奇異 (GE) 2002 Q2 法說會逐字稿

Good afternoon.

My name is

and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Arden Realty second quarter 2002 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remark there will be a question and answer period.

If you would like to ask a question during this time then please press star then the number one on your telephone keypad.

If you would like to withdraw your question press star then the number two.

Thank you.

I would now like to turn the call over to Mr. Swartz, General Counsel.

Sir you may begin.

Thank you good morning.

Everyone should have a copy of the second quarter 2002 earnings release and supplemental information, if not, this information can be obtained from our web site at ardentrealty.com in Investor Information section under Annual and Financial Reports.

Additionally, we are offering a live webcast of today's call, which can be accessed at ardenrealty.com in the Investor Information section under Earnings Conference Call Webcast.

This conference may contain forward-looking statements based on current expectations, forecast, and assumptions and involve risk and uncertainties, which could cause actual outcomes and results to differ materially from our expectations, forecast, and assumptions.

These risks and uncertainties include the National and Southern California economic climate, the effect of recent act of terrorism on our operations and the operations for tenants.

Southern California real estate conditions, perceptions of prospective tenants of the attractiveness of our properties, our ability to manage and maintain our properties and secure adequate insurance, potential increases in operating cost including real estate taxes and utilities, changes in applicable loss including tax loss and interest rate levels and available financing.

For further listing description such risks and uncertainties see the reports we filed with the Securities and Exchange Commission.

We disclaim any intentions or obligations to update or

any forward-looking statements whether as a result of new information future events or otherwise.

I will now to turn the call over to Richard Ziman, our Chairman and Chief Executive Officer.

Thank you David.

Welcome everyone to our second quarter 2002 earnings conference call.

With me this morning are Victor Coleman, President and COO who will give you a detailed update of the Southern California office markets and the status of our development program, Rick Davis, Senior Vice President and CFO who will provide a financial and operating overview, Andrew Sobel, Executive Vice President of Strategic Planning and Operations, and Robert Peddicord, Senior Vice President of Property Operations.

Our near term recovery has remained elusive and we continue to operate in the real estate market that reflects the nation's overall economic uncertainty and the spillover effect of the recent stock market activity and accounting scandals.

The anticipated economic rebound hasn't fallen to traditional path and has also been impacted by other unanticipated influences.

All the current environment presented tough and challenging leasing market.

Certain other office markets including some of our own are finally beginning to show some signs of reaching the bottom of negative absorption and a few are even showing some positive absorption.

Todate, however, we have not seen the level of business expansion and job growth to acquire to drive significant office demand and meaningful or sustained positive absorption.

At this time, we see little short-term release from these market pressures.

If you listen to the economic experts that release is not expected to occur until the middle of 2003.

Although we had anticipated better growth in our occupancy, rental rates and a lessening of concessions.

Much of what we are seeing as a continuation of the last three quarters.

Occupancy and rental rates remain under pressure.

Completing new lease transactions is taking longer.

The larger tenants is still has the decision paralysis and our typical tenant base, smaller businesses, continue to delay expansion and renewal decisions.

Some tenants are still under utilizing their existing space and can expand internally before they require additional space.

And as we mentioned in our last call, suddenly space appears to have stabilized but still remains at 2.5-3 percent of the total inventory in southern California.

Our leasing velocity in April, May was on the low end of our expectations and we saw a more significant drop off in June.

Although we have not been directly affected by the business areas and down sizing with some of the larger national companies that has been widely reported, our small-to-medium size tenants are facing the same challenging environment.

Victor will discuss the markets in more detail later during our call.

There is no doubt that our economic condition presents near-term challenges that reflect the lack of economic expansion occurring on national and local fronts.

Fortunately, we have an outstanding team of real estate professionals at every level of the organization that are tackling or leasing operating objectives.

Our mandate from the top down is to maintain our focus on occupancy and renewals deep in our tenant relationships and refine our management practices to continue to rate at groundwork as the market recovers.

And I am glad to know to know we just announcing acquisition news today that demonstrates our continued confidence in this region with our purchase of Gateway towers in the South Bay for approximately 66 million dollars.

Gateway is the premier office project in that market and includes 433,000 square feet of Class A office space that is approximately 93 percent lease together with an additional 5 acre development parcel.

The acquisition of this project brings us to 3 million square feet in the south bay, a strong market and provides Ardent with a strong position as the largest owner of Class A office space.

Victor will comment on the specifics of the transaction that confirm that the Gateway towers is extremely synergistic with our properties in our portfolio and strongly reflects our overall investment strategy.

Due to the recent volatility here in the stock market, which also has affected our stock.

Our board of directors has authorized the stock re-purchase program for up to 72 million dollars of Ardent's common stock.

Based on our current price, we are not contemplating any immediate re-purchases but this program has authorized by our Board to remain in place for one year to take advantage of opportunities for any volatility in our stock would result in superior investment returns.

Regarding stock options, we estimate the full year impact of expensing options in 2002 and 2003 would be between 200 and 300 thousand dollars a year.

We will begin expensing stock options in 2003 and are viewing different valuations that which to calculate the annual expense and we will update you on our methodology at a later date.

Also want to take a moment and address our response into reforms we said

We welcome all measures that ensure a high standard of co-operate governance and responsibility in the public markets.

In fact, we have elected to take the requirements of that act a step further

the not only with Rick Davis, our CFO and I certify all of Ardent's financials from this point on but all of Ardent's named executive team will do so as well.

We hope that this underscores our on-going commitment to complete accuracy, accountability and transparency at every level of our reporting progress.

Looking ahead, we want to reiterate our belief in the long-term stability and strength of the setting California economy and real estate markets.

Our diversified economic phase, excellent access to national and international markets, significant barriers to entry and our road to the low unemployment rate with a well educated work force to provide a solid foundation for future economic growth.

For the rest of 2002, we will proactively the challenges ahead.

While we have maintained higher occupancy levels compared to our markets we are not satisfied and we will continue to focus on stabilizing and improving our portfolio and operating results.

Victor will now provide an update on our markets and development projects.

Thanks Richard.

Let me just clarify one part Richard made, our stock buyback is going to be a total of 75 million not 72 million.

Before we talk about our markets, let me give you a little more color on our recent acquisition.

As Richard mentioned Gateway Towers is a 433,000 square foot Class A asset located on the 190 street of Sub market.

This property is located within 10 minutes of Los Angeles International Airport, with easy access to three major freeways.

The 193 sub market contains 3.6 million square feet of total office space of which 1.4 million feet is Class A space and is part of a 34 million square foot self contained market place.

The primary industry is driving this overall market for automotive with North American headquarters for Nissan, Toyota and Honda, as well as healthcare defense and professional service companies.

New supply on this market is limited with no new project under construction currently at this time.

Gateway Towers currently 93 percent leased with quality tenants including Nissan, C.B Richard Ellis, All State

Trammell Crow and Mellon Bank and has a moderate role over the next 18 months.

With this acquisition we now control virtually all of the Class A office space in a significant position of the class B space in the

market as well.

In additions to the existing volumes this acquisition also has included a five year critical government partial where we can build up to 300,000 sq. feet of office and we have no immediate plans currently at this time of this site, but we are going to start shortly marketing built suites for certain users and see what comes out of it.

In terms of the purchase price net allocations of the development partial, it's a144 dollars a foot, which is well below the replacement cost for this asset.

The first year cash yields are at 9.1 and 9.7 for the second year on a GAAP basis it's a nine four to nine ten in the second year.

One important thing to note is that we were not the high bidder n this transaction but we were selected because the seller has a relationship with us and we have a reputation with them as well and our ability to close quickly was an important factor in this deal.

We're also on a discussion on another acquisition opportunities and we may have some new reports soon, but it is our policy not to discuss the details of the transaction until they close.

The impacted Gateway Towers purchase and any other potential acquisitions are included in our earnings estimate that Rick covered in a few minutes.

Now let me just give you an update on the Southern California markets.

We've seen activity in the status of our development projects.

As mentioned earlier Southern California office markets continued to possess good undergoing real estate fundamentals that are suffering from a lack of general demand due to national and local economies.

Overall during the second quarter there is a minimal positive net absorption in the Southern California markets and we saw continued vacancy increases

impression and increases in tenant concessions.

Before I discuss each market in detail I am going to touch on a few global issues including supply sublease based rents, tenant concession and finally transaction velocity in vacancy.

The information I am going to give you is from various published reports including Market Data from C. B. Richard Elis as well as our own market knowledge.

In today's information all the rent and rates I'm going to discuss is going to be on full service gross basis.

First new office supply completions in Southern California are expected to continue in check, with expected completions for the second half of this year of 4 million feet or less than 1.5 percent of the Southern California total inventory of 311million feet.

Combined with deliveries through the second quarter total new supply in 2002 is estimated at 7.4 million feet or less than 2.5 percent of total inventory.

Available data also shows less new supply scheduled for 2003 with 1.9 million feet or above one half of the 1 percent of the total inventory scheduled for delivery next year.

Including completions in the first half of this year new office constructions in LA County in 2002, is expected between one and half to two percent of a 175 million square foot total inventory base.

Although this is one of the lowest levels of checking supply for any major marketing nation, there will be an additional 3 to 3 and half million square feet of new office space, added to an RE demand from trade market.

In Orange County, new office construction over the last few years has outpaced the demand, mainly in the airport and

County markets.

Contributing to an overall vacancy rate of 15 and half percent at the end second quarter, which is about 2 and half percent higher than the same time last year;

Year-to-date there has been about 1.1 million square feet of new office products added to the inventory in Orange County, with another 600,000 feet of completions expected by year end, was helping in total supply of one and half to 2 percent added in Orange County's 90 million square foot inventory base in 2002.

San Diego added about 150,000 square feet of new office product during the second quarter with a significant amount of that new supply, over 50 percent of that is preleased.

New construction in San Diego is expected to add one and half to 2 million square feet representive of 4 percent of San Diego's 46 million square foot base for the rest of this year.

In terms of sublease space, the total amount of office sublease space available in Southern California decreased slowly, during the second quarter to about two and half percent of the total inventory, with more than half of that amount in the L.A.

County market places.

Although some sublease space is going to absorb the total amount available, has remained fairly constant over the last 69 months, and is being

with difficulty in leasing the space revenue in the new available sublease space entering the market.

Precise in that obviously

vacancies

related to available sublease space, it is hard to determine and overall we have noticed very aggressive pricing in a more recently, a limited tenants in sublease space in most markets, which obviously impacts overall vacancy in the rates in those areas.

I am going cover the impact of sublease space in more detail as I go through the major markets in a few minutes.

In terms of rates and concessions, overall market rental rates were down two or three percent during the second quarter in Southern California compared to 4 to 5 percent decline in rates that we saw in the first quarter.

Larger second quarter rates decline were in South Los Angeles and West Los Angeles markets.

Consistent with the trend over the last 6 to 9 months asking rates declined mainly for larger blocks of space, and within certain some sub markets on a building to building bases depending on pressures from continuing to climb.

Given the current trend's, including expected continuing occupancy pressures and more aggressive pricing for sublease space, we expect market rates will decline in addition of 3 to 5 percent during the rest of this year, which is reflecting in our earnings guidance.

Regarding concessions, our average concession package for new deals was between 16 and 17 dollars a foot and if that shifts up from just over a 16 dollar a foot number, that was in the first quarter, so it is almost flat.

We have also seen limited free rent concessions, and when it does occur, it is primarily for larger deals.

As occupancy pressures continue, we expect concessions to rise in the 4 to 6 percent range throughout the rest of this year.

Finally let me just touch on vacancy and transaction velocity before I get into more detail on the market places.

Overall net absorption in Southern California's major markets was a positive 550,000 square feet during the second quarter compared to a negative of 700,000 square feet in the first.

About 70 percent or 400,000 square feet positive absorption was in Orange County, which was partially offset by a negative absorption of 325,000 square feet in west Los Angeles and the other 130,00 feet in Downtown Los Angeles.

Although we have no properties in Downtown L.A, plus available sublease space in that market was about 17 percent, and the rental rates were slightly down under 22 dollars of foot compared to an average rental rate of 25 to 26 dollars a foot, for all of Los Angeles County market in the second quarter.

Overall, the direct vacancy in Southern California increased 20 basis points to a 13.7 percent.

The direct vacancy for the markets where we had properties increased 30 basis points to 13.6 percent in the second quarter compared to

vacancy of about 10.1 percent.

We're pleased to report that recently we signed a lease for the entire 130,000 square feet that was available in our Carlsbad building in San Diego.

This is a ten-year triple met lease with a tenant scheduled to take occupancy in August.

It is always challenging to back

large office space like this and much tougher in the current Carlsbad environments.

We believe this illustrates the strength of our regional and operating structure and I would like to specifically thank our San Diego regional team for sourcing and closing this transaction.

We really didn't expect to get back the space until the end of this year.

While we are really pleased with this transaction, we continue to see a wide disparity in demand for larger versus smaller blocks of space.

With few exceptions, decision paralysis for larger blocks of space that began in the second half of last year, is seriously continued.

During the second quarter, we signed 375,000 sq. ft in new leases which is about 50000 ft than the first quarter, but, less than we expected and lower than we needed to significantly to drive occupancy up in the third quarter.

Leasing velocity for the quarter broke down as follows: 130,000 sq.ft in April, 170,000 sq.ft in May, And then unfortunately, only 75000 sq.ft in June

Excluding the floors that are leased, that I just mentioned, new velocity recovered somewhat in July, only signed leases for a 100,000 sq ft.

The average size of new leases signed in the second quarter was also consistent with the last 69 months at about 3500 sq ft which is down from our historical average of 5 to 6000 ft per new lease signed.

With all this as a backdrop, I'm going to quickly walk through the Southern California real estate markets through our second quarter statistics for LA, Orange, and San Diego Counties.

Starting San Diego, overall this marketplace has weathered the recent downturn, better than most major markets in the nation.

Direct vacancy increased by 60 basis points to 9.2 percent while sublease space decreased by 150,00 sq.ft just over 3.5 percent of total inventory.

Net absorption was a positive 35000 sq ft compared to a positive 17000 sq ft in the first quarter.

Some of the soft submarkets in San Diego include Surrento Mesa with 13 percent direct vacancy and another 7 percent or 280000 ft. of available sublease space.

University Town Center with 13 percent direct vacancy and another 7 percent which is 300000 sq ft available for the sublease space.

In Carlsbad before the transaction that we signed was 80 percent vacant with another 5 percent or 130,000 ft. of available sublease space.

The bio-tech and life science industries are the truly the main drivers of demand in San Diego with a projected 2.5 m to 3 million ft of space needed in the future.

Overall, market rental rates in this market are flat, an average of 20 to 22 dollars a foot.

Switching over to Orange County, total net absorption was positive 400,000 square feet, and market vacancy decreased by 30 basis points to 15.5 percent with available sublease space decreasing to just under 2 percent of the total inventory.

The highest vacancy in Orange County is still the South County marketplace with just over 19 percent direct vacancy.

The Airport market had a positive net absorption of 300,000 square feet of in the second quarter, but rates still remain relatively flat in this market still, and is still has 16 percent vacancy factor, Vacancies in the Airport and South County markets were heavily influenced by virtually all the 4.5 million square feet of new construction that came on line last year, but overall the rates in Orange County were flat at an average of 24 to 25 dollars a foot.

Finally Los Angeles County, for the county overall total net absorption was 125,000 square feet versus a negative 550,000 square feet in the first quarter.

The overall asking rates were flat in L.A County at 24 to 26 dollars a foot, and direct vacancy increased by 40 basis points to 37.7 percent, and some of these bases are slightly up between 2 and a half to three percent of the total inventory.

Specifically in the west L.A. marketplace net absorption was a negative 325,000 feet and direct vacancy increased by 190 basis points to 12.8 percent and sublease space decreased by 100,000 feet to 3.5 percent to the total inventory.

Market leverage were down 2 to 3 percent at 33 to 35 dollars per foot influencing part by the very aggressive pricing for sublease space.

In the onlyl north market net absorption was a positive 240,000 square feet and this is driven primarily by 200,000 square foot transaction that was done in Burbank.

Direct vacancy decreased by 10 basis points to a 11.6 percent while available sublease space increased by 125,000 feet, just over 3 percent of the total inventory and market rental rates in this market were also flat, at about 25 to 24 dollars a foot.

Finally in the South LA county marketplace net absorption was a positive 130,000 square feet direct vacancy increased 40 basis points to 18 percent and the available sublease space primarily 2.5 percent of the total inventory.

The market rental rates were down 3 to 4 percent in this market to around 23 and 25 dollars a foot.

Let me change gears quickly and just touch on our developmental activity in Howard Hughes project that is summarizing a supplemental package.

Our 60

liabilities currently 89 percent leased which is up 4 percent from our last call.

The remaining 18,000 square feet that we need to restabilize at 95 percent, we have about 10,000 square feet that are on leased negotiations which would bring us to 94 percent lease and we will remain comfortable with our third quarter stabilization estimate.

With respect to 6100 Center Drive, we received our

during the second quarter and to-date we have no committed leases.

We are actually marking this building and have offered additional broker incentives to ensure we see all potential deals.

We just recently changed the leasing team on this project as well.

The location, quality and amenities offered under our Howard Hughes project are superior to any other competing space at this time and we continue to be comfortable of our estimates of reaching stabilization for this project by the end of second quarter of next year.

Or if activity doesn't pick up by the end of this year, we are going to look to revise the estimated stabilization date.

But we will address that at that time.

Looking forward we believe the Southern California markets have distinct fundamental advantages over other major markets including a diverse business space, a lack of new supply for delivery over the 12 to18 months and moderate rental rates.

With that I will turnover the call over to Ric, who will work the second quarter financial results and provide earnings guidance for the rest of this year.

Thanks Victor.

Inline with consensus, funds from operations for the second quarter with 70 cents per share funds available for distribution, with 54 cents per share and fully diluted net income and operating earnings with 27 cents a share, our coverage ratios remain strong with interest coverage at 3.2 times and fix charge coverage at 2.9 times.

May I update you on our second quarter capital market transactions.

We closed at 75 million dollar unsecured term loan with Wells Fargo that matures in 2004 and at our option the extended maturity to 2006.

This one, there is interest at

plus125 during the initial term and

plus 145 during the extension period.

We used to proceed from this term-loan to repay a 75 million dollar unsecured line of credit that matured in July that bore interest at

plus 130.

We also extended the maturity of our 10 million dollar unsecured line of credit with City National Bank by one year at August of 2003 at the same terms.

Finally we are also in the process of extending and upsizing our 275 million dollar unsecured line of credit that is scheduled to mature in the April of next year.

The anticipated new maturity at April of 2006 and the proposed terms of this extension are similar to the existing line.

We schedule to close this extension fairly quickly and at that time, we will issue you a release with more details.

Same store NOI increased by 3.3 percent on a GAAP basis and 2.5 percent on a cash basis for the second quarter compared to second quarter of last year.

And year-to-date decreased by 3.2 percent on a GAAP basis and 2 percent on a cash basis compared to 2001.

The decrease from the second quarter of 2001 to this year was due both to a 4.1 percent decline in the average occupancy of our same store pool and about 500,000 dollars on lease termination fees and non-recurring items this year compared to 2001.

Excluding lease termination fees and non-recurring items in both same store NOI was 60 basis points better on a GAAP basis and on a cash basis for the second quarter.

Rent growth on space renewed or re-leased during the second quarter was 10 percent on cash basis.

This growth was based on an average expiring amount of just over 19 dollars a foot moving up to 21 dollars a foot.

On a GAAP basis, the second quarter rent growth was 18 percent based on average effective expiring rents between 18 to 19 dollars a foot moving up to 22 dollars a foot in effective rent on new or renewed leases.

Our portfolio occupancy declined by just over 1 percent to 89.9 percent in the second quarter.

This difference representing about 200,000 square feet in negative net absorption breaks down like this.

Retention dropped to 70 percent.

On the 450,000 square feet of expiring leases, we retained 315,000 feet.

We had about a 195,000 square feet in default and a 180,000 square feet in lease terminations.

These net losses were some what offset by the 310,000 square feet new leases taking occupancy during the second quarter.

The 135,000 feet lost on lease expiration in the second quarter was spread throughout our portfolio and were made up mainly of 3000 to 5000 square foot tenants.

The largest lease expirations not retained this quarter was for 13,000 square feet in El Segundo.

This tenant was acquired by another company and left the area.

For the rest of this year, we have 535,000 feet scheduled to expire in Q3 and 625,000 feet that will expire during the 4th quarter.

Of the fourth quarter expirations about 400,000 feet is scheduled to expire on December 31st.

Yet the expirations are distributed among our three major markets on a weighted average per data basis.

Today we renewed 48 percent of this year's roll with another 5 percent in negotiations.

Our most recent detailed portfolio occupancy analysis indicated that our retention rate for the rest of this year would decline on an average between 65 to 68 percent in the 3rd and 4th quarters.

This estimated rate is down by 5 to 6 percent form our earlier estimates and is due to changes in recent renewal discussions with several tenants in the 10,000 to 15,000 square foot range and 135,000 square foot health care related tenant in San Diego who recently merged with another company and purchased a building for their combined operations.

Tenants are generally continuing to wait as long as possible to make renewal decisions in part due to overall economic uncertainty and in an effort of gaining more favorable terms at a later day.

Of the 2.8 million square feet expiring in 2003, 20 percent expired in both the first and the second quarters, with 35 percent expiring in Q3 and the remaining 25 percent expiring in the fourth quarter.

To date we have renewed about 10 percent of next year's expirations with another 5 percent in negotiations.

Of the 195,000 square feet defaults we had in the second quarter, that was down from about 220,000 feet in the first quarter, but higher than our normal quarterly trends.

These defaults are related to about 25 tenants mainly occupying 5000 feet or less.

The largest default was for 19,000 feet from a tenant in the advertising industry who filed for bankruptcy and rejected their lease.

The second quarter defaults occurred throughout the portfolio with a little larger concentration in West Los Angeles.

It falls in the second quarter although higher than normal we are about what we expected at our last earnings call.

At that time we also expected defaults would start to trim down and normalize in the last half of the year.

This assumption was based on our tenant watch list at that time and the tenant request for rent relief were significantly trimming down.

As Richard mentioned earlier, the continued financial pressures felt by many larger name companies also continuing to impact our smaller tenant base.

We currently have about 15 tenants with around 300,000 square feet on our tenant watch list included on this list is 22,000 feet to MCI which represents all of our WorldCom exposure, 15,000 feet Arthur Anderson, and a total of 80,000 feet for executive suite operators.

We fully reserve for any aged outstanding charges for tenants on our watch list and are closely monitoring each of these tenants.

We continue to closely monitor our outstanding receivables and conservatively reserve when appropriate.

Our receivable balances decreased by 2.8 million since last quarter and by over 5 million since the end of last year.

At the end of the second quarter, our net receivable balances over 60 days were less than 100,000 dollars.

In the second quarter we recorded 1.3 million in bad debt expense with all but 150,000 of that amount representing additional reserves versus actual write-offs.

Leaving us with total reserves for AR and deferred rents at 9.9 million were about 17 percent of the combined balance.

Including the receivable and straight-line reserve, security deposits and letters of credit; we had about 37 million in total security in our leases at the end of the second quarter.

Looking to our operating trends our operating results are listed on page 7 of our supplemental package.

Cash rents were down by about 350,000 from the first quarter primarily from lost rents related to our assets sales and occupancy decline.

Straight-line rents were up about 480,000 over the first quarter as you recall straight line rent was down in the first quarter because we recorded a 450,000 dollar additional reserve for deferred rent related to a specific tenant.

Tenant reimbursements were approximately 600,000 lower than last quarter primarily due to additional 2001 reconciliation billings in the first quarter.

Other rental operating income was about 600,000 higher than the first quarter primarily due to lease termination fees.

We had about 1.4 million in termination fee income in the second quarter compared to approximately 600,000 in the first quarter.

We expect termination fees to range between a million to a million and a half in third quarter and fourth quarter.

Insurance expense was higher was in the second quarter due to an increase in premiums on our property and causality policy that was renewed effective March 1st of this year and to the cost of terrorism insurance coverage.

As I mentioned in our last call, we renewed our property and causality insurance policy effective March 1st of this year, at a cost of 42 cents preferred, which was a 30 percent increase of our old policy.

We also purchased two separate blanket terrorism insurance policies aggregating a 100 million in total coverage, covering acts of terrorism excluding biological and chemical claims at cost of about 750,000.

Looking at the trend on page 7 of our supplemental, keep in mind that the first quarter included only one month of new property and casualty policy that went into effect on March 1st and didn't include any terrorism insurance expense as we purchased these policies during the second quarter.

Looking to third quarter and fourth quarter you should expect an additional 100,000 of expense per quarter as a run rate.

Rental rate was back up or expected to be for the rest of this year.

As you recall the variance in the first quarter was due to the reversals and accrual for an annual contingent ground lease payment that was paid in March.

G&A expense for the quarter was consistent with our historical trend at about 2.9 percent of total revenues.

As I mentioned during our last earnings call, we expect G&A for this year to be flat with 2001 between 12 to 12.5 million including the elimination of bonuses for our Senior Management team.

Depreciation was up by 2.4 million over the last quarter primarily resulting from a 4 quarters depreciation on 88.5 million dollars of assets that we ceased for marketing for sale in the first quarter.

Under FAS 121 you are required to stop recording depreciation for assets that have been marketed for sale and our marketing efforts are subsequently ended the asset that will be combined with the operating portfolio and the balance sheet and depreciation is to commence from that point forward.

Our second quarter results included 2.1 million in GAAP NOI including 400,000 in straight line rent from a 6080 Center Drive development project and about a 100,000 dollars in GAAP NOI from two assets we sold during the second quarter.

We also had 300,000 in capitalized interest on the 6080 project in the second quarter and we stopped capitalizing interest on that asset in May.

With added our Top 10 tenant list on page 16 of the supplemental package, only 10, only only 2 tenants the Vivendi Universal in the state of California inidividually represent 2 percent or more of our annualized based rental.

The Vivendi is located at our Howard Hughes center that houses our knowledge adventure and Wendy Universal Interactive game groups which has been in business for over 15 years.

The State of California is our largest tenant as measured by square feet and roughly 24 different locations on our portfolio.

During the second quarter, we closed the sales of 2 assets Renaissance Court at 61,000 square feet office building located in WestLake and 6800

and 80,000 square feet office building located in Canoga Park.

Including these properties, year-to-date we sold 23.6 million in assets for a weighted average CAP rate of around 10 percent on future NOI that provided us with an unlevelled

of approximately 10.5 percent.

Take a minute now to provide FFO guidance for the rest of 2002.

During our last earnings call, we estimated our portfolio occupancy with the client by an additional 100 or 120 basis points during the second quarter and an increase in the third and the fourth quarters.

This estimate was based on 3 assumptions.

First, seeing an upward trend in new leases signed from January through April.

Second on the client and estimated defaults and third on maintaining our historical retention rate in a low to mid 70 percent range.

Based on the continued slow down the national and local economies and resulting lower demand for for new space, lower retention of expiring leases and above normal default to the end of the year, we expect occupancy to remain stable around 90 percent till the end of the year.

We arrived at this estimate after considering the new

lease and extensive space by space and tenant -by-tenant review of our portfolio including remaining schedule expirations anticipated defaults and a lower estimate of velocity per new leasing transactions to the end of the year.

Based on this analysis the current economic environment and our view of market conditions and expectations regarding the minimal rates and various other projections, revising our earlier estimate for 2002 from 2 dollars and 90 cents to 3 dollars per share, to 2 dollars and 70 cents to 2 dollars and 76 cents per share including 63 cents to 65 cents for the third quarter.

Our lower occupancy assumptions have a majority of the change in, in our estimates.

Due to our lower cash rents at

reimbursements straight line rents for parking .

Let me run you through the assumptions for these estimates.

Our lower occupancy estimates represent about 14 to 15 cents per share in cash rents.

Due to lower expected occupancy we are also assuming lower tenant reimbursements, parking and straight line rents of 3 to 4 cents per share.

The low end of our range assumes the fall continues higher than normal rate reducing our estimates by about 2 to 3 cents per share.

We are assuming additional 3 to 5 percent decline in market rates over the rest of this year resulting in a reduction of 3 to 4 cents per share.

Finally we are assuming, we are assuming an increase of 2 to 3 cents per share for acquisition, no additional disposition through the end of the year, excuse me, and no impact from any potential stock repurchases.

Based on these FFO estimates our dividend payout ratio would range between 73 to 75 percent and adjusting FAD for lower expected TI's and leasing commissions related to lower expected leasing velocity within our range, our FAD pay out ratio ranges from 94 to about 95 percent.

Due to continued economic uncertainty with the economy we are not providing guidance for 2003 at that time.

That wraps up our prepared remarks.

We would like to thank you for your time and your interest in Ardent and with that we will turn the call back over to the operator for questions.

At this time I would like to remind everyone if you would like to ask a question please press the star and the number one on your telephone keypad.

We will pause for just a moment to compile the Q & A roster.

Your first question comes from David Harris of Lehman Brothers.

Yes, good morning, afternoon everyone.

I think these questions may be for Drew.

Drew, have you got an idea of the amount of subleasing in the portfolio and how much of that is currently vacant?

We have roughly David, about 2 percent of the portfolio is under sublease and we do not quite have feel on the vacancy.

But most of that is occupied, probably roughly maybe half a percent is unoccupied.

And just backing into Victors remarks about your sense that, the market sublease will stabilizing, will that be true with your portfolio as well.

Yeah, we see that as a trend within the portfolio.

Okay, on the expense side it looked like tax, real estate tax , does it remain pretty flat.

Do you anticipate that there to be some additional pressure on that side coming forward?

With the real estate taxes?

Yeah.

Only, I mean the only chance that we anticipated just with the acquisition.

Okay, that was Rick wasn't it?

Yes.

Okay, could you give me an idea when, the Gateway built straight ahead that is within the question for Rick but probably more for Victor.

When the Gateway building was built?

1945.

Have you had any extensive renovation during its life?

Yes, there was a complete rehab lobby revision in the building in common areas that was done by the past ownership.

Do you know approximately when that was Victor?

Yeah, about, about 2, 2,3 years ago.

Okay, so you do not see any major CAPEX additional CAPEX on the building?

No, David the building is very clean.

It is in great shape.

We do not have any, any requirements at this time though we anticipate any additional CAPEX in that building.

Okay, is there any subleasing in the building now?

Yeah, there is a minimum amount of sublease in the building.

Okay, and could you give me an idea what the, the rent you are talking about on 6100 is at the moment, Victor?

Yeah, hang on for a second let me get that for you... right now we are looking at 6100, you asked right?

About 34 dollars a foot, which was asking initial performers 40.

So, we are currently asking 285 per month, which is 24 foot.

About the

package?

The

package has increased slightly, but it is not material at all.

Okay, so, the swing has really been on the actual asking rent?

Yes, exactly.

It has been the case, you know, the TI packages, it has only driven based on the market right now because, you know, it is new space, so, we are still assuming that 40-dollar foot number.

Okay, let me hand you over to David Shulman.

Hi David.

Yeah hi everybody.

I have a sort of, I think a simple minded question, is it your

ratio was going to be 95 percent

going forward and then you have a potential share buy-back of 75 million dollars going forward.

That implies you are willing to take your leverage up to buy-back shares, am I correct or not?

No, the share buy-back that is, you know, we are really looking at that just being leverage neutral.

If you recall, we have taken some asset off the block before just because of the spread in the CAP rates that we were selling versus paying down 3.5 percent debt was extremely diluted.

Thus, you know, depending on the volatility of the stock price and alternative forms of investment, we will take a look at repurchasing stock, but it would be leverage neutral.

We are ready to do that our cash flow or sell assets.

So, essentially this cash flow is going to be, free cash flow is going to be a very small number, given the

ratio that come out of asset sales.

That's right.

That is our intension.

Okay thank you.

You got it.

The next question comes from Donald Fandett of Wachovia Securities.

A quick question on the sub let space.

I wonder if you could clarify what kind of discount you are seeing on sub let space in terms of rent per direct space where you think it would go.

I think I heard mentioning that at the discount spread widen?

Right now, this is Robert .

Right now, we are seeing about a discount of 20 to 25 percent on the sub let space and we anticipate that will increase hardly 5 to 8 percent for the balance of the year.

Okay and lastly, I may have missed, but the change in vacancy in West LA sequentially in a quarter was how much?

We have got a regular increment

this year, West LA had made absorption of 325,000 ft and it went to 12.8 percent, which was a 190 basis point sequentail.

Okay.

It looks like you lost somewhere in the neighborhood of 300 basis points in your portfolio in West LA .

Can you comment on that differential?

It really was spread out throughout the portfolio in addition to terminations and

, you know smaller tenants that just left our portfolio.

We didn't have any one major cash that took any of the heat other than the one lease by other that we did in our

building.

Thanks.

Once again if you do have question, please press star and then number one on your telephone keypad.

The next question comes from David Loeb of Friedman, Billings, Ramsey & Co., Inc.

Just back to gateway.

Richard you described the roll over is moderate over the next 18 months.

Can you give us a little more color on how much of that does come up?

Yeah, it is, you know what, there is no large tenants that are

and throughout all of those three, we got 10 percent of the billing rolling.

Okay, so it is less than what you have in the average bills?

Correct, it is less than we have overall in our portfolio.

I think our portfolio prediction is 17 percent.

Okay Great thank you.

You got it.

Your next question comes from David AuBuchon of A.G.

Edwards & Sons, Inc.

Yes, thanks.

Could you talk about what you expect for

growth in the reminder of 2002 in your assumptions?

Yeah, we are looking at a net growth negative between 3 to 5 percent ......

We are looking at net growth negative 3-5 percent for rest of this year and we have been putting on in this in the past 2 quarters so overall we are looking at majority of that discount to be in this quarter what we are currently in and being flat for the next quarter.

And you are talking about on the lease that you sign.

Correct?

No.

We have got to market as well..

I am sorry.

I was asking about the leases that you expect to sign over the remainder of this year.

What type of rank growth do you expect over the previous......

Yeah as you know, we were on a cash basis I think we were 15 percent last quarter.

It was 10 percent I think for year to date, we are looking at about 10 percent on average so it is going to go down in the third and the fourth quarter in the 7-8 percent range on a roll off, on a cash basis.

And as you look at your portfolio in whole, your embedded market, your marked-to-market in your portfolio has dropped.

Can you give an idea how far it has dropped from a year ago?

You know, I looked at it this morning from the last quarter and we probably dropped from may be around 70 cents to in the mid high 60s or so, we are probably talking about may be 43-45 million dollar.

Okay.

100% if you look at a percentage basis.

That's fine.

The increase in

in the second year is due to roll off events?

Yeah.

We see no more of lease up in that buildings because it worth 93 percentage.

It is a straight wall on the building.

Okay.

Would you just give me your comment, you're obviously disappointed about the leasing velocities as the quarter progressed into the summer.

Is that, can you tell that velocity is just due to normal seasonal slow down in summer or is it something at definitely some pattern that were working here just believing that has definitely slowed from market perspective?

As I mentioned, we were looking at April, May and June, where the months we were looking at, April and May where we thought there would be dramatic fall offs.

As I mentioned, July, we gave you information in July.

It is constant owing effect we did that lease of a 130,000 people

.

Right.

It was constant with really April and May.

I don't think its seasonal fall, it's just the lack of demand for large heads in the portfolio.

Fortunately, we do not have a lot of large vacant spaces in the portfolio at this present time other than our 6100 buildings.

So the reality is, going forward, we know a couple of tenants in our portfolio that are expiring this year that are larger, that are leaving.

We just know that they are leaving, they are moving on to other spaces and they grow on a very consolidated, whatever the case may be, that in itself is really what's striving our feeling of where the lease growth in terms of velocity transactions are going to be larger tenants.

We were pretty confident on the small tenants, we are seeing velocity we viewed.

It just is a decision

that's taking place in the larger tenants.

Okay then on the 400, 000 square feet that is

reasons?

We have multiple leases but there is one ten for a 100,000 feet but leaving 12/31/02.

Okay.

And the other 300,000 square feet.

Do you anticipate those over now?

Of the larger space we know there are two tenants that are leaving once for a 130,000 square feet, once for a, as I said a 100,000 square feet.

Of the remaining tenants that are there, we think we are going to be in line with our members for retention as Rick mentioned.

Okay and can you review one more time to securities the

37 million?

Yes.

Right at 37 million.

And that's comprised of what?

That's comprised of our reserves, we are straying on in AR with that 9.9 million, security deposits and letters of credit.

Okay, thank you guys.

Thank you.

Your next question comes from Jim Bracken of Green Street Advisors.

Hi Rick, I think this is for you.

What is your estimate of the current market rent for your portfolio and what was it at the peak 4 or 5 quarters ago?

The current market rent were 21 to 22 bucks and a year ago we were 23 to 24 bucks probably.

Okay, thanks

Thank you.

At this time there are no further questions.

I'm sorry you have another question from Bob Howard of Globe Street.

Hi, this question is probably for Rob Peddicord; you mention that a new leasing team at 6100 Center drive, that be an internal or external?

We have taken the lease scene of 6100 in-house.

Okay, Who....

I'm sorry.

Who was that leasing with?

That's with CB Richard Ellis.

That John.

A. Youth and

That's correct.

Okay.

I have another question;

I'm not sure who is it for, could you tell me in a nutshell the reason for the drop in FFO and net income second quarter 2002 versus second quarter 2001?

Well, I mean the biggest factor is occupancy, we, you know, had lost probably 4 percent in occupancy from a year ago.

That's probably the biggest, obviously the biggest factor.

Like to add one other comment, getting rid of or replacing CB Richard Ellis is not a negative impact on them, they are doing a great job, we just decided to take that in-house, we now have just 6100 in the presence that we developed Howard Hughes Center.

Okay good, that's all questions I have.

Thanks.

Your next question comes from Carla Taylor of Kenwood.

Hi, it's Carla Taylor.

I just want to clarify the question about market rents, total market rents what they are now versus the year ago.

Can you tell me what, how that compares to the overall market rents because I guess one of the thesis for investing in your stock was that your rents were already so far below market rents and so my question is how far below market rents are you now or has your fall-off been greater than within your region?

Do you understand my question?

Yeah, you know, I guess, you know, one way to look at that is the rollup that we had on our renewals and again it, you know, it's been a little bit trending down certainly from a year ago, may be, you know, when we were on this call a year ago our rollup was on a cash basis was in the high teens or 20 percent, so it's come down a bit from there, but we still have, you know, in the first quarter we still had a 10 percent rollup on the leases that we renewed on a cash basis and about 18 percent on a GAAP basis.

You know for example, if we are looking at average rates in the 20, you know, 22 to 23 dollar range, the leases that we have expiring rest of the year have an average rate of just little over 18 dollars or so.

Does that answer your question?

Yes, thank you.

At this time there are no further questions, are there any closing remarks?

Just want to thank everyone who joined us and have a great day.

Thank you.

Thank you for participating in today's conference call, you may now disconnect.