SL Green Realty Corp (SLG) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Reckson Associates second quarter earnings teleconference. At this time all participants are in a listen-only mode. Later we'll have a question and answer period. If you should require assistance, please press zero then star and an operator will assist you. As a reminder this teleconference is being recorded. The information to be discussed on this earnings conference call including estimates of future FFO per share may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements and all other statements that are made on this call that are not historical facts are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those expected. Among those risks, trends and uncertainties are the general economic climate, changes in the supply and demand for office and industrial properties in the New York tri-state area, changes in interest rate levels, our ability to lease space in a timely manner at current or anticipated rental rate levels, changes in operating costs, repayment of debt owd to the company by third party, risks associated with joint ventures and risks associated with the development and acquisition of properties including risks that development costs are greater than anticipated. For further information on factors that is could get Reckson, references made with the filings of the Securities and Exchange Commission. Reckson is such to reporting retirements and undertakes no responsibility to update or supplement information discussed on this conference call. I would now like to turn the conference over to your host, Co-Chief Executive Officer Mr. Scott Rechler.

I'd like to thank everyone from participating in our second quarter conference call. With me is Michael Maturo, our Chief Financial Officer and Donald Rechler, my Co-Chief Executive Officer and Chairman of Our Board as well as other members of the senior management team.

For those who have not listened to our conference calls before, we work off of a formal presentation which we'll go through first and then open ourselves up to questions and answers for anyone who might have further questions. If you did not receive the formal presentation, you can get it by going to our website which is www.Reckson.com or call Susan McGuire at 631-622-6642. In addition, this quarter we-actually sent out a supplemental package that typically historically we send out in the next day or so, we sent it out as well earlier today so you'll have access to supplemental information as well as information provided in our slide presentation.

If you do not have a copy of that, you can access that through the website or through Susan McGuire if you need that.

Let me start with the formal presentation. If you turn to slide 2 of the presentation, let me review some of the reported results for the quarter. We reported FFO per share 59 cents which is inclusive of a 2 cents per share charge for deferred rent reserves. This compares to 70 cents per share for the same period in 2001 which is a 15.7% decrease. This decrease is attributable to the exclusion from income from front line RSVP in 02 versus 03 as well as delusion from not reinvesting distribution proceeds of assets we sold that were in place in 01 and not in place in 02 and as well an additional amount of bad debt less other income. Mike Maturo will walk you through a reconciliation between those numbers.

We reported diluted CAD of 45 cents per share for the second quarter of 2002 including two cents per share for rent reserve compared to 48 cents per share for the same period in 2001. CAD was impacted to similar factors as I described relative to the FFO. Our portfolio continues to perform extremely well in this challenging environment. During the quarter we generated same property net operating income increases of 12% on a cash basis and 2.1% on a GAAP basis. We generate same-space rent growth on space leased during the quarter of 19.3% on a GAAP basis and 14.1% on a cash basis for our office portfolio and our industrial portfolio, we have 12.4% rent growth on a GAAP basis and 9% rent growth on a cash basis. Our occupancies held up well.

If you look at our overall occupancies the end of June 30th, overall occupancy was 94.2% down from 95.1% from the end of the first quarter and down from 97.2% at the end of June 30th; however, this is not a same property analysis. We actually added the Reckson executive park which is a development project that went into service during this quarter so our inventory went up. If you look at the same property stats below that, you'll see our overall occupancy on same property basis is 94.9 versus 95.1% so really only 2 basis point difference. I'm sorry, 2% 20 basis point difference in the quarter from March 31st to June 30th and down from 97.5%. We provide you our office and industry stats for 95.2% from 96.2% on an overall basis and on industrial 92% from 92.9% on an overall basis. On the same property basis our office portfolio was from 96.2% down from 95.9% and our industrial portfolio went from 92.9% down to 92%. During the quarter we renewed 57% of the leases that are expiring. That brings our year to date renewal rate to 71%.

There were some specific aberrations in this quarter which I'll talk about later in the presentation. We had a little less leasing activity than we traditionally have. We completed 478,000 of leasing transactions during the quarter. We had a vibrant month since the quarter ended. We leased another 370,000 square feet and I'll discuss the impact of that later in the presentation as well. We now take into account the additional leasings post-quarter. At the end of the quarter, our portfolio exposure expiring leases was 3.1% the remainder of 2001 and 9.2% for the balance of 2003. This obviously will be better based on our additional leasing.

We had some good Capital Markets activity during the quarter, we completed a $50 million unsecured note offering with five-year notes with a rate of 6% and effective rate of 6.13%. Something we've been trying to do for some time is repurchase shares of the stock. We spent a lot of time during the quarter working on doing that and post-quarter we are successful. We acquired 1,856,000 of class E common shares at a weight leveraged price of $21.98 and 368,200 class b common shares at a price of $22.90 per share. All reinvested $29.2 million into the share repurchase program during the period since the quarter ended and Mike will provide more details about that. We had taken the steps to start expensing the cost of our stock options and do this effective January 1st, 2002. So in our numbers you'll have the cost associated with outstanding stock options from that point forward.

Our standard and poor's investment grade rating of triple-b minus and maintains our statment of outlook on the company and we took steps to enhance disclosure in our already comprehensive supplemental package. When you get a chance to look at it, you'll see a number of new types of schedules that give you better insights into the company and provide you with more guidance in that later in the presentation. If you turn to the next slide, I'd like to talk about our portfolio statistics starting with the composition of our portfolio. We have 20.5 million square feet made up of 181 properties, no change in that from last quarter to this quarter. Our NOI is broken down with 86% derived from our office portfolio and 14% being derived from our industrial portfolio.

You can see the breakdown by region. 30% of net operating income from our portfolio, 20% from Westchester and Connecticut, 28% from New York City and 13% from New Jersey. The next slide segments tenants by industry and highlights our diverse our tenant mix is. If you look at the slide, you you'll see the top five industries that make up our tenants are: consumer products which makes about 12%, financial services which is 12%, legal services 11%, telecom which is 9%, and last of the five is other professional services which is 8%. You can see this is a fairly comprehensive chart.

Just one comment on the telecom of 9%, I'm going to talk later about two of the tenant that is fit into that category which is WorldCom and Metro Media which we have taken reserves against. They make up 40% of that 9% in the telecom segment. Now turning to our markets, I'd like to start by giving our sense of the market trends and then I'll give you more details on the markets and how we are performing in them. First new supply remains in check through all of our markets other than the markets we're not in which is Jersey City which is seeing new supply in that marketplace, but does not have a dramatic impact on us.

All the balance of our markets have seen a constraint on supply as we anticipated and noting in our prior conference calls. Sublease space remains a factor in all of our markets with. When look at our trends, sublease space continues to grow. Sublease space definitely has an impact on our markets. In many places the impact is statistical rather than actual, in other words it does put pressure on the market place. The level of sublet vacancy is not directly as competitive as direct vacancy and we'll talk about the impact later on. You'll see the markets having the pressure from sublease space. New tenant demand is absolutely unlimited. We spend a lot of time on tenant retention and gaining market share. Tenants don't want, don't want to spend the money to move or disrupt their business. Tenants who do move do so for strategic reasons, they are consolidating or decentralizing into the suburbs out of Manhattan or doing it to save money.

Few tenants are expanding in our market, although there are some that are expanding. The sectors where we are seeing some expansion include consumer products pharmaceuticals, insurance, restructuring professions whether it's law firms, accounting or investment banks that focus on restructuring or hedge funds. Leasing costs in all of our markets are increasing. We need to fight tenants, it's costing more in TI and other concessions. We are maintaining a cautious outlook due to the general uncertainty surrounding our corporate downsizing and credit risk.

When we look at our marketplace, that is the big unknown is which of the big companies in our marketplaces will run into financial problem that is impact their needs for space, so it's something we are extremely cautious about. As in the past down cycles, one thing we have seen is high quality buildings and high quality landlords are competing more effectively for market share. Tenants want to go to a place where they know they'll get high quality property and a landlord they can rely on. Specifically, into our markets turn to slide seven, an overview of the markets, you'll see in all of the markets again other than in Westchester you've seen sublet space increasing as I mentioned, our portfolio in all those cases which is the little diamond is outperforming all of the markets by a large margin which is obviously critical.

Let me take a second and walk you through some of the specifics of each of the marketplaces starting with Long Island. Long Island as you can see, vacancy rate has gone up. The overall availability is 13.3%. The direct availability is 8.5% for the class-a space which we have seen clearly there are two submarkets in particular dragging down Long Island.

Western Nassau and for those who follow our company, we had an asset there that we sold recently where there's 1.4 million square foot project that put 700,000 square feet into the market and that was a 20.1 vacancy rate and Suffolk county, cetral Suffolk which is Haupac where there is a new development 170,000 square foot development put in the marketplace which had an impact of 4% to that vacancy rate. Sublease space in the market accounts for 21% which has improved at prior quarter. It accounts for about 25% of the overall available space. I think when you look at the Long Island market, the general theme is it's competitive and as you watch the tenants out there, we are glad we have a lot of higher quality properties in well located submarkets within Long Island. Next I'd like to touch base on quickly is Westchester.

Our suburban markets we rank as sort of the most improved, Westchester has benefited from seeing tenants from New York City looking for a suburban location that is close to the city. There's a couple of law firms in Westchester looking for space there, back office trading operations looking for space in Westchester, Morgan Stanley moved to Westchester. When you look at Westchester relative to Westchester's past, it's a good picture and we rank that to be one of the better markets. There are about seven to eight larger deals in the marketplace. We continue to do extremely well in this marketplace.

Last quarter we did 22% in terms of leasing and did that with 70% of the leases without a broker. Stamford has been a market that has seen a tremendous amount of sublet space. A big part of the sublet space in Stamford, southern Connecticut relates to American express which was pulling out of the location after 9/11 and going back to downtown Manhattan had a big impact on it. We've done extremely well in Stamford. We achieved 40% of the market share this quarter in Stamford and 70% of our deals in Stanford without a broker and maintaining 5.1% vacancy rate. In terms of rank in suburban markets, the one we have a greater concern for is northern New Jersey.

While this quarter has seen the direct vacancy rate go down and positive net absorption of 1.4 million square feet, sublet space is a significant issue. Companies such as Tyko, WorldCom, Arthur Andersen, Lucent are all major tenants in the marketplace are all subleasing space, American Express moving out of the space it rented after 9/11 and moving back into Manhattan is subleasing space and, of course, we have the merger with Pharmacia and Pfizer, which is unclear as to what the oucome is although I'm not sure that's going to be as big of an impact when you look at the space in a multi-tenant marketplace. There are a lot of unknowns in that market space. Sublease in New Jersey makes up I/3 of all available space. Jersey City is a big skewing factor in the statistics and a concern in the overall northern New Jersey marketplace. There's about 1.14 million square feet of vacant space in Jersey City today with another 1.3 million square feet scheduled to be delivered under construction. 2.4 million square feet marketed today directly or through sublet space in Jersey City especially when you look at what's going on downtown could have a significant impact on that submarket.

Moving to the office market in Manhattan on the next slide, I would still say that Manhattan relative to all our markets is the strongest specifically in midtown. We think we are extremely well positioned with the product and how well leased we are in Manhattan. The mid-town market in the plaza district is doing well and clearly is a differential demand for high quality well located assets in Manhattan. In addition a lot of tenants out, there's a lot of activity of tenants looking for 5-15,000 square foot prebuilt or well-built versus raw spaces which we have in our buildings in Manhattan. We've done extremely well. You'll note in this quarter we increased our occupancy in Manhattan, we are projecting through the year to have our occupancy in Manhattan to continue to increase.

Downtown is a different story in terms of market. I think downtown is still going through its issues. Again, similar to mid-town, downtown is seeing good demand from small to medium-sized tenant looking for pre-built space and so in addition getting good incentives from the government, tax incentives and other types of occupancy incentives to reduce the overall cost downtown. Talk more about the markets during Q&A.

Now turning to Reckson's portfolio, this chart highlights that we've been able to maintain a relatively stable occupancy on slide 9 through since 1997, you'll see we are 95.9% occupancy and this does pull out the development project out of the mix so you have a apples to apples analysis. When we look toward the rest of the year, I would like to guide the street that we'll probably have occupancy somewhat stable on the office portfolio and up a little bit on our industrial portfolio and talk more about that later when we go through our guidance analysis. I'd like to take a second here and talk about the sublet components of our portfolio. This 4.1% of our office tenants or office square footage on the sublet market, a little less than at the end of the second quarter where we had more than that on the sublet market and of that 4.1% on the sublet market, 50% of that space has less than four years left on the term of their lease. We have not seen sublet space become a big issue within our portfolio in terms of more tenants trying to sublet space during the past year.

If you turn to slide ten, to give you more details with respect to our property and NOI performance. Our cash NOI is up 12%, our GAAP NOI up 2.1%. The GAAP NOI was driven by 3.7% with an increase in revenue in a 6.9% increase in expenses. On the cash side, we tried to provide you with a reconciliation so you can see specifically where our same store NOI growth was driven from. On the cash side 10% growth in revenue in this quarter in 2002 versus the same period in 2001. Breaking down the details, 5.1% of that 10% related to the burnoff of prerent, 2.1% related to built-in rent increases which we have to add in our porfolio particular our Long Island suburban portfolio. Our same space rent increases or the impact of prior quarter mark-to-market leases provided 1.6% of that 10% growth. Escalation increase of $1.5 million provide 1.4% and note that that $1.5 million matches increase of expenses of $1.5 million and that's due to higher expenses relating to security and other items passed through to the tenants.

We had a New York City incremental revenue driven by repositioning of our retail positions at 1350 Avenue of the Americas, 919 and other items in New York City which provided 1.1%, half a percent of other type items, then a decrease in our suburban portfolio occupancy which reduced that number by 1.2% and an increase in our bad debt which brought that down another .6% to reach the 10%. On the expense side of our operating expenses were up 7.1%. Our real estate taxes up 6.6%. When you weight that together, our expenses grew in total of 6.9% and generates the 12% same property NOI group. If you turn to our supplemental, you can actually find the details of the same property NOI growth from each of our markets.

From a GAAP perspective, Long Island was up 1.9%, Westchester was down 3.7%, Connecticut was down 3.4%, New Jersey was up 8%, New York City up 5.8% and our one building in Florida down 15% to a total of 2.1%. If you turn to the next slide, you'll see that during the quarter as I mentioned earlier we were able to increase our rents when we released space previously vacated. The office side raised it 19.3% higher rents than the prior tenants. On the industrial side 12.4% higher rents. That's on a GAAP basis, on a cash basis we released office leases 14.1% higher rents and industrial 9% higher rents.

By market on a GAAP basis, Long Island rents were up half a percent. Connecticut was up 16.6%. New Jersey up 16.1%. New York City was up 16.4% and Westchester up 11.3%. If you turn to the next slide, we tried to provide you with more of a picture of the leasing activity in the second quarter. We leased 478,000 square feet during this quarter and 45% of that square footage related to, were new leases or 212,000 square feet. 28% of the 478 were renewed leases and 13% were renewals that expire at later dates or early renewals. 11% were expansions of existing tenants and 3% were contractions of existing tenants. We provide you with additional leasing trends, on the left hand quarter, you see our same space average rent growth for the quarter it was 19.4%, down a little but in line with what it's been in the past.

The tenant retention side, we're at 51% which is down off of 82% last quarter and at the low end of the range. That has to do with vacancy that we had. Some tenants in Westchester that consolidated to a park through headquarters in a different location and without that, we have renewed 75% of our expiring tenants. On the top of the right-hand side of the page, you see our net effetive rent spread, this is taking our base rent, average base rent and subtracting out TI in free rent and determining the spread between base rent and effective rent. You'll see this quarter reported 7.9% net effective rent spread which is in line with the past. I would reiterate more affirmatively we expect the net effective rent spread to start to decline. It is costing us more to get tenants today than it did in the past. You'll also note on the bottom of these leasing trends, our average lease term during the quarter was 6.1 years which is still holding in line with the balance. I would expect that to continue to hold or climb up a little bit because as it costs us more, we are demanding more lease term from our tenants.

Take a moment to talk about lease expirations. At the end of the quarter 12.3% of our portfolio expiring and you'll note here that 3.9% is in the office portfolio in 2002. 9.1% in 2003 and our industrial portfolio had 1.6%. The other thing I'd like to point out on the slide and I think I pointed it out last quarter and it's important is look at our lease expirations in 2005 and 2006 on the office and industrial portfolio. We think there is significant mark-to-market opportunities in those years as we release the space and move the rents to market.

On the next slide, slide 15, we did a pro forma analysis of the 2002 and 2003 office portfolio expirations taking into account the 180,000 square feet of expirations that were taken off the market post second quarter. And that is part of the 370,000 square feet of leases we leased over last month. If you look at this, you'll see on the office side we have 3.1% expiring in 2002 and 7.9% in 2003. For the entire portfolio, we have 2.4% expiring in 2002. 8.1% expiring in 2003 bringing our total portfolio expiration exposure down to 10.5% which we think is very, very good. We also broke down for you on the left hand slide a pie chart which lays out the lease expirations out per division.

Westchester has done a great job in terms of reducing the exposure. You might recall last quarter Westchester had 275,000 square feet expiring through 2002. Now it has 255,000 square feet expiring through 2003 and even with that, working on 146,000 square feet of deals. Not renewals but deals of taking existing vacant space or renewals that they are working on now in their marketplaces. The area where you see large exposure is in New Jersey. 398,000 square feet. 185,000 square feet of this space relates to our billing and American Express is occupying now which comes through at the middle of 2003. If we had to take space back, that's great space to have in any market. In addition, we've been very active in our New Jersey portfolio at this time. Working on 240,000 square feet of leases. 96,000 square feet are renewals. 120,000 square feet are new deals and 20,000 square feet relate to expansion deals. We are seeing activity in our buildings in the marketplaces. We broke this out for you, the lease expirations per quarter so you can track where we have the greatest amounts of quarterly exposure.

Turn to slide 16, we provide you with an analysis of our expiring rents versus forecast rents. These are rent numbers built right in from internal business plans where we expect to release space once the space expires. We expect rents to be 7% higher on a cash basis and 12% higher on a GAAP basis over the lease we saw between 02 and 03. I want to note this is down from 10% and 17% last quarter when we provided the same analysis. It's come down during the quarter.

On slide 17, I'd like to take a moment and ask our Sal Delafranco our Managing Director of Westchester to provide you background about a transaction we completed in Westchester related to Fuji Film. I believe this is demonstrating the tone of the market and how we are approaching operating in this market environment.

Thanks, Scott. We are excited to announce the signing of 163,000 square foot lease with Fuji in Westchester. It's a ten-year transaction with the company I would imagine triple-A credit rated. To give you a feel for the transaction, we accomplished what was a complex deal in-moving and relocating seven tenants encompassing four buildings within the park and the total transaction being about 240,000 square feet. A breakdown on that, there was 65,000 square feet expiring through 2003 and 96,000 of it was either vacant or going to be vacant within this current year.

It's important to note that when Fuji first came to us and this was a deal in the market for three years and obviously the size of the transaction and availability of large blocks of space made it competitive and sought after in the marketplace. It's interesting to note it will be the largest lease signed in two years in the Westchester marketplace. When they came to us, we had 75,000 square foot vacant in the building. We saw it as a great opportunity to put to bed not only the vacant space in the building but to take 60% of that property and put it to bed for a long term basis with great tenants and certainly a franchise-building deal and one that would be critical to this product.

There was approximately 50,000 square foot of space included in the deal that was sublease space on market with tech and financial services-type firms so that was another piece of opportunity we saw in terms of taking that space back. Getting upside on the rent, we were successful getting surrender fees of $2.3 million out of the tenants and relocating them and putting the space to bed for a long time period. A couple of key notes, our franchise value and our team was key for us making this deal in the market and giving us a competitive advantage.

Our relationship with the tenants and understanding the motivational factors that we asked to move and relocate on behalf of this transaction is something we hold dear and do well in the marketplace. We understood what was going on prior to Fuji coming so when they came we could react quickly and accommodate the transaction by making the space available. Our franchise value was important because our reputation in the market allowed Fuji to have confidentce that we could deliver the transaction as well as underlying tenants and the confidence we would be able to take the space and also find a substitute tenant to work with them on it. Keep in mind within 60-70 days, we finished economic negotiations and did all the lease negotiation and documentation on this deal.

Timing was you have the essence for not only Fuji but in the event we couldn't deliver all these tenants, they needed to pull the plug and move on with their search for a new headquarters but also the tenants we were dealing with, the economic sensitivity in terms of mitigating cost, time was critical and the quality of our portfolio and critical mass allowed us the competitive advantage to have the opportunity to move these tenants into different buildings all of which were of equal quality and well sought after and looked to accommodate the guys that were interested in moving around. We were pleased with the transaction. It's critical for us in a tough market to bring this transaction home, and to move forward with what we think is going to be a great long-term relationship with Fuji.

And we'll take questions about that on the Q&A section. One of our value creation activities on slide 18 where we have good progress, our Reckson executive park which is our one outstanding development project we have going right now, we are plead pleased to announce that we signed Solomon Smith Barney for 38,000 square feet which will bring the property to 75% occupied. We have 208,000 square feet leased against our projection of 220,000 leased by the end of 2002. We are pleased with the occupancy of the building and if you look at the tenants, the quality of tenants we are bringing into the building.

Moving away from operations, I'd like to jump into discussing the investment environment. If you look at the investment environment, the way we characterize is a tale of two investment markets. The marketplace for high quality stable assets where there's an extremely competitive marketplace where investors are scrambling to get yield that they can rely on, and the prices for those assets are trading at significant what we believe to be abnormal premiums. Then you have assets where there is rollover exposure or lease rollover exposure. There's much fewer potential investors in those types of opportunities.

That being the case, there have not been that many opportunities of that nature put on the marketplace but we believe there's a difference in those types of markets.

During the past quarter we bid $1.75 billion of assets both in the CBD and suburban markets. It is our opinion that pricing is still not appropriately addressing our market risk and no surprise we didn't win any of the bids we made on those assets. To give you a sense of where these assets traded, the CBD assets are anticipated to trade at an average price in excess $450 per square foot and an average cap rate of 6 1/2 to 7%. The suburban assets are anticipated to trade between 8.5% cap rates, and that's $260 per square foot. Mind you suburban assets were pulled off the market because pricing could not be agreed to. That all being said, we do expect there to be greater market activity over the next six months based on discussions we are having with investment bankers.

They are receiving a number of new assignments by owners who are attempting to take advantage of current pricing. Based on some of the assignments we've heard about, there are some things that are more interesting for someone like us that needs a value-added landlord to take on lease exposure and reposition buildings, et cetera. We are hopeful that does bring opportunity. While the opportunities may be there and identify them in 2002, we do not think it's likely that we'll close any of the acquisitions in 2002. We might, but don't think it's likely. In any case, it's going to be key to us as it has been to continue to maintain our discipline with respect to underwriting and assure we account for the risk we think exists in the market and if we can't underwrite appropriately, we'd rather sit on the sidelines with our balance sheet and repurchase shares of our stock if the prices are appropriate there than take undo risk at pricing. In addition, we are evaluating additional dispositions or joint ventures to capitalize on investor demand for high quality stable assets and while it hasn't progressed to a level we are thinking about, we are considering that. With that, I'd like to turn it over to Mike Maturo to provide details about our financial results.

Thank you, Scott. Good afternoon, everybody. I'd like to start with some detail comparing the quarter of this year to last year. We've reported 59 cents as compared to 70 cents for the quarter. 3 cents of that is attributable to the income that we no longer report on the front line in RSVP. That would bring us to a comparison of 5967. If you follow along on slide 20, I've outlined what that represents. We've had decrease termination fees of about a penny of $2.3 million in 01 and 1.8 million in the 02 period. 4 cents per share decrease in other income.

Some detail on that was from last year that we no longer have the keystone dividends of $1 million real estate tax and utility refunds of 1.2 million, service company income related to construction and development areas $600,000 interest income from 120,000 and miscelanious items for $500,000. That amounts to $3.4 million of other income items that were in last year's numbers that we don't have this year for about 4 cents. Disposition delusion about 7 cents per share represents the income lost on the sales of properties and JV sales. Excess bad debt expense of about 3 cents per share, 2.5 million reported as opposed to $100 thousand last year. And the bottom line actually resulted in an increase as a result of reduced debt service and increase in NOI that Scott spoke about of 7 cents and that amounts to the 8 cent difference on a quarter over quarter basis.

Turn the page, slide 21 to look at some of the operating data in the margin analysis. From a operating revenue standpoint for the June period, we had about $4.4 million straight line rent in those numbers. That is net of a million 8 reserves against the straight rent and we'll talk about that as I go on. The straightline rent of 919 for this quarter was about a million 4. If we look at the operating margin for the quarter of 66.2, that is up from last quarter of 65.5 and essentially leads to a seasonal adjustment and increase in rents. That is down from a same quarter a year ago from 67.4 to 66.2 and essentially is mainly attributable to the reserves we took in the quarter. If we look at the marketing G&A expense line item, take a moment on that. On a sequential basis that went from 7.1 to 7.6 million.

That's attributable to the fact that we are picking up now some G&A costs from the construction company as a result of the lowered amount of activity there in the allocation of people, in some cases from the development side to the operating side. I would expect that to continue for the foreseeable future until there are activities on the development and construction side that pick up. I think this number of about 7.6, 7.7 is probably a number that is good as a run-rate basis. The number is down from last year of 8.4 million but that is essentially atributable to the fact there are nonrecurring items including dead deal collections and severance payments in last year's number. Stepping back and talk about operating expenses in general.

Overall, the operating expenses were only up about 2% but that includes the fact that there was dispositions of properties included in that number. We look at the same store analysis which Scott mentioned, operating expenses were up 6.9%. Real estate taxes were up 7%. Utilities were down 6%. A couple of big items being security was up 50% and that's essentially attributable to new security measures as a result of 9/11 situation primarily in the New York City properties. I'll tell you that I believe that amount will be mitigated in the future. A couple of reasons, one is entirely passed through to tenants.

The other thing is that we are installing certain capital type items including turn style that will alleviate some of the labor-type expense that are including with mainly the lobby entrances. The other big increase on the expense side is insurance. I want to spend a moment to talk a little bit about insurance. Obviously, it's a big item for the industry in general and something we've spent a lot of time on including cost relating to terrorism. If we look at kind of a run rate historically. We've run 9 cents per square foot for the entire portfolio.

Under the new policies which are recently implemented from a standpoint over the following two quarters as various policies expire, the base insurance cost, this is general liability and property insurance for suburban office and industrial will be about 21cents per square foot. When we add in the insurance cost related to terrorism to the CBD properties, that adds about 27 cents per square foot for those properties. Then lastly an additional terrorism policy on 919 alone which adds 71 cents per square foot bringing that total amount of 919 to $1.19 per square foot.

I will tell you based on our work as we've done through exploring or recovering ability, we do believe that we'll be able to recover approximately 80% of the increase cost across our portfolio and that number is actually higher in our New York City properties particularly in the 919 property. Now with respect to terrorism insurance just to give you a bit of color on that, we have a $100 million of coverage covering all properties on a per occurrence basis. In addition to that we have a $150 million additional coverage for 919 alone bringing the total coverage on 919 to $250 million and that is on an aggregate limited basis. So that's some points on the insurance costs and obviously going up significantly, but it is coverability analysis and we believe on an overall basis we'll be in an area covering 80% of that cost.

Just going back to slide 21, other income, we spoke about that, we're down from $7 million down to 2 million. I think the $2 million number is a good run rate number going forward. It will be between $2-2 1/2 million is what we reported in the first quarter. Receivable reserves for the quarter was $2.5 million including reserves against our deferred rent receivable as opposed to $1 million last quarter and only $100 thousand for the quarter, same quarter June 30, 2001. We have about $1.2 million for the remaining two quarters in our budget. I believe that this point that looks sufficient. Obviously we have a couple of items that we're gonna go into, particularly MCI that we can't predict right now. That's where our budget is for the time being.

If you turn the page to number 22, slide 22, Scott provided commentary on our tenant diversification profile. I'd like to walk you through some of the credit risk issues we are addressing currently. We spoke about one last quarter which was the HQ Global work places space. We had 220,000 space with HQ. Two leases were given back. We have 202,000 square feet of space in nine properties. Three of those properties have been restructured and six leases were unadjusted.

We expect at this time based on our discussions in our work with HQ that those leases will be affirmed in the bankruptcy but that has not been done yet, although, those leases are paying on a current basis. Metro Media Fiber is a tenant in 360 Hamilton Avenue for 112,000 square feet. They filed for bankruptcy in May 2002. They had a base rent of $25 per square foot or about $2.8 million in total. We've restructured the lease with Metro Media. They'll keep 32,000 square feet at $25 per square foot.

In connection with that restructuring, we receive termination fees of $1.8 million. As far as the space that came back, we are currently negotiating a lease for about 49,000 of the 80,000 square feet of space with a tenant and as far as receivables related to Metro Media, everything is written off related to the space that was given. The next tenant is Arthur Anderson, they lease 636,000 square feet. Annual base rent of $15 per square foot. Their rent is paid through August. We have written off 100% of their deferred rent receivable and essentially on a go-for-it basis and report only the rent that we receive on a cash basis.

Turn to slide 23, we've spent some time and previously issued commentary on our exposure to WorldCom. It represents about 3% of our portfolio income. As of current, they are still in all the spaces and they continue to pay rent. We've received rent through July and checks have come in for August for substantial amount of the space. What we've done here, we've spent time trying to speak with them and getting detail. We're not sure what they are doing with this space. They haven't provided us with information as to how much, if at all they are going to give up. As a result of that, we have decided to at least for now report a reserve against 50% of the deferred receivable that's on our books which is approximately $1 million and continue to only report straight line rent for 50% of the space on perspective basis.

Moving on to slide 24 looking at our balance sheet and financial ratios which continue to be very strong 3.4 times interest coverage fixed charge of 2.66 and a debt ratio of 40%. The only substantial change from a balance sheet standpoint has been the five-year, $50 million note issuance taking advantage of low rates to lock in long-term debt is something that's consistent with what we try to do.

If we turn to page 25, it gives a little bit of detail on our debt schedule. Not a lot of change but as a result of doing the unsecured $50 million transaction, we now have $1.2 billion of fixed rate debt with a 7.7 year average maturity of 7.3%. Down below, look at our floating rate exposure it's down 12% and across from that, look at our expiration schedule which is in very good shape, we have no near term refinancing exposure until mid-04. A $100 million bond coming through there. After that nothing until mid-2006. So we have really not much exposure related to refinancing of any of our debt.

If you turn to page 26, I'd like to spend time talking about our CAD or payout ratio and capital expenditures and Scott hit on this. We've included in our supplemental, a series of capital expenditure disclosures that we believe will provide additional insight as to cost of maintaining our buildings retention of tenants and actually leasing to new tenants. We've also included additional payout ratio analysis which is summarized on this page and I'll spend a little time on it. I have fielded as well as Scott a number of questions on the payout ratio. Our ratio is impacted by a couple of things historically which includes the 919 free rent. The class-b dividend which is at a higher rate in the class-A and we use a total committed cost for TI and leasing commission to calculate the payout ratio as well as expenditures for the quarter. What we've done is expanded disclosure so people can see this ratio in a number of ways.

Follow along on slide 26, I've broken out the three methodologies that we put in place. Committed nonincremental TI on leases signed and capital improvements on an actual basis. The next is the cash pay which is the cash paid for nonincremental items during the period and the third is a variation of the first which is committed but only on leases assigned and excludes leases scheduled to expire in future periods. What was happening as we saw last quarter is as we've accelerated the renewal process, we were including in our payout ratio costs for leases getting renewed but expiring in future periods. As far as the 919 free rent situation, that has burned off this quarter and the class-B dividend ceases in the third quarter of 03. Both those facts should move through our payout ratios and actually make them better. If you look that's already happening. Look from March 02 to June of 02. We've seen improvement on all three levels. 108.5% versus 93.9 on the oral committed. On the paid 115 down to 99% and the leases related to space that had just expired 103% down to 90%. I think this will provide people with some good analysis and clarity in dealing with some of the issues that have historically impacted our payout ratio and on the positive side these are all starting to move out. It will be less complicated on a go forward basis.

On slide 27 just an update on our recycling program. The $18 million under contract, we believe that will occur in the next week. The $30 million which has been identified for 02 is not under contract at this time. Then you'll see of our remaining assets, $87 million in 03. As Scott mentioned, we are evaluating additional sales particularly JV opportunities. One other item here I want to mention and address is on the rsvp side. We have that slated for $65 million slated in which is essentially a carrying value in 03. There's no change in the evaluation of RSVP. We haven't changed evaluation or reserve. We believe this amount is recoverable and included in our balance sheet and these assets are all positioned for sale which we believe will occur in 2003.

On page 28, just a little bit more detail. Scott covered most of this, 1.856 million shares were purchased at a weighted average of 2198 and 368,000 shares of the B stock at 2290 for a total of 2.24 million. We have a 5 million share buyback program in place. The remaining amounts are 2.776 million.

Turn to slide 29, Scott spent time talking about our expanded disclosure. We continue to try to enhance our supplemental package. This quarter with items such as Cap Ex schedules. We added some disclosure on unconsolidated joint ventures. Essentially the one building we own 520 White Plains Road. We added a tenant list of tenant industry breakdown. Leasing activity and as we mentioned detailed analysis on our payout ratios. We've decided to adopt stock option expensing effective January 1 of 2002 where any options that were issued throughout this year will be valued and then amortized into expense over a investing period.

If you turn to page 30, I'd like to provide update on guidance for FFO for 2002. If we look at our previous guidance out there now, 245-255 as a result of the activities that we've talked about today, we're moving our current guidance to 240-245 per share. Just to give you a feel for that reconciliation, if we started a 245 per share, the previous guidance, we believe a 2% reduction for other income, 2% reduction for additional bad debt. Based on an assumption of no acquisitions, closing during 2002, we have a 3 cent reduction attributable to that. And an actual 2% increase as a result of lower debt. 2 cent increase as a result of lower debt service which is primarily related to lower interest rates.

The other end of the range of 245 essentially would come from any more positive outcome as a result of such items as other income but primarily as a result of any acquisition activity that we may be able to execute. These estimates are based on as I said zero dollars of acquisitions and stock repurchases of between $50-100 million. I will now hand it over to Scott for some concluding remarks. Thank you. And I appreciate everyone's patience. We have a lot to cover today. Just in conclusion to give some ending points and one comment. Obviously I think you can tell we are continuing to successfully navigate through what is a challenging marketing environment. We are focusing on retention and gaining market share.

We've talked in the past of playing in your face football and focusing on every deal as if it is the most important thing around and at the close of that, our corporate portfolio is well-positioned. We are maintaining a cautious stance due to the uncertain economic environment and specifically because of the concerns regarding the tenants that are in the marketplace today and what the impact of that might be. With respect to investments, we are hopeful we'll see opportunities it come to the market.

We believe we are starting to see a pipeline build on that and we'll be poised to execute those. In addition as I mentioned also we are going to be looking to capitalize on investor demand and add to our dispositions ventures that we have done in the past. And as well as continue to pursue the opportunistic share repurchase program in the past month. As a comment, Mike went through the disclosure, the enhancements to the disclosure. I'd like to talk about our emphasis to shareholder communication.

We went public in 1995, we as a company sat down and talked about how we wanted to approach shareholder relations. Actually in trying to think it through, what we determined was the best way to do that was to treat our shareholders like you treated our partners in the 35 years prior to becoming a public company. Which was to only be open and honest with our partners as to what was going on in our business so they could make an intelligence investment decision.

If you look at our core values which is in our annual report or come to our office, one of our core values is treat our shareholders like we treated our partners. To us an approach we have taken and continue to take and think that would offer our investors the ability to understand what's going on. We are not always going to agree on a strategic direction but I assure you're not going to know that we are not taking a direction. You'll be able to voice your opinion. With that I'll be glad to open up for questions, operator?

Thank you. Ladies and gentlemen if you wish to ask a question, press the 1 on your touch tone phone. You'll hear a tone indicating you've been placed in queue and remove yourself at any time by pressing the pound key. If you're using a speaker phone, pick up the hand set before pressing a number. Please press the one on your touch tone phone at this time. The line of Stuart Axelrod at Lehman Brothers.

Hey guys, the Reckson Executive park and ride book. What does that relate to?

There were three leases that came up. One of them was Siemens and they consolidated back to their headquarters and we have two deals on the table that one of them is out for signing that will backfill that space with a ten-year deal and the other one was market data who consolidated down from like 40,000 square feet into 50,000 square feet and looking to backfill that space.

Okay. In New Jersey, looked like you had huge TIs on the renewals for the quarter. Can you comment on that? And expectations going forward.

A good point [indiscernible] parkway.

Okay. Expensing the options, you mentioned the start effective 02, is there any cost associated with that?

Not for the first six months. Haven't been any options issued during the first six months.

And then on the RSVPs, there was a change on the privatization balance sheet, pretty significant in terms of asset side.

Essentially that platform has been essentially distributed to its partners meaning the platform partners RSVP and the operators have decided to part ways and there was a settlement where assets were distributed to each partner in settlement of their interest. That transaction will close in the third quarter.

Just on your New Jersey question, also had to do with a renewal that there was a large brokerage commission and looks like it skewed the numbers a bit. Not a lot of activity we are talking about.

And [indiscernible].

Stewart, you faded out on that.

Any thought to the procedure to wind down the corporate loan program given recent legislation?

Yeah, it's not allowed. So we -- you will not be seeing that any longer because it's prohibited. Just a little commentary on-that, those loans were part of a long-term incentive compensation, but that on a go forward basis will be structured in a different manner.

Hi, guys. This is David Shulman, I have one question. Have you noticed any change in the tone of your markets and the tone of your business in July beginning of August compared to say April, May and June?

I would say the tone clearly April and May, we saw a slowdown in the business. The first quarter coming off of our first quarter call we saw a slowdown. Seems, I don't want to speak for the markets but from our own business obviously we've had a lot of activity pick up. Look at the general market conditions out there, I would say that I've seen the tone somewhat negative. Our business has been pretty good. Would you -- do you have a comment to that?

It's been spotty for this whole year. Definitely in July and in June we've been active with the deal in Westchester. Westchester so far this year has held up but it's been spotty. Kind of comes and goes in starts and stops. Definitely more activity going on in the market in June and July than in April and May.

Even in Manhattan since the end of the quarter we leased 40,000 square feet just you to give you a perspective. Even the leases which is interesting, look at the net effective rents of the leases and this is more in the second quarter than 40,000 square feet that we achieved versus what we established in the business plan at the beginning of the year, we are up over 10% on the net effective rents we are achieving. You can tell by our call, we are cautious and concerned about the markets. We think we're doing a good job but we are fighting for them.

Thanks a lot, guys.

Our next question will come from Raul Tokijhari from Merrill Lynch. Please go ahead.

Two questions from your list of financial distrust. First Metro Media, was the fee in the previous quarter or taken on prior periods?

No, in the second quarter.

Okay. And with regard to Worldcom, the biggest occupation Worldcom has is in the Reckson executive park. What is that space used for and you know, what's the likelihood that Worldcom or whatever successor would want to continue to use that space?

Yeah, there's two pieces there, one is telecommunications and the other is MCI international headquarters. You know, we're not sure of the likelihood they are going to stay there. It's decent space.

We haven't been -- we haven't had any information about what their indications are going to be to stay or go. They are using the space. They have paid rent, but we don't have a lot of information. We've tried to get information from their facilities people. I think as a result of the bankruptcy and what they're going through. I'm not sure, frankly, that they know specifically what is their plan on keeping and not keeping. You know just two points on termination fees. Mike went through the guidance. We're not making changes to the fees based on where we are. We are assuming that termination fees we forecasted when we did our guidance is about where we'll be for the year including the termination fees we got from the Fuji transactions as well as termination fee. And the second piece is in that range of 240-245, we have a cushion for additional credit risk as it relates to potentially WorldCom or Arthur Anderson giving up more space earlier.

In the development pipeline, everything you have in your pipeline now is pretty much classified as in planning. Are you pretty much expensing the costs associated with those projects?

No, we are not. Although there is not dirt moved per se, we are still doing a lot of work relative to planning, making sure our approvals are still there. Looking at alternatives for land use and those things so actually marketing the space and working with various tenants on design for potential things we are looking at. We continue to work on those properties to bring them to market which we believe we will so we are continuing to at least capitalize those costs. Now to the extent that we believe that they're not recoverable or that we believe that that space will not be built for a very extended period of time, we will evaluate that. At this point we continue to capitalize carry costs.

And in terms of 03 guidance, any suggestions or is there no visibilitity at this point?

I think it's very hard to go to 03 at this point. We are limiting our comments to 02.

All right. Thank you, guys.

Thank you.

Next question will come from the line of Tim Glabell at Deutsche Banc. Please go ahead.

The charge for the receivables in the quarter, where was that? Was that in the rent revenue as soon as.

That's correct.

And could you break that down among the different tenants involved?

It's not really done in that manner. We look at our exposure and we do estimates. We booked reserves based on anticipation. Obviously we focused on MCI and as a large amount. We did take a specific reserve against Arthur Andersen which is $140,000 in reserve and Metro Media which is $350,000 related to the space that they did not continue to occupy because obviously, we're not going to receive that.

Okay. And the additional reserves were about $2 million in the quarter?

That's correct.

Okay. And deppreciation jumped sequential $1.7 million, is this a good run rate at this point?

Yes, I believe it is. It may be a little bit higher for adjustments. Maybe half a million but no more than that.

Okay. And on the delivered projects in the quarter, what is the leasing percentage on them?

REP which is one project that moved into operating is actually as of today with the signed lease with Smith Barney that Scott mentioned 75% leased.

It was 60% moving to the quarter.

Okay. In terms of near term mark-to-market as opposed to looking into 05 and 06, where do you?

We gave you looking at 02 and 03 if it's on page 20 -- I'm sorry.

Of course.

Page 16. I would say, again, 04-06 are years I was pointing to 05 and 06 specifically because the amount of volume that we had expiring in those years. Frankly 04-06 we have very good mark-to-market opportunities. We don't forecast out that long at this point, these numbers are actual numbers from our business plan.

Okay.

Versus just general markets.

And the change in the mark-to-market estimates, to what extent is that, rents coming down versus leasing up say low hanging fruit, if you will.

The change is mostly rent forecasted rents coming down. There was about 200,000 square feet difference in the amount of square footage that was expiring. The last time was $1.9 million vs. 1.7. Maybe a little bit of lower hanging fruit that we hit in that quarter as you see in this quarter that you see by the numbers. I would say adjusted expectation for lower rents.

Okay. And trying to get at the capitalized interest number talking about, are you capitalizing interest on all 150 million on the balance sheet?

In development?

Yep.

Yes.There may be some small land pieces that we are not, but for the most part, the development dollars represent active projects that we're seeking to bing the market at some point reasonable in the near future.

And are you capitalizing anything else besides what's in the cost and to land?

No.

Okay. You mentioned insurance going up, is there going to be a timing discrepancy between when you see the charges and when you'll see recoveries? What extent is that material?

It's an interesting question in that pursuant to certain of the leases, you're required to bill through on a prior year basis or on a submitted budget basis. We are trying to deal with that issue from the standpoint of going to tenants and having discussions. We're in the process of doing that. We will book the recovery to the extent that we believe it's recoverable prudent to the leases. I think it may result in a billing timing situation. In obviously collection to the next year in some cases. We are addressing that issue. I can't say it's not material because the increases are material relative to insurance. But we will be reporting them to our best knowledge of their ability to be cast through and we are having those discussions.

Just on the insurance thing that I want to make, we do believe that when and if hopefully there will be a when, the federal government passes an insurance act, these numbers will come down. They won't come down to where they were historically but they clearly won't be in the levels that we are paying in this last round of insurance. We're not looking at this as an salute long-term at these levels, we expect them to come down.

Okay. Great. And one last question. I missed the rent increases by division.

If you go to the supplemental that's on our website, it's right in there page -- the rent increases are not. Increases by division? Give it to you quickly. On a GAAP basis it was Connecticut was 16.6%. Long Island .5%. New Jersey 16.1%. New York City 62.4% and Westchester was 11.3%.

Great.

Thank you.

Our next question is from John Luzias.

One quick question, what is the amount or percentage physically vacant at Worldcom MCI?

I think they're using all the space, John. As far as obviously us going to the spaces that they're in, they're occupied.

And one sublet space that they haven't been in for a couple of years. Right.

One floor of the 100.

But there's a physically present sublet.

And the rent is $22 a foot or something.

Thanks a lot.

Thank you.

Our next question is from Gary Boston of Solomon Smith Barney. Go ahead.

I'm here with John Litt. Mike, I was wondering if you could help me on the Cap Ex disclosure. On the cash flow statement in the queue, is there any other place except for payment of leasing costs and additions to property that is Cap Ex and TI's and leasing commissions work themselves through to cash flows?

No, that should be the true numbers and I've taken the liberty of tying that back. Okay. I was waiting your question and unfortunately it's not issued. When it will be those numbers will go up to the cash flow statement.

I was trying to -- maybe I'm looking, I was trying to back out from the new disclosure back to first quarter numbers and coming up short relative to those two line items. I wasn't sure if it came through somewhere else on the operating side.

No.

Okay. In terms of the G&A, mentioning it increasing as a result of slower developments, can you tell us what the capitalized G&A was for the quarter?

I don't have that number.

Okay.

I apologize.

No problem. And John had a couple of questions.

Thank you, it's John Stewart. Mike, did you quantify the impact of options in 2003 expensing this?

You know for, well, for purposes of implementing the expensing, we will be implementing it based as of January 1, 2002. So the expense related to 2002, as it right now will be zero because there have not been options issued. Unless we issue options, there's no way to tell and not in a position to -- we're not in a position to discuss whether or not we are issuing options.

Right. Okay. On your second quart of 2001 conference call, you gave an internal estimate.

Let me clarify. I thought it was more like $26 a share. Again, what we did and what we said on that conference call is that we are providing a model in which people could then use themselves to plug in numbers and different Cap rates to access an NAV. There were other things moving in and out of our numbers which doesn't exist today but at the time did exist. It's not that easy for an analyst to come down. In the spirit of trying to give everyone the ability to do so, we laid out effectively a model that we propose to be used as a formula but no means a guidance to our view of net asset value.

Fair enough. Are you willing to share where you pick it today?

No.

Okay. And final looking at our FFO reconciliation, I didn't see if you were specifically taking the dispositions into account. What number?

They were essentially considered in the original estimates.

The full $50 million?

Yes. That's it for me, thanks.

Next question is from Matthew Gilman of ABP Investments. Go ahead. Mr. Gilman, your line is open.

Probably went home for dinner, such a long conference call.

Next question is from Dan Perla of Earnst and Young. Mr. Perla, your line is open. Okay. No response from that line. Once again if there are additional questions, you may press the 1 or touch tone phone at this time. And we do have a question from David Thick from Legg Mason.

Good afternoon, gentlemen. Hey, David.

Can you talk given that you do have development and predevelopment under way about guidance. I don't you don't want to do it globally but assumption that is we could make about next year's development pipeline based on what you have on your balance sheet and in the works today.

To be honest, it's difficult for us to do that as to give guidance for the same reasons. Not enough clarity as to what the markets are going to be. Or an Arthur Anderson, what space we may have or not have and what factors figure into the decision to develop or not develop and acquire or not to acquire. It's related and impossible for us to provide those guidelines.

How do you make judgments about which projects to continue investing cash in today?

Either A, because we can evaluate best use or, B, maybe it's not the best time but in our batting lineup as to which projects we believe would be most competitive coming out of the ground at the right time but we don't know what that time should.

You're not able for today for the stuff in your pipeline to run specific IRR until you see the market move.

We can make IRR but it's all fictitious until we put a shovel in the ground. It gets going through an IRR.

I guess you're making development investment calls today, you're not able to --

One of the things Mike said is a fair statement, we are looking at our development pipeline and saying we believe it may be an extended period based on expectations in the future is Greg and his development team is out re-zoning properties for higher and better usage and marketing assets to specific users that may make sense.

We are working our development pipeline in trying to say, okay, which are the prime pieces that when the market comes back we want to get in service right away, which are the pieces that would lag market recovery and which would be later and the alternatives higher and best use to use for the projects.

Given the state of the economy, it's a good opportunity to go in and try to create better efficiencies with land. For example we went in and had a piece that was re-zoned for 175,000 square feet re-zoned for 255,000 square feet. We are going after opportunities like that to find a value within the land without putting a shovel in the ground and doing so.

I understand that. I guess what it leads to is the question given the overstaffing and the stuff you've had to do internally, at what point do you make hard decisions about your level of internal staffing on the development side?

We have done that.

In the past year we significantly cut down our development team, down to a level that focused on managing. Value creation with existing pipelines.

Okay. Do you see significant amounts of additional G&A costs transitioning over? There's a follow-up to a previous question, but what shall we be expecting again not looking for guidance on 03 but presuming there are no further cuts, what's an appropriate run rate, I guess, is the question.

I think if you look at this quarter which was about $5-600,000, I think that that is a fair run rate. That could be offset in the future. There are actually a number of jobs that the construction company is working on for tenants which could be large. So that may offset some of that. We're going to call it as it happens this quarter was, I think a conservative estimate or amount that was allocated and I would use this number as a run rate and as we move forward and balance that with the amount of activity that is being worked on.

Thanks a lot, guys.

And we have no further questions in queue at this time.

Thank you, operator and thank you for joining us on our conference call and look forward to speaking to you soon.

Ladies and gentlemen, this conference will be available for replay starting today 7:15 eastern time until August 16th midnight. Dial the playback service 1-800-475-6701 with the access code 644478. If you're dialing internationally dial 320-365-3844, code 644478 and that does conclude your conference. You may now disconnect. Have a good day.