SL Green Realty Corp (SLG) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Reckson Associates Realty Corp.first 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 press zero then star. As a reminder this conference is being recorded. The information to be discussed on this earnings conference call including guidance concerning the company's future performance may contain forward-looking statements within the meanings of Private Securities Litigation Reform Act of 1995. Such forward-looking statements and all other statements that are made on this call that are not historical facts are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those expected. Among those risks, trends and uncertainties are the general economic climate, including the conditions affecting industries in which our principal tenants compete, financial conditions of our tenants, changes in the supply and demand for office and industrial properties in the New York Tri-State area, changes in interest rate levels, downturns in rental rate levels in our markets and our ability to release or release space in a timely manner at current or anticipated rental rate levels. The availability of financing to us or our tenants, changes in costs, repayment of debt owed to the company by third parties, risks associated with joint ventures, liability for uninsured losses or environmental matters, and other risks associated with the development and accusations of properties. For further information on factors that could impact Reckson, references -- reference is made to the company's filings with the Securities & Exchange Commission. Reckson undertakes no responsibility to update or supplement information discussed on this conference call. Also during this conference call, the company may discuss non GAAP financial measures. The GAAP financial measures most directly comparable to each non GAAP financial measures discussed in reconciliation between these measures can be found on the company's Website at www.reckson.com. And the company's first quarter earnings press release slide show presentation and supplemental packet. I would now like to turn the conference over to our host, co-CEO Scott Rechler. Please go ahead.

Thank you operator and thank you all for joining us on our first quarter 2003 earnings call. With me today is Donald Rechler our chairman and co-CEO and Mike Maturo, Chief Financial Officer as well as the balance of our senior manage many team. We will start with Mike and me providing an overview of our quarterly results and then we will open up for questions for us or any other members of our management team.

For those who have not participated on our calls in the past we will be using a power point presentation that you can access from our Website, as the operator said www.reckson.com. If you have problems accessing the presentation, please call Susan McGuire who runs our investor relations at 631-622-6642. Now working off the power point presentation I'd like to turn to page 2 and I'll start with providing a summary of our quarterly highlights. We reported diluted funds from operations of 59 cents per share for the first quarter of 2003 which compares to 60 cents per share for the first quarter of 2002. Representing a per share decrease of 1.7%. The first quarter results were impacted positively by 7 cents per share attributable to the First Data land sale transaction as we discussed last quarter and negatively by 3 cents per share of excess costs attributable to the severe winter weather conditions that we experienced in the Northeast. Our quarter results were consistent with our internal forecast and guidance and reflect a material drop in occupancy caused by over 400,000 square feet of lease terminations. As you can see on the bottom of the slide, our property occupancy for overall portfolio from the end of this year to the end of this quarter dropped 220 basis points from 95.6% to 93.4%. On a year over year basis it dropped about 200 base points. Our office portfolio was a big factor in that dropping 300 basis points from the end of the year to the end of the quarter, and on a sequential basis it dropped about 310 basis points. If you turn to slide No. 3 continuing on the highlights, as expected, the reduced occupancy and expense pressure resulted in reduction in same property NOI for the quarter. Our cash NOI declined 1.1%, our same property NOI including straight lines dropped 6.1%.

As we began last quarter we also have netted out the same property performance by netting out the minority interests of joint ventures and you see that declined 4.5% on a cash basis and 7% when you include straight line rent. We also looked at this without the WorldCom terminations and on the cash basis the same property NOI was flat and down about 5.2% when you include the straight line rents. From a leasing perspective we were still able to generate higher rents on renewal and replacement space during the quarter. Our cash rents office portfolio increased 1.2%, industrial portfolio increased 6.6%. When you include straight line rent our office portfolio rents were 9.8% higher and industrial portfolio rents were 16.1% higher. Leasing activity was slow during the quarter. We executed 48 leases encompassing 561,000 square feet. I'm going to provide more color on that later in the presentation. And during the quarter, we executed leasing transactions resulted in 61% renewal rate. Now, to turn to slide 4, and talk about our portfolio. Starting with our portfolio composition. While our portfolio stayed the same in the terms of the number of properties the composition changed due to the occupancy falling. You'll note for example, New York city last quarter, its NOI contributed approximately 31% to the overall company's NOI. Now it contributes 28%, that is really occupancy. Similarly if you look at our net operating income our industrial portfolio in the prior quarter contributed 15% and now it's up to 17%. Again that is just an allocation of where the occupancy dipped off and is to be expected.

On page 5 we provided a review of our tenants and you can see it is a highly diversified industry base that make up our tenants. On the left-hand side is a pie chart that demonstrates that. Our largest industry segments is consumer products making up 14%. Financial services making up 13% it will deal services making up 11% and insurance making up 8% and this is not changed on the prior quarter. On the right-hand side of the slide we list off our top 25 tenants based on revenue contribution. You'll note some notable newcomers to the top 10 is Dunn and Bradstreet Corp and Fuji Photo Film making up 1% of revenue.

If you turn to Slide 6, I'd like to take a couple of minutes discussing our markets. The market activity continues to be slow. Continued to be slow during the first quarter as we said in our last conference call, the first quarter really reflected the distraction that companies were facing while they were caught up with the war in Iraq. Especially I believe in the New York area where the capital market activity froze. It froze a lot of companies from making decisions. In addition, the geopolitical uncertainty resulted in a lack of desire for any company to make any long term strategic plans or commitments.

One thing you'll see later in our presentation is that holdover levels during this period were significantly higher than in the past which I think reflects companies lack of desire to make these types of decisions. Activity has picked up since the end of the first quarter however markets still remain competitive. I'd characterize it as a tenant's market. Tenants are shopping for a lot of deals and they have lots of at tern tiff. Sublet space is a competitive factor in all of our markets. Leasing costs remain elevated as tenants do not want to expend any significant capital.

What we are doing in this market is continuing to focus on gaining market share from our competitors. Recent tenant activity is building a type line in leasing activity late '03 early '04. Because tenants sat on the sidelines for most of the first quarter, what its done is sort of build up a pipeline that will push leasing we believe later into this year versus this coming year, but we're starting to see that pipeline develop and activity reflects that. Confidence levels are definitely up, and companies are starting to address future needs where they haven't been doing that in the past.

Companies we see with the most demand are companies related to consumer products law firms or restructurings. It is from our perspectives the market appears to be bottoming out. Addition of sublet space appears to be stabilizing in our all of our marketplace, we'll talk about that market by market. In some instances we have seen some sublet space pulled off the market altogether. In addition tenants are entering the markets early to capitalize on the pricing environment.

In our mind that means they don't have an expectation that leasing terms will get materially better so they're trying to take the deals today, that's creating another level of activities although that activity is not resulting in leasing that will commence immediately since we need to begin when they're existing terms expire. The other thing we are seeing is higher quality aspects, competing more effectively as tenants are looking to move up in the terms of the quality of their real estate. One wild card of this appearance of bottoming is the financial service sector shadow space and what happens with that, it seems as I said to have stabilized but that could also be something that could have a significant impact on the markets in particular in New York city. At this point we expect our markets to sort of stay on the bottom and sort of bump along the bottoms for the next 12 months or so.

That being said we see a potential for material recovery in late '04 or early '05 and let me tell you why we feel that way. First tenant space requirements are assuming no expansion. When we sit down and talk to our tenants historically they are telling us that they are building in 10 to 15% additional space for future expansion. Today they are not doing that and in some instances they are actually building in a view they are going to contract to less space to take advantage of efficiencies that they are budgeting for. As companies become more expansion moded and start hiring again they are not going to have space to expand into and need to find new space to grow. In addition, we believe that sublease space should return to normal levels as that expansion mentality starts to take hold. If companies have not sublet space targeted for sublet at the point of the expansions beginning to occur it is likely that they'll pull that space off the market versus taking a loss on the sublet space and then having to release additional space and put all that capital back into the it. So we'd expect a recovery sublet space to come off the market at a fairly rapid pace.

In addition also we expect in '05 and '06 there to be significant lease expiration scheduled that's because in '95 and '96 particularly in Manhattan a lot of tenants were signing ten year leases so what that's going to create is another layer of activity in '05 and '06 just at a point we believe demand will be picking up generally. And lastly as we have discussed in the past supply is being constrained in all our marketplaces and during this period of the downturn the pipeline for new development mass been fully suspended so supply would not be available for new product to actually meet the demand as it comes into place.

Just if you turn to slide 7 we'll talk a little bit more about each of our markets in particular. We continue to compete extremely well in our markets. Some general observation again consistent with what I said is you'll see that sublet space seems to be subsiding in or stabilizing in all of our markets. Long Island and Westchester continue to be the strongest of our suburban markets.

Focusing on Long Island for a moment, statistically, last quarter, overall vacancy shot up that is comprised of Cablevision putting 300,000 square feet on the market which we anticipate, known in the market but wasn't in the statistics last quarter. You'll also see that Reckson's vacancy rate shot up to 9.7%, which was significantly impacted by WorldCom we'd be at 6.4%. The bulk of our WorldCom space on Long Island is located in Mitchellfield where we have a large block of space and we actually have a couple of large tenants that we've been in discussions with and we'll see where it takes it. Beyond that, there is not a lot of activity but we're hopeful that it is an attractive block and will continue to attract big tenants to take the space.

Shifting to Westchester, this is kind of an a statistical anomaly. Cushman and Wakefield this quarter decided to go ahead and reset the denominator of what they had in Westchester. User occupied buildings that have been in the statistics for I guess a couple of years now, and decided to actually pull them out of the statistics completely. So you took 100% leased buildings to single users and pulled them out of statistics which brings the overall vacancy up to 21.6%. If you adjust and add them back into the statistics so you can see apples to apples to prior quarters it would take that overall vacancy to 19.1%. In addition, as we've mentioned in our last call New York life has signed a contract to buy a 380,000 square foot building in Westchester and occupy that building. That is also not in the statistics. If you pull that -- but that in the as statistics it would also take the overall vacancy from 18.9% to 17.5%. And similarly on the class A the direct vacancy you'll see it go from 15.3% to 14% by making those adjustments.

So the statistics are just skewing what I believe is a Westchester market that continues to improve. As we mentioned in our last call some of our WorldCom exposure also in Westchester in particular it's in Rye Brooke, on the east side of the county, which is the strongest of the submarkets on the scene, the greatest leasing activity in terms of large transactions. In Rye Brooke we already have 130,000 square foot of activity of interest in that -- in the WorldCom space and if we had to have that space back in Westchester that's where we'd like to have it.

Moving to southern Connecticut, Southern Connecticut seems to be stabilizing. As you see again if you look at the overall vacancy, clearly we've had a stabilization of the sublease space. Leasing activity in the first quarter was extremely strong and it was actually 161% of what the leasing that was done in the fourth quarter. So we're looking at Southern Connecticut carefully as a marketplace that could be on a recovery.

Northern New Jersey is still a challenging marketplace. While some positive things have occurred, first the sublet space there also seems to be stabilizing. This is actually the market where three different tenants pulled off their sublet space off the market that was on the market. In addition, just in the last day or so, Pfizer reaffirmed its commitment to northern New Jersey and Manhattan where they plan on consolidating jobs and investing a lot of capital and making it their corporate headquarters which is a big positive in terms of a question of how the series of mergers that took place with Pfizer would impact our market. So I think that turned out to be a positive.

One of the trends in Northern New Jersey is a complete to quality. Short hills portfolio which is a large percentage of our NOI we are practically 100% leased in that marketplace. As a matter of fact, we are about to in August we're scheduled to take one of our buildings offline and commence a redevelopment. And we already have two floors under lease negotiation for that and we haven't even started that. So I think that's a sign of companies wanting to lead to quality in Northern New Jersey. In Manhattan just really starting more on the Midtown side of things, sublease space has been stable in midtown since mid December representing 39% of the available space. The availability rate overall for Midtown has been stable for the last two months. Again I think while I say and I want to emphasize is generally speaking while sublet space in terms of new space coming out of the market is stable, as I said earlier is still competitive. The sublet space that is on the market still is driving competitive transactions. You know, we had during this quarter a number of leases either terminate or expire as upon their scheduled expiration date, hit us in Manhattan and that was expected starting on the Midtown west where we have 810 Seventh Avenue you'll see our vacancy rate went from 3% to 8.8%, that reflects a scheduled expiration of Planned Parenthood in 65,000 square feet.

1350 Sixth Avenue Rockefeller center, our vacancy shot up, that reflects the Arthur Andersen termination of two floors in that building. Downtown you'll see their occupancy went from having no vacancy whatsoever to now having vacancy of 12.2%. And you'll see that that reflects the termination of three floors for WorldCom and Ingenuity, and the scheduled expiration of T. D. Waterhouse and we're actively working on getting that space released.

Now, if we turn to slide 9 I'd like to shift to our portfolio's performance during the quarter. As I mentioned our coarse same property NOI for the first quarter was 1.1% negative on a cash basis and 6.1% negative when you include the straight line rent. We've actually provided a reconciliation of the components that impacted the cash NOI. Starting on the revenue side where you see the cash revenue is up 4.5%. Some of the big line items that impacted that were, $4.9 million, built in rent increases $2.3 million. Escalation increase which was $1.6 million, a decrease in occupancy which caused a negative $3.6 million and the WorldCom MCI terminated revenue caused a negative $1.2 million, $1.15 million. On the expense side, our expenses were up 14.3%. The big items there, utilities and snow removal were up 21.8%. Which was not only high for the quarter, but also you recall the first quarter of '02, were particularly low. And our insurance as expected was up 268% versus where we were in the first quarter.

Finally, real estate taxes were up 9.1% due to the tax increases we experienced in Manhattan and Nassau County for example. In total you could see our NOI was down $754,000 or 1.1%. As forecast last quarter, we're still getting higher rents on renewal and replacement space. As I mentioned earlier 9.8% straight line rents office portfolio and 16.1% for the industrial portfolio.

Just a little more clarity, on the leasing transactions, we had of the 61% renewal rate during the quarter, the office portfolio had a 54% renewal rate and the industrial portfolio had an 87% renewal rate during the quarter. In addition to the face rents that we're getting, our net effective rents are still generating attractive economics based on our cost basis. If you look at our leases done during the quarter for our suburban portfolio we generated a net effective rent after TI leasing commissions free rent and building expenses of $12.90 per square foot. And in our CBD or Manhattan portfolio we generated net effective rents after all the same things of $19.69 per square foot which we think are still compelling in these market conditions.

On slide 11, we wanted to provide an analysis of our leasing and occupancy activity. And really to give a sense as to what the net absorption effect was. If you start on the top we start with the occupancy as to where we were at the beginning of the quarter which was 95.4% occupied. We had 905,000 square feet of expirations or terminations, 416,000 square feet were terminations. 488,000 square feet were scheduled expirations, so that was a 905,000 square feet occupancy reduction. If you look at the leasing activity that we had in the quarter, we actually signed leases of 767,000 square feet. What we back out of that initially is short term leases and holdovers which are leases that are less than 12 months, for a period of less than 12 months because we think it excuse the number and would not characterize what's going on. That's 205,000 square feet leaving 561,000 square feet of what we would deem true leasing activity. Of that 561, new leases were 219,000 square feet, renewals at expiration were 49,000 square feet. And net expansions were 5464. We also had 287,000 square feet of what we call occupancy neutral activity, which is either renewals or new leases on space that is scheduled to come available at some point in the future. And so when you net all that out, we had net absorption of negative 425,000 square feet. Which resulted in an occupancy of 93.2%. So hopefully that provides a good snapshot as to really what happened in terms of the ins and outs of leasing activity and occupancy during the quarter. What that leaves us with as we look out again for '03, expiring for '03 office and industrial portfolio plus the negative absorption that we are assuming from the prior quarter, is a million and a half square feet of space, of which a million one or two, million two or so is office portfolio and 365,000 square feet is for the industrial portfolio. A large percentage, 50% of that is Long Island, again that is skewed because most of the industrial activity is on Long Island. But still that's where a big chunk of that is. I hadn't commented on our industrial market. Let me just say that our industrial market on Long Island continues to be strong. I wouldn't say it is as strong as it was two or three quarters ago but it's a very healthy market and we're still occupied 97% or so in that marketplace so I think we're confident in there.

Just other notable points on this slide. You see New Jersey has 319,000 square feet expiring. Again as I mentioned earlier 195,000 square feet of that expiring relates to American Express at 101 JFK pulled off the market and repositioned when that lease comes through. So there is 124,000 square feet, this is the area we are focusing now in terms of leasing activity.

Just to give you more trends of our leasing activities, just on the office portfolio now on page 13 or slide 13, you'll see in terms of the historical trends, on rent performance and renewal and replacement space, we had as I mentioned 9.8% higher rents when you include straight line. And just to look at that trend what you'll see is that is at the low end of the trend but stabilized. That's what we expected and we expected to stay at the 9 to 10% range in the next couple of quarters and we'll talk more about the prospective later. Office leasing activity, it was low end of the range of 312,000 square feet.

On the topside of the chart, we provide an analysis of our effective rent spread which takes our base rent and then compares it to our gross effective rent, our rent backing out TI leasing commissions and free rent and takes the difference between the two and we'll call that our effective rent spread and you'll see that's about 10.3%. In the prior quarters I've been guiding people to assume it's going to be more than 11 to 12% range and I still expect it to climb to that range while we're in this point in the cycle. And then lastly, one of the things that we've been doing is, as capital cost has gone up is pushing for longer lease terms, and you'll see we've been averaging 8.1 for this quarter. 8.1 years per lease per this quarter.

Focusing on prospective lease expirations, we have only 5.4% of our portfolio revenue expiring in 2003, and that includes straight line rents. If you look on a square footage basis you'll see that on the office side it's 830,000 feet which is 6.1%. We are also assuming that we'll get back 90,000 more square feet from WorldCom so that would take it up to 920,000 square feet or 6.8% of our portfolio. You'll see on the industrial portfolio we're extremely well situated with only 4.6% of our portfolio expiring for the balance of '03. The other thing I'd like to point you to is in the same thing on the Office portfolio for '04 we're well situated with only 7.2% of our portfolio expiring. If you also look at 2005 and 2006, I pointed to this a couple of times, I just want to do it again, you'll see that is an area where we have a significant amount of our portfolio square footage expiring in the office portfolio 13.2% and 11.5% respectively. We believe there is a possibility of mark-to-market opportunity in coming years. I'll talk to you about that a little later in the presentation.

In terms of looking to our mark-to-market for 2003 and 2004, we still expect to generate positive mark-to-markets to for this period of time based on a space by space internal forecast and you'll see that on a cash basis for office portfolio we expect rents to be 7.8% higher. Straight line rents included, are 15% higher. CBD portfolio is driving a lot of that growth where suburban is flat on a cash basis and up 8.5% when you include the straight line rent. We also this quarter include a similar analysis for 2005 and 2006 and in looking at 2005 and 2006, we took the rents that are scheduled to expire at the time of the scheduled expiration date against today's current market rents assuming no rent growth. So we're taking today's market rents and assuming no rent growth. When you look at that you'll see our office portfolio which has 3.4 million square feet expiring, we anticipate having, under those circumstances, a 10.6% higher rents on new leases signed or replacement rents than what the prior tenants were paying. So there is a big potential opportunity and as you see a big part of that driven by the CBD whereas the suburban portfolio down just a little bit.

If you turn to slide 17, I just want to take a moment and talk to you about our value creation pipeline strategy and how we approach it at different points in the real estate cycle. What we have here is a graph of our cumulative completed pipeline projects, our investments in each of our value creation projects each in total against the total U.S. overall office occupancy which is the dotted line.

As you'll see when you look at the different parts of the cycles, we were in the pipeline -- as the recovery began in '95 through '98, we were in the pipeline expansion phase. We were actively buying vacant buildings, vacant pieces of land where we then believe we could put into service as the markets recovered, in 1998 $271 million. As the markets were strong let's say '98 to 2001 you'll see we put as much of our value creation projects into service. And we actually, in by 2001 had put about $1 billion of assets into service and at that point brought down our investments in the pipeline from $$431 million to $117 million. Now we're at the point in the market where the market is weakening and our objective at this point is to actively evaluate our value creation pipeline and reduce the investment in that pipeline by selling assets, particularly parcels of land which makes up now the bulk, almost all of this pipeline, where we believe we can generate higher prices for higher better use other than what we approved previously bought the piece of land for. For example if we believe we can get higher better use for rezoning something for single family homes or retail or sell it for build to suit opportunity, we will actively do that to reduce our inventory. So that as the market again gets into the recovery stage, we believe there will be good buying opportunities again and we will refill that pipeline. A prime example of that is what we did with First Data Corp. where we sold, this quarter we closed on the piece of land and build a suite.

If you look on page 18, you'll see that we actually lay out for you our current land holdings and just to give a sense we have $115 million invested in land as said on the prior slide. Where we could build 3.5 million square feet of either office and industrial or industrial space. Just on Long Island we just closed First Data. We are also in the process of selling some smaller parcels, our parcel we have near our parks or some other buildings on islands.

In New Jersey we just signed letters of intent on two parcels. Where we would down zone the parcels to single-family and in aggregate the value of those are in excess of $30 million depending on where the zoning comes out. And in Westchester and Connecticut we are looking right now in a project in Connecticut to kick off a retail project as part of Landmark 7 and continue to focus on build to suit and opportunities in Westchester. So we are actively working on and expect on the balance of '03 and '04 be able to report continued progress on.

On slide 19 let me take a moment to talk about a investment environment. As you know, in the past few quarters we've been fairly Bearish as to the investment environment. We see signed that the investment markets are beginning ting rationalize, reflect the weaker market fundamentals. One of the reasons that's happening is the higher TI and commission costs are forcing owners to actually go out of pockets. They have to start writing checks to reinvest into their buildings which is something that is making them think about selling them. The other thing is their perspective on interest rates are starting to shift. I don't think they're going to remain low for a long period of time. Lock in long term or sell and that's driving some activity. Don't get me wrong, there is a extremely strong market for well located stabilized assets. But on the more evaluated or transitioning assets is where we feel we would see the opportunities. Higher level investment activity in the next 12 months. At this point we're targeting approximately $50 million of additional investments in 2003. A portion of this investment will serve to facilitate like-kind exchange relating to the First Data land sale. And also included in this is our board's decision to exercise options on two wholly owned option properties that are included in that -- those numbers. While we expect activity to be more brisk we're obviously going to maintain the discipline, the underwriting discipline we have over the last few years and we're going to balance our investment activity with our desire to maintain financial flexibility. With that, let me turn you over to Mike to walk you through some of our operating data.

Thank you, Scott. Good afternoon, everyone. If you turn to page 20, I've outlined some of the detail operating data, and just to walk through some of those numbers, and what they consist of. From an operating margin, percentage standpoint, we reported 61.2% operating and gross margin for the quarter. That is down from 65.6% of the same quarter last year, and 64.1% from the quarter -- last quarter 2002, and is in line with where we expected the margin continues to be compressed by the decrease in occupancy, as Scott reported, about 190 basis points year over year. Including the impact of the WorldCom terminations, as well as increased operating expenses, real estate taxes being up 10% year over year, utilities, particularly respect to the weather conditions in this year, and insurance cost which year over year includes the impact of the terrorism insurance and the overall increase in the liability.

For the year we're forecasting a margin of about 62%, so we do believe it will be some marginal recovery as we go through remaining part of this year. The G&A line item is pretty much where we had thought it would be for the quarter. We're at a run rate now of about $8.25 to $8.5 million a quarter.

One thing I wanted to point out, though, on a go-forward basis, this number will be impacted as a result of a long-term incentive plan that was put in place this past quarter. That plan has two components. A core component, which is in form of a restricted stock award, and an out performance component which is based on performance over a four-year period.

From a reporting standpoint, the core award is a restricted stock award that vests over four years on an annual basis. 25% of that award is based on continued service, and 75% of the vesting is based on meeting annual performance criteria. So from an accounting standpoint that 25% will be accrued as stock amortization each quarter which amounts to about $390,000 per quarter. With respect to the 75% portion that's allocable to or based on performance criteria, the accrual would be based on the determination of the probability or probability of meeting that performance criteria for the year. If that amount is accrued, it amounts to about $1.1 million a quarter. So that comes to about $1.5 million if both components are accrued. We're going to make that determination based on a measurement of the performance as of the end of each quarter.

For the past quarter, since the plan was instituted at the end of the quarter, there was very little impact. There is a detail outline of the long term incentive plan, both the core and the special component pieces in the supplemental package that you could review.

With respect to other income, it is $7.425 million reported for this quarter as compared to about $2.5 million last quarter and in the comparable quarter of a year ago. Included in that number is about $5.8 million of profit from the First Data transaction which is profit attributable to the land sale and a small recognition of profit attributable to the construction contract that exists. Also included in that number is about $800,000 of loss that's reported on the construction company this quarter that essentially represents overhead period cost. That amount will be recovered over the next three quarters as some of the income that's being produced out of the construction company is earned. So from a run rate basis, without the first profit data and adjusting for the construction lost it's about $2.4 million. So it's pretty much where it's been. And again, it includes for the most part interest on the notes and miscellaneous refunds an so forth.

With respect to tenant reserves for bad debt we reported about $1.7 million this quarter similar to what we reported last quarter. Included in that number we increased our general reserve for about $300,000. We also -- is included in that number is about $800,000 that's attributable to the write-off of straight line receivable balances for terminated tenants. So on a go-forward basis, you know, we budgeted about $1 million a quarter and we would expect that to be the case, barring any, you know, significant terminations that would result in any unusual write-offs. With respect to termination fees, we recorded $1.3 million this quarter and we've budgeted $3 million for the year.

Turn to page 21. We've outlined our payout ratios which are fairly consistent with where they were last quarter. 116% on the amounts committed, based on committed expenditures for TI and leasing commissions. 112% if you back out amounts attributable to early renewals. If you look at the actual paid which is 176%, that reflects some of the actual costs coming through from some of the activities from last couple of quarters, particularly related to the Fuji transaction. If you turn to page 22, with respect to dividend coverage, we tried to give an outline here of how we see this falling out over the next couple of years through 2004. We estimate an aggregate dividend shortfall based on our forecast now of between $36 and $42 million. Again, that's aggregate through 2004.

And if you look at some of the items that are contributing to that shortfall which are not recurring and as they turn around should produce some future cash flow, I've outlined a few here. WorldCom rent, lost rents will be about $8 million. The WorldCom retenanting cost one time charge to put that space back in service of about $8.5 million.

The Class B dividend, the last dividend payment will be made on the B on October, as of October 31st. So we'll have a savings there of about $7.5 million. As we said before we continue to have money on the sideline. As Scott said we do start to see some ability to put out some of that money, investment opportunities, and we've estimated that dilution amount for this period of about $10 million.

Some other items that we believe will contribute to normalizing the payout ratio account is excess tenanting cost which as the recovery takes hold we believe will begin to stabilize. Right now we are paying out 50% or more on historical basis on a per square foot basis of excess tenanting cost. And obviously, as we lease up the vacancy, that will contribute to cash flow as well as in Long Island particularly we have built-in rent increases. As a result of that and looking at our forecast, we believe the payout ratio will begin to normalize by the end of 2004.

With that said if you look at the bottom of the page, I've added here if you take a $40 million shortfall and just say that you'd funded that with debt that would only increase our leverage by less than 100 basis points. We reviewed the dividend at the annual meeting each year where we will go through this same analysis with our board of directors. That meeting is scheduled at the end of this month, where we will formally adopt dividend policy going forward.

If you turn to page 23, just an update on some of the significant credit issues that we faced historically. WorldCom, they've paid on all nonrejected leases through May, with respect to additional terminations, 192,000,000 square feet has been terminated. We're expecting an additional 90,000 square feet of terminations. However, we did receive payment on that 90,000 in May.

With respect to each cube, global there was an item this quarter, the lease at 919-33rd Avenue of 31,000 square feet was rejected. That resulted in $285,000 straight line receivable written off however that was offset by a letter of credit that we were able to draw upon for $485,000. Currently, leases outstanding of 171,000 square feet and these three leases are -- continue to be negotiated. And we hope that those negotiations will come to a close sometime in the near future.

On page 24, just a quick update to our stock buy-back program. We did buy 252, 000 additional shares of Class A during the quarter at an average price of $18.01. Total purchase is about $4.5 million.

On page 25, looking at the balance sheet, our ratios continued to hold up well. 3.22 on interest and 2.52 on fixed coverage. The debt to total market cap has gone from 39% to 48%. That increase is substantially attributable to the decrease in the stock prices, and the resulting total market capitalization. If you turn to the next page, 26, there's a summary of our debt schedule. No real material changes there. We still have very long maturities. Our average maturity on our long term debt is seven years. We only have 20% of our debt now on floating, a floating rate basis. And if you look at our maturity schedule we only have one near-term maturity of 100 million note that matures in April of 2004 and that's our only maturity over the next three years of any substance. With that said I'll hand it back over to Scott.

Thanks, Mike, I appreciate that. Just to summarize and give you a view on the outlook. As I mentioned again, we believe the markets appear to be bottoming but remain competitive and we expect it to be that way for the next 12 months or so. We do strongly believe that there is a potential for a real recovery in late '04, early '05, that can ship this over to a landlord's market for a period of time, while there is this equilibrium in terms of supply and demand. And we believe that we're well positioned to capitalize on that market recovery, as I showed you when we walked through our expiration report. Our focus for remainder of 2003, is getting our portfolio restabilized for the prior quarters has been to keep our occupancy where it's at. Now it's get our occupancy back to where it was and that's something that we're focusing on across the board and we want to do that in the manner that still provide good economic rents as we have in the past. As I demonstrated in the presentation earlier. As we said the investment markets are starting to rationalize and so we're starting to look at value-added transactions and hopefully we'll have a pipeline that will start building in that regard.

We're making progress on the disposition of our non income producing assets. I spoke about the land with First Data and the two additional LOIs that we signed. We're also making good progress on with RSVP and the restructuring that we have been pursuing there, we have actually signed agreements, with all of the parties subject to financing contingencies, and we are in the process now of raising the financing, to complete that restructuring to put us on a course to pursue an orderly disposition program. And we're still forecasting to net about $30 million of proceeds from RSVP in '04. From a performance outlook standpoint, we are reaffirming the guidance we provided last quarter of FFO between $2.26 to $2.36 per share. And as Mike mentioned we anticipate our dividend payout to normalize during '04. With that, operator, we'd open up for any questions that anyone might have for myself, Mike, Donald or any other members of our management team.

Ladies and gentlemen, if you wish to ask a question please press 1 on your touch tone phone. You will hear a tone indicating you have been placed in queue. If you did so prior to this time we ask you that you again do so. If you are using a speaker phone please pick up the hand set before pressing a number. If you have a question or comment please press 1 at this time and our first question will come from Lou Taylor from Deutsche Banc. Please go ahead.

Thanks. Can you clarify a variety of things, I guess given reg G and the restricted adherence to the definition of FFO, what's the rationale of the 7 cents of land sale gains in the reported FFO?

The land sale was undepreciated land, so I believe that's consistent with the FFO definition. In the white paper. Also I think you saw from our strategy going forward basis, we expect this to be part of our business as in any business cycle, has been for the last 45 years, in the late end of the cycle you start disposing of your land inventory where it's strategic to do so. Which frankly funds down times in your business. And so we think it's fairly consistent with our business.

Lou Taylor; All right. I mean, land has never been depreciated. So that's been GAAP for 100 years. But normal part of your business, I mean, I don't -- I mean, covering the company since '95 and I don't recall land sales being a normal part of the business. So what's changed?

I just said, I think I gave you a pretty good description on it, on our slide show that in the early part of the cycle we were big acquirers of land. In the mid part of the cycle we were big in terms of putting our land into service and since that point we've been actively disposing of our land. And I gave you not only First Data but as I mentioned we have two other letters of intent signed in other parts of Long Island that we're in the process of disposing of and this is the part of the cycle in which you are sellers of lands. There are points where you are buyers and sellers and this is the point we are selling.

Is your guidance that you're reaffirming including the 7 cents of land sale gains and other gains as well and if so how much land sale gains do you have in your guidance?

The First Data land sale is included in guidance. We have not included any other gains from land sales in '03 because right now we don't believe anything will close of any substance.

Okay. Then to close the logic loop here, then how is it a normal part of your business if you don't expect any more this year?

Because again as I said, you know, we have signed letter of intent, we're just not -- our expectations are that they're not going to close in '04, that it's an '04 type activity.

Okay. Now, within the guidance, what is the assumption for the amortization of the performance criteria component of the restricted stock? In or not in?

It's in the range.

It's in the range, okay. Now, should we expect on this, this amortization to just be as you've said a quarter by quarter thing, so you may go a couple quarters and not recognize it and then all of a sudden you recognize it and have a little catch up and so you know we may be sitting here in the fourth quarter and you say, gee, we made it for the year, here's six cents worth of charge or amortization for the restricted stock grant, is that a fair assumption?

Well, it's -- for accounting purposes, it's not something that you can accrue on a piecemeal basis. It basically, the accounting rules say that if you believe you will make it or it's probable, you've accrued the whole thing. It is not something that you can essentially accrue 50% or 25% based on that probability. It's either you believe it will be earned or it will not be earned. The situation that you describe, Lou, unfortunately, may occur. But we're going to -- you know, we're going to take a look at it and based on our evaluation of where we are, relative to meeting that criteria, we're going to have to make that call.

Okay. I guess, in terms of I think it was slide 21 or 22, on the dividend. I mean, should our take away be here not so much that we're going to feed this thing $36 to $42 million dollars over the next seven quarters but that we're going to present this to the board, this is what they're going to see and they're going to make a decision on this slide and presumably some other detail?

I think the stay-away should be that this is what we are going to present to our board. Our assessment of it is that it's a manageable number at $36 to $42 million dollars, being less than 1%, increasing our total debt level by less than 1%, and there being clear of aspects that will normalize our dividend as we reach '04. But this will be, the final assessment is being made by the board and this plus additional analysis done by you and third parties will be discussed with our board.

Last question was should our take away be from our inferences in '05 and '06, these expirations mark to market et cetera, this seven-quarter gulf between here and there is a relatively short period of time and short enough that suggests that we will feed, most likely we will feed this dividend, because you know, we see a recovery seven quarters out, and then we should be fine?

Again, as I said, I think that from our perspective, you know, there's factors here some that don't even relate to a recovery, that will have an impact of normalizing our dividend. That's what we'll present to our board. We'll have this discussion and go there, also I don't want to leave you to say we don't think '04, as I mentioned we have very little relative expirations in our portfolio right now, on the office side. And so you know hopefully we'll also see the normalization of our occupancy in '04 producing a more, you know, typical run rate for us.

All right. I'm sorry, just one last question. Also on 22 where you have these ort normalization items, vacancy lease up clearly adds to the revenue. Have you factored in the cost to lease up that space in your $36 to $42 million shortfall?

Yes.

Okay, thank you.

Next question is from the line of Brian Legg from Merrill Lynch. Please go ahead.

Just to clarify the starting point for the core award and special out performance award, March 13th is sort of the dates where thee things are calculated. Is closing part of March 12th the starting point?

Scott Rechler I believe it's March 13th.

Closing was March 13th?

Scott Rechler That is the date of the grant so as of close of business that day.

Can you talk about your leasing activity? Obviously it was down in the first quarter, but can you talk about it subsequent to the first quarter, you're talking about increased activity, just mainly showings or pickup in actual lease signings?

Scott Rechler We have seen some additional lease signing activities since the end of the quarter. I think the big thing has been showing activity and leases sending out activity. We have had leases in the pipeline that have gotten executed, subsequent to the second quarter. And -- but I think the big thing that we're pointing to is the number of tenants that are out there today looking at our space and leases that we've sent out for negotiation. There has been a tremendous amount of activity on that front. And I think also if you go back to how I described in the slide, you know, went from sort of a standstill in the first quarter or towards the end of the first quarter. Then the situation in the Middle East, picked up, But doesn't go from activity picking up to leases being signed. We would expect it to be sort of following through the pipeline as the year continues we pick up momentum in terms of lease signing activity towards the third, fourth quarter and into '04.

So the 2.8 million square feet in 2002, you don't necessarily think that's achievable but you'll certainly get more on that run rate towards the last half of the year?

2.8 million square feet I'm sorry --

I think that's all of what you signed last year.

2.8 million square feet all of last year. We went into it not thinking it was necessarily achievable going into this year. Last year was a very strong year. But I think that, you know, our view is we'll start picking up momentum, especially at is of the bigger spaces in this sense with what we have with some of the renewals that we're working on for '04 and '05 as well as the WorldCom space that we have back. We have some large blocks of space in our pipeline. That I think will push up some of the activity as we get later in the year. I wouldn't rule it out but the run rate's going to stop coming maybe more excessively towards the end of the year.

Is this activity across all markets or centralized in a few of your markets?

I think went market to market. In some space we don't have space to generate activity, like in Stamford. Westchester, Long Island, New Jersey, we have two floors out already for redevelopment that we don't plan to kick off until August, a very positive indicator for us. Looking in Westchester with Rye brook, the amount of activity we have on the WorldCom space that we got back again is a very positive indicator.

Last couple of questions. Your non income producing assets sales, you said you don't have any land -- more land sale gains in this year. What about '04, do you have any guidance for any gains from non income producing, and the potential proceeds from non income in maybe '03 or '04?

We haven't yet provided guidance for 04 at this point.

Although Scott did mention with respect to RSVP we expect $30 million or so from proceeds of the liquidation of that portfolio that come in 2004.

Okay. Last question, are you planning to take any steps to improve corporate governance?

We review corporate governance on a regular basis and will discuss it as we always do at our annual meeting with our board of directors. We have actually added two steps we added two different board members in this past year. We, you know, modified all of our committees so that the independent committees now are made up, I mean, the nominating committee, the corporate corchance committee and the compensation committee are solely made up of our independent directors. We had two directors, one being Peter Quick who is president of the American Stock Exchange and the other being Ron Meddeker, who is the head of operations at J.P. Morgan and shared their compensation and was on their audit committee. We have been focusing on it on a regular basis. And beyond all that we've also done all ever our internal audits that, you know, I think we feel that we're ahead of the curve on a lot of the processes that Sarbanes has modified but we're going to continue to evaluate that.

Thank you.

Next question is from Tony Paolone from J.P. Morgan. Please go ahead.

Thanks. Can you review the First Data deal on when, how much those fees will be, I guess they show up in other income.

Yeah, the First Data transaction has a total consideration of $47.6 million. And essentially, is a sale of the land coupled with a contract to build the building. The total estimated profit for the whole transaction is about $16.5 to $17 million. The way for accounting purposes that this is treated is, it essentially looks at it as one transaction. And it provides that profit will be recognized essentially on a cost-completion basis.

So in the first quarter, since most of the cost incurred is attributable to the land, it was for land cost plus the amount of dollars spent to begin the building, and the site. Those costs over the total cost in that percentage times the profit is what was recorded as profit for the quarter. So as you -- as we move forward, we'll continue to recognize a profit on the transaction until the building gets complete. The profit going forward will more or less be attributable to the build to suit contract.

So I guess it seems like then you would have about $11.5 million worth of profit to recognize, is that fair?

Something like that. Although that is a tack that is in the construction company and that will be a taxable property.

And when is the project expected to be completed?

In first year, end of first quarter next year.

So if I just kind of assume some tax rate, and kind of just straight-line it over the next four quarters, is that fair, do you think?

It's a little bit off. Because for one thing the land sale, remember, this is a GAAP accounting for tax purposes. We were trying to do a 1031 exchange for the land, for the land sale. So the profit split between the land and the building is about $8 or $9 million on the land and the residual to the construction. So we theoretically still have some profit to recognize on the land portion. Although for tax purposes, 8 of the 16 will be a tax deferred.

We have about 5 cents more on the construction side probably 5 cents of after-tax profit that will flow through the development period.

Okay. So you are spending a majority of that in the guidance for --

Some of it's '03 and some of it's '04.

Okay. In terms of the $8.5 million in WorldCom retenanting that you detailed, you are proactively kind of building out the space or is that money being spent now or is it what you expect to be spent at some point?

It's what's anticipated to be spent based on the forecast of releasing that space.

Okay. But it's not being spent now?

No. Again, what we're trying to show here is, if you look at the WorldCom transaction, we lost, you know, about $8 million of revenue, right, and it's going to cost us $8 million of revenue but $8.5 million more to retenant cost. So if you look at it there is $16 million worth of actual cost, that have been impacted, you know a dividend deficit. It was really more of a demonstration.

Okay. And on the SG&A, I'm a still bit confused, that doesn't include any of the amortization of the incentive comp?

No, not the new two.

And then I guess if I'm understanding it correctly you still have to make the decision as to whether or not you're going to include that in there?

Yes. There has to be a decision made whether the performance criteria will be met in order to make the accrual.

Okay. And that pertains to the $1.1 million?

That is correct.

And so it sounds like it's an all or nothing thing, it will be a $1.1 million over the $8.25 or $8.5?

Yes, that performance piece is all or nothing.

And when will you need to make that decision?

By next quarter.

Okay. And you said you built most of that into the range of guidance?

Its in the range, yes. All of that is in the range of guidance.

And finally last question with respect to the option properties concerning the directors could you walk through how that works, what exactly that is?

If you recall when we went public there were the series of properties that were owned by, those properties were carved out of the IPO and the company was given ten-year options with a fixed price -- the lesser of a fixed price or a cap rate which is 11.5% cap rate. And they exercised, a number of the properties, there were only two properties that they had the ability to get wholly owned ownership on them left. And at the beginning of the year they set out on a course where they hired advisors to evaluate the exercising of those options and they decided to exercise them. There is really one major assets which is the main office building corporate headquarters at ,225 Broadhollow Road in Bellville which is about a $21.2 million purchase price. And then there's a smaller building along with that.

And so if I understand it, RA will buy these?

Yes, exactly. The company's buying them based on their options.

And so you'll get -- are those the sort of identified properties that go into this $50 million of transactions that you're anticipating through the end of the year?

Yes.

Okay and the yield then would be at least a 11.5?

That's correct. They would be higher than that. Probably they blend to something like a 12, and they're like, you know, mid to high 80s in terms of occupancy so there's some growth in that.

Okay, thank you.

Our next question is from Stewart Axelrod from Lehman Brothers. Please go ahead.

As to the weather expenses, worst of that in New Jersey and Long Island. Is that all related to industrial?

No, the difference on the Jersey is the size of what it was prior, percentage change, but it was you know, it was across the portfolio.

Okay. And on the land sales, you mentioned the $30 million development. What is the expected gain on that?

I think, you know, I'd rather not actually state because of the negotiation, it's substantial.

Okay. And again you think that's going to be more of an '04 closing than '03?

Yes, that's a later closing. Again we are working on other ones as well which are smaller in scale, that is actively what Greg and the development team have been working on the last 12, 18 months.

What percentage of the portfolio could be down zoned to residential?

In terms of acres --I would say it's about --Here is Gregg.

How you doing. It is probably about 180,000 acres, maybe a little bit less, 175. Timing you know is a little more prolonged.

So it's up 40% or so. And then also we mentioned we're looking to start some ever our land in Stamford, and a few other things that we're working on.

Okay. And other question regarding the LPIP. I understand the high hurdle. Just talk about why the Rechler family members who own 10% of the stock need to put the space in the program.

A common view, whether they're insiders or not and if you're management and creating value for shareholders, you know, management creates value for shareholders should be incented with plans to do so. And that's why.

The stock ownership is not enough?

I think the stock ownership is important in terms of alignment but I think there are two different things. I think people have ownership in companies and I think this is across REIT land and non REIT land, where there is inside ownership they still get compensated for creating value.

This is David Shulman. One last question from us. New York times lead editorial, taxed to our limit, regarding New York city and surrounding areas.

I read that.

A lot of people read that I think. At what point do you think with the level of taxation in the New York area generally is, do you decide the burden on production is too high, and they decide to move?

I think that what we've seen, you know, I think this clearly taxes are challenging right now. And the one that I will say is, which is at least somewhat of a positive is that we have good company. I think you know you look at California, look at every other major city in the U.S. and municipality in the U.S. and they're having a significant budget crisis which is going to force them to raise taxes.

New York I think was particularly impacted because of obvious things, with 9/11. But what I'll tell you is along with that article today there was an article at Pfizer as I mentioned announced that they are going to relocate their corporate headquarters to Manhattan or into another building in Manhattan, buy a building, move a thousand jobs to Manhattan. So there is counter to it. I think Manhattan and the New York state Tri-State area is, has proven time and time again, it knows how to find and attract talent, innovation and you know it's the financial capital of the world and will continue to survive challenges like we're facing right now. I was pleased to see that they put a -- you know there's a two to three-year, you know, term on the tax increases so that they're not something that will be deemed permanent at least initially.

Okay, thank you.

Thank you. Our next question will come from the line of Don Bendetti from Wachovia Securities. Please go ahead.

Actually it's Chris Haley. Scott, how are you?

Good Chris. How are you?

Good. I was pleased to hear about some of the corporate activity in terms of staying in the metro area, the next 12 months, what are your field officers and what are you aware of in terms of other corporations that are looking at the alternatives, and some of our southeastern Mark field trips, we've heard of a couple of big companies that are attempting to move out. And wanted to see what companies you're looking at, what you're hearing that might be good indicators of what was just asked?

We just had some interesting round tables with some of our tenants that just made some moves, where there were some law firms or some of the other firms that were moving outside the city into Westchester as an example. And I think as you sit through some of that maybe Sal can give you some of his color in terms of talking to tenants what's driving them. But that did not come up once in terms of be speaking to them and Sal maybe you can give color to that.

A lot of it was consumer products guys as well as financial services and legal and construction companies, was that they want to protect their largest asset which is their employment base. I'm not so sure that they're in the same mindset that they were in the either '90s was that employment cost was so high and that employment across the country was so available that they would consider going to a Texas or a Tennessee or a Florida. And I think right now they're saying we really want to protect that employment base. And that was kind of the key of the discussion,

Scott you will agree, what was their MO going forward the 12 to 18 months, as much as many were saying we're not hiring, they were not laying off and in a protective mode to keep the skilled labor that they have. And I think the New York marketplace continues to compete strongly with that. The real estate taxes we have seen in Westchester, we have not heard that it's hit a real pressure point yet in the particular place related to putting their cost structure out of whack.

The one thing that clearly, again, you know, echoing south point is you have seen a greater availability of high-quality labor because of where the economy has gone, you know, that's the byproduct of a little bit higher unemployment is people can actually hire high quality people. They don't have to go out of the country. Todd do you have anything to add?

I think in history shown major corporations that have moved out of New York, J. C. Penney, particular example, not fared particularly well, that is recognized by CEOs today, and I don't expect a trend to see major companies leaving the New York area.

Maybe not major companies but certain divisions, back office, for example, which may have similar densities of office space usage, say for example some of the financial service companies.

Well, I think if those companies, and I think they will, to the extent that they shift some of their workforce, for instance, out of Manhattan into other markets, I think No. 1, that has a chance of benefiting our company. And No. 2, I think it makes way for growth in Manhattan.

Just in some instances where you've seen downtown becomes again a compelling, if someone is looking now for a return on investment type situation and cost containment, downtown with the level of incentives for companies to move downtown, you know, you could have $44.00 tax incentive tiff per foot over a five-year period, most of it is front-ended over that period of time, so it makes it a very compelling alternative if you are looking to save money. Also something came out of having lunches with our tenants, it is components of their workforces, not relocating out of Manhattan, components of their workforce for workforce reasons, you look at companies we move in our portfolios, New York life now moving into Westchester, I think those are good indicators that there is a regional decentralization occurring, not necessarily a decentralization out of the region.

You know one of the example is First Data. They had an opportunity to move this operation out of state. And chose to not only keep it on Long Island, but the growth doubled in size because of their workforce, because it is such an important workforce forum. You see that happening also.

It is good to mention First Data for a second. Besides the, it doesn't show up in our leasing transactions but we still sent 195,000 square foot tenant, structured that as a sale versus a lease in the first quarter. And it was actually a tenant that was expanding from 120 to 195. So it is -- skews our numbers in some degree but in terms of getting a sense of activity in the marketplace, that is clearly a gig positive for the market.

You know Fuji Color is a great example. They looked to our property and Valhalla was the result of their nationwide search as to where they should be located. The single most important factor was the skill of the labor pool. That's what they found was lacking when they looked at different areas of the Southeast and the Midwest of the country.

Thank you very much:

Thank you Chris.

Gary Boston of Salomon Smith Barney, go ahead.

Good afternoon.

hello?

Mr. Boston, do you have a question?

I'm sorry, could you hear me?

No, Gary, we couldn't hear you.

I just had a quick question on the timing of the sales on the option properties. When you thought, I know you said later this year but at what point over the next few quarters you thought that would come?

I believe it will happen sometime within the second quarter.

Okay. The other questions are -- surround the incentive program. Just looking at the performance piece of the core, I guess just some color on what the sort of factors that are going to drive those metrics are. And then, looking at the out performance piece of the puzzle that comes at the end. Just the thinking on you know, why make that a cash award, and then you know, I sort of understand the process, but to have the board be able to sort of vest that, even if you don't hit the hurdles, you know, why go through the process of setting up all the hurdles in the first place if you are going to let them vest it if you want to.

Let me take a step back. I think on the special, in terms of how that works, is that the -- the concept is to really make this performance based. Our view was to set up a plan where our management team would be aligned with our shareholders on driving total shareholder return over a longer period of time. Not managing our business per quarter but over a four-year period. And our view by the way is you know, that gives our shareholders a big voice as to whether or not they think we're doing a good job from every element of our business and how we run our company. Because to the extent our stock does not perform we will not be seeing any benefit of that plan.

And the outcome on the cause that you just referred to, it really specifically states that the board can only do that if the spirit of the -- if something occurs that mires the spirit of the agreement. So for example, let's say for three and a half years, you know, we have outperformed all of our peers and generated a 12% total shareholder return per year. But on the, you know, the quarter of the measurement date, there is another horrific event that occurs in Manhattan. And on that day, the -- you know, our stock tanks, along with every other stock. The board can then take a step back and evaluate the spirit of what this plan was, our performance measure and make an assessment. And my guess is that the rational assessment they would make would be consistent with what our shareholders would think would be appropriate.

Right. I guess my question is sort of the reverse, you know, the reverse situation happens where, you know, your stock underperforms for three years but then there's an event where the REIT market takes off.

There's a guard against that and the guard against that is that we need to perform in the top 40th percentile of our peer group. Or we don't qualify to be considered for the plan. So the guard is if capital flows is what is the cause of this and we don't you know outperform it in the sake of that flow then we won't be compensated.

The addition is a further guard which relates to the core which I don't know might relate to again trying to ensure that it really demonstrates the true economic return is the board has the right to look at -- our total shareholder return and make adjustments for dividend payments in excess of 100% of our payout ratio. So in other words, that if we're paying out a dividend that's more than what we're actually getting in cash they can make adjustments to the total shareholder return.

Just finally comment on why that piece of reward would be cash versus stock?

I think it's a compensation program and it's at the board's discretion. At the time if they think that something should be an equity base they'll go to our shareholders and see if that's something that wants to be done or there will be a plan in place to do so. But you know I think their view is it is a compensation special bonus different than the core which is an equity, you know, based plan. They can make those assessments. The company's option, something that is not fixed one way or another.

Thanks for the comments.

Necessary question is from Ken Weinberg with Legg Mason please go ahead.

TIs and LCs of a little more than $9 million and take the that over the 560,000 square feet you did in leasing for the quarter that runs about $15.50 to $16 a foot. I know you were too about $12 a foot with Fuji, $9 without. Is there anything that skewed that or has the run rate moved up that much?

Where are you looking at or where are you pulling these numbers from?

Tenant improvement and leasing costs for the quarter were $8.8 million if I'm reading that correctly.

If you look at committed cost, just on TI leasing commissions in our supplemental you'll see for the quarter, year to date we're averaging $12.68 a foot. For 2002, we averaged $11.20 per square foot. Again, this is as we said a relatively small sample during the quarter so that things are swung in that area. So that's really the different is $11.20 to $12.68.

Okay.

That's page 28 of our supplemental.

My comment had more to do with the fact that I thought last year was skewed by the Fuji deal. Could you give us a sense of where you feel the costs are, a 11 to 13 a fair expectation?

Think that is a fair expectation. One thing that we've seen is that you're not really getting the benefit of reduced cost on renewals. Because tenants that are renewing have already shopped the market or been advised by board of directors so they are sort of demanding in the same manner, that type of TI leasing commissions. I'll also see that again this is built into our assessment for this year, we have you know WorldCom.

And so you know with the WorldCom space which are big blocks of space, they typically will skew the numbers for a higher TI and leasing commission. So you know, I think that maybe we pulled out WorldCom out of the mix that answer would be yeah, we would sort of be where we were in '02. You add WorldCom into the mix and I think it skews the numbers up.

Okay. Other question, I guess had to do with your chart on page 15 of the supplemental projecting out where you see your rent rollups being into '03 and '04, you say that you know the '03 and '04 numbers are based on forecast. What -- can you give us a sense ballpark in terms of what you're projecting in terms of for rents over the next 18 months?

Well, again, I think you are talking about 15 on the slide show that we sent out and the answer is these are the numbers that we are projecting on rents over the next 12 months. When I say forecast, it is space by space, internal budget. Are you talking about '05 and '06 or '03 and '04?

'03 and '04. I think that implies what market rents are going to do over that time frame.

I think it shows what in terms of market rent, market by market, that we're sort of down you know 5% or so I would think in terms of what, you know, rents were a year ago at this time. And I sort sort of walked you through the effective rent numbers which I think still demonstrate, you know, where we're holding up.

Okay. That's all I had. Thank you.

Thanks.

Once again if you do have a question please press 1 at this time. And at this time we have no further questions in queue. Please continue.

Thank you, operator and thank you everyone for participating in our call. I look forward to speaking during the quarter and reconvening next quarter.

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