$470 Million Sale-Leaseback Deal

Reckson Associates Realty Corporation, a Long Island, N.Y-based REIT, bought a 1.4 million sq. ft. local office tower for roughly $470 million. One Court Square is a 50-story, Class A trophy tower located in Long Island City across the East River from Manhattan.

Financial services giant Citibank, which sold the building to Reckson, will occupy the entire building under a 15-year net lease. Reckson estimates that the property will generate a 6.5% unleveraged cash flow yield while Citibank's net lease is in effect. The Citibank lease contains partial cancellation options effective during the sixth and seventh year of the lease for as much as 20% of the space. Similar cancellation options exist for year nine and ten, according to Reckson.

“Given that the GAAP yield of 6.8% on the acquisition is only slightly higher than the cash yield of 6.5%, this would indicate that the rent paid by Citigroup is fairly flat over the 15-year period. As a result, a 6.5% yield is a low going-in yield for this bond-like asset,” wrote Merrill Lynch REIT analyst Steve Sakwa on May 5. Merrill Lynch has a neutral rating on Reckson, which is trading at 108% of Merrill’s NAV estimate of $29.30.

Reckson expects to close on One Court Square this month. The firm secured a $470 million unsecured bridge loan for the acquisition.

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