 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. The purchase price was funded by $29.0 million of borrowings under the Company's credit facility, the assumption of $9.4 million of mortgage debt and the issuance of 307,606 (pre- split) 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 (pre-split).
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.
The Westchester Acquisition was 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 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.
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, 1997, nine of these properties were 100% leased to single tenants, one of these properties is 100% leased to two tenants and one of these properties is 66% leased to a single tenant with a lease pending for the remaining portion.
Leasing Activity
During the year ended December 31, 1997, the Company leased 548,992 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 $19.95 per square foot and 790,359 square feet at the Industrial Properties at an average effective rent of $6.37 per square foot. Included in this leasing data is 197,239 square feet at the Long Island Office Properties at an average effective rent of $22.69; 179,061 square feet at the Westchester Office Properties at an average effective rent of $17.42; 123,501 square feet at the Connecticut Office Properties at an average effective rent of $20.23; and 49,191 square feet at the New Jersey Office Properties at an average effective rent of $17.43. Also included in this leasing data is 698,359 square feet at the Long Island Industrial Properties at an average effective rent of $6.08 and 92,000 square feet at the Westchester Industrial Properties at an average effective rent of $8.54.
Financing Activities
The Unsecured Credit Facility. On April 30, 1997, the Company obtained a three-year $250 million unsecured credit facility from a bank group arranged by Chase Manhattan Bank and Union Bank of Switzerland (the "Unsecured Credit Facility"). The Company's ability to borrow thereunder is subject to the satisfaction of certain financial covenants, including covenants relating to limitations on unsecured and secured borrowings, minimum interest and fixed charge coverage rations, a minimum equity value and a maximum dividend payout ratio. In addition, borrowings under the Unsecured Credit Facility bear interest at a floating rate equal to one, two, three or six months LIBOR (at the Company's election) plus a spread ranging from 1.125% to 1.50%, based on the Company's leverage ratio. The Unsecured Credit Facility replaced the Company's $150 million secured credit facility. The Company utilizes the Unsecured Credit Facility primarily to finance the acquisitions of properties and other real estate investments, fund its development activities and for working capital purposes. At December 31, 1997, the Company had availability under the Unsecured Credit Facility to borrow an additional $35.75 million (net of $4.0 million of outstanding undrawn letters of credit).
On January 2, 1998, the Company obtained a $200 million unsecured credit facility (the "Bridge Facility") which matures on April 1, 1998. The Bridge Facility was provided by the two lead members of the Unsecured Credit Facility bank group and serves as interim financing while the Company seeks to expand the availability under the Unsecured Credit Facility.
Other Financing Activities. During August 1997, the Company refinanced approximately $43 million of mortgage debt on its Omni office property with a $58 million fixed rate mortgage loan. The loan which matures on September 1, 2007 has a fixed rate of 7.72%.
On August 28, 1997, the Company sold $150 million of 7.2% senior unsecured notes due August 2007. The net proceeds of these notes were used to repay borrowings under the Unsecured Credit Facility and for acquisitions of properties.
Stock Split
On February 12, 1997, the Board of Directors of the Company declared a two- for-one stock split, effected as a stock dividend distributable on April 15, 1997 to stockholders of record on April 4, 1997.
Stock Offerings
On March 12, 1997, the Company sold 4,945,000 shares (pre-split) (including 645,000 common shares related to the exercise of the underwriters over allotment option) of the Company's common stock at $45.25 per share (pre-split) for an aggregate consideration of approximately $224 million before deducting offering expenses.
On December 5, 1997, the Company sold 3,081,177 shares of the Company's common stock at $26.00 per share for an aggregate consideration of approximately $80 million before deducting offering expenses.
On February 18, 1998, the Company sold 791,152 shares of the Company's common stock at $25.44 per share for an aggregate consideration of approximately $20 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 40-year operating history, Reckson has created value in its properties through a variety of market cycles by implementing the operating strategies described below. These operating strategies include the implementation of (I) a multidisciplinary leasing approach that involves architectural design and construction personnel as well as leasing professionals, (ii) innovative property marketing programs such as the 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 and Units) of less than 50%. As of December 31, 1997, the Company's Debt Ratio was approximately 31.6%. This calculation is net of minority partners' 40% interest in Omni's debt and including the Company's share of unconsolidated joint venture debt. This Debt Ratio is intended to provide the Company with financial flexibility to select the optimal source of capital (whether debt or equity) with which to finance external growth.
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 or invest in properties at attractive yields. The Company believes that its (i) capital structure, in particular its Unsecured Credit Facility providing for a maximum borrowing amount of up to $250 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 to selectively develop new Class A suburban office and industrial properties and to continue to redevelop existing office and industrial properties as these opportunities arise. In the near future the Company will concentrate its development activities on industrial and Class A suburban office properties within it's Tri- State Area markets.
In October 1997, the Company entered into an agreement to invest $150 million in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse facilities. The Morris Companies' properties include 23 industrial buildings encompassing approximately 4.0 million square feet. The Company's investment will be used to acquire a controlling interest in Reckson Morris Operating Partnership, L.P. ("RMI"). In connection with the transaction the Morris Companies will contribute 100% of their interests in certain industrial properties to RMI in exchange for operating partnership units in RMI. On January 6, 1998, the Company acquired an approximate 70% interest in RMI for approximately $65 million. In addition, at December 31, 1997, the Company had advanced approximately $12 million to the Morris Companies primarily to fund certain construction costs related to development properties to be contributed to RMI.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI) and Reckson Strategic Venture Partners, LLC ("RSVP"). RSI will serve as the managing member of RSVP. RSI will invest in operating companies that generally will provide commercial services to properties owned by the Company and its tenants and third parties. Since RSI will not be making REIT qualifying investments, its shares will be distributed to the Company's shareholders and trade as a separate public company. RSVP was formed to provide the Company with a "research and development" vehicle to invest in alternative real estate sectors. RSVP will invest primarily in real estate and real estate related operating companies generally outside of the Company's core office and industrial focus. RSVP's strategy is to identify and acquire interests in established entrepreneurial enterprises with experienced management teams in market sectors which are in the early stages of their growth cycle or offer unique circumstances for attractive investments as well as a platform for future investments. The research and development vehicle will enable the Company to minimize its investment risks during the early stages of an investment. The vehicle permits the Company to monitor the long-term potential for each investment. As later stage capital is required, the Company will determine the prudence of additional investment and the potential for incorporating it as a core business line. To facilitate investments by RSVP, the Company has committed $100 million of initial capital. In addition, RSVP has obtained a $200 million preferred equity facility from Paine Webber Real Estate Securities (PWRES") and a PWRES/George Soros sponsored fund. At December 31, 1997, the Company had made investments in or loans to RSI and RSVP aggregating approximately $4.3 million and $7.4 million, respectively.
Environmental Matters
Under various Federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The cost of any required remediation and the owner's liability therefore as to any property is generally not limited under such enactments and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws govern the removal, encapsulation or disturbance of asbestos- containing materials ("ACMs") when such materials are in poor condition, or in the event of renovation or demolition. Such laws impose liability for release of ACMs into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property.
All of the Office Properties and all of the Industrial Properties have been subjected to a Phase I or similar environmental audit after April 1, 1994 (which involved general inspections without soil sampling, ground water analysis or radon testing and, for the Properties constructed in 1978 or earlier, survey inspections to ascertain the existence of ACMs were conducted) completed by independent environmental consultant companies (except for 35 Pinelawn Road which was originally developed by Reckson and subjected to a Phase 1 in April 1992). These environmental audits have not revealed any environmental liability that would have a material adverse effect on the Company's business.
Item 2.
Item 2. Properties
General
As of December 31, 1997, the Company owned 155 properties (including three joint venture properties) encompassing approximately 13.6 million square feet. These properties consist of 58 Class A suburban office properties encompassing approximately 7.6 million square feet, 95 industrial properties encompassing approximately 6.0 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, 1997, the Company owned or had contracted to acquire approximately 847 acres of land in 17 separate parcels that may present future development opportunities.
Reckson has historically emphasized the development of large scale office and industrial parks and approximately 66% of the Office Properties and 58% 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, 1997, the Company had invested approximately $72.5 million in certain mortgage indebtedness encumbering five Class A office properties on Long Island, one 586,000 square foot industrial property in New Jersey and a 400 acre parcel of land. In addition, on March 13, 1997 the Company loaned approximately $17 million to its minority partner in Omni, its flagship Long Island office building, and effectively increased its economic interest in the property owning partnership.
Set forth below is a summary of certain information relating to the Properties, categorized by office and industrial parks, as of December 31, 1997.
Office Properties
General. As of December 31, 1997, the Company owned or had an interest in 58 Class A suburban office properties that encompass approximately 7.6 million rentable square feet. As of December 31, 1997, these office properties were approximately 92% leased to 696 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. Thirty-seven of the 58 office properties are located in the following eight 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, the 32 acre Executive Hill Office Park the 76 acre Royal Executive Park and the 11 acre University Square. 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, the Southern Connecticut Properties and the New Jersey Properties 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.
Industrial Properties
General. As of December 31, 1997, the Company owned or had an interest in 95 Industrial Properties that encompass approximately 6.0 million rentable square feet. All but six of the Industrial Properties are located on Long Island. As of December 31, 1997, the Industrial Properties were approximately 94% leased to 230 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 distribution, warehousing, research and development and light manufacturing/assembly activities. Leases on the Industrial Properties are typically written for terms ranging from three to seven years and require (i) payment of a Base Rent, (ii) payments of real estate tax escalations over a base year, (iii) payments of compounded annual increases to Base Rent and (iv) reimbursement of all operating expenses. Electric costs are borne and paid directly by the tenant. Certain leases are "triple net" (i.e., the tenant is required to pay in addition to annual Base Rent, all operating expenses and real estate taxes). In virtually all leases, the landlord is responsible for structural repairs. Renewal provisions typically provide for renewal rents at market rates, provided that such rates are not less than the most recent rental rates.
Approximately 58% 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, 1997, the Company owned 27 standalone Industrial Properties. As of December 31, 1997, these Properties were approximately 94% leased to 54 tenants. Included in the 27 standalone Industrial Properties are 21 Properties located on Long Island encompassing approximately 1.6 million square feet, of which 32% are located in Farmingdale, 13% are located in Islip/Islandia, 13% are located in Melville and 12% are located in Hauppauge.
Retail Properties
As of December 31, 1997, the Company owned two free-standing 10,000 square foot retail properties. The retail properties which are located in Great Neck, New York and Huntington, New York were 100% leased as of December 31, 1997.
Developments in Progress
As of December 31, 1997, the Company owned or had under contract approximately 847 acres of land in 17 separate parcels, 10 of which are located in Long Island, 2 of which are located in Westchester and 5 of which are located in New Jersey. The parcels have been zoned for potential industrial and retail development. The Company plans to seek development opportunities as market conditions permit. The Company had invested approximately $29.3 million in land costs and approximately $25.2 million in additional development costs at December 31, 1997.
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 1993 through 1997 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 prices 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, 1997.
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". 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 for each respective 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 (pre-split) of common stock for a purchase price of $10.00 per share(pre-split). In addition, on June 2, 1995 (the closing date of the IPO), the Company completed a concurrent offering of 400,000 shares (pre-split) of common stock to members of the Rechler family at the initial public offering price of $24.25 per share (pre-split). The Company issued these shares in reliance on an exception from registration under Section 4(2) of the Securities Act of 1933.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the historical financial statements of Reckson Associates Realty Corp. (the "Company") and the combined financial statements of the Reckson Group and related notes.
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 and industrial buildings, and also owned certain undeveloped land located primarily on Long Island, New York. On June 2, 1995, following completion of the Initial Public Offering (the "IPO") and the related formation transactions, the Company owned or had an interest in 72 properties (including one joint venture property) and succeeded to the Reckson Group's real estate business.
The Company owns all of the interests in its real estate properties through Reckson Operating Partnership, L.P. (the "Operating Partnership") or Reckson FS Limited Partnership. At December 31, 1997, the Company owned 155 properties (the "Properties"), (including three joint venture properties) encompassing approximately 13.6 million square feet. The Properties include 58 suburban office properties containing approximately 7.6 million square feet, 95 industrial properties containing approximately 6.0 million square feet and two retail properties containing 20,000 square feet.
Since the IPO, the Company has acquired or contracted to acquire approximately $804 million of Class A suburban office and industrial properties encompassing approximately 10.7 million square feet located in the New York City Tri-State Area of Long Island, Westchester, Southern Connecticut and Northern New Jersey. In that regard, the Company has acquired 13 office Properties and 32 industrial Properties encompassing approximately 2.1 and 2.5 million square feet, respectively, located on Long Island for an aggregate purchase price of approximately $302 million. In February 1996, the Company established its Westchester Division with the acquisition of an eight building 935,000 square foot Class A office portfolio and associated management and construction operations for an aggregate purchase price of approximately $79 million. Since its initial investment in Westchester the Company has acquired 11 office properties encompassing approximately 1.4 million square feet and three industrial properties encompassing approximately 163,000 square feet for an aggregate purchase price of approximately $130.9 million. 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 for an aggregate purchase price of approximately $77 million. Since its initial investment in Southern Connecticut the Company has acquired one industrial property encompassing 452,414 square feet for a purchase price of approximately $27.0 million. In May 1997, the Company acquired five Class A suburban office properties encompassing approximately 496,000 square feet located in Northern New Jersey for an aggregate purchase price of approximately $56.9 million and, in connection with this acquisition, established its Northern New Jersey Division. Since its initial investment in Northern New Jersey the Company has acquired eight office properties encompassing approximately 976,000 square feet and six industrial properties encompassing approximately 903,000 square feet for an aggregate purchase price of approximately $131.3 million. Additionally, the Company has invested approximately $31.5 million for approximately 74 acres of land located in Long Island, 32 acres of land located in Westchester and 268 acres of land located in New Jersey which allows for approximately 3.5 million square feet of future development opportunities. In addition, the Company has invested approximately $72.5 million in certain mortgage indebtedness encumbering five Class A office properties on Long Island encompassing approximately 927,000 square feet, a 400 acre parcel of land and a 586,000 square foot industrial property in New Jersey. In October 1997, the Company entered into an agreement to invest $150 million in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse facilities. The Morris Companies' properties include 23 industrial buildings encompassing approximately 4.0 million square feet. The Company's investment will be used to acquire a controlling interest in Reckson Morris Operating Partnership, L.P. ("RMI"). In connection with the transaction the Morris Companies will contribute 100% of their interests in certain industrial properties to RMI in exchange for operating partnership units in RMI. On January 6, 1998, the Company acquired an approximate 70% interest in RMI for approximately $65 million. In addition, at December 31, 1997, the Company had advanced approximately $12 million to the Morris Companies primarily to fund certain construction costs related to development properties to be contributed to RMI.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI") and Reckson Strategic Venture Partners, LLC ("RSVP"). RSI will serve as the managing member of RSVP. RSI will invest in operating companies that generally will provide commercial services to properties owned by the Company and its tenants and third parties. Since RSI will not be making REIT qualifying investments, its shares will be distributed to the Company's shareholders and trade as a separate public company. RSVP was formed to provide the Company with a "research and development" vehicle to invest in alternative real estate sectors. RSVP will invest primarily in real estate and real estate related operating companies generally outside of the Company's core office and industrial focus. RSVP's strategy is to identify and acquire interests in established entrepreneurial enterprises with experienced management teams in market sectors which are in the early stages of their growth cycle or offer unique circumstances for attractive investments as well as a platform for future investments. The research and development vehicle will enable the Company to minimize its investment risks during the early stages of an investment. The vehicle permits the Company to monitor the long-term potential for each investment. As later stage capital is required, the Company will determine the prudence of additional investment and the potential for incorporating it as a core business line. Following the spin off of RSI the Company will make investments with RSVP on a joint venture basis. To facilitate investment by RSVP, the Company has committed $100 million of initial capital. In addition, RSVP has obtained a $200 million preferred equity facility from Paine Webber Real Estate Securities ("PWRES") and a PWRES/George Soros sponsored fund has agreed in principal to join the investment. At December 31, 1997, the Company had made investments in or loans to RSI and RSVP aggregating approximately $4.3 million and $7.4 million, respectively.
The market capitalization of the Company, based on the market value of the 44,988,846 issued and outstanding shares of Common Stock and Operating Partnership Units ("Units") (based on a share price of $25.38 as of December 31, 1997) and the $527 million (net of minority partners' 40% interest in debt encumbering the Omni and including the Company's share of joint venture debt) of debt outstanding at December 31, 1997, was approximately $1.7 billion. As a result, the Company's total debt to market capitalization ratio at December 31, 1997 equaled 31.6%.
Results of Operations
For discussion purposes, the results of operations for the year ended December 31, 1995 combine the operating results of the Predecessor (excluding results of properties not transferred to the Company) for the period January 1, 1995 to June 2, 1995.
The Company's total revenues increased by $57.3 million or 60% from 1996 to 1997 and $36.8 million or 62% from 1995 to 1996. The growth in total revenues is substantially attributable to the Company's acquisition of 46 properties comprising approximately 4.9 million square feet in 1997 and 29 properties comprising approximately 3.3 million square feet in 1996 and nine properties comprising approximately 900,000 square feet in 1995. Property operating revenues, which include base rents and tenant escalations and reimbursements ("Property Operating Revenues") increased by $51 million or 55% from 1996 to 1997 and by $35.6 million or 62% from 1995 to 1996. The 1997 increase in Property Operating Revenues is comprised of $2.1 million attributable to increases in rental rates and changes in occupancies and $48.9 million attributable to acquisitions of properties. The 1996 increase in Property Operating Revenues is comprised of $6.6 million attributable to increases in rental rates and changes in occupancies and $29 million attributable to acquisitions of properties. The remaining balance of the increase in total revenues in 1997 is primarily attributable to interest income on the Company's investments in mortgage notes and notes receivable. The increase from 1996 to 1997 was offset by a decrease in the equity in earnings of service companies as a result of the management and construction companies focusing most of their resources on the Company's core portfolio and redevelopment opportunities rather than third party services. The Company's base rent was increased by the impact of the straight-line rent adjustment by $4.5 million in 1997, $3.8 million in 1996 and $2.8 million in 1995.
Property operating expenses, real estate taxes and ground rents ("Property Expenses") increased by $16.8 million from 1996 to 1997 and by $12.9 million from 1995 to 1996. These increases are primarily due to the acquisition of properties. Gross operating margins (defined as Property Operating Revenues less Property Expenses, taken as a percentage of Property Operating Revenues) for 1997, 1996 and 1995 were 64.7%, 63.4% and 63.2%, respectively. The increases in gross operating margins reflects increases realized in rental rates, the Company's ability to realize certain operating efficiencies as a result of operating a larger portfolio of properties with concentrations of properties in office and industrial parks or in its established sub-markets, and to a lesser extent increased ownership of net leased properties.
Marketing, general and administrative expenses were $8.3 million in 1997, $5.9 million in 1996 and $3.7 million in 1995. The increase in marketing, general and administrative expenses is due to the increased costs of managing the acquisition properties, the cost of opening and maintaining the Company's Westchester, Southern Connecticut and Northern New Jersey divisions and the increase in corporate management and administrative costs associated with the growth of the Company. Marketing, general and administrative expenses as a percentage of total revenues were 5.4% in 1997, 6.1% in 1996 and 6.3% in 1995.
Interest expense was $21.6 million in 1997, $13.3 million in 1996 and $12.9 million in 1995. The increase of $8.3 million from 1996 to 1997 is attributable to an increase in mortgage debt including a $50 million mortgage note incurred in connection with the acquisition of Landmark Square in October 1996, the refinancing of Omni in the amount of $58 million in August 1997, increased interest cost attributable to an increased average balance on the Company's credit facilities and interest on the Company's $150 million of senior unsecured notes (the "Senior Unsecured Notes"). The weighted average balance outstanding on the Company's credit facilities was $103.2 million for 1997, $71.2 million for 1996 and $24.8 million for the period from June 3, 1995 to December 31, 1995.
Included in amortization expense is amortized finance costs of $.80 million in 1997, $.53 million in 1996 and $.52 million for the period June 3, 1995 to December 31, 1995. The increase of $.27 million from 1996 to 1997 was the result of the amortization of financing costs associated with the Unsecured Credit Facility, the Landmark Square mortgage, the Omni refinanced mortgage and the Senior Unsecured Notes.
Extraordinary items, net of minority interest resulted in a $2.2 million loss in 1997, a $.9 million loss in 1996 and a $4.2 million loss for the period June 3, 1995 to December 31, 1995. In 1997, the extraordinary items, net of minority interest, was attributable to the write off of certain deferred loan costs incurred in connection with the Company's secured credit facility which was terminated in April 1997. In 1996, the extraordinary item, net of minority interest, was attributable to the write-off of certain deferred loan costs incurred in connection with the secured credit facility which was substantially modified and restated in February 1996.
Liquidity and Capital Resources
Summary of Cash Flows
Net cash provided by operating activities totaled $70.6 million in 1997, $39.4 million in 1996 and $18.6 million in 1995. Increases for each year were primarily attributable to the growth in cash flow provided by the acquisition of properties and to a lesser extent from interest income from mortgage notes and notes receivable.
Net cash used by investing activities totaled $547 million in 1997, $273.7 million in 1996 and $79.0 million in 1995. Cash used in investing activities related primarily to investments in real estate properties including development costs and investments in mortgage notes and notes receivable.
Net cash provided by financing activities totaled $485.4 million in 1997, $240 million in 1996 and $63.2 million in 1995. Cash provided by financing activities during 1997 and 1996 was primarily attributable to proceeds from public stock offerings and draws on the Company's credit facilities and additionally in 1997 proceeds from the issuance of Senior Unsecured Notes.
Investing Activities
During 1997, the Company acquired (i) on Long Island, five office properties encompassing an aggregate of approximately 881,000 square feet for approximately $87.5 million and 15 industrial properties encompassing approximately 968,000 square feet for approximately $43.5 million; (ii) in Westchester, eight office properties encompassing approximately 830,000 square feet for approximately $109.4 million and three industrial properties encompassing approximately 163,000 square feet for approximately $8.0 million; (iii) in Connecticut, one industrial property encompassing 452,000 square feet for approximately $27.0 million and (iv) in Northern New Jersey, five Class A office properties including Executive Hill Office Park encompassing approximately 496,000 square feet for approximately $56.9 million. Additionally, in New Jersey the Company acquired eight office properties encompassing approximately 1.5 million square feet for $153 million and one industrial property encompassing approximately 128,000 square feet for $2.8 million. During 1997, the Company invested $29 million in mortgage notes receivable encumbering one Class A office property, one industrial property and a 400 acre parcel of land. In addition, on March 13, 1997, the Company loaned $17 million to its minority partner in Omni, its flagship Long Island office property, and effectively increased its economic interest in the property owning partnership.
Financing Activities
On January 7, 1997, the Operating Partnership issued 101,902 (pre split) Units in connection with the acquisition of 110 Bi-County Boulevard, a 147,281 square foot office property located in Farmingdale, New York.
On March 12, 1997, the Company completed a public stock offering and sold 4,945,000 common shares at a price of $45.25 (pre-split) (including 645,000 common shares related to the exercise of the underwriters over allotment option). Net proceeds to the Company were approximately $212 million. The net proceeds of the offering were used to acquire properties and to repay credit facility borrowings.
On April 30, 1997, the Company repaid and replaced borrowings under its existing $150 million secured credit facility with proceeds from the $250 million unsecured credit facility.
During August 1997, the Company refinanced approximately $43 million of mortgage debt on its Omni office property with a $58 million fixed rate mortgage loan. The loan which matures on September 1, 2007 has a fixed rate of interest of 7.72%.
On August 28, 1997, the Company sold $150 million of 7.2% Senior Unsecured Notes due August 2007. The net proceeds of the Senior Unsecured Notes were used to repay borrowings under the unsecured credit facility and for acquisitions of properties.
On December 5, 1997, the Company completed a public stock offering and sold 3,081,177 common shares at a price of $26 per share. Net proceeds from the offering were approximately $79.7 million. Net proceeds from the offering were used to acquire properties and to repay borrowings under the unsecured credit facility.
During 1997, the Company paid dividends of $1.54 per share (representing dividends for five quarters).
On February 18, 1998, the Company completed a public stock offering and sold 791,152 common shares at a price of $25.44 per share. Net proceeds from the offering were approximately $19.1 million and were used to fund acquisitions of properties and repay borrowings under the unsecured credit facilities.
Capitalization
The Company's indebtedness at December 31, 1997 totaled $527 million (net of the minority partners' 40% interest in Omni's debt and including the Company's share of joint venture debt of approximately $13 million) and was comprised of $210.3 million outstanding under the Unsecured Credit Facility, $150 million of Senior Unsecured Notes and $167 million of mortgage indebtedness with an average interest rate of approximately 7.71% and an average maturity of approximately 7.1 years. Based on the Company's total market capitalization of approximately $1.70 billion at December 31, 1997, (calculated at a $25.38 stock price at December 31, 1997 and assuming the conversion of the 7,218,688 Units and $527 million of debt) the Company's debt represented 31.6% of its total market capitalization.
On April 30, 1997, the Company obtained a three-year $250 million unsecured credit facility from a bank group led by Chase Manhattan Bank and Union Bank of Switzerland (the "Unsecured Credit Facility"). The Company's ability to borrow thereunder is 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 Unsecured Credit Facility 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 Unsecured Credit Facility replaced the Company's $150 million secured credit facility. The Company utilizes the Unsecured Credit Facility primarily to finance the acquisitions of properties and other real estate investments, fund its development activities and for working capital purposes. At December 31, 1997, the Company had availability under the Unsecured Credit Facility to borrow an additional $35.75 million (net of $4.0 million of outstanding undrawn letters of credit).
On January 2, 1998, the Company obtained a $200 million unsecured credit facility (the "Bridge Facility") which matures on April 1, 1998. The Bridge Facility was provided by the two lead members of the Unsecured Credit Facility bank group and serves as interim financing while the Company seeks to expand the availability under the Unsecured Credit Facility.
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 Unsecured 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 Unsecured Credit Facility at maturity or retire such debt through the issuance of additional debt securities or additional equity securities. The Company anticipates that the current balance of cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and equity offerings, will be adequate to meet the capital and liquidity requirements of the Company in both the short and long-term.
In connection with the acquisition of Landmark Square, the Company plans to incur approximately $12 million of capital improvements to refit the building to portfolio standards. At December 31, 1997, approximately $3.7 million 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
Certain office leases provide for fixed base rent increases or indexed escalations. In addition, certain office leases provide for separate escalations of real estate taxes and electric costs over a base amount. The industrial leases also generally provide for fixed base rent increases, direct pass through of certain operating expenses and separate real estate tax escalation over a base amount. The Company believes that inflationary increases in expenses will generally be offset by contractual rent increases and expense escalations described above.
The Unsecured Credit Facility bears interest at a variable rate, which will be influenced by changes in short-term interest rates, and is sensitive to inflation.
Impact of Year 2000
Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, or engage in similar normal business activities.
The Company has completed as assessment to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Currently, the entire property management system is year 2000 compliant and has been thoroughly tested. Since the Company's accounting software is maintained and supported by a third party, the total year 2000 project cost is estimated to be minimal.
The project is estimated to be completed not later than September 30, 1998, which is prior to any anticipated impact on its operating systems. Additionally, the Company has received assurances from its contractors that all of the Company's building management and mechanical systems are currently year 2000 compliant or will be made compliant prior to any impact on those systems. The Company believes that with modifications to existing software and conversions to new software, the year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the year 2000 Issue could have a material impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will complete the year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and costs of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties.
Funds From Operations
Management believes that funds from operations ("FFO") is an appropriate measure of performance of an equity REIT. FFO is defined by the National Association of Real Estate Investment Trusts (NAREIT) as net income or loss, excluding gains or losses from debt restructurings and sales of properties, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. (See Selected Financial Data). In March 1995, NAREIT issued a "White Paper" analysis to address certain interpretive issues under its definition of FFO. The White Paper provides that amortization of deferred financing costs and depreciation of non-rental real estate assets are no longer to be added back to net income to arrive ad FFO.
Since all companies and analysts do not calculate FFO in a similar fashion, the Company's calculation of FFO presented herein may not be comparable to similarly titled measures as reported by other companies.
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 1998 annual meeting of stockholders is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information contained in the section captioned "Executive Compensation" of the Company's definitive proxy statement for the 1998 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 1998 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 1998 annual meeting of the stockholders is incorporated herein by reference.
Part IV
Item 14.
Item 14. Financial Statements and Schedules, Exhibits and Reports on Form 8-K
(a)(1 and 2) Financial Statements and Schedules
The following consolidated financial information is included as a separate section of this annual report on Form 10-K:
Reckson Associates Realty Corp. and the Reckson Group
Report of Independent Auditors ..............................................
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996....
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and for the period from June 3, 1995 to December 31, 1995 and the Combined Statement of Income for the period January 1, 1995 to June 2, 1995...........
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and for the period from June 3, 1995 to December 31, 1995 and the Combined Statement of Owners' (Deficit) for the period from January 1, 1995 to June 2, 1995.........................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and for the period from June 3, 1995 to December 31, 1995 and the Combined Statement of Cash Flows for the period January 1, 1995 to June 2, 1995.........................................................................
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) 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 Third Amended and Restated Agreement of Limited Partnership of Omni Partners, L.P. 10.3** Employment and Non-Competition Agreement between Registrant and Donald Rechler 10.4** Employment and Non-Competition Agreement between Registrant and Scott Rechler 10.5** Employment and Non-Competition Agreement between Registrant and Mitchell Rechler 10.6** Employment and Non-Competition Agreement between Registrant and Gregg Rechler 10.7** Non-Competition Agreement between Registrant and Roger Rechler 10.8** Employment and Non-Competition Agreement between Registrant and J. Michael Maturo 10.9** Purchase Option Agreements relating to the Reckson Option Properties 10.10** Purchase Option Agreements relating to the Other Option Properties 10.11*** Amended 1995 Stock Option Plan 10.12**** Registrant's Unsecured Credit Facility 10.13*** 1996 Employee Stock Option Plan 10.14** Executive Center Leases 10.15* Ground Leases for certain of the Properties 10.16** Amended and Restated Agreement of Limited Partnership of Reckson FS Limited Partnership 10.17** Indemnity Agreement relating to 100 Oser Avenue 10.18** 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 10.19 Amended and Restated 1997 Stock Option Plan 10.20 1998 Stock Option Plan 10.21 Amended and Restated Agreement of Limited Partnership of Reckson Morris Operating Partnership, L.P. 10.22 Registrant's Unsecured Bridge Facility 10.23 Note Purchase Agreement for the Senior Unsecured Notes 10.24 Severance Agreement between Registrant and Donald Rechler 10.25 Severance Agreement between Registrant and Scott Rechler 10.26 Severance Agreement between Registrant and Mitchell Rechler 10.27 Severance Agreement between Registrant and Gregg Rechler 10.28 Severance Agreement between Registrant and Roger Rechler 10.29 Severance Agreement between Registrant and J. Michael Maturo 12.1 Statement of Ratios of Earnings to Fixed Charges 21.1 Statement of Subsidiaries 23.0 Consent of Independent Auditors 24.1 Powers of Attorney (included in Part IV of this Form 10-K) 27.0 Financial Data Schedule 27.1 Restated Financial Data Schedule for the 6 months ended June 30, 1996 reflecting the effect of FASB #128, Earnings Per Share. 27.2 Restated Financial Data Schedule for the 9 months ended September 30, 1996 reflecting the effect of FASB #128, Earnings Per Share. 27.3 Restated Financial Data Schedule for the year ended December 31, 1996 reflecting the effect of FASB #128, Earnings Per Share. 27.4 Restated Financial Data Schedule for the 3 months ended March 31, 1997 reflecting the effect of FASB #128, Earnings Per Share. 27.5 Restated Financial Data Schedule for the 6 months ended June 30, 1997 reflecting the effect of FASB #128, Earnings Per Share. 27.6 Restated Financial Data Schedule for the 9 months ended September 30, 1997 reflecting the effect of FASB #128, Earnings Per Share.
* 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 Registration Statement on Form S-11 (No. 333-1280) and incorporated herein by reference. *** Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on November 25, 1996 and incorporated herein by reference. **** Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on May 15, 1997 and incorporated herein by reference.
(b) Reports on Form 8-K
On September 9, 1997 the Company filed a report on Form 8-K relating to the acquisition of 400 Garden City Plaza, Garden City, New York.
On October 21, 1997, the Company filed a report on Form 8-K announcing its contract to invest $150,000,000 and acquire a controlling interest in the Morris Companies.
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 24, 1998.
Reckson Associates Realty Corp.
By: /s/ Donald J. Rechler (Donald J. Rechler) Chairman of the Board, 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, Chief Executive - ------------------------ Officer and Director (principal executive (Donald J. Rechler) officer) March 24, 1998
/s/ Scott Rechler President Chief Operating Officer - ------------------------ and Director (Scott Rechler) March 24, 1998
/s/ Roger M. Rechler Vice Chairman of the Board and - ------------------------ Director (Roger M. Rechler) March 24, 1998
/s/ J. Michael Maturo Executive Vice President, Treasurer - ------------------------ and Chief Financial Officer (principal (J. Michael Maturo) financial officer and principal March 24, 1998 accounting officer)
/s/ Mitchell D. Rechler Executive Vice President and - ------------------------ Director (Mitchell D. Rechler) March 24, 1998
/s/ Harvey R. Blau Director - ------------------------ (Harvey R. Blau) March 24, 1998
/s/ Leonard Feinstein Director - ------------------------ (Leonard Feinstein) March 24, 1998
/s/ John V.N. Klein Director - ------------------------ (John V.N. Klein) March 24, 1998
/s/ Conrad Stephenson Director - ------------------------ (Conrad Stephenson) March 24, 1998
/s/ Herve A. Kevenides Director - ------------------------ (Herve A. Kevenides) March 24, 1998
/s/ Jon L. Halpern Director - ------------------------ (Jon L. Halpern) March 24, 1998
/s/ Lewis S. Ranieri Director - ------------------------ (Lewis S. Ranieri) March 24, 1998
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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended and for the period from June 3, 1995 (commencement of operations) to December 31, 1995 and the related combined statements of income, owners' (deficit) and cash flows for the period January 1, 1995 to June 2, 1995 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, 1997 and 1996, and the consolidated results of operations and cash flows for the years then ended and for the period June 3, 1995 (commencement of operations) to December 31, 1995 and the combined results of operations and cash flows for the period January 1, 1995 to June 2, 1995 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 set forth therein.
ERNST & YOUNG LLP
New York, New York February 13, 1998, except for Note 14 as to which the date is February 18, 1998.
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 pre split)of $.01 par value common stock ("the Offering"). The Offering price was $24.25 per share (pre split) resulting in gross proceeds of $148,410,000. The Company also issued 400,000 shares (pre split) 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 (pre split) 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 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 (pre split) 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.
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., Reckson Service Industries, 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, 1997 represent approximately a 16% 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 offerings of common stock 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 1997, the Company paid dividends of $1.54 per share (representing dividends for five quarters) of which approximately 72% was considered ordinary income and 28% was a return of capital for federal income tax purposes. During 1996, the Company paid dividends of $.89 per share (split adjusted and representing dividends for three quarters) all of which was ordinary income 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 and notes receivable on an accrual basis of accounting. The Company does not accrue interest on impaired loans where, in the judgment of management, collection of interest according to the contractual terms is considered doubtful. Among the factors the Company considers in making an evaluation of the collectibility of interest are, the status of the loan, the value of the underlying collateral, the financial condition of the borrower and anticipated future events. Loan discounts are amortized over the life of the real estate using the constant interest method.
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 6).
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. The conversion of Units into common stock (Note 6) 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, 1997, there are thirteen mortgage notes payable with an aggregate outstanding principal amount of approximately $180 million. Properties with an aggregate carrying value at December 31, 1997 of approximately $225 million are pledged as collateral against the mortgage notes payable. In addition, $59.2 million of the $180 million are recourse to the Company. The mortgage notes bear interest at rates ranging from 6.82% to 9.25%, and mature between 1999 and 2012. The weighted average interest rate on the outstanding mortgage notes payable at December 31, 1997 is 7.71%. Certain of the mortgage notes payable are guaranteed by certain minority partners in the Operating Partnership.
Scheduled principal repayments during the next five years and thereafter are as follows (in thousands):
Year Ended December 31,
1998 $ 2,327 1999 2,368 2000 33,788 2001 2,336 2002 26,978 Thereafter 112,226 --------------- $ 180,023 ===============
3. Credit Facilities
On April 30, 1997, the Company obtained a three-year $250 million unsecured credit facility from a bank group led by Chase Manhattan Bank and Union Bank of Switzerland (the "Unsecured Credit Facility"). The Company's ability to borrow thereunder is 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 Unsecured Credit Facility 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 Unsecured Credit Facility replaced the Company's existing $150 million secured credit facility. As a result, certain deferred loan costs incurred in connection with the secured credit facility were written off. Such amount is reflected as an extraordinary loss in the accompanying consolidated statement of income.
The Company capitalized interest incurred on credit facility borrowings to fund certain development costs in the amount of $2,351,201 and $800,434 for the years ended December 31, 1997 and 1996, respectively.
On January 2, 1998, the Company obtained a $200 million unsecured credit facility (the "Bridge Facility") which matures on April 1, 1998. The Bridge Facility was provided by the two lead members of the Unsecured Credit Facility bank group and serves as interim financing while the Company seeks to expand the availability under the Unsecured Credit Facility.
4. Senior Unsecured Notes
On August 28, 1997, the Company sold $150 million of 10-year senior unsecured notes in a privately placed transaction. The senior unsecured notes were priced at par with interest at 110 basis points over the 10- year treasury note for an all in coupon of 7.2%. Interest is payable semiannually with principal and unpaid interest due on August 28, 2007.
5. Land Leases
The Company leases, pursuant to noncancellable operating leases, the land on which seven 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 $1,948,000 and $1,676,000 at December 31, 1997 and 1996, 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, 1997 are as follows (in thousands):
1998 $ $1,093 1999 1,202 2000 1,203 2001 1,212 2002 1,212 Thereafter 42,114 ------------- $ 48,036 =============
6. 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.
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.
On March 12, 1997, the Company sold 9,890,000 shares (split adjusted) of the Company's common stock at $22.63 per share (split adjusted) for an aggregate consideration of approximately $224 million before deducting offering costs.
On December 5, 1997, the Company sold 3,081,177 shares of the Company's common stock at $26.00 per share for an aggregate consideration of approximately $80.1 million before deducting offering costs.
The Company has established the 1995, 1996 and 1997 Employee Stock Option Plans (the "Plans") for the purpose of attracting and retaining executive officers, directors and other key employees. As of December 31, 1997, 1,500,000, 400,000 and 3,000,000 of the Company's authorized shares have been reserved for issuance under the 1995, 1996 and 1997 plans, respectively.
Options granted to new employees vest in three equal installments on the first, second and third anniversaries of the date of the grant. Options granted to existing employees are generally exercisable on the date of the grant.
In addition, the independent directors of the Company have been granted options to purchase 45,000 shares pursuant to the 1995 Employee Stock Option Plan at exercise prices ranging from $12.13 to $22.50 per share (split adjusted) and options to purchase 3,000 shares pursuant to the 1997 Employee Stock Option Plan at an exercise price of $25.31 per share. The options granted to the independent directors were exercisable on the date of the grant.
The Company has made loans to certain executive officers to purchase 310,834 shares of common stock at market prices ranging from $22.50 per share to $27.13 per share. The loans bear interest at the mid-term Applicable Federal Rate and are secured by the shares purchased. Such loans including accrued interest will be forgiven each year on the annual anniversary of the grant date based upon a ten year amortization period with a balloon payment due on the fifth anniversary. As of December 31, 1997, the loan balances aggregated approximately $7,860,000 and have been included as a reduction of additional paid in capital on the accompanying consolidated balance sheets.
During 1997 and 1996, 140,406 and 13,977, respectively of employee options were exercised resulting in proceeds to the Company of approximately $1,888,000 and $338,000, respectively.
During 1998, the Company established the 1998 Employee Stock Option Plan which reserves 3,000,000 shares of the Company's authorized shares for issuance under this plan. On January 9, 1998, 1,415,965 options were granted at an exercise price of $25.75 per share.
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 1997, 1996 and 1995; respectively: risk-free interest rate of 5%; dividend yields of 4.7%, 7.57% and 10.22%; volatility factors of the expected market price of the Company's common stock of .142, 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.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
A summary of the Company's stock option activity, and related information follows:
The weighted average fair value of options granted for the period June 2, 1995 to December 31, 1995, for the years ended December 31, 1996 and 1997 was $.25, $.86 and $1.47, respectively. In addition, there were 30,000 options at a weighted average per share exercise price of $12.13, 403,564 options at a weighted average per share exercise price of $13.95 and 1,758,534 options at a weighted average per share exercise price of $20.16 exercisable at December 31, 1995, 1996 and 1997, respectively.
Exercise prices for options outstanding as of December 31, 1997 ranged from $12.13 per share to $27.13 per share. The weighted-average remaining contractual life of those options is approximately 8.81 years.
The Company made loans to certain senior officers to purchase units at market prices ranging from $12.13 per unit to $21.94 per unit. The loans bear interest at rates ranging between 8% to 8.5% and are secured by the units purchased. Such loans will be forgiven ratably at each anniversary of employment over a four to five year period. The loan balances of $325,500 and $250,000 at December 31, 1997 and 1996, respectively have been included as a reduction of additional paid in capital on the accompanying consolidated balance sheets.
The following is the Company's reconciliation of the numerators and denominators of the basic and diluted net income per weighted average common share computations and other related disclosures required by FAS Statement 128 (in thousands except share amounts).
7. Related Party Transactions
The Company, through its subsidiaries and affiliates, provides management, leasing and other tenant related services to the Properties. Certain executive officers of the Company have continuing ownership interests in the unconsolidated service companies.
In connection with the IPO, the Company was granted options, exercisable over a 10 year period to acquire six properties owned by the Predecessor (the "Reckson Option Properties") and four properties in which the Predecessor 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 divided 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 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 271,228 Units at prices ranging from $16.38 per unit to $18.50 per unit (split adjusted) as partial consideration in the transactions. Such Units were issued to certain members of management and entities whose partners included members of management.
During 1997, the Company acquired one of the Reckson Option Properties for a purchase price of approximately $9 million. In connection with the purchase, the Company issued 203,804 Units at a price of $21 per unit (split adjusted) as partial consideration in the transaction. Such Units were issued to certain members of management and entities whose partners include members of management.
The Company made construction loan advances to fund certain redevelopment and leasing costs relating to one of the Other Option Properties. At December 31, 1997 and 1996, advances due the Company were approximately $4,200,000 and $2,940,000, respectively. Such amounts bear interest at the rate of 11% per annum and are due on demand. In January 1998, the outstanding advances including accrued and unpaid interest was repaid in full.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI") and Reckson Strategic Venture Partners, LLC ("RSVP"). The Operating Partnership owns a 95% nonvoting interest in RSI. RSI will serve as the managing member of RSVP. RSI will invest in operating companies that generally will provide commercial services to properties owned by the Company and its tenants and third parties. RSVP was formed to provide the Company with a "research and development" vehicle to invest in alternative real estate sectors. RSVP will invest primarily in real estate and real estate related operating companies generally outside of the Company's core office and industrial focus. RSVP's strategy is to identify and acquire interests in established entrepreneurial enterprises with experienced management teams in market sectors which are in the early stages of their growth cycle or offer unique circumstances for attractive investments as well as a platform for future growth. The Company will determine the prudence of increasing its investment and the potential for incorporating it as a core business. At December 31, 1997, the Operating Partnership had made investments in or loans to RSI and RSVP aggregating approximately $4.3 million and $7.4 million, respectively in connection with start up costs and certain initial investments. Such amounts have been included in other assets on the accompanying balance sheet.
8. Commercial Real Estate Investments
During the period from June 3, 1995 to December 31, 1996 the Company acquired 22 office properties encompassing approximately 2.8 million square feet and 16 industrial properties encompassing approximately 1.4 million square feet for an aggregate purchase price of approximately $273 million.
During 1997, the Company acquired five office properties encompassing approximately 881,000 square feet and 15 industrial properties encompassing approximately 968,000 square feet on Long Island for an aggregate purchase price of approximately $131 million.
During 1997, the Company acquired eight office properties encompassing approximately 830,000 square feet and three industrial properties encompassing approximately 163,000 square feet in Westchester for an aggregate purchase price of approximately $117 million. In addition, the Company acquired approximately 32 acres of land located in Westchester for a purchase price of approximately $8 million.
During 1997, the Company acquired one industrial property encompassing approximately 452,000 square feet in Connecticut for a purchase price of approximately $27 million.
During 1997, the Company acquired 13 office properties encompassing approximately 1.5 million square feet and one industrial property encompassing approximately 128,000 square feet in New Jersey for an aggregate purchase price of approximately $156 million. In addition, the Company acquired approximately 303 acres of land located in New Jersey for an aggregate purchase price of approximately $16.2 million.
In October 1997, the Company entered into an agreement to invest $150 million in the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse facilities. The Morris Companies' properties include twenty three industrial buildings encompassing approximately 4.0 million square feet. The Company's investment will be used to acquire a controlling interest in Reckson Morris Operating Partnership, L.P. ("RMI"). In connection with the transaction the Morris Companies will contribute 100% of their interests in certain industrial properties to RMI in exchange for operating partnership units in RMI. On January 6, 1998, the Company made its initial investment into RMI of approximately $65 million. In addition, at December 31, 1997, the Company had advanced approximately $12 million to the Morris Companies primarily to fund certain construction costs related to development properties to be contributed to RMI.
In October 1997, the Company sold 671 Old Willets Path in Hauppauge, New York for approximately $725,000 and recorded a gain on the sale of $672,000.
In addition, the Company has invested approximately $72.5 million in certain mortgage indebtedness encumbering five Class A office buildings located on Long Island encompassing approximately 927,000 square feet, a 400 acre parcel of land located in New Jersey and, a 586,000 square foot industrial property in New Jersey. In addition, on March 13, 1997 the Company loaned approximately $17 million to its minority partner in Omni, its flagship Long Island office property, and effectively increased its economic interest in the property owning partnership.
9. Fair Value of Financial Instruments
The following disclosures of estimated fair value at December 31, 1997 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.
10. Rental Income
The Properties are being leased to tenants under operating leases. The minimum rental amount due under certain leases are generally either subject to scheduled fixed increases or indexed escalations. In addition, the leases generally also require that the tenants reimburse the Company for increases in certain operating costs and real estate taxes above base year costs.
Included in base rents and tenant escalations and reimbursements in the accompanying statements of operations are amounts from Reckson Executive Centers, LLC, an equity investee, as follows (in thousands): Tenant Escalations and For the Periods Base Rents Reimbursements --------------- --------------- Year ended December 31, 1997 $ 2,154 $ 441 Year ended December 31, 1996 $ 1,898 $ 417 June 3, 1995 to December 31, 1995 $ 1,095 $ 100 January 1, 1995 to June 2, 1995 $ 675 $ 48
Expected future minimum rents to be received over the next five years and thereafter from leases in effect at December 31, 1997 are as follows (in thousands):
Reckson Executive Centers, LLC Other Tenants Total -------------- -------------- -------------- 1998 $ 2,561 $ 156,909 $ 159,470 1999 2,634 147,473 150,107 2000 1,549 133,814 135,363 2001 787 109,767 110,554 2002 820 94,112 94,932 Thereafter 3,814 206,336 210,150 -------------- -------------- -------------- $ 12,165 $ 848,411 $ 860,576 ============== ============== ==============
11. Non-Cash Investing and Financing Activities
Additional supplemental disclosures of non-cash investing and financing activities are as follows (in thousands):
(1) During 1996, the Company purchased eight office properties located in Westchester County and associated management and construction operations as follows:
Cash Paid $58,533 Issuance of 677,534 Units (1) 9,527 Purchase price holdback 1,700 Mortgage assumed 9,366 -------------- Total purchase price $79,126 ==============
(2) During 1996, the Company acquired three of the Reckson Option Properties as follows:
Debt assumed and repaid $21,750 Issuance of 271,228 Units (1) 4,516 -------------- Total purchase price $26,266 ==============
(3) In January 1997, the Company acquired one of the Reckson Option Properties as follows:
Mortgage assumed $4,667 Issuance of 203,804 Units (1) 4,280 Cash paid 61 -------------- Total purchase price $9,008 ==============
(4) In November 1997, the Company purchased a 181,000 square foot industrial building located in Hauppauge, New York as follows:
Mortgage assumed and repaid $3,037 Issuance of 62,905 Units 1,578 Cash paid 10 -------------- Total purchase price $4,625 ==============
(5) In December 1997, the Company purchased a 92,000 square foot industrial building located in Elmsford, New York as follows:
Issuance of 183,469 Units $4,700 ---- (1) Split adjusted
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 1997 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.
At December 31, 1997, the Company had outstanding undrawn letters of credit against the Unsecured Credit Facility of approximately $4 million.
13. Quarterly Financial Data (Unaudited)
The following summary represents the Company's results of operations for each quarter during 1997 and 1996 (in thousands, except share amounts):
14. Subsequent Events
On February 18, 1998 the Company sold 791,152 shares of the Company's common stock at $25.44 per share for an aggregate consideration of approximately $20.1 million before deducting offering expenses. Net proceeds were used to repay borrowings under the Unsecured Credit Facility and for property acquisitions.
The aggregate cost for Federal Income Tax purposes was approximately $932.4 million at December 31, 1997.
The changes in accumulated depreciation, exclusive of amounts relating to equipment, autos, furniture and fixtures, fo of the periods in the three years ended December 31, 1997 are as follows:
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 Third Amended and Restated Agreement of Limited Partnership of Omni Partners, L.P. 10.3** Employment and Non-Competition Agreement between Registrant and Donald Rechler 10.4** Employment and Non-Competition Agreement between Registrant and Scott Rechler 10.5** Employment and Non-Competition Agreement between Registrant and Mitchell Rechler 10.6** Employment and Non-Competition Agreement between Registrant and Gregg Rechler 10.7** Non-Competition Agreement between Registrant and Roger Rechler 10.8** Employment and Non-Competition Agreement between Registrant and J. Michael Maturo 10.9** Purchase Option Agreements relating to the Reckson Option Properties 10.10** Purchase Option Agreements relating to the Other Option Properties 10.11*** Amended 1995 Stock Option Plan 10.12**** Registrant's Unsecured Credit Facility 10.13*** 1996 Employee Stock Option Plan 10.14** Executive Center Leases 10.15* Ground Leases for certain of the Properties 10.16** Amended and Restated Agreement of Limited Partnership of Reckson FS Limited Partnership 10.17** Indemnity Agreement relating to 100 Oser Avenue 10.18** 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 10.19 Amended and Restated 1997 Stock Option Plan 10.20 1998 Stock Option Plan 10.21 Amended and Restated Agreement of Limited Partnership of Reckson Morris Operating Partnership, L.P. 10.22 Registrant's Unsecured Bridge Facility 10.23 Note Purchase Agreement for the Senior Unsecured Notes 10.24 Severance Agreement between Registrant and Donald Rechler 10.25 Severance Agreement between Registrant and Scott Rechler 10.26 Severance Agreement between Registrant and Mitchell Rechler 10.27 Severance Agreement between Registrant and Gregg Rechler 10.28 Severance Agreement between Registrant and Roger Rechler 10.29 Severance Agreement between Registrant and J. Michael Maturo 12.1 Statement of Ratios of Earnings to Fixed Charges 21.1 Statement of Subsidiaries 23.0 Consent of Independent Auditors 24.1 Powers of Attorney (included in Part IV of this Form 10-K) 27.0 Financial Data Schedule 27.1 Restated Financial Data Schedule for the 6 months ended June 30, 1996 reflecting the effect of FASB #128, Earnings Per Share. 27.2 Restated Financial Data Schedule for the 9 months ended September 30, 1996 reflecting the effect of FASB #128, Earnings Per Share. 27.3 Restated Financial Data Schedule for the year ended December 31, 1996 reflecting the effect of FASB #128, Earnings Per Share. 27.4 Restated Financial Data Schedule for the 3 months ended March 31, 1997 reflecting the effect of FASB #128, Earnings Per Share. 27.5 Restated Financial Data Schedule for the 6 months ended June 30, 1997 reflecting the effect of FASB #128, Earnings Per Share. 27.6 Restated Financial Data Schedule for the 9 months ended September 30, 1997 reflecting the effect of FASB #128, Earnings Per Share.
* 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 Registration Statement on Form S-11 (No. 333-1280) and incorporated herein by reference. *** Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on November 25, 1996 and incorporated herein by reference. **** Previously filed as an exhibit to the Company's Form 8-K report filed with the SEC on May 15, 1997 and incorporated herein by reference.
Exhibit 21.1
Reckson Associates Realty Corp. Statement of Subsidiaries
Name State of Organization - ------------------------------ ----------------------------- Reckson Operating Partnership, L.P. Maryland Omni Partners, L.P. Delaware Reckson FS Limited Parntership Delaware Reckson Morris Industrial Trust Maryland
Exhibit 23.0
Reckson Associates Realty Corp. Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement Form S-3 No. 333-28015 of Reckson Associates Realty Corp. of our report dated February 14, 1998, except for Note 14, as to which the date is February 18, 1998, with respect to the consolidated financial statements and schedule of Reckson Associates Realty Corp. included in this Annual Report Form 10-K for the year ended December 31, 1997.
Ernst & Young
New York, New York March 23, 1998