SL Green Realty Corp (SLG) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Reckson Associates fourth quarter earnings conference call. At this time, all participants are in a 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 depress 0, then star. As a reminder, this conference is being recorded.

I would now like to read a disclaimer. 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 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 of and demand for office and industrial properties in the New York Tri-State area. Changes in our 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 owed to the company by third parties, risks associated with joint ventures, and other risks associated with the development and acquisition of properties. For further information on factors that could impact Reckson, reference is made to the company's filings with the Securities and Exchange Commission. Reckson undertakes no responsibility to update or supplement information discussed on this conference call.

At this time, we would like to turn the conference over to our host, Scott Rechler, Co-CEO. Please go ahead.

Thank you, operator, and thank you all for joining us to review our fourth quarter and year-end 2002 results. For those who have not participated in our calls previously, we're going to start with Mike Maturo, our Chief Financial Officer, and myself providing comments, and we'll open it up to questions for us and our management team joining us today. We work off a formal presentation, a PowerPoint presentation that can be accessed by going to Reckson's website, www.reckson.com. If you have a problem accessing or retrieving the presentation, call Susan McGuire at 631-622-6642.

Turning to that presentation, starting on slide number two entitled "Summaries of Highlights," just I'm going to review the quarter. For the fourth quarter of 2002, we reported diluted FFO of $.59 per share, as compared to $.57 per share for the comparable period in 2001, which was a per-share increase of 3.5%. For the year end December 31st, 2002, we reported diluted FFO of $2.36 per share, as compared to $2.61 per share for the comparable of 2001 period, which represented a 9.67% decrease per share. During the quarter, we increased our occupancy by 120 basis points to 95.4%, which is 80 basis points higher than where we ended 2001. That's our overall portfolio.

If you look below that, and we actually break it out on theme-property basis, where I'd like to provide more detail. There you'll see we increased our occupancy 140 basis points sequential, and 100 basis points from where we ended 2002, to 95.6%. If you look at our office portfolio specifically on a sequential basis, we ended the year 96.1%, which is a 50 basis point increase over the September 30, '02 quarter, and was a 10-basis point decrease from 12/31/01. On the industrial portfolio, we actually ended the year at 94.6% occupied, which was a 300 basis points increase, both on a sequential base and year-over-year basis, so very strong. As you see, these are obviously incredible occupancy numbers and very, very positive. As I go through my presentations I want to just temper that and say I do not believe that these are sustainable in today's environment at this level of occupancy increase is not something we would continue to expect to see as we go through 2003. Obviously I'll provide more color throughout the presentation.

Continuing with the highlights. On the next slide, page 3, our same-property performance is also strong, where on a consolidated basis our fourth quarter same-property NOI increased and increased 8.3% on a cash basis and 3% on a GAAP basis. For the year, it increased 7.7% on a cash basis, and .7% on a GAAP basis. We also this quarter are providing these operating metrics net of minority interest in joint ventures. We actually adjust for the minority interest, our same-property NOIs for the fourth quarter reduced to 3.9% on a cash basis, and 2% on a GAAP basis. And for the year, I'll go down to 3.9% on a cash basis and minus .3% on a GAAP basis.

We also continue to achieve higher rents. You see in the next bullet point during the fourth quarter, our office portfolio achieved cash rents that were 5.8% higher than the space that we either renewed or replaced. Our GAAP rents were 9.5% higher for the fourth quarter. On an annual basis, our cash rents were 9.2% higher, and on a GAAP basis 13.8% higher on the renewal and replacements base. As it relates to the industrial portfolio, our cash rents were 8.3% lower in the fourth quarter. Our GAAP rents were 1.9% higher in the fourth quarter. For 2002, our cash rents were 1.1% higher on the industrial portfolio, and the GAAP basis was 14.4% higher on -- for 2002.

Just as a -- to explain a little bit of the variance between the cash and the GAAP numbers, on our industrial portfolio, much of the lease nets -- all of the lease nets has related to the Long Island industrial portfolio. For those of you remember or recall, we had built-in rental increases, so on an annual basis it continues to climb between 3% and 4% per year, so when the lease expires, it expires at a fully escalated at a cash number, so I think the better measure to understand the economic value of the replacement lease is to look at the GAAP number, which also includes the same level and averaging out those built in rent increases.

2002 was extremely active for us. We executed 255 leases encompassing 2.8m square feet during the year. During the quarter, we actually signed 63 leases encompassing 699,000 square feet, so again very, very busy. Subsequent to year's end, as expected WorldCom/MCI announced the rejection of 191,972 square feet, which is 36% of the square feet that they occupied, and represented about $5.3m of revenue, which is about 35% of the revenue that they had -- that they were projected to pay. If you recall last quarter, we talked about expecting WorldCom to reject approximately one third to half of their leases. We actually expected this to happen in the beginning of the second quarter. This was, you know, obviously on the low end of that range, but we believe this is the beginning. We expect more leases to be rejected, and Mike Maturo and I will both discuss that later in the presentation.

On a positive note, we refinanced the line of credit, $$5.2m line of credit, which was not originally scheduled to expire to September 2003. It was a very successful offering, and we're pleased to have that put to bed, and actually bettered the terms we were paying prior to completing the refinancing.

If you turn to slide 4, another exciting development for this -- you know, subsequent to the quarter was last night, we announced we actually reached an agreement with the affiliate of First Data Corporation which provides for the sale of about 19.5 acres that we have on Melville Long Island and a build-to-suit construction project for an 195,000 square foot office building. The aggregate consideration for the built to suit and land sale is $47m, and it's something we expect to commence almost immediately. This is actually land that we purchased in 1997 and sits contiguous to a building that we purchased to redevelop at the same time. We actually redeveloped that building, some may remember it as Melville Square in 1999, and converted it into 167,000 square foot, Class A office building. Melville square today is 100% leased and actually generating a return on investment, unleveraged of 25%. So with the substantial profit we'll be generated with the First Data transaction, this entire project turns out to be an incredible success and something we'll we're very proud of, I'd like to congratulate the team led by Gregg Rechler and really making it a successful transaction. It's great for our company and the overall market.

If you turn to slide 5, I'd like to take a moment to walk through some of the components of our portfolio. First you'll note our portfolio composition, we have 23.3m square feet. If you look back at the end of 2001, it really didn't change much. It was a 300,000 square foot drop based on the sale of four different properties. 13.6m square feet is our office portfolio, 6.7m square feet are industrial portfolio. Our average lease size is 13,000 square feet for office tenants, 27,000 square feet for industrial tenants. And our NOI, 85% comes from the office portfolio, and 15% from our industrial portfolio. If you look at the composition as it's broken out throughout of the region, you see that 33% of our NOI is derived from Long Island, 31% from New York City, 23% from West Chester and Connecticut, and 13% from New Jersey. Again, those numbers have not really shifted too much over the past year.

On the next slide, I would provide you with analysis of our tenant roster. On the left is a pie chart that lays out all the major industries that our tenants are made up of. You can see it's a diverse group of industries. The 14% of our revenue is driven from tenants in the consumer product sector, 13% is financial services, 11% is legal services, and 8% is insurance, and the balance is split through the myriad of other industries that we broke out for you. Also on the right-hand side, you'll see we actually provided a list of our top 25 tenants based on revenue. You can see that it's very high-quality roster of tenants and very diverse.

Now I'd like to shift the weight from the portfolio for a moment and talk about some market trends. So if you turn to slide 7. The market continues to be extremely competitive and can on by characterized as a tenant's market. Tenants have a lot of choices and they will shop the market. We have found we have to fight for every transaction whether it's a 5,000 square foot transaction or 150,000 square foot transaction. Our sublet space continues to impact the market, as they are offering space as significant discounts to what direct space is being offered to as corporations just want to get rid of their space, in many cases, at any price.

Another factor we have dealt with is shadow space, which continues to cloud the market, particularly as it relates to the financial service sector. There's been a few examples in New York City, one of which is Clifford Chance Rogers and Wells recently announced they'll be taking 500,000 square feet or so from Deutsche Bank on 52nd Street that was not on the market and they'll be moving space out of 200 Park Avenue, so that's a swing of space of almost 800,000 square feet of space that will now show as a could have been a positive absorption that wound up negative absorption. Another example is CIBC, who is building a 1.2m, I believe, square foot property on Park Avenue, recently -- Madison Avenue, I'm sorry -- recently announced they will be subletting 800,000 square feet of that space. So we're seeing that primary in the financial service sector, but there are examples of smaller scale that we've run into in all of our markets, where we're negotiating with tenants who end up taking space that we didn't even know was on the market. So that's something we are watching.

We're also concerned, as we look at the new FASB ruling FASB 146 that it might accelerate the conversion of shadow/sublet space, as companies are forced to recognize underutilized space more quickly than they may have otherwise. Once they recognize it, they may be more apt to sublet it at discounted prices. In this environment, leasing costs are being elevated by the fact that tenants do not way to lay out any capital dollars if they can avoid it. In addition, brokers are active soliciting tenants, thereby reducing the chance of renewing those tenants and increasing our commission costs. So it's something that continues to happen as we mentioned last time, brokers are involved in many, many more transactions than in the past. Our leasing philosophy remains erratic and varies market to market. Tenants are cautious about making decisions in this uncertain environment unless they have to. We are seeing some areas where tenants are willing to make some commitments from an industry perspective, the legal and restructuring advisory work-type tenants are seeing some growth. I heard a statistic recently that 50% of the restructuring dollars that are being spent around the nation are being followed back to New York, as those professionals are the ones working on those assignments. Also in the industry, consumer product-related type of tenants are also expanding; a good example of that is First Data.

From a strategic standpoint, you see tenants are making the move if they have a consolidation opportunity or have an opportunity to move to a better space at a better price, but they're definitely more cautious. Interestingly enough, we are seeing good activity from tenants with '04 and '05 expiration, tenants looking to make deals in this environment to capitalize on the pricing, and actually not have to take the space to a point where they believe that the economy will be more stable. So we are seeing a lot of activity in '04 and '05, and we're capitalizing on that where we can.

Tenant stability remains a concern. In the fourth quarter, we had 236,000 square feet of early terminations. So far this year we've had 367,000 square feet of early termination of which 191,000 related to WorldCom, but that's still a significant amount of other space that was terminated that isn't related to WorldCom. Last year, we talked about our guidance of being between .5 and .1% as relates to revenue loss on underperforming tenants. Based on what we're seeing right now, we believe it will be 1% of our revenue. And what you're finding also is non-performing tenants are forcing us to do a lot of leasing to stay even. In other words, we're finding ourselves just leasing space we didn't know we were going to have just to keep the occupancy where it is. While we're extremely active, in many cases it's being active on a treadmill versus running on a track.

You know, one big advantage still is our Tri-State area focus of regional decentralization activity has been strong, as companies have again focused on moving a portion of their operations out of Manhattan to the suburbs, from a business continuity perspective and employee retention perspective, we've seen a bulk of that, and I'll discuss that more how that's impacted some of our suburbs. That's been something that's been very positive. Also, the lack of new supply in our markets have kept or markets in check and made our challenging markets somewhat less challenging. Lastly, as I mentioned last quarter, our regional focus provides a number of competitive advantages due to our local market knowledge.

The good news is Reckson continues to have some of the best performing markets, and Reckson continues to outperforms in its markets. When I listen to some of the other conference call and you company about companies hoping to get net effect rents after expenses of above zero, it makes we feel look when we look at our NER less operating expenses of $14.00 a foot to $26.00 a foot in our suburban markets, not including Manhattan. So while there are challenging marketplaces, I think that speaks well to us relative to the rest of the nation.

If you turn to slide 8, we provide you some graphics of our suburban portfolio. Our suburban/office portfolio today is 95% leased. Just generally speaking about our portfolio, you'll see, again the key points I raised before. We are outperforming in all of our suburban markets. The other thing you'll note is the sublet space is a big factor in many of these markets. For example, in Southern Connecticut sublet space, it makes up over 50% of the total available space today in that marketplace. Northern New Jersey has a big sublet space issue related to the Telecom space that has come back onto the marketplace. That is a large challenging areas that we are dealing with. The good news in both those Markets are -- is that we well-leased. You can see in northern New Jersey we're 4.2% of vacant, and in Southern Connecticut, we're 2.3% vacant. So, we are extremely well-leased in those markets. Long Island and West Chester are two of our better-performing marketplaces. Long Island has seen good growth from the consumer product-driven service businesses that makes up the bulk of the tenants here, as well as demands from defense-related tenants. That being said we have overhang of things like WorldCom. Cablevision, the cable company out here has put some large base in the market, so we're watching it carefully, but it is one of our healthier markets. The big surprise that we've been pointing to sometime is the strength of our market is the West Chester market that has benefited from the decentralization I spoke about in the prior slide. West Chester has seen a tremendous amount of demand from tenants looking to relocate outside New York City, and have actually hit some large transactions. We spoke about Morgan Stanley in the past taking over 600,000 square feet. New York Life recently announced they'll be moving a thousand employees to West Chester, and 375,000 square feet at Ameriquest(ph) Mortgage Company that had 60,000 square feet in West Chester actually expanded and to 130,000 square feet and took space in the marketplace. And then we've seen a number of world-class law firms from Manhattan take space in West Chester for portions of their operations, such as [inaudible] we discussed last quarter. So that's been a very big, strong component for that market. We actually statistically, I Think, will start to see West Chester improving in the subsequent quarters now that these deals have actually been announced.

If you turn to Manhattan, again you'll see that we're extremely well leased in Manhattan. The only marketplace we have any meaningful space at this point is in the Sixth Avenue, Rockefeller center, and 1350 Avenue of the Americas, where we took back space from Arthur Anderson which was two floors were we have 8.1% of that vacancy in that building. Other than that, we're extremely well leased. I spent a lot of time talking about sublet space and shadow space being a factor in those markets, and you could see that's something we discussed. Sublet space is accounting for about 43% of the available space in the Mid-Town market, so this is something to watch, and they are challenging to financial services, but again I think we're performing extremely well in those markets.

Moving off of the markets, I'd like to focus on our portfolio's performance during the quarter and the year, starting with the same-property NOI performance, on slide 10, you'll see same-property NOI increased in the last three months on a cash basis 8.3% for the quarter, and 7.7% for the last 12 months, and on a GAAP basis 3% for the quarter, and .7% for the last 12 months. As we have done in the past, we provide a reconciliation on a cash basis of the same-property NOIs so you can see what were the big factors that drove that. I'd like today to focus on the 12 months and not three months just for a matter of time, it describes it. You'll see on the revenue side there is large free rent burn-off, a big chunk related to 919 Third Avenue where we had $17.7m burn-off in the year total. We had built in rent increases which are contractual rent increases in our leases, and which provide $9.5m in additional revenue. Same space rent increases which is as we lease space at renewals or replacement at higher rents generated $3.4m of higher revenue. Escalation increase to $3.3m, which corresponds to higher expenses which I'll talk about momentarily. We had incremental revenue in New York City of $4.2m, where we leased up certain spays that were vacant like P.J. Clark's and some of the other retail spaces in our portfolio.

We had a weighted average occupancy decrease of which $2.5m, now really is 120 basis points decrease between 2001 occupancy and 2002 on a weighted average basis. The numbers I quoted before were the occupancy at the end of the quarter. This actually weights the occupancy throughout the year, and on that weighting, there would be 120-base point decrease during the year. You'll see there's a $2.5m impact to that increase. We had an increase in our bad debt expense of $2.9m, all total related in an increase of 7.7% on a cash basis for the last 12 months.

On the expense side our total expenses increased 7.7% as well. That's broken out between our operating expense which increased 7%. The big factors there were security, which increased 27%, insurance which increased over 150%, and other R&M such as cleaning which also increased, real estate taxes increased 9%, that got us to the total of $12m. In total, our NOI increased 7.7% on the same-store basis.

Moving along, on the fourth quarter 2002, our rent performance on renewal and replacement, you'll see on the office rent for the quarter was up 9.5%, the industrial rent up 11.9%, for year-end, the office was up 13.8%, the industrial was up 14.4%. During the quarter, we renewed 45% of our expiring square footage, and during the year, it was 60%. The 45% I think speaks to my point about brokers being involved and needing to address that circumstance.

If you turn to slide 12, we provide again analysis of the leasing activity. Again, I'm going to focus on the annual numbers versus the quarterly number. You'll see we signed 2.7m square feet of leases during the year, 57% of those leases were new leases with new tenants. 28% were tenants that we renewed at their expiration. 9% or 235,000 square feet related to early renewals. 6% or 172,000 square feet related to net expansions. During the year, we also had terminations of 610,000 square feet, much which we re-let 363,000 square feet. We also had, just as a sense to measure against your expansions, we had contractions on leases we signed of 118,000 square feet.

We've also provided a trend as it relates to our office leasing. Starting at the top, you'll see or average rent performance on renewal and replacement space, you'll see this quarter was 9.5% so we had 9.5% higher residents as I mentioned earlier. What you see is trending down, so we're still getting higher rents, and with the prior tenants, on the place downs(ph) were paying, its still lower than what the trends have been historically. As we look into 2003, I would expect it to level off at that 9.5%, 9% to 10% range.

On activity, we leased 369,000 square feet of office space. That's the lower end of the range, but still respectable. For the year, the office leasing was $1.74m square feet. From an effective rent standpoint, we actually produced 9.2% spread between our base rent and our effective rent netting out our free rent concessions TI and leasing commissions, and again that's average rent. The one thing here I want to point out, this was somewhat impacted by one short-term extension, I think it was 18-month extension with a company in Connecticut if you pulled that company out, the spread would have climbed from 9.2% to 11.3%, and as we go forward on the guidance I've been giving recently, as I would expect it to be in that range to where it was last quarter, and that 12% range as we go forward. So that's more of I think likely than the aberration of 9.2%.

On a lease term standpoint, we dropped from 8.4 leases per year of each lease, to 5.1. That also was impacted by the short-terminate of the UDV lease.

If you turn to slide 14, you'll note a prospective basis we have done a good job of limiting our exposure. We have 8.1% of our total portfolio, GAAP revenue expiring in 2003. This includes the leases that WorldCom has rejected to date, plus an additional 104,000 square feet that we anticipate to be rejected sometime in the next couple months. If you look at our office portfolio and see the square footage we originally anticipated having a 1.065m square feet, now due to WorldCom we'll have 1.361m that we have to be dealing with in 2003.

You also have to note we're well-positioned in 2004 where we have only 7.5% of our square footage expiring, and in 2005-2006, that's where we have the blip of big expirations. Those are years that we hope to have some good roll-up potential, because a lot of them are New York City leases with very good in-place rents as compared to market.

On the industrial side, you see we're well-positioned with 7% of our square footage expiring in 2003. We also broke this down in a little more detail for you, so of the 1.4m square feet, that now will be expiring in 2003. You can see how it's broken down by division. The area where we're going to have to provide the greatest focus in '03 is Long Island, where we have 525,000 square feet of new space that we're going to need to address in that marketplace. You'll also note that I think we have made very good progress in our New Jersey marketplace where we have now only 89,000 square feet of space expiring in '03 when you pull out the American Express space, it's 195,000 square feet in a building that's going to be taken off-line and redeveloped when that lease expires in August. Also, we made great progress in West Chester where pre-MCI we had only 138,000 square feet left. We now expect to have another 120,000 square feet expiring or come back to us from MCI. That's based -- located in Rye Brook and one of our better sub-markets where we've seen good activity. But it will be something we have to deal with.

We also broke this out by quarter. Again, this doesn't include in the aggregate the forecasted MCI give-back. You'll note in the first quarter because of MCI, we now have 487,000 square feet coming back to us. I will say, as we started the 2003, it's been a slow start. We've leased 262,000 square feet in '03 year-to-date, but 112,000 square feet related to tenants that were terminated early. Some 62,000 terminated at the end of 2002; the balance is terminating in 2003. So again that's sort of my treadmill effect, was really not a net gain in that activity. To date, we've had about 360,000 square feet as I mentioned earlier of early terminations in '03. That we are addressing. As we look at this, we know we have our work cut out for us in 2003, and velocity has not been what we hoped for so far.

Just continuing looking at our lease expirations on slide 16, we provide you the contractual expiring rents versus or forecasted rents, and you'll note that for our portfolio, we expect to see a 9.6% increase on a cash basis and a 16.5% increase on a GAAP basis. These do not include the WorldCom/MCI space that's coming back to us. On the WorldCom/MCI space, we expect to roll down about 9% on the leases the ones in particular we expect to get back, on a cash basis, a 5% on a GAAP basis, based on our forecasts at this time.

With that, I'd like to turn on are it over to Mike to provide you with some of our financial results.

Good afternoon. I'm starting on page 17 of the slide show. I'll start off with some information on the operating data.

We reported a net income of $81.422m for the quarter with a margin of about 64.1%, which is slightly better on a sequential basis from the September number, which is appropriate based on seasonality but lower than the 65.2%, we reported for the same period of last year, and that's mainly attributable to pressures on the expense side that Scott had mentioned relating to real estate tax and insurance costs. We would anticipate this type of pressure and these levels will continue into next year.

From a marketing G&A, we were over what we anticipated by about $800,000 for the quarter. There were certainly items, non-recurring excess items. We had a New Jersey business tax payment that was due of about $120,000 that was a new tax enacted in New Jersey on business income. We had about $150,000 of excess marketing and sales and holiday costs that we incurred in the fourth quarter. About $100,000 of less capitalized cost for the fourth quarter. We had about $150,000 of costs attributable to legal, director fees and other professional fees relating to Sarbanes issues. And about $300,000 of compensation and employee bonus costs that we didn't anticipate or were over budget. So on a go-forward basis, I would anticipate into '03, this number will run at about $8m to about $8.25m on a quarterly basis.

With respect to other income, that was pretty much in line with what we expected, where it has been. $2.3m is made up of about $1.6m or notes receivable, $.5m attributable to service income and about $300,000 of miscellaneous refunds and those types of items that roll through the system on a fairly regular basis.

With respect to receivable reserves, we reported $1.7m, which, as you see compared to other periods, is slightly elevated. That's attributable basically to two things, and I'll cover one later on, which is MCI. We increased the reserve there as a result of getting a better understanding of what's going on with the rejection of leases. That was about $450,000. Then we increased our general reserve by about $385,000, and Scott had mentioned in his commentary our concerns about the credit issues in general, and we are taking a conservative stance and adjusting some of our reserves right now. Termination fees of $2.2m which that number is included in the property revenue line item up above.

If you turn to page 18, you'll see here that we've presented our payout ratios for the quarter, last quarter, and for the prior year periods. We reported payout ratio of 118% for the fully committed leases signed during the quarter. At 113%, if we pull out those leases, which is essential early renew always that relate to future periods. This is a substantial, favorable change from the prior quarter where we had some excess tenant costs, and really related to the Fuji lease which was a substantial long-term lease and had a high cost to it.

If you turn to page 19, I wanted to address taking that payout ratio another step further, while it's improved dramatically from last quarter, I wanted to try to lay out how we're looking at a normalized payout ratio and what we see for 2003 and some of the items that are impacting that ratio. As a result of the operating environment that Scott spoke a lot about, particularly relating to tenant costs and even the investment environment, we expect a shortfall throughout 2003.

And then factors that we believe positively will impact that coverage relate to a couple things, and I have them listed out here. Reinvestment of asset sales proceeds. As you know, we've sold in excess of $500m of assets over the prior few years, and have not had the opportunity to reinvest much, if any, of those proceeds back into operating accretive assets. That's caused a dilutive effect, and over time, we think as we're able to put out that money, that obviously will positively affect that ratio.

Sales of non-income producing assets, we have about $200m of land and other non-income producing assets like the RSVP investment which we believe over time will get back and be able to reinvest back into purchases or other accretive-type investments. First Data, actually, is a transaction of the example of the beginning of that happening. We're also working on other types of transactions related to land, particularly rezoning land for other uses where we think we can realize some value.

The next item being the adjustment of tenant costs, which currently are about 20% to 25% over the five-year average, and as those costs begin to stabilize as the markets recover, that will have a positive impact. Then the return 6 a normalized NOI growth. So as these events occur, and we do believe over time they will, we believe that the ratio will normalize in the area of 85% to 90%.

If you turn to page 20, just real quick on some of the credit risk items we've been following throughout the last few periods, Scott spoke a lot about WorldCom. We started out -- or they had 527,000 square feet of space originally. 192,000 has come back, or has been rejected. That relates to about a quarterly revenue run rate of about $1.3m. We have received base rents on all other non-rejected leases through March. As far as our reserves, we wrote off $1.1m, related to the 192,000 square feet which we now know is rejected, which we had previously reserved, so that's not a P&L item. However, we did reconcile the additional square foot or additional revenue. Originally when we did our reserve, it was strictly based on an average cost or average revenue stream from all the leases. We didn't try to pick or determine which lease was going to go. The actual leases that were rejected carried a higher rate on their lease. So we had to re-reconcile that reserve and considering where we believe as Scott mentioned additional rejections will be, we added another $475,000 reserve to deferred receivable balance. So we think we're pretty much covered to a point where we believe we will wind up. However, the active discussions continue, and we're not entirely certainly to what the outcome will be.

With respect to HQ Global, we had 202,000 square feet in nine properties, four leases continue to be under discussion for negotiation. Again, we've reserved, based on where we believe our outcome will be, on those leases. We're hopeful we'll finalize those negotiations this quarter. As far as other credit issues, we have no major individual situations, but again we are concerned about that tenant stability, and we did add to general reserves this quarter of around $400,000.

If you turn to page 21, this outlines our coverage and our debt profile from a ratio standpoint. Our ratios have improved from the prior year basically reflecting the positive impact of interest rates on a sequential basis from 9/30/02, the ratios are just about flat. From a debt-to-total market perspective, it's slightly higher this quarter, which is attributable just to stock price. If we were to look at this on a real estate asset basis, we're pretty much leverage neutral on a sequential basis from 9/30 also from 12/31/02.

Moving on to page 22 and looking at our debt schedule, no real material changes, we still have a very strong BS, very long maturities, which average 7.2 years. As Scott mentioned, wee refinanced our $500m line of credit in December, and picked up 15 basis points on the spread on that deal. When we look down at our floating rate, while this represents 18% of our total debt and historically a low number, the marketplace right now is really very attractive. It has unprecedented rates for long-term money, so we possibly will look into extending maturity on some of this long-term debt. As far as the maturity schedule is concerned, we have very limited near-term maturities. We have only a $100m of matures debt over the next three years.

With that, I'll turn it back over to Scott for some closing remarks.

Thanks. Just to talk about 2003 and our outlook, starting just generally and then I'll talk about guidance.

For a generals perspective, I think you can tell, we remain uncertain about the markets. The geopolitical and economic uncertainty remain an issue. The impact of WorldCom and the MCI exposure is still unclear. While we hope we have under written what we think will happen, I'm not sure frankly even MCI/WorldCom knows what's going to happening at this point. We're doing the best we can to manage it; we're not exactly sure where that's going to end up being. Our shadow space may become more visible if financial service sectors remain weak before the economy starts to recover. And, you know, with all this environment, we did not anticipate a significant office market recovery until some point in 2004, and so we're building a business plan with that in mind.

From an investment standpoint, the markets remain competitive. While we are still dialing in 0 in terms of our earnings guidance, in terms of new investments, we're hopeful that pricing will rationalize as owners start to recognize the challenges within the marketplace, we have seen a continuation of good activity and deal flow and some, maybe a little more interesting than others. So maybe we'll see that. We will maintain or investment discipline. Again, if we can't find deals we think are very good from our underwriting prospective [inaudible] dividend, then we will pass and just continue to hold our BS where it is.

We will also seek to sell non-core assets or pursue selective joint ventures and capitalize on investor appetite where appropriate.

As Mike mentioned, and I mentioned earlier, we're going to also -- a big key strategy for us in 2003 is to focus on harvesting our non-income producing assets. We have 14 land sites encompassing 338 acres. We will focus on rezoning those where appropriate, from office/industrial to even multifamily and other higher and better uses where we can extract value or built-to-suit opportunities where it makes sense. We have a number of projects we're working on at this time. As Mike also mentioned, R.S.V.P., we continued to work on the disposition of RSVP's assets. We're actually making good progress on the platform disposition and restructuring of our arrangements with the preferred holders. That's something we will continue to focus our energy on in 2003.

Lastly, we will continue to opportunistically repurchase equity in Reckson. As mentioned in last quarter, we'll do this in conjunction with this position so they're leverage neutral, but we will continue to monitor that market.

Let's talk about earns guidance for 2003. You notice, while we ended the year well-occupied, a number of factors have impacted our near-term view on 2003's results. The first obviously is WorldCom. Going back to last quarter, as I mentioned earlier, we expected to get back a third to half of the space at the beginning of the second quarter. We already got back over a third. We expect to go a little over half, based on our initial underwriting, maybe 55% to 56% of the space. It happened earlier than expected, and we also believe now we will have to be giving concessions on some of the other space that's out there so that, I think is a little bit more challenging than we would have hoped. As we also mentioned, we had some concerns about other revenue relating to other tenants that are not performing. We have projected originally .5% to 1% a loss of revenue due to those tenants. Now we believe it will be closer to 1%.

While RSVP is going well, remember last quarter we talked about trying to generate $30m in the middle of 2003 and repurchasing stock. Going down the road on the restructuring, we're pursuing a different approach, which we believe will enhance our position, but will defer the receipt of that $30m to the beginning of 2004.

As it relates to the core operations, on the expense size of the equation, the inclement weather, obviously will have an impact on our operating expenses in the Northeast. The cold and snow has clearly added to utilities and R & M costs.

Finally, as I've been mentioning earlier, we're concerned about the leasing environment as we began 2003. Just to put this in perspective, if you look at the portfolio, we're 93.9% occupied, and we've been active, but not as active as we need to be based on the amount of space we have to lease and the potential for other space. Now we're projecting same-store net operating income to be between 0% flat, to down minus 1.5%, and occupancy being down 150 basis points to 300 basis points.

We think guidance will set a range of holding 2003 flat, with 2002 or at $2.36 per share to down 4% from where we ended 2002 which is $2.26 per share. I'd be glad to answer any more questions about that.

Operator, we are prepared to take question on this or any other subject from Michael or myself or the balance of the senior management team.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the 1 on your Touch-Tone phone. You will hear a tone indicate you have been placed in queue, if you press 1 prior to this announcement, please do so again at this time. You may remove yourself by pressing the pound key. Please pick up the handset before pressing the numbers.

We have our first question from the line of Dave Shulman with Lehman Brothers. Please, go ahead.

3.6% of our tenants are based on the sublet market?

3.6%? Thank you very much. I have no further questions.

Our next question coming from the line of John Lutzius from Green Street -- I apologize, ATV? Is that.

It's Green Street Advisors.

Thank you. Please go ahead.

Good morning. I wanted to hit this treadmill concept you had. In your presentation, you talked about how you did leasing for the year that amounted to 13.7% every the portfolio?

Right.

As I look back on some of your information as of this time last year, the rollover expected I think was 6%? Is that about right?

I think it was probably closer do 8% if I had to guess.

You're talking about for 2002, right?

Right, as we stood at the end of '01 --

I don't know the exact number but I think it was probably closer to 8% to 9%, but I think it's still consistent. Go ahead.

I'm trying to quantify that a little bit. Let's not get tied up on the exact number.

Exactly.

Can you maybe break it into the broad categories of why it was so much higher?

Well, again, as I said to you in my comments, that in 2002, we had -- what was the exact square footage? I think it was something Like 800,000 square feet, or 750,000 square feet of space that was terminated early. So that's one component. The other component in that number is we had the -- our development projects in 2002 that were also being leased, which was the ShortHills project, which was 123,000 square feet, and then we leased I guess about 110,000 square feet or so in our Reckson Executive Park and Melville properties. So I would say those are the components to make up the difference between where we started the year and to now. That's why I'm drawing the point because we're already commencing 2003, and while, you know, we did a number of leasing, we already had, you know, 367,000 square feet given back to us.

Oh, and then also there's some early renewals in that number, too, and if you go to the supplemental, you would see what that number would do also actually related. Those are the components, though.

What would it be in a more typical year? Let's say you had 10% rolling per lease schedules for a more typical year. There are things like terminations and early renewals, et cetera, in a typical year. How much extra leasing would you normally have to expect to do?

You know, I guess it's conjecture. I don't know the real answer, but I think the answer to the question is sort of qualitatively. Probably the lease -- the early renewals, that can vary, and frankly that's not a big deal in good years. That's usually something that's not costly in big years and that's something that maybe you're getting rent increases or something on the positive side of things, but I think the big impact there are the early terminations, you know, so in normalized years you have much fewer early terminations, and if you have early terminations, it's an opportunity, not something that is as much of a challenge as today.

Thanks.

Can you talk a little more about RSVP? What is the restructuring that you have under way with the preferred?

I can't go into the process, because we're in the process of finalizing that negotiation, but the premise behind it is to restructure what we believe will actually derive liquidity more quickly than we otherwise would derive liquidity.

Okay. It just strikes me that it's a very difficult market to be making up ground on a dividend gap. Can you comment in bigger-picture way on your ability to do that?

Well, I think Mike's commentary was meant to sort of state we don't really anticipate making up ground on a dividend gap in this market conditions. We're all comfortable based on where our BS is today and with the dispositions of having the dividend position -- the payout ratio that we do have with the recognition that, as the market conditions change where it's not so difficult, where we can again commence our investment process and redeploy our non-income producing assets, you know, and things of that nature, and have our TI costs come down, and et cetera, that we're comfortable where that's going to be.

So, you know right now we're anticipate a recovery sometime in 2004, and, you know, the other items we believe we'll be in a position to do that as well. I don't think we'll be trying to make it up in 2003. I think what Mike was saying is expect that to continue.

And then you're comfortable with the dividend at the current level?

Yes.

Okay. Just one last question. Your credit balance at the end of the year was -your credit facility balance was ...

267.

Fairly high. Are you expecting to perhaps refinance that at the attractive rates you mentioned, or is there a near-term source of repayment? What are your plans there?

We're looking at the market, as I said, John, in my words. I think it's -- there's unprecedented ability to take advantage of long-term rates, and I think we're at a level from a historical perspective, the number's still low, being only 18% of total debt, but it certainly makes sense to take advantage of where rates are today.

Okay. Thanks.

Thanks, John.

Our next question is from David Shulman with Lehman Brothers.

I'm sorry, David --

It's quite all right. I thought you guys were upset with me.

No, no.

The question is how will you book the First Data transaction. Are you going to book a land sale gain or a fee development? How is that going to get booked and when will that get booked?

It's actually a combination of two things. We do have a land sale, and we will try to 1031 the gain of that land sale, so that would be deferred.

So that would be, in theory, booked in Q1?

Yes.

That would be a Q1 booking, and then book a development fee later?

Then we would book a development fee over time as the building is constructed.

And when do you expect that to be completed by?

I think it's the first half of next year.

April of 2004.

April '04. Okay.

Next question on the dividend, what kind -- what would it take for you to really revisit the dividend question and -- you can't say what you're paying -- how long will this market have to continue before you have to take a careful look at the dividend question?

I was going to say we look at it on a regular basis, and look at everything on a regular basis. We spend a lot of time evaluating where we are. I think that would have to deal with a lot of factors, including what our BS looks like, our view on the market, and some of the other factors that Mike laid out. If we don't see things trending in the right direction, we have to reevaluate that.

In Q4, it looked like you couldn't pass through all the your increased operating expenses to tenants. That's what it looked like. What percent of increased operating expenses do you have to eat, compared to what your tenants will have to pay? So on the marginal increase in '03, how much will be borne by tenants and how much borne by Reckson, on a rough percentage basis?

I think it's 85% is borne by tenants and the balance by us. Clearly one of the areas that impacts that is Long Island, where a lot of our leases don't include for pass-throughs but rather there is the contractual rent increases.

Okay. So snow removal in Long Island could impact the first quarter then?

Yes.

Utilities are actually passed through on Long Island.

Yeah, electricity is passed through, but the snow removal obviously will affect, and then fixing up some of the -- you'll have extra CAPEX to deal with the snow damage that invariably occurs?

Exactly.

Our next question coming from the line of Frank Greywitt with McDonald Investments.

The build to suit with First Data, is that included in the development pipeline in land or projects and planning? Where exactly is that?

I believe it's in land.

Okay. And none of that in projects and planning?

No.

Okay. The extraordinary item, I assume that has to do with the restructuring of the line of credit?

That's correct.

And, finally, a cursory question. The level of furniture fixtures and equipment doubled sequential and year over year. Is there anything to that?

One thing I think I mentioned last quarter which is the construction and management companies, we're now consolidating those businesses, and that was effective as of October 1st, so this is the first time that's showing up. So there's a level of that type of -- you know, those types of items in the service company's BS that's now being consolidated, as opposed to before.

Thank you.

We now have a question from the line of with Jon Litt with Gary Boston.

In the fourth quarter, you leased 700,000 square feet, and so far in this quarter you've leased 263,000 square feet. Can you comment if there was any unusual activity in the fourth quarter that led to so much leasing?

If you look at my slide show, 13, and look at the office leasing in particular, which again, the other thing with our occupancy and leases, all leases aren't the same. You're leasing the space at 919 in the office building versus the space in Bohemia, you're talking a difference of $55 a foot and $5.50 a foot. So if you focus on the office leasing, that gives you a sense of trends, in the fourth quarter was 369, as I said, that's sort much in line with the trends, but the low end of our recent trend for the quarter since the beginning of 2001 on just the office side. I think that that's more normal than, you know, sort of in the office of have been 400,000 or 450,000 square foot of leases per quarter has sort of been our normal run rate when you find a mean there. As I said to you, I think that the first quarter is just is a little slower right now.

But last year you did 2.7m of square leasing; this year you got 2m square feet rolling. That would sound like to me for a year end to year end, your occupancy would at least be flat.

That's again why I'm reiterating the points to you about, A., the WorldCom space, but, B., you have the treadmill effect. I don't know if you sort of ahead the comment, but we're gaining back space that we have to lease. So I think I quoted for this quota so far, we already have 275,000 square feet of space that we've gotten back that we're now in the process of having to re-lease. So while it's there -- 367,000 square feet so far this quarter, so 367,000 square feet of space coming back to you in the first two months of a year, you know, I hear you.

I guess the question I have is you know, out of 20 office suites we follow, you know, at this point most of them have a good handle on how bad things can be, and, you know, have looked into the future and tried to incorporate it, and it seems as though every quarter you guys are going, oh, well, we weren't conservative enough. I'm just trying to put my finger on -- the leasing activity seems pretty good, but it seems as though you go into each quarter a little more optimistic than you really should be.

Again, I think that if you look -- following the same analysis that did you, talking about what you're leasing trends were in the fourth quarter -- in the third quarter and second quarter, you know, you would say to yourself that things look strong. So you know, I'm giving you where it is. If you listen to where we sort of point to guidance, some of the things that have taken us back a little bit was the non-performing tenants which now are biased and everything seems closer to 1%. WorldCom, we think, is going to be worse than what we had originally anticipated, and I've listen to my peers and I don't think anybody has a handle on how slippery that is at this point unless they've already had their terminations are done. So I think that's had an impact. I also think that our markets, frankly, are lagging the rest of the country because of the financial service sector, and we're seeing a little softer point in the cycle, where other people may have already seen it.

I guess, it's disappointing, the chopping of the numbers every quarter. We were fortunate trying to put more WorldCom exposure there than you guys have put there but is certainly a continual disappointment -- but it continues to be difficult for you guys to overcome. I think Gary has another question, I'll turn it over to him.

On the 367,000 that's come back, sort of excluding the WorldCom, on the other piece, have there been any lease termination fees associated with that?

There has been some lease termination fees, about $1m of lease termination fees.

And in terms of the guidance, you know, what sort of -- I know it's kind of hard to peg sometimes but what sort of run rate would you be looking at on a quarterly basis.

We basically in total guidance, we have $3m estimated for the year.

John, just another thing, I think it's very early in the year, and we made a decision, looking at our numbers now and based on the facts we know, to make a call that's going to be more choppy and challenging in our market, whereas other companies may see that subsequent or may not see it at all. But in our markets, we decide to take a view we know what we have seen so far in the first quarter and it could get better and we could pick up a lot of velocity, in terms every providing guidance we would look at what we have today versus what we hope for in the future.

But my point is you're playing catch-up. Many companies are in front of this. They're looking for earnings to be down 3% to 5%, and your prior guidance wasn't close to that. So I think a lot of your peers are ahead of these issues, and I think what's really hurting the stock is you continue to come in and, you know, continue to have to lower it. Not many companies in your sector are lowering it this quarter.

Just to conclude, the only point I want to raise, our guidance is flat down 4, okay? So if you said the sector is down 3% to 5%, the other is we're down flat, and the other is we're down 4%, so I think maybe it's bringing us more in line with where they are. But, anyway --

Hopefully it's the last hatchet job we have to do.

From your mouth to our lease signing.

Thanks, bye.

Our next question coming from the line of Ken Weinberg with Legg Mason.

If you could give an update -- last quarter you provided a breakout on leasing costs, on a per square foot basis, CBD versus suburban, where you see that number falling out for '03?

Is that the only question you have where I can dig through and pull out that stack?

I guess related to that, how much of the increase would you attribute to really retention rates dropping off a little bit here. It looks like that number has dipped sequential.

Again, I think what you're finding is even on the renewals -- I've listened to my peers, and this is consistent across-the-board, when you're dealing with renewals, when your in a marketplace where brokers are involved and the vast majority of transactions, your costs are going up, because you're still paying the broker and the broker are making you pay rents that are higher, and pay TI costs as if they're going to a new space. So you, you know I think the renewal factor is there, but as I defined it before, it's a tenant's market.

On the TI cost, as a breakdown, I'm not sure what you're looking for, different than - your asking for just sort of our results CBD per market, if you turn to the supplemental, there slide that actually breaks down by each market what our TI leasing and commission costs is --

I'm just trying to get a square foot base.

Just year to date, our commission costs were about $27, and our suburbs range from a low of $6 to, you know, a high of $19.

Okay. Mike, do you have the actual number of your chair purchase numbers for the quarter? On last call, you had run through what you had done up to that point. I think you bought back some of the preferreds?

I don't have that, because we reported it last quarter. We don't do anything --

Nothing since then?

Nothing since then. So the numbers that we have reported as of last quarter are all we did for the year.

Last question on the run rate for straight line, I think the 919 free rent should have been burned off by now. Do you have what that number is?

I think it's about $26m.

Okay. Thank you.

Thank you.

The next question comes from the line of Steve Sakwa from Merrill Lynch.

Good afternoon.

Hi, Steve.

Scott, in your guidance, I just want to understand, in terms of acquisitions, dispositions and share repurchases, are those three all zeroes?

In our guidance, acquisitions are zeroes, share repurchasing is what we call leverage neutral, so that would be tied to a disposition, but at this stage we're assuming in the guidance itself it's zero. If something happens, then you know, we'll put it in there now. But right now its zeros.

But I mean, at least the land sale gain for the First Data building, would that be considered sort of a --

That would be something that, depending -- that would be something that we could use for a share repurchase.

And do you have any other buildings right now you're active considering for marketing? Given the strong pricing that we continue to hear about, are you actively seeking to sell more of the portfolio?

We are looking at a couple of the things that are on the non-core side that we have been talking to, and some areas where we could do joint ventures to capitalize on value.

Okay. Thanks.

If there are any additional questions, please press the 1 at this time.

Our next question coming from the line of Greg Karandi(ph) with Wachovia Securities.

It's actually Chris Haley, how are you?

I'm doing fine.

Could you go through what your market rent expectations are by your major markets for '03, and what you're budgeting for your portfolio rolls.

Market rents by market? Yeah. Let me pull that out for you.

That would be great. Thanks.

I'm just trying to find exact numbers where they are. I don't have the exact numbers by market. In these numbers here, you can see what we have in the suburban markets versus the CB numbers. For the CBD basis for the leases that are rolling, we're projecting $38 a foot, on a cash basis, and on the suburban portfolio we are projecting $36.64. That's obviously made up -- those are weighted average for leases market per market.

Mr. Karandi(ph), your line is open.

Is that a full service rent?

Yes.

And how that come so ... I'm trying to find the page. Which page are you looking at?

I'm on page 16.

Okay. And in aggregate, what type of roll down or up is in the suburban versus CBD again?

If you look at the suburban portfolio, it's about flat up .9% on a cash basis up 8.6% on a GAAP basis. CBD is up 27.1% on the cash basis, 32% on a GAAP basis.

Okay. And your retention assumption for '03?

Our retention assumption for '03 I believe is about 50%.

50. Okay. All right. Thanks, Scott.

No problem.

Mr. Rechler, there are no further questions. Please continue.

Thank you, operator, and thank you, everyone, for participating on the conference call. I look forward to speaking to you all during the quarter, and feel free to call if you have any further questions. Thank you.

Thank you, operator.

You're welcome.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using AT&T Executive. You may access -- the conference call available for replay starting today at 7:15 p.m. eastern time through midnight on Friday, March 16th, 2003. You may access the AT&T teleconference replay system at anytime by dialing 1-800-475-6701, and entering the access code 669674. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701, and 320-365-3844, and access code 669674.