SL Green Realty Corp (SLG) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Reckson Associates third quarter earnings conference call. At this time, all lines are in listen-only mode. Later, we will conduct a question-and-answer session, instructions will be given at that time. If you should require assistance during the call, please press zero and *.

As a reminder, this conference 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 risks, trends and uncertainties that could cause actual results to differ materially from those expected.

Among those risks, trends and uncertainties are general economic climate, changes in supply of and demand for office and industrial properties in the New York tri-state area. Changes in interest rate levels, our ability to lease -- Excuse me, to lease rental rate levels, changes in operating costs, repayment of debt owed to the company by third parties, risks associated with joint ventures and acquisition of properties. For further information on factor that could impact the company reference is made to the company filings made to the Securities and Exchange Commission. Reckson undertakes no responsibility to update or supplement information discussed on this conference call. I would like it turn over to your host, Co-Chief Executive Officer Mr. Scott Rechler. Please go ahead, sir.

Thank you for joining us for our third quarter earnings call. With me is Donald Rechler, co-chief Executive Officer and Michael Maturo, Chief Financial Officer and the balance of our senior management team. For those who have not participated in our calls in the past, we will reference a power point presentation. If you have not received, you can go to our website, www.reckson.com, to the Investor Relations section and follow along with that. If you don't have access to the website and want a copy, call Susan McGuire, head of Investor Relations at 631-622-6642.

We will start with a formal presentation, that myself and Mike will make. Then, we will open up for questions for Donald, myself, Michael and the rest of the senior management team. Turn to the slide presentation and to the second slide, summary of Highlights. Let me walk you through highlights for the quarter.

During the quarter we reported diluted FFO of 59 cents per share, which is compared to 66 cents per share for comparable quarter of 2001. Which is a 10.6% decrease. Later in the presentation, Mike will provide a reconciliation between the 2001 period and 2002 results.

Our core portfolio continues to perform extremely well. During the quarter we generated same-property NOI before termination fees of 7.2% on a cash basis and minus .4% on a GAAP basis. We generated same-space rent growth during the quarter at 7.9% on a cash basis and 11.1% on GAAP basis for our office portfolio and 4.8% on a cash basis and 16.6% on a GAAP basis for our industrial portfolio.

Our occupancies on an overall basis were flat as compared to June 30th, and down 260 basis points as compared to a year earlier. When you look on same-property basis, our overall portfolio occupancies were down 40 basis points as compared to June 30th, and down 80 basis points if you look a year earlier. Office portfolio, in particular, greater impact due to the size of the revenue stream. It was down 30 basis points between September 30 and June 30th and down 80 points also if you look in the prior year September 30, 2001.

During the quarter we renewed 65% of our expiring leases. We completed 745,000 square feet of leasing transactions which included 612,000 square feet of office space, which is about 50% higher than our fourth quarter historical run rate. We did a tremendous amount of leasing during the quarter. In particular, Westchester was extremely active. Where this quarter we completed the Fuji transaction, which equated to a 239,000 square feet for Fuji and associated tenants. I will talk about that later in the presentation.

From an investment perspective during the quarter we were able to capitalize on the -- what we believe was undervalue of stock price and repurchased 842,000 shares of Class A Common Stock and had a weighted average stock price of $20.77 per share and 357, 500 shares of Series A preferred at weighted average cost of $22.29 per share. These purchases were made subsequent to the September 30 period, but during this reporting period. Year-to-date we have acquired 75 million dollars of a combination of our Class A common and Class B and our series A preferred. We will provide more details about that later in the presentation.

Now, if you will turn to the next slide, I would walk you through a snapshot of our portfolio. Not much has changed this quarter compared to last quarter. We did sell 3 properties, two of them Class B in Westchester and smaller industrial building. We have now 20.4 million square feet, 178 properties. NOI is still 85% office, 15% industrial. When you look at the composition of our portfolio as it relates to each of the markets, you will see the NOI is split with Long Island still maintaining 32% of our NOI, which is about up from 30% last quarter on reported. New York City is 29%, then Westchester 27% and New Jersey at 12%.

If you turn to the next slide, note we provide you with a view of our tenant roster. You can see extremely diverse tenant base. If you look at the pie chart on the left, you will see that the consumer products makes up the largest type of tenant that we have or industry. 13% of our base rental revenue, 12% from financial services companies. 11% from legal services. Then, telecom at 9%. Then, we have in the fifth largest its a tie between other professional services and the Insurance industry. Extremely diverse.

We provided you with a list of our largest tenants. Here is our largest 25 tenants. You see names here. Clinton is our largest tenant 919 3rd Avenue. Then we have Worldcom, which we have talked about in the past and we will update you. You see the list of stellar tenants within the portfolio.

If you turn to the next slide, I would like to take a moment and address our markets and trends we are seeing in our markets. Starting with the trends. While our markets continue to be competitive, we do not view the markets like the early 1990s. They are still reasonable activity. Still gains in these markets. When there is activity, it enables us to capture market share, which is critical for our strategy. We will talk about that later, as well. Tenants are cautious, but still doing transactions.

Large strategic deals are active throughout the region . For example, in Long Island, we have a large block of space with Worldcom in paying rent. We have two tenants of scale looking at that space. We have additional examples of that in Westchester and Connecticut, as well and Manhattan. There is a lot of tenants looking for deals in our marketplaces. Early renewals are being pursued by larger tenants, in particular tenants who want to capitalize in the present market conditions and are looking at trying to complete early renewals. In certain instances, we are taking advantage of that. One in particular in Long Island we are working on. Reasonable activity of smaller sized tenants continues to be prevalent in all of our marketplaces.

So, again market conditions are tough, but there is activity, which is critical for our strategy and gives us an advantage. In the 1990s, the market conditions were tough, but there was no activity. You could have space vacant for an extremely long time. That is not the case today. One thing that is overhang today is tenant stability. It is difficult to know which tenants are stable and how their businesses are doing. We do not have any major tenants left in our portfolio that have not come to the top of the list we have spoken about. When you look across the market, you can come up with names of tenants that you question their stability and the impact they would have on our markets are something we watch very, very closely.

While there is activity and we have been able to hold rent, clearly this resulted in higher leasing costs than we had in the past. One thing that has been clear, tenants are capital sensitive than rent sensitive. They would rather continue to pay reasonable rent than come out of a dollar out of their pocket. That is something that as we have gone both on existing tenants and new tenants, you will see our TI numbers have gone up. It's costing more to keep tenants for the season same reason. You have to match the type of deal in the marketplace. Again, that is costing more in terms of tenant costs.

Lastly, brokerage costs are increasing, following the point I just made on tenants renewing, most of the tenants are hiring brokers, where in the past they may not have. They wanted to scope the market for opportunities. Landlords are getting more competitive and paying larger commissions on renewals than in the past. That is something that is impacting the tenant costs.

As we mentioned last quarter, sublet space remains a factor, high-quality buildings with high-quality landlords are competing effectively. I don't think we can think of any significant deal in this quarter that we lost to a sublet space in any of our markets. It is out there, but not been a major factor in terms of us being able to get our market share.

One thing that has been obvious to us this past quarter is that our geographic concentration provides us with a significant competitive advantage. First of all, enables us to provide flexibility to relocate tenants throughout our submarkets. This is helpful when tenants are looking to expand or contract or find other marketplaces. A prime example is Fuji, which we will talk about in detail later. They were looking for 165,000 square feet and at the time we had 70,000 square feet available for them, but were able to move tenants around throughout the market and accommodate their needs. That is something that has been valuable for us.

In addition our regional relationships provide us with an edge with the tenants and brokers and give us competitive advantage in our markets. As we go forward, we will continue to focus on gaining marketshare and maintaining occupancies. During the previous quarter I have been using football anologies about how we are pursuing things from blocking and tackling to last quarter, characterizing the markets as in-your-face football. This year we have inclimate weather conditions and we are playing to control the clock and stay well occupied to get through this economic downturn.

To get specific in our markets, turn to slide 6. We provide you with layout starting with suburban portfolio. Both the overall vacancy rates, the direct vacancy rates and Reckson's vacancy rate. You will see in all marketplaces we continue to outperform the general marketplaces and thus remain the reasons I noted on the prior slide.

Starting specifically with comments on Long Island. 5.8% vacancy there. The overall vacancy, while looked like it climbed from first quarter of '02 to third quarter of '02 is down from second quarter of '02, where it was 13% and now it is 12.5 percent. So, that market has held. On direct vacancy, it has been flat at 8.6%.

In southern Connecticut, it continues to hold its own. It is down from 10.9% on direct vacancy rate to 7.3 percent today. And we are 5.2 vacant in that marketplace. Northern New Jersey, as I mentioned last quarter, and I will reiterate, is our toughest suburban marketplace. If there is any market that has been hit by sublet space and tenants that are having trouble, it is northern New Jersey. Lucent technology, AT&T, Arthur Anderson, have all had significant space they are putting back on the market and have put back in northern New Jersey. Pharmaceutical's, while they have been a grower, have not been as aggressive as in the past to capitalize on the space. Of all markets, northern New Jersey was one of the only markets where supply got ahead of itself later in the cycle. That is something being absorbed in the market. The Jersey Water Front is something that had significant impact in northern New Jersey. That is one area in particular being hit by financial service contraction.

Just ending with Westchester, if you recall, in our first quarter conference call, we talked about our outlook for 2002. We spent time talking about Westchester and how it was going to be a leasing challenge in 2002. It clearly was a leasing challenge and I am pleased to report we met that challenge in 2002. Just to give you color about what has happened in Westchester, beyond even what we had originally anticipated at the beginning of the year, we saw a lot of new tenant issues come up. MetroMedia at 360 Hamilton Avenue has 110,000 square feet that ran into issue that is had to be addressed. We had 30,000 square feet of bad credit tenants throughout the Westchester marketplace. We had trade-out for 60,000 square feet in Valhalla. Then we had another 110,000 square feet of tenants contracting and going to corporate headquarters or consolidating into other space.

It left us in Westchester with 275,000 square feet we had to address and I am pleased to say we have addressed 250,000 square feet of the space to date. It has been very active. The Fuji transaction played a big role in that and I will discuss that in detail later.

Generally, looking at market stats, the Westchester overall vacancy rate is at 19.5 percent, direct vacancy rate is 15%. Note our outperformance at 5.9%. One of the real positives that we have seen in Westchester during the last couple of quarters, in the interest from tenants from Manhatten, prime example of that is Scatten Arps (ph) located 48,000 square feet of back office into 360 Hamilton. Obviously, the poster child of making that move was Morgan Stanley, who purchased a 500,000 plus square foot building in Westchester last year. Westchester is seeing that type of demand and it is something that is growing on itself. It is positive and we will watch that carefully and be able to capitalize on.

Moving to New York City, which happens still to be on a relative basis, an extremely well performing marketplace. If you look at our portfolio, we practically have no vacant space in New York City at this point. The team has done a great job addressing vacant space and getting it leased up. I would caveat to the strength of the market. That downtown is still one of the tougher markets and the one most seriously impacted by financial service contraction and one we are watching carefully.

Our ability happens to be well situated in the downtown area as things have shaken out. So, we continue to hold occupancy and do very well there. The only area I want to point to, we will be getting back two floors from Arthur Anderson at 1350 Avenue of the Americas. We already gotten a tenant we are in negotiations with for one of the floors. We will have another 15,000 square feet or so we will be leasing in that market in that building.

Turn to slide eight, you will note that we continue to maintain high occupancies in both our office and industrial portfolios, even in this difficult environment. Just a comment on the industrial portfolio. The drop from 97.5 to 91.7 relates to 710 Bridgeport, a building in Connecticut that has 206,000 square feet that is vacant. Our industrial portfolio is in excess of 95% occupied. The Long Island industrial portfolio in particular has been extremely strong and continues to have a tremendous amount of demand. So, we are very bullish about that market.

Moving away from the markets back to our portfolios' performance, I would like to talk about same-property NOI. During this quarter, as I mentioned earlier, we had cash NOI growth of 7.2%, GAAP that was minus .4%. This NOI growth, the way we report same-property NOI, is we exclude termination fees as part of the calculation in the core portfolio.

I would like to take a second and give you reconciliation of the cash same-property NOI growth. Look on the right-hand side. Pre-rent burn-off accounted for 5.1 million of 7.5 million revenue growth. Built-in rent increases are escalations that we put into leases and accounted for 2.1 million dollars. Same-space rent increases, benefit we have been deriving from leasing expiring leases and higher rents, accounted for million dollars. Escalations decreased by 325,000 dollars as a biproduct of having to set some new base years on leases, in particular in Westchester.

We had incremental revenue, as we discussed last quarter in New York City, where we leased up some retail locations we had not had on a prior basis. Some occupancy decrease in our suburban market accounted for $700,000 negative and a bad debt increase of 350,000 dollars. For total revenue increase of 7.1% or 7.5 million dollars.

On the expense side, we saw our expenses grow by 6.8%. Our operating expenses accounted for $1,767,000 of that, 7.3% increase over the period in '03. 70% of this 7.3% increase related to increase in security and insurance. We had a real estate tax increase of $1 million or 6.2% over the prior quarter. For total expense increase of 2.8 million. Of the 2.8 million dollars, 78% of that number will be recovered from pass-throughs to our tenants. We only be about 22% of those increases.

On a same-space basis, as I mentioned earlier, we saw rent increases in our office portfolio of 11.1% on GAAP basis, 7.89% on cash basis. On our industrial portfolio, 16.6 percent on a GAAP basis and 4.8 percent on cash basis. During the quarter, as I mentioned, we renewed 65 percent of our expiring square footage. 100% of our industrial portfolio was renewed. We had 66 leases and 745,000 square feet. Active quarter.

We tried to provide color on the next slide, for distribution of leasing activity as to what was the nature of the leases. You will see of the 745,000 square feet, 460,000 square feet were new leases. 171,000 square feet were renewals at expiration. 70,000 square feet were early renewals and 44,000 square feet were expansions. We also had 57,000 square feet of leases that contracted at renewal during this quarter. If you look at expansion, 44,000 versus the contractions of 57,000 or 58,000 square feet, they are pretty close.

Also during this quarter, we had 256,000 square feet of early terminations, of which we released 150,000 square feet, large chunk relating to leasing activity in Westchester that I spoke about earlier. To provide detail about our leasing activity, we put together our office leasing trends slide. Before I go into the detail, I would like to step back and talk about Fuji. You can't talk about our leasing activity without talking about the impact Fuji had on this quarter.

So, just again, for those who were not involved in the call last quarter, just to remind you, Fuji was 164,000 square foot transaction located in Valhalla. We accommodated them by moving a series of tenants throughout our other properties within Westchester and in total, we did 240,000 square feet of leases for Fuji and tenants to move them around. It was a deal we felt was critical to shore up our position in Westchester. Not only for the reasons I mentioned earlier in terms of 10--tenants that were expiring. We knew we had Worldcom and have Worldcom for 250,000 square feet in Westchester that can hang over and become an issue later. We felt it was important to shore up the portfolio and get a long-lease term.

If you look at leases, almost all leases were in excess of 10 years. It was -- Fuji itself had net effective rent of $10.43. As I mentioned, it was a costly transaction, but one we felt was worthy of getting done. Take into account Fuji into Valhalla property, where it went, we will still be yielding in excess of 9% return on investment for that property. And I think we did a good job. This Fuji transaction, by the way, is the sixth largest transaction in the country for the quarter, just Fuji, not counting any of the related transactions. It was a very sought-after deal and one we reached for and are please that we made.

That being the case, it did impact the numbers. If you look at our numbers, starting on the top left. We have actually provided numbers both with and without Fuji so you could see the impact of the Fuji transaction. Our same-space average rent growth, for example, without Fuji was 15.6%. With Fuji, 11.1%. The 15.6%, you can see is still lower than historical trend, but not much lower. With Fuji, it is substantially lower. On the bottom part, you will see it reiterates my point about the leasing activity during the quarter. On office leasing 612,000 square feet leased during the quarter, well above our historical trend line. Net effective net spread began. Without Fuji, net effective rent spread for this quarter was 8.8%. You can see, which is at the higher end, but in line with historical average. With Fuji, that went up to 13.6%.

Lastly, to reiterate my point, we were able to get trends with and without Fuji during the quarter. Average lease term of 8.2 terms without Fuji and 8.4 years with Fuji. From that perspective, we were able to achieve a lot during the quarter. Even taking aside Fuji our leasing costs have increased in all markets. On the next slide, we tried to give a sense as to where leasing cost trends have been and broke down each marketplace. On the left Long Island, Connecticut, New York City and Westchester and we provided the leasing cost per foot for 1998 through 2001. 2001 and year-to-date 2002.

Now, it was important and Mike Maturo will go through this in detail later. When we actually report our leasing cost, we report 100% of the cost associated with the lease in the quarter that lease is signed. We do not amortize this over the term of the lease and we do not report it in this instance as actually spent. So, these are fully loaded numbers and when you do longer term leases with larger costs, it skews the numbers because of the fact we are recognizing them in the beginning. If you look clearly from average year-to-date 2002 cost are significantly higher than '98 through 2001 average and in most cases higher than 2001 average.

Now, what we tried to do is put this in perspective and give it a sense of how it impacts dividend coverage. Again, a lot of moving pieces. We tried to provide some analysis here. If you look, we took expiring leases in 2003 and applied them to the different weighted average tenant improvement or leasing cost for suburban markets, New York City and our Long Island industrial market. By applying the amount of square footage expiring in '03 against the weighted average numbers both for '98 to 2001 average, 2001 actual numbers, the year-to-date 2002 in addition to what we consider was the highest historical and we looked at all three periods and said what was the highest number and averaged it up. That is highest historical. We put a conservative forecast to try to establish where could the range be of capital costs associated with leasing in 2003.

As you see, we then take the numbers and work our way down to a CAD number, which again, would show you for example, in 1998 and 2001, the $1.89, $1.84 in 2001 numbers. $1.76 using 2002 numbers, using highest historical $1.75 and using a conservative forecast $1.71 per share, would be the CAD numbers relating to the analysis. We used a $2.40 FFO number to then calculate pay-out ratios. We provide pay-out ratios both for Class A common and weighted average for Class A and B common. As a point, the Class B common actually converts automatically in November. So, that is something that is there.

And now, again, all this is based on leases expiring in 2003. If you see, our pay-out ratios follow using Class A. 90%, 92%, working up to 99% in the most conservative forecast. One thing we noted for sometime is that because we have chosen to deleverage, it has impacted -- provided us with dilution impact of FFO. To get assessment of normalized coverage, we have made assumption that if we sold $100 million of non-income producing assets, which I will land for example and our interest in RSVP and we repurchased shares, what would that do to the pay-out ratio in all instances? What it would do, if you use '98 to 2001 average, take it down to 84%, working up to conservative forecast of 93%.

So, I think what we provided for the investor community is framework to look at Reckson's normalized dividend coverage based on how we would perceive our portfolio. Clearly, if we are successful at renewing a large extent of early renewals, that would change in any particular quarter what the numbers might be. This is lease we set out for ourselves to try to get a handle on where capital numbers might be going as we go forward. We can take questions about the slides in the Q&A.

Now, to the point of early renewals. This is something we have done over the past year. We made the point we have been working on trying to reduce lease expiration exposure in 2003 and 2004. We made good headway doing this. Our office portfolio we have one and-a-half percent of leases expiring for remainder of '02. In '03 and '04, we only have 8.5% of our portfolio rolling over in our office portfolio.

On the industrial side, for '02, .4% left. For '03, 8.7% and 04, 9.8%. Tremendous amount of headway in chipping away at future expirations, which will impact capital costs. If you supply more detail about the lease expirations for the balance of '02 and '03 on slide 16, entitled pro forma office expiration, we provide you a breakdown by each division of the leases expiring in the fourth quarter through the end of '03. And we also provided to you on the right-hand side, we provided how this breaks down throughout each of the quarters.

You will see focusing on the quarter, 70% or so of the lease expirations occurred in the second half of this five-quarter period. By division, you will note the largest amount of leases that are expiring are on Long Island, where 11% of division leases are expiring which is 433,000 square feet. On top of the 433,000 square feet we will address on Long Island, we have 165,000 square feet of leases to Worldcom, MCI on the line that will also be addressing in the marketplace. Next is New Jersey, which has 330,000 square feet. Although 190,000 square feet of that 324,000 square feet that has expired relates to our property in Short Hills where American Express lease expires and we plan to redevelop that asset in a similar fashion as we redevelop its sister building this past year and leased it to DNB.

Just looking at our mark-to-market potential, we only provide this for 2002 and 2003. We have chosen not to do the later years because we think it is too premature to really quantify what the potential is. If you look at the later years, rents are significantly even below today's market in those years. At some point, we will provide greater color on that. Focusing on 2002 and 2003, you will see total portfolio on cash basis has leases that are 6.3% below what we believe is market today and 9.6% below what we believe is market today on a GAAP basis.

A lot is driven from our Cthereto BD portfolio where cash rent is 23% below market today and GAAP rent is 20.3 percent below market. In the suburban portfolio on a cash basis, we are about flat, and up 4.6% on GAAP basis. With that, I will turn over to Mike Maturo to walk you through additional financial data and then I'll join you again.

Thank you. Starting off with reconciliation between the third quarter 01 and third quarter '02 where we reported for '01, 66 cents per share. Working down the schedule on page 18, give you some clarity on what some of the differences are. A penny a share is for the RSVP JV income, which we ceased reporting actually that third quarter of last year was the last quarter that we had anything relative to those JVs. So, that difference will no longer be there in the future. Same property NOI as Scott reported, was essentially flat. So, no difference there. Termination fees decreased from 4.1 million in 01 to 3.2 million in '02, about a penny a share.

Other income decreased by 3 cents a share, that is mainly made up of tax and utility refunds of about $800,000 difference between the two years. Keystone stock dividends that we had sold during the course of '02 of $600,000. Interest income of 700,000 and service company income of 600,000 totaling $2.7 million. Disposition dilution from assets which we have sold and have not reinvested cash of about $4 cents per share. Bad debt, excess bad debt between the two years of about a penny. Then, from the positive side, reduction in debt service and the beginning of the benefit of the share repurchases that we have made early on in the quarter of about 3 cents per share. So, that brings us down to net 59 cents that we reported.

Moving to page 19, some information on the operating data and margins. We reported margin of 63.7% for the three months ended September. On sequential basis that compares to 66.2% for the June quarter. There is an actual seasonality adjustment downward for the third quarter as the expenses for cooling buildings, landscaping and such during those months is higher on relative basis.

As Scott had mentioned, the insurance costs was higher for the quarter basically as result of new insurance premiums with property Terrace insurance included, real estate taxes going up as we got the new tax schedule during this past quarter. As Scott said, significant portion of those expenses are passed through. There is about 25% or so that is not recovered. Bad debt expense, slight increase over the quarter has also impact on that. From year-over-year basis, similarly, insurance cost increased. We had increase in security cost from last year, third quarter as result of the 9-11 and also real estate tax increase.

In the marketing, G&A area, the 7.995 million is roughly about 300,000 off of last quarter. That number, that 300,000 is made up of 200,000 of bad deal costs that we recognized during the quarter and about 10,000 dollars of DNO insurance and miscellaneous items or issued options during the quarter. Other income, we covered pretty close to last quarter and we would expect going forward that number to be around 2 million dollar amount for the 3 months. Tenant receivables we had a million dollar expense for addition to reserves for the quarter as compared to 470 last year. That is nothing major in there. I will speak a little bit more about credit analysis shortly. That is basically just a smaller tenants in the activity we see in the reserve accounts.

Turning to page 20, Scott had spent significant time on pay-out ratios. We calculated, Scott had said, pay-out ratios under 3 different forms or methodologies. One is the actual amounts paid for the quarter for TI leasing commissions and non-incremental capex. Our second presentation is based on total committed leases signed for the quarter. Then, we add another form or disclosure, which is committed excluding those leases that represent early renewals. We also provide separate disclosure for the class A stock and for the Class A and B on weighted average basis. If you recall, the Class B stock was issued a number of years ago and actually expires or converts to Class A in November of '03. So, over a long-term basis, we look at Class A as kind of the run rate number.

With that being said, if you look at the numbers considering the significant amount of leasing activity that we had for the quarter and Scott mentioned, the increased cost based on market conditions, reported 133% pay-out ratio for the quarter on actual basis 257% for committed, 243% for committed less the early renewals. If you pull out the costs of the leasing transactions related to Fuji for the two committed columns you will see 128% for the total committed and 124.3% for the committed less the early renewals.

Moving to page 20, in dealing with the credit risk issue that is we have identified last quarter, the good news is there are no new additions. With respect to Worldcom, nothing really to report. They continue to pay their rent in all their locations. We have taken at least from a reporting purpose, a 50% concept with respect to their future tenants. We reserved 50% of their future receivable relative to straightline rent and recognize rent on go-forward basis on cash basis.

With respect to HQ Global work places, we reported nine leases with them. Three leases continue to be under renegotiation with them. They are not done. We are hoping to have that tied up by the end of the year. We are not exactly sure whether they will assume all or any of those, but the negotiations are an attempt to restructure those leases and for them to continue in the space. On a positive note, those three leases are with 919 third Avenue, 29 JFK Avenue and 50 Charles Lindberg (ph). To the extent those leases were to kick back, we would be -- that would be space that would be desirous for us to release.

MetroMedia. That deal is pretty much done. They had 112,000 square feet and renegotiated and amended their lease to keep 32,000 square feet. Of the 70,000 or 80,000 square feet they didn't keep, as Scott mentioned, 49,000 was released in the quarter to Skadden, Arps. The last tenant, Arthur Anderson, a deal has been reach wide them. They will vacate the space and they essentially paid rent through the end of the year, December 31st. All other receivables and such have been written off. On page 22, Scott had mentioned very active buyback program during the quarter. We repurchased 2 million 224 million -- 2.2 million shares of common A. 842,000 shares of A subsequent to September 30 at average price of 21.60 for a and 22.90 for the b. Subsequent to the quarter we also had the opportunity to repurchase some of the Series A preferred, 357, 500 shares at 22.29. That resulted -- will result in annual dividend savings of 6.2 million dollars. On the Common Stock buyback program that we have outstanding, we have approximately 1.9 million shares that remain to be available for purchase.

On page 23, financial ratios continue to be strong. The balance sheet continues to be in good shape. Interest coverage of 3.32 times, fixed coverage 2.58 times and a leverage ratio of roughly 42%. We added account to give the pro forma effect of the buybacks. That adjusted the interest coverage to 3.29, but as a result of repurchasing the higher priced preferred stock it left our fixed coverage actually neutral at 2.58 times, which is good. And the total debt increased modestly to 43.1%.

Just taking a quick view of our balance sheet and our debt schedule, we have about billion 2 in debt at 7.3% with long-term maturity of 7.5 years. Floating rate is 224 million, which represents about 15% of our total debt, that is floating. If you look at our maturities, very limited risk and exposure to maturities through 2005. $100 million comes due of an unsecured note in 2004.

With that being said, I will hand over to Scott with outlook on 2003.

Thanks. I would like to talk about strategy for 2003. Currently, investments, we will continue to maintain investment discipline we have in this competitive marketplace. We have been very, very active and a lot of activity in the marketplace. Prices have been too high for us. During the last six months we bid on a number of transactions, two in particular, just to point to were transactions that were extremely large and attractive to us because they did have some lease-up risk. So we were able to underwrite the lease of had up risk and being able to buy it to create value by matching through that lease-up. Neither of the transactions were on the market. We were down the road with them. The sellers in both instances, decided to not sell their portfolios. So, you had little bit disappointed. It is a sign of the times.

There is a tale of two markets, stabilized assets, where there seems to be a lot of activity and a lot of people willing to pay high prices. The question mark we had is how are asset that is have lease-up risks going to be sold. Things have a lot of lease-up risks haven't gotten sold at what we would consider to be attractive prices because sellers are pulling them off the market. We are not sure that is going to last. The current recognition of the weaker real estate fundamentals may create opportunities the sellers determine they would rather sell now than deal with lease-up risks themselves. So we are hopeful opportunities will arise and sellers will get more realistic and some of the capital that has been pouring into the office markets in particular in specifically Class A assets in Manhattan and suburbans will cool off a little bit.

While that is the case, we believe that we're in the business of making very good investments. If we don't see investments that meet our criteria, we will pass and sit on the sideline, as we have and wait for those type of opportunities. I assure you it is not because we are not looking. We are working hard to find creative transactions. To date, we have not found ones that are worthy of our allocations of capital.

So, that being done, the investment, we are focusing on doing is monetizing our nonincome producing assets. A big one is Strategic Venture Partners. We have on our books for $65 million and are working hard trying to get that relationship structured in the way we can start creating liquidity and targeting $30 million of liquidity from those assets in 2003, which we could redeploy. We have certain land holdings we are looking to harvest and put into service or rezone into higher and better uses where there is active markets today to purchase and create liquidity from there and Gregg Rechler and his team has been working hard in looking at each and every one of the land parcel necessary determining how to maximize value in short-term and long-term. That is something you could expect to see activity on that front going into 2003.

We also continue to pursue share repurchases, although we pursue leverage neutral share repurchase program. Our objective would be to actually reallocate proceeds from the sale of these assets or liquidity we create from these asset to repurchasing our shares. We think this is a great way to redeploy capital to the extent the investment marketplace is not open and attractive to us.

From an operations perspective, we will focus on early renewals. In particular early renewals where we believe the mark to market opportunity is not that great, so tenants are expiring in 2005 and 2006 and we feel rents today we could keep them at that rent. There is not a lot of upside in that. We are pursuing them aggressively and working on a large one right now. I think with -- our hope is by narrowing down the ones where there is lower mark-to-market in 05 and 2006 will capture the greatest upside for the ones where there is potential in 2005 and 2006, because we will be better positioned to do so.

Lastly, we continue to leverage tenant relationships trying to capitalize on build-to-suit opportunities and sale-lease-back opportunities in the marketplace. We do believe sale-lease-back opportunities are something that will continue to be considered by corporations that are looking for other means to create liquidity and reallocate capital for better uses. Tenants are looking today to putting themselves in a position where they can get a strategic space solution and build-to-suit is something they are considering around the tri-state area and we are well positioned to capitalize in that and that is should go you should look at for us to start pursuing in 2003.

From a guidance perspective, turn to the next slide, starting with 2002 guidance for the fourth quarter. We are providing guidance for 2002 of between $2.37 to $2.39 per share, which is down from 2.40-2.45 per share. Primarily this is a biproduct of our share repurchase program occurring a little bit later in this year than expected. We were focused on trying to take advantage of lower prices. As most of you know, the share prices were fairly volatile, in high 25 and 26 and low as 22. We were waiting to time it effective and capitalize on it. There were timing issues there.

In addition there was more downtime than we originally budgeted. I noted how much the lease terminations we had in this quarter. That had impact of down time that would flow over into the fourth quarter that would bring down these numbers. So 2.37 to 2.39 is guidance for 2002.

Now, turn to 2003. Start with I want to say it is early to provide this type of guidance, specifically in the market environment we are in. There is a lack of clarity of what is going to happen in these markets. We try to provide reasonable framework for guidance and provide enough details as to how we derive assumptions to come to this guidance so you can monitor as it goes along and as the year progresses, better clarity to get specific components and everyone can see the impact.

Starting with operating assumptions and guidance of 2.35 to 2.45 is the guidance that we are looking at for 2003. From an operating assumption perspective, we are forecasting same-property NOI being flat between 2003 and 2002. In that forecast, we are assuming occupancies to climb between 100 to 150 basis points from where they are in 2002. We are assuming that Worldcom rejects 30 to 50% of its leases during the year. Our leases made up in each of our markets, we actually did mark-to-market assessment as to where we think they may reject leases.

On the positive side, we expect development properties, primarily development project in Melville to provide 2.5 million of incremental leasing revenue in '03, versus what is provided in '02, as it stabilizes. From termination fee perspective, we forecast a more conservative termination number than we had in 2002. We had over 5.5 million dollars of termination fees. We are forecasting 2 million of termination fees for 2003. We are holding other income flat at $2 million for 2003. Then, in terms of revenue loss to nonperforming tenants, in addition from what we lost from Worldcom, we are assuming somewhere between . 5 percent and 1 percent of bad tenant revenue loss.

So, that's the operating assumptions. From the investment and disposition assumptions, we are assuming zero real estate investment opportunities or acquisition opportunities. Again, I think it is a conservative forecast, but until we actually have something that we are working on and we feel confident we would be getting, we don't feel comfortable including it in our forecast. We would rather update the forecast for that transaction. That is one reason we provided so much detail.

While, we don't necessarily expect to get third-party transaction. One thing the independent members of our executive committee of our board are reviewing at this point are exercising the options on certain properties that the company adoptions on since initial public offering. For those of you not involved with us that long, the company had a large pool of options of assets of properties held by members of the Rechler family. There is a small pool left and the board is evaluating that at this time. We are projecting between zero and 28 million dollars of those options being exercised.

We also are going to pursue a leverage-neutral share repurchase program. We are estimating somewhere between zero and 80 million dollars to repurchase those shares. And we get that liquidity from dispositions of $50 million or liquidity margin of $30 million, equal to the $80 million. So we take this into the mix and it produces a range of between $2.35 and $2.45 per share. With that, I would like to open up for any questions anyone might have for myself, Mike, Donald or other members of the management team. Operator.

Ladies and gentlemen, if you wish to ask a question, press the 1 on your touchtone phone. You will hear a tone indicating your line has been placed in queue. You may remove yourself at any time by pressing the pound key. If you have a question, press 1 at this time. Our first question comes from the line of Louis Taylor with Deutsche Bank. Please go ahead.

High, good afternoon, guys. Scott, I noticed on one of your schedules, you had tenants expanding. Can you just talk more about that? Was that consolidation of some other locations and they ended up taking more space in your buildings? Or are tenants actually growing square footage out there?

I will let the guys in the division give a couple examples. Todd.

Actually two expansions within the last five months that are fairly significant. Sandler O'Neill moved into the building, a former World Trade Center tenent, actually doubled their size. So, that is all pure organic growth in that building. Actually, 100 WallStreet we had Waterhouse (ph) Securities took more space in the quarter. Sal?

We had in Westchester, consumer products companies expanding and took additional space. You know, we're seeing across Connecticut and Westchester consumer products and insurance companies are reaching out for additional space.

Newest of our buildings had moved in during the fall of 2001 and took additional space this quarter.

One thing we also talked about on prior calls, tenants have taken only the amount of space they actually needed to be sure they need it. They return the need space and there has been a tendency to evaluate that more quickly.

Okay. The second question, just pertaining to monetizing some of the RSVP assets. What are some of the steps you are looking to take care to do that?

Mike reported last quarter with correctional facility platform that existed there, we have actually got that position for creating liquidity. So, there are certain contracts there we expect to throw off proceeds already. We are also having discussions with the preferred holders about accelerating the dispositions of some of the other platforms and also there is some cash within our RSVP today that we had discussions about having redistributed out to partners.

Lastly with regard to your assumption for Worldcom MCI, you have got that 30 to 50% rejection for '03. How about the releasing of that space? Are you assuming it stays vacant for the balance of the year?

Most when you look at it, different times and different locations. Most is toward the end that is rejected toward the end of the first quarter and pretty much stays vacant throughout the balance of the year and leases up in 2004.

Okay. Great. Thank you.

Our next question comes from the line of John Butcus of Green Street Advisors.

With respect to the exercise option properties, the ones the Reckson insiders would be selling to the company, what's the thought process as to why do it now and can you review the pricing of those properties?

If you recall, there is only two assets now that are really one substantial one. One office building and one small building that are actually Reckson has an option to buy 100% on. There's three small interest-in buildings, which are small dollars, but they are interest-in buildings. The thought process doing it now frankly was as we continue to evaluate it and evaluate it on a normal basis internally, where do we allocate capital? Part of the design, as you know, was to position the company that if there were not good third-party investment opportunities to have a place to allocate capital to generate that. That worked extremely well for us when we first went public in 1995 and 1996. We were able to invest into a lot of option properties.

Then the third party investment market became active, at which point we decided not to allocate capital there. This past quarter, in particular, we felt that we had a couple of very good shots on the investment side that went the other way. So, we're less optimistic that the markets did that well and we thrown it up to executive committee. They are going through a process of evaluating and recommending to the independent representatives of the board as to what to do. We remove ourselves from the process, the executive committee hires third-party independent advisors to advise them on this. Then, they report to the full board, who makes a decision and we recuse ourselves.

So, that's why I don't in terms of specific details, there's not a lot I can say. I would tell you that, you know, I gave a decent framework of the amount.

And what was the pricing? Lower of fixed amount and a yield?

Yeah, lower of a fixed amount or 11.5 percent NOI yield on the historical, 12-month historical results.

That pricing still applies?

Exactly the option has.

Okay. Uh, then just last question for Todd Waterman. What is your expectation of the TI package that you will achieve with respect to the Arthur Anderson?

I think Arthur Anderson, we bought that deal out as Mike mentioned. It pays through the end of this year. They are paying about $52 per foot, John. That was what it would be through expiration. We have done deals in buildings, smaller deals higher than that, we are expecting $53 a foot to replace that. The fortunate thing for us was that all of the FF&E, furniture, fixtures and equipment, phone systems, computers, all furniture, all stayed. So, we are really anticipating maybe clearly, will have to pay brokerage commission, standard brokerage commission. Maybe we will have to give 10 to 15 dollars per foot to release the space. As Scott mentioned, we already have offers for one of the floors and that offer would be consistent with what I just mentioned.

So, how long had Arthur Anderson been in that space?

About three years.

So, TIEs were done by the time they moved?

No, it wasn't, actually when we acquired 1350, that space was built space. And I -- I don't recall exactly, but I believe we just painted and carpeted that space. Maybe gave a little more money. I can't quite remember, but it was built space. They were taking space from us because their world headquarters outside of northeast headquarters was across the street at 1345 Avenue America. This was growth space for them.

Okay. Thanks a lot.

Next question comes from the line of Eric Deling with Wells Fargo.

Good afternoon. Could you tell me, for the past two quarters, which percentage of NOI coming from the lease termination income?

Termination fees -- Well, termination fees for this past quarter of 3.2 million. Last quarter I believe 2.8 million or 1.8 million. 1.8 million. Just so you know, we report state property NOI and back out termination fees. So, it is not in those numbers. I have it right here. But, it is in the numbers in the operating data that we provided on. First quarter 460,000. Second quarter 1.8 million. 3.2 million.

Thank you very much.

Ladies and gentlemen, if there are additional questions at this time, please press the 1 on your touchtone phone. Our next question comes from the line of Stuart Axelrod with Lehman Brothers. Please go ahead.

Hey, how are you? On the Fuji lease, you quoted net effective of 20/43. Does that factor into TIs?

Net effective gross rent. It doesn't pull out expenses. TI and leasing concessions and leases associate wide it, but doesn't take out property-specific expenses.

Okay. You amortize that over the 10-year life?

Exactly.

Roughly $11 per -- 7 per square foot?

I'm sorry. $7 per square foot over the term?

Actually $5.50 per lease. The lease starts at $25 per foot and climbs to $32 per foot.

Okay. You quoted 9% yield on the return on that investment?

On net asset, yes.

How are you doing that?

Total cost invested in asset and our NOI, basically NOI once Fuji moves in.

Okay. In terms of additional buyback, you need additional authorization to get to that, right? Any question of timing from the board?

This is 2003 outlook. We have a little time.

Almost 2 million left on the common. We also have additional room to buy preferred.

Okay. And maximizing land option, could you elaborate on what that means?

Not land options, land portfolio. Turn it over to Gregg, who has been handling that.

Hi, it means couple of different things. NOI, we acquired properties that with multiple uses, meaning in Deraldo, we acquired 190 acres, of which 40 acres is in one town for its own profit. There is additional 140 acres that may or may not have higher and better use. What we are doing now is looking at that property and we're coming up with different use. We are talking to potential buyers for those billable terms in the future. That would create good value in doing that. As well as built-to-suites we are talk to different tenants on different properties in our land bank about build-to-suite, as well as potential sales for profit. We are working on that, as well.

Okay. In the Geraldo forums, you increased from 80 to 115 million in terms of the value of the build-out, does that relate to what you are talking about?

No.

Just increased project costs?

Yes. For potential development. Square footage change.

I think it is just increased cost from one.

Okay. Yeah.

Next question comes from the line of Larry Raiman with Credit Suisse First Boston. Please go ahead.

The call is getting long. In my head, with the different scenarios you put together, I appreciate that scenario analysis on pay-out ratios. For us and your investors, could you simplify it for me? You have an FFO set of expectations for both this year and next? Could you just very simply lineate what your expectation is for one straight-line rent for next year? Then, two, tenant improvement and leasing costs on expected leasing? Anderson space and expirations that could get me to CAD or FFO number on per share basis for next year.

What was the second part? The leasing cost you have, right? they are up top, top of the schedule. So, put it simple. If you play through this, this takes into account, the CAD number in the bottom are just a function of the leasing cost for suburban, New York City and Long Island industrial based on the amount of square feet expiring, which is roughly 8% in 2003. Our view is that if you are assuming this may be on the conservative side and assuming we will lose occupancy, you may not be releasing all the space that expires. This at least gives you weighting on it. You could just choose one of these five scenarios, as to what the cost would be. That would be in the CAD number based on the all the information you requested straight-line.

Okay.

So in this instance, the $1.71 to $1.89.

No additional questions at this time. Please continue.

Thank you very much. I look forward to speaking to you on the quarterly call and year-end call in the beginning of next year. As usual, make ourselves available to provide any further information anyone might need. Thank you for your support. Thank you, operator.

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