SL Green Realty Corp (SLG) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Reckson Associates third-quarter earnings teleconference. 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to turn the conference over to a Reckson Associates spokesperson. Please go ahead.

The information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, and all other statements that are made on this call that are not historical facts are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those expected. Among those risks, trends and uncertainties are the general economic climate, including the conditions affecting industries in which our principal tenants compete; financial condition of our tenants; changes in the supply of, and demand for, properties in the New York Tristate area; changes in interest rate levels; downturns in rental rate levels in our markets and our ability to lease or re-lease space in a timely manner at current or anticipated rental-rate levels; the availability of financing to us or our tenants; changes in operating costs, including utilities, security and insurance 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 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. Also, during this conference call, the Company may discuss non-GAAP financial measures. The GAAP financial measure most directly comparable to each non-GAAP financial measures is discussed, and a reconciliation between these measures can be found on the Company's Website at www.reckson.com in the Company's quarterly earnings press release, slideshow presentation and supplemental package.

I would like to now turn the call over to Scott Rechler, co-CEO.

Thank you, Amy. I thank you all joining us on our third-quarter conference call. With me today is Mike Maturo, our Chief Financial Officer, and other members of our management team. For those who have not participated on our calls in the past, we will be following a PowerPoint presentation which, if you have not yet received, you can access through our Website. And as Amy said, just to reiterate, that's www.reckson.com. If you have a problem with that, you can call Susan McGuire, who runs Investor Relations, at 631-622-6642, and she'll make sure you get it for the call.

Turning to the PowerPoint presentation, to slide number two, I'd like to take a moment and provide you some of the highlights from the reporting period. For the third quarter, we reported funds from operations of 56 cents per share, which compares to 59 cents per share for the third quarter of 2002. This is in line with our internal estimates, and 2 cents above consensus estimates.

Our portfolio performed relatively well, in what was a more stable but still challenging environment. Our occupancies -- turning to our occupancy first, on a same-property basis for the overall portfolio, sequentially, quarter over quarter, it remained flat. When you look at it from 9-30 of 2002, a year ago, we were down about 200 basis points. On our office portfolio, on a same-property basis, we actually saw a 30 basis point increase sequentially in our occupancy. Again, when you go year over year, there we have seen a downturn; we actually had a downturn of about 410 basis points in occupancy from September 30, 2002. About half of the occupancy loss year over year was due to the space that we got back early from Worldcom in HQ. For the overall portfolio, you see that we actually had an occupancy of 91.6 percent, when you -- on a non-same-property basis. And the only difference there is we had acquisition in Stamford, 1055 -- a property which I'll talk about later, and the redevelopment property that we have in New Jersey are in those numbers.

Continuing with the highlights, on slide number three, we had same-property NOI, on a cash basis, down 1 percent for the quarter. And including straight-line, we were down 2.9 percent for the portfolio. When you back out our minority interest in joint ventures, it would be down 0.6 percent. And including straight-line, we'd be down 3 percent. When you look at our same-store, our property NOI, really, we had some growth in Westchester, due to some of the leasing activity that we've had in prior quarters, particularly with Fuji and other areas, and in New Jersey, where we had prior leasing in Short Hills and in West Orange. Areas where we are under some pressure on our same-property NOI was in Long Island, where we had the vacancy from Worldcom, and the same thing with Manhattan, where we had the vacancy from Worldcom and other pre-scheduled expirations.

From a rent performance perspective, again, I think we did relatively well. Our cash rents were up 12.5 percent on renewal and replacement space, and up 19.8 percent when you incorporate straight-line in there. Just looking at the office portfolio, that was up 13.1 percent and 19.9 percent, when you include the straight-line rent.

From the investment and disposition activities, we had total investment activity of approximately $60 million. As you all know, we executed a contract for the sale of our Long Island industrial portfolio, and also announced the corporate restructuring, which I'll give an update later in the presentation. We signed a contract for a Long Island office building for approximately $24 million. We executed contracts for land dispositions in New Jersey which would have anticipated proceeds of up to $43 million, depending on how that zoning process goes. We completed the restructuring of the RSVP capital structure and related management agreements that we anticipated getting done, which will enable us to pursue the disposition plan that we have been working on, as relates to RSVP.

From the capital markets side, we elected to exchange all outstanding Class B common stock into Class A common stock, which will be effective November 25th, 2003.

Before I continue talking about our performance, let me take a second and talk about providing the snapshot of our portfolio. We provided you with a breakdown of our portfolio composition, both as it was in the third quarter, as well as what it would be pro forma for the sale of the Long Island industrial portfolio. You will see that what happened with the sale of the Long Island industrial portfolio, that we go down from Long Island contributing 32 percent of our NOI to 24 percent, and New York City would go up from contributing 31 percent of our NOI to 37 percent. In our historical numbers, we have about 21 million square feet of properties that were providing those results, and 182 specific properties.

Turning to slide five, we have laid out for you a review of our tenant diversification. This is just for our office portfolio. You see, when you look at our pie chart, we have a number of diverse industries representing our tenant base, the largest of which is legal services and financial services, each at 13 percent, then followed by consumer products at 12 percent. Also, on the right hand of the slide, we've listed off our top 25 office tenants. You see the largest is Debevoise & Plimpton, which actually, this past quarter, took another 120,000 square feet that will show up in the numbers in the future. Schulte Roth and Zabel, another large tenant, also expanded this quarter by 50,000 square feet. And then also, we've had, in the past quarters, Norfolk Bank expanded, as well.

Going back to the portfolio performance, as I mentioned, we had same-property NOI increase by 1 percent. We thought it would be valuable to just walk you through a more detailed reconciliation of how that NOI increase was broken out. Starting on the revenue side, our revenue grew 2.6 percent, or about by $3 million, and the components first was we had a decrease of revenues due to a loss of occupancy, that is $3.2 million loss of revenues due to the occupancy shift. Our bad debt decrease was actually -- our bad debt was actually better, so we actually picked up $750,000, because the credit situation was better. We had same-space rent increases due to the mark to market we've had on prior leases of $442,000. We had built-in rent increases from our existing tenants of $2.3 million, and we had an escalation increase of $2.7 million which was due to the increase in expenses. So in total, our revenue was up 2.6 percent year over year. On the expense side, our operating expenses were up 5.2 percent to $1.3 million. That was really comprised of an increase in utilities, cleaning, which is based on a cleaning contract, and labor, based on union contracts. Our real estate taxes were up 12.6 percent. This is expected, since many of the municipalities and counties that we do business in have had large real estate tax increases over the past year. That resulted in a total increase of expenses of 8.3 percent, so when you net out the increase in revenue of 2.6 percent against the increase in expense of 8.3 percent, that results in the 1 percent decline in same-property NOI.

I'd like to take a moment and turn to our markets, starting with some market trends. Activity does continue to improve in our markets. Tenants are seeking to capitalize on the perceived market bottom to take advantage of good pricing, either moving to higher-quality assets, extend their lease term on their existing space or consolidate operations into larger blocks of space that they didn't have available to them at times in the past. We're also starting to see tenants starting to plan for the future. I think you see companies today are recognizing that, while the economy's starting to pick up momentum and they might not have the demand today to start hiring and making other moves, they're starting to develop a strategy to get more expansion area. And so there's a lot of tenants in the market today starting to think about expansion plans for 2004.

Some positive market indicators that we like to look at -- one is sublet space, which is stable in most of our markets. And actually, we've seen signs of contraction in some of our markets today. We are starting to see tenants taking expansion space. Year to date, we've had 240,000 square feet of expansion space signed by tenants in our properties, and we've also actually seen the financial service sector starting to recover. Not only have they had record earnings, but that record earnings isn't just driven by proprietary trading; they are actually seeing an increase in their banking business, which has subsided their drastic layoffs, and in some cases, they are actually even hiring today, which I think are good indicators for the markets in which we do business.

Based on this information, we believe that the markets have bottomed, but they still remain competitive. As it relates to pricing power and to the landlord/tenant negotiating stance, we believe our suburban markets are more balanced than Manhattan today. Manhattan has some large competitive blocks still of sublet space and other -- of high-quality space in the marketplace that makes that market very competitive. Across both markets, we're still seeing significant leasing concessions. So, while rents have held up reasonably well, it's still costing a lot to put tenants into the space, and our general sense is we would expect our markets to remain active throughout the first half of 2004, but we would not expect a material positive net absorption in the marketplace. So occupancy rates should stay somewhat stable.

That being said, Reckson is well-positioned, because if there is activity in our marketplaces, it enables us to gain market share, because of the quality of the buildings, the quality of our management team and the strength of our franchise in our markets. So we believe that our portfolio occupancy has bottomed at this time, and that from the fourth quarter on, we should start seeing an increase in our occupancy. We have good activity on releasing the vacancies created by the early terminations of HQ, Worldcom and Arthur Andersen. We almost leased all of the HQ space we got back, we've leased half of the Arthur Andersen space that we've gotten back, and we have active negotiations on all of the suburban Worldcom space that we got back at this time. We have a visible pipeline of real deals in all of our markets. These are deals that are going to get done. They are not necessarily moving quickly, but they are tenants that have requirements that they need, and ultimately, they will get filled.

Turning to some specifics on slide eight of the market overviews, and just looking at the regions, starting on Long Island, you see that Long Island, both overall and direct vacancy rates, have decreased from 13.7 to 13 percent on the overall, and 9.7 down to 8.6 percent on the direct vacancy rates. I would still say Long Island is our strongest market right now, in terms of activity and a lack of competitive space. And you see for us, as our portfolio, where we are 7.8 percent vacant today, we would only be 5.5 percent, had we not gotten back the Worldcom space.

Turning to Westchester, you see that direct vacancy actually declined from 15.6 to 13 percent. The sublet space sort of has been stable around the 19 to 20 percent for the last few quarters. The 1 cent with Westchester is that it had an extremely strong and active first quarter. As we've looked at it in the second and third quarter, a lot of the deals that had been out there are still out there, but have not yet really manifested itself yet in closings. So the market has activity, but the activity in terms of culminating and signed leases is somewhat choppy.

In Southern Connecticut, in Stamford, activity is good. It feels better than the stats would imply. We are showing a 19.2 percent overall vacancy rate. There is activity both on small and large tenants in that marketplace, and we feel pretty good about getting our space in that marketplace leased. In northern New Jersey, the market for the high-quality assets, such as the assets in Short Hills, remains good. What we're seeing in northern New Jersey is a lot of strategic deals in the marketplace, tenants looking again to consolidate and move to higher-quality space, or look to blend and extend their leases. But we own high-quality space in that marketplace, and that's where we have some vacancy today. So that's where we would like to see those tenants looking to move up to high-quality. You'll see we would be -- we are 9.8 percent vacant in that market today. If you pull out the one property that we have under redevelopment in Short Hills, we'd be 4.9 percent, which again is extremely good for that market.

Turning to Manhattan for a moment, starting on downtown financial lease, that still is a market that is tough. As we said in the past, we actually got back space from Worldcom and other tenants in that marketplace, as well as scheduled expirations, so our one building in downtown, 100 Wall Street, is 18 percent vacant today. This is a marketplace where we've seen -- where big deals are getting done, the 100,000-plus type deals are getting done, and small deals are getting done. What you are not seeing is the mid-size deals getting done. And what I'm doing at 100 Wall is doing a lot pre-billed, smaller-type space to get that space leased, which we'll get at least eventually, but you're chipping away at it, versus making one large deal.

Below that, Midtown East, where we have our 919 asset, is a strong market. 919 is 100 percent occupied, with very little expirations anywhere in the near term, so we're very comfortable with that marketplace.

Moving to the right hand side of the slide, to Midtown West, where we have 810 Seventh Avenue, is where we have about 80,000 feet there, again from scheduled expirations in that marketplace. We are 8.1 percent occupied -- I'm sorry, 8.1 percent leased -- 8.1 percent vacancy in that building right now. That is a tougher market, in terms of Times Square, where there is a lot of competition in that marketplace, and there's a lot of high-quality space that we're competing with. But we feel pretty good about 810 Seventh, and that building's ability to compete and get that space leased. And lastly on Sixth Avenue, we have had good activity, which is where we have 1350 Avenue of the Americans. We are down to a 5.2 percent vacancy rate, off of 8.7 percent. That was from leasing up the Arthur Andersen space. So we have good activity in that marketplace.

Just looking more closely at our activity during the quarter, as I mentioned earlier, on a same-property basis for our office portfolio, our occupancy was up 30 basis points, from 91.6 percent to 91.9 percent. On slide 10, you can see we've provided you the sort of analysis as to what changed, in terms of occupied space. The big thing is we started on the third quarter, we actually leased 356,000 square feet of new leases and expansions. Of that, 155,000 square feet actually will affect the third quarter. The balance would affect future periods. We renewed, or early renewed, 87,000 square feet. Of that, 21,500 square feet will affect the third quarter, and the balance would be future periods. We had 23,000 square feet of short-term leases and holdovers, and we had about 58,500 square feet of leases from prior quarters that actually impact the first quarter. So the total net activity -- leasing activity that will impact the third quarter is 259,000 square feet. In terms of adjustments to our inventory, we had early terminations this quarter of 64,000 square feet, and we had scheduled expirations of 143,000 square feet during the quarter, for a total reduction of occupied space of 207,000 square feet. So when you net the 259 against the 207,000 square feet, that would result in 52,000 square feet of positive absorption to achieve that 91.9 percent occupancy.

Just to spend a little more time analyzing our leasing activity on slide 11, we provided you a sense of some of the key metrics and the trends over the last few quarters, starting on the top end of the slide, where we actually review the same-space rent on renewal and replacement space, you'll see this quarter we had a 19.9 percent increase in same-space rent on a straight-line basis, which is significantly above our more recent trendline. That is because 40 percent of the leases in this quarter were from New York City, where we have a large mark to market opportunity. In New York City, we had about a 20.4 percent increase of same-space rent on a GAAP basis, and 16.3 percent on a cash basis. When you look at also in there, one large tenant is Debevoise & Plimpton, which took 120,000 square feet, which is a lease that actually kicks in in 2005. So while the number is there, we're not going to see the benefit of that until a later point. We also had good same-space leasing stats in Long Island during this past quarter.

Shifting below that, looking at our leasing activity, during the second quarter, our leasing was 70 percent higher than the leasing that we did on the office portfolio in the first quarter, and our third quarter was right on top of our second quarter. So we're very comfortable, as I mentioned, with our leasing activity. As I said, it's costing a lot to get tenants to take space, and if you look at our effective rent spread, you'll see that the spread between our average base rent and our gross effective rent, backing out TI and leasing commissions, is 13.3 percent, up from about 9 percent the prior quarter. This is in line with our expectations. You may recall, over the last few quarters, we have continually said that we believe in this environment, to be in the 12 to 13 percent range would be what we call the net effective rent spread -- the effective rent spread that we would anticipate. And so we would anticipate, frankly, it staying in this range for a period of time until the market starts to recover. Consistent with our strategy to look (ph) below this, we actually have been able to increase our lease term. This is something that we have been working on for a number of quarters now, and this past quarter, we actually got our average lease term to 11.8 years on all new leases signed.

If you turn to slide 12, just to walk you through a little bit again, sticking with what the trends are, as I mentioned, training costs continue to be high, and that's consistent with the effective rent spread that I had mentioned earlier. You will see that this past quarter, we had $3.08 per foot per year of lease term for tenanting costs, which is still, again, above our trendlines as to what we have seen but, again, not surprising with the amount of TI and leasing commissions that we've had to pay out to continue to get tenants.

One of the things, though, that we spent a lot of time focusing on is, while we are out there and spending a lot of money to occupy our space, what are the underlying economics of the leases that we are signing? And if you turn to slide 13, we actually provide you with an analysis of the underlying economics of our deals. And you'll see that we are still completing deals with good economic returns. What this shows you is the net effective rent, which is the average rent less TI and leasing commissions and operating expenses for each of the properties where we have leasing activity, against the total investment that we have in the relevant buildings. And you'll see, of the 526,000 square feet of leases that we executed for the office portfolio during this quarter, we yielded 9.7 percent from our net effective rent against the total investment that we had in the properties. So we're still generating good yields on our cost basis of the buildings that we have, on the deals that we are during.

Now, if we turn to the next slide, I would like to spend a couple of minutes just looking forward, starting with our office lease expirations. You'll see where we only have 1.7 percent of our office revenue expiring in 2003, and 5.6 percent of revenue associated with leases expiring in 2004. So we have really mitigated any material lease rollover, and it's significantly below trendlines for the balance of this year, obviously, but, more importantly, into 04, where it's only 5.6 percent of our overall revenue, on a straight-line basis.

Looking again at the 2003 and 2004 leases, we did a mark-to-market assessment as to where we come out with that. And just to take a moment, what we did is we used current annualized rents, grossed up for all operating expense reimbursements and recoveries that are out there. So this really is the number that, when the tenet -- where the tenant is paying today, that if a new tenet came in, you'd have to be matching to actually achieve the same number. On the forecast side, these are actually the forecasts from our own internal forecast that we just most recently completed. We do believe these are conservative numbers, and frankly, they are down, actually, from the last time we have done this analysis, by about 5 to 10 percent, depending on which market. So we've shown that we believe that the market rents per space that we would be leasing will be down from our last forecast. And so, when you look at these numbers, you will see our total office portfolio, on a cash basis. We would see a negative mark-to-market of 6.2 percent. On a straight-line basis, we would see a positive 9.8 percent for the leases that are expiring for 2003 and 2004. You will note that the CBD is positive at 1.4 percent and 23.4 percent for the leases are taking place there. And suburban, on a cash basis, is down 11 percent and up 2.2 on a straight-line basis.

Looking a little bit further out, we went to 2005 and 2006, which, again, I would just want to emphasize specifically is 2005 and 2006, we're using current market rents that I believe are conservative. So these numbers, obviously, as we get closer to '05/'06, hopefully change and go up, in terms of what market rents we would be using in our underlying forecast. What this shows you is using these low rents against, again, the current annualized cash rents grossed up for all reimbursements, we would be up 1.5 percent for the entire office portfolio, and this is on a cash basis. For CBD, you'd be up 9 percent; for suburban, you'd be down 5.8 percent.

Moving off operations, and shifting to acquisitions and disposition activity, as I mentioned earlier, we acquired or had investments totaling $60 million during the quarter. This is compared to our forecast for 2003 of $50 million, so we have achieve the 50 plus 10 more. The biggest transaction was 1055 Washington Boulevard, which I'll go through a slide on that in a moment. Then we also bought back a JV interest partner at 275 Broadhollow Road, which was a building that we actually just released or renewed -- North Fork Bank -- for 10 years on that building. And we actually used the acquisition of our JV interest partner to accommodate the like-kind exchange relating to the first day of that land sale. And the last investment we made was a $15 million investment in a $30 million junior mezz loan secured by a Long Island Class A office building. We expect to achieve a minimum blended yield of about 13.5 percent on that investment.

From a disposition side, again, very active -- a total of $340 million of announced dispositions, the biggest, of course, being the sale of our Long Island industrial portfolio, which was 95 properties and 5.9 million square feet. In addition to that, we're selling 538 Broadhollow Road, which is a 180,000-square foot building on Long Island, and we will be selling this to a user. This building actually has a lot of rollover scheduled for 2004, so by moving it off our books, that's valuable, as well. We're moving tenants that are actually occupying this building today into other reqs (ph) and buildings to accommodate the user.

Lastly, we executed contracts for land sales in New Jersey -- these are land sales we have spoken about before -- in Giralda Farms and in Eagle Rock, where we are in the process of going through a rezoning process to rezone these sites to residential and sell them in that manner.

On slide 18, shifting to 1055 in even more detail, as I mentioned, it's a 181,000-square foot building. It's a 10-story Class A, as you can see from the photo, office building. It really works well with the balance of our portfolio in Stamford, in terms of floor sizes and quality of the asset. We acquired the property with $21.6 million in cash, and we issued 465,000 shares of what we call Class C common unit, which is valued at $24 per unit, that had a little bit of a higher dividend. So when you net out, do a net present value of the differential and the dividend, it's about $23.30 per share, is the effective unit valuation. We anticipate generating initial yields of about 7.2 percent on a building which is just under 80 percent leased today. And through 2004, as we bring the occupancy up to a normal level, we anticipate stabilizing at 9.5 percent NOI yield on this building.

With that, let me turn it over to Mike to walk you through some of the financial details. Mike?

Thank you, Scott. Picking up on slide number 19, the operating data, let me first caveat this information by noting that these numbers are adjusted for the discontinued operations accounting that we are required to report on, assuming that assets that are under contract for sale are pulled out, and put in a one-line type of disclosure. And you'll see that in our financial statement, so these numbers do not reflect the operations of those discontinued operations.

If we look at the September 30, 2003 operating margin of 57.7 percent, which is down 300 basis points from the last quarter -- and that is somewhat expected as a result of seasonality, as during the summer months, we have higher energy usage. However, this quarter particularly, we experienced some increases in electric rates and seasonality billing. We were up about $2.6 million from the June quarter to the September quarter on electric, of which we recovered about 75 percent of. In addition, we got the real estate tax bill adjustments that come in July. Taxes increased by $1.8 million from the June period, of which we recovered about 80 percent. So I would expect this margin to restabilize somewhere around 60 percent and then, as we increase occupancy, I would see that number go up maybe 100 or 200 basis points throughout next year.

Looking at the year-over-year analysis, September 30, '02 to '03, we had about a $3 million decrease in the revenue line item, which is primarily a result of the vacancy that we've experienced. We also realized about a $4 million increase in expenses. $3 million of that is attributable to real estate taxes, again, which we recovered about 70 percent of. About $1 million is made up of cleaning contract increases, and then some rate increases on the utility side.

Moving down the page here, on marketing G&A, from last quarter, we are down about 600,000. Earlier this year, we adopted FAS 123, which deals with accounting for stock-based compensation. We also put into place a long-term incentive plan, which, under the rules pursuant to 123, we believe qualifies as a target stockprice plan. And for those purposes, the rules provide that this type of plan has to be valued and expensed over the planned period, regardless of whether you meet those performance hurdles or not. And what essentially you do is you value those securities, determine what the value is today. We had that done by an outside firm in valuing that plan, and this relates to the core portion of the LTIP. And it resulted in about 40 percent discount on the total face value, so going forward, we'll have to record that expense, but it will be at a reduced level. And you'll see that's what the difference is here. So going forward, on a run-rate basis, I believe the 8.2 -- $8.3 million on a quarterly basis is a fair number, pre the industrial transaction. As you know, we have previously reported that we believe our G&A savings on an annual basis will be about $7.5 million on the G&A line item. However, note again that these are based on a discontinued operations performance. So the 8.3, on a postindustrial basis, considering the 7.5, would be reduced by about 1.4 to 1.5. So the run rate, on a postindustrial transaction basis, is about $7 million a quarter.

Moving down, again down to the other income line item, 6.5 million versus 4.6 last quarter. Included in the 6.5 million is 4.2 million of the First Data transaction. If you recall, we are recognizing the income on the sale of that land and the completion of the building on a percentage completion basis. So we'll continue to recognize that as we complete that building, which we anticipate to happen in the first quarter. As I said, 4.2 million was recognized this quarter. In addition, of the 1.9 increase, about 1.4 was a result of third-party tenant work that we did in the construction department, and also about a $750,000 tax reserve that we reversed, as a result of a successful 1031 exchange that we did for First Data. We also had about $500,000 in leasing commissions overrides that we get on our JV properties.

Moving down, tenant receivable reserves and termination fees are substantially down, and that's actually a good thing, from the standpoint of we see a better credit profile from our tenants, so we're seeing the need for reserves, and the resulting termination fees go down. One additional thing I don't have on this page that I wanted to inform you about is on the interest income line item you'll see on our P&L, which was 1.7 million this year and about 1.5 million last quarter, 1.7 this quarter, two things occurred there. As Scott mentioned, we invested $15 million in a mezzanine position with an interest rate -- an average LIBOR spread of 11.8 percent, with a LIBOR floor of 1.63. In addition, we received $15 million back on a unit loan that we had outstanding to one of the partners that had contributed properties into the REIT. So that was repaid, $15 million at 12 percent return.

Moving on to page 20, taking a quick look at the ratios for the quarter, September 30th, on an actual basis, interest coverage of 3.14 times and fixed coverage of 2.45 times, which is fairly consistent with last quarter, 44.9 percent debt to total market cap. On a pro forma basis, if look at the next column, this essentially overlays the industrial transaction. Those ratios will temporarily go down, as a result of us using a substantial portion of that proceeds to pay down the line of credit, and we don't realize that negative arbitrage until those funds are reinvested.

Turning to page 20, the debt schedule, what I did was I overlaid the industrial transaction onto this schedule, effectively. It just impacts two things. The credit facility will again go down to about 210 million of $500 million that we have available, and the floating-rate debt will decrease down to 15 percent of total debt. There is no significant change to the maturity schedule. We have $100 million of bonds that come due early next year, in April, that we will refinance. And other than that, there is no significant maturities.

I'll hand it add back over to Scott.

Thanks, Mike. Just to talk a moment, I wanted to reiterate on our last interim (ph) quarter, our call. We talked about our proposed governance change, and I just wanted to review them again, because really, it's a focus of our Company to be an industry leader as it relates to corporate governance. And to give you the updates on this, we are going to reconstitute our Board of Directors when we are done with the industrial transaction, so we'll have six independent directors and two inside directors. As we noted, Peter Quick is serving as our Lead Director and Chairman of the Nominating and Governance Committee. Our audited (ph) compensation and nominating governance committees are going to be made up solely of the independent directors. We amended our Board of Directors' annual compensation, so that a significant portion of their compensation is in the form of common stock that must be held through their term as a director, and can't be sold until their tenure is over. We're proposing to de-stagger our Board of Directors at the next annual shareholders' meeting, and we're going to be opting out of the state anti-takeover provisions. We're going to authorize the modification of the five-or-fewer rule, so that it can't be used for any anti-takeover type activities. And we're eliminating any operating partnership units conflicts that exist, so there is no divergent tax basis between insiders, members of the Board or management and the common shareholder. So these are some of the things that we're focusing on, and (technical difficulty) over the balance of this year.

Again, as we look forward, now, into 2004, we wanted to lay out some milestones, some performance measures that you can judge and monitor our activities at. Starting with the first thing, which is executing on the corporate restructuring, we have made some good headway on that. The management appointments that we discussed in our prior call have been announced at this point. We expect to close the Long Island industrial sale by the end of fourth quarter. Our current guidance on that now is based on year-end closing. If it closes before year end, we will provide you with any adjustments that we need to make to guidance because of the early closing there.

The next milestone that we set is we wanted to achieve 2004 targeted overhead savings of $9.5 million. Some of that hits the G&A line, some of it hits other overhead. At this point, we have identified all of the G&A savings of $7.5 million that we had targeted directly relating to the industrial transaction, plus an additional $2 million of other overhead throughout the Company. And we were able to do this without losing any of our value creation capabilities.

Another objective, obviously, is to normalize our occupancy. And we have some large blocks of space that we have talked about that we got back from nonperforming tenants that we want to fill. We believe we have the activity. We believe the markets are stabilizing, and credit issues of the past have subsided. So we should be able to get that accomplished, and that's one of our objectives. We want to capitalize on investment opportunities. We're pleased that we met our expectations for 2003, in terms of the investment side, but we do believe that there is other opportunities in the marketplace, and that we'll be active, at least working on trying to execute on those opportunities. Of course, we want to strengthen our balance sheet and work on selling our non-income-producing and non-core assets. To do that, some of the contracts we have signed and the RSVP restructuring this quarter are encouraging on that front, and that's something we will continue to pursue.

And lastly, through the operations, and hopefully the settling of the market, we want to normalize our dividend payout ratio. So these are the key objectives that we would like you to be focusing on, as you think about Reckson going forward.

With that said, operator, we are now available for questions.

(OPERATOR INSTRUCTIONS). Brian Legg, Merrill Lynch.

Hi, Scott. The reduction in your rent spread was pretty big versus the last quarter. It looks like you think your office rents are going to go down -- they are going from a 9.1 percent increase to a -6.2 percent decrease, on a cash basis, in '03/'04. And '05 and '06 go from 10.4 percent to 1.5 percent. What really changed from the last quarter? Are you just being more conservative in the rents, or did rents decline that much quarter over quarter?

Two things -- it's not all rents, because it had to hit on both sides. What we did hear is we grossed up the expired rents for all expenses that would not be recoverable from the new tenants, whereas historically that number was base rent -- and real estate taxes only. So on one side, what we did is that number is a higher number. And then there was, as I said, about a 5 to 10 percent reduction in our forecast for what the market rent is, space by space. So that's really where the reduction on the rent is, and, as I said, I think it is a conservative estimate as to what is out there. But that is the estimate.

And also, as you mentioned, your non-incremental leasing costs increase quite a bit in the third quarter. Was that really because you signed a larger percentage of your leases in New York City? They went to $23 per square foot versus $11 in '02 and $7 on average from '99 to '02.

As I said, about 40 percent of our leases this quarter were signed in New York City. So obviously, New York City right now is having significant -- has much more substantial TI and tenanting costs in the suburban markets. That being said, we are seeing our large costs across all our markets. But I think that when you have a large fence (ph) in New York City, it's even going to be higher.

So is the $15, or the average for the first nine months -- is that a better number to use? Or is the $23 --?

That's probably right, probably an average for the first nine months is probably the right type of number to use.

And your gains on the sale of land -- the $43 million sale of land in New Jersey -- what's the timing and the amount of gains?

From a timing standpoint -- again, this is a range. The value here that we could get could be anywhere from 22 million, 23 million to that other number, depending of what yield we get from our rezoning process, how many units of housing we get. And that's a process that we're kicking off now, and it's not something that we would anticipate happening until either the end -- starting to see that coming to you the end of '04, the beginning of '05.

So that could be an '04 or '05 -- spread that through '04 and '05?

Right.

Okay, the $23 million gain. Okay. And are there any financial impacts from the RSVP restructuring?

Not at this point. We have taken the position that we're not going to be recognizing income from RSVP until we recover what we have on our books on it. Mike?

Yes. We would report -- to the extent we've got proceeds, we're going to report a return of our capital before we report any gain or profit in FFO.

Brian, I just wanted to step back. On the 23 to 46, those are proceeds. That's the proceeds on those sales. We have, I think, about $8 or $9 million of basis on those two properties.

And when you talk about rents bottoming, why are you signing longer-term leases? Your lease term went out 11.8 years.

As I said, I think markets are bottoming. And again, our view is -- and if you look at the economics of the leases that we are signing, is that tenants today -- they are less rent sensitive than they are capital sensitive. They don't want to come out of pocket, and they expect heavy tenanting costs, TI costs and other types of investment into the infrastructure. That is what the market is today. And so you have to spend that money. So if you are going to spend that money anyway, we will go with longer-term leases.

And last couple of questions. In your '04 guidance that you have in the back of this presentation, what are you assumptions for acquisition activity in '04? And if you have any assumptions for development start activity? And the last question is amount of gains left from First Data and the timing of those gains.

The acquisition assumptions are a low of zero to a high of 150. And on First Data, I think we have another 4 million next quarter, and I believe it's 1.5 to 2 million in the first quarter.

David Shulman, Lehman Brothers.

To follow up, in your guidance, is there any provision for major acquisition in New York City?

No, there is not.

Is there a major acquisition contemplated in New York City, as has been reported in one of the real estate rags?

We do not comment on rumors like that, especially real estate rags.

Especially from real estate rags? Okay. The next thing is on the Debevoise lease, buried in all the footnotes, if I have this right, $7.8 million of leasing and TIs. Right?

Right.

And 120,000 square feet. So that works out to about a $65 package a foot, in round numbers?

That sounds about right, yes.

How long is the lease term? How long is that extension?

I think it's 17 years, David.

That sort of makes sense. On a 17-year deal, there's some economics there.

It's good economics there.

The rents are starting in the low 50's, David.

The rents are starting in the low 50's, and net to you would be, what, about 32, maybe something like that?

You say net of tax and operating and --?

Yes.

Probably higher than that. (multiple speakers). Just to go to the slide that we included here, just to give you a sense, that's a big part of the New York City leasing, and we're yielding, on our cost basis, over 9 percent. And in that, just so you know, 919's cost basis -- we are not making any adjustments for the fact that we actually profited from the sale of the interest. That's the gross cost basis of 919, so we had 919 at a cost basis of 3-something a foot right now, and -- (multiple speakers).

355, in that area.

And just go over the previous question on First Data. You basically got 6 cents a share from First Data in Q3, in round numbers. And you're going to get another 4 million in Q4, and about 1.5 to 2 in Q1, and then it sort of goes away, right?

That's correct.

Jonathan Litt, Smith Barney.

Good afternoon. It's Gary Boston here with John. Scott, could you just talk -- you've mentioned the Manhattan asset that you don't want to talk about, but just generally the acquisition environment, what you're seeing, where you're seeing deals coming on the market, and what sort of pricing you are looking at?

Again, our strategy is to try to find transactions where we can create value and there's something quirky about them. So we've been of the mindset that if they are stable assets that don't have some nuances to it, they are trading at pricing that does not make significant sense to us. So we have not really been aggressive on that front. Where we see assets in the suburbs or in Manhattan, where there is some level of either uncertainty or transition going on, or something that we do think they are -- in that particular market, there are opportunities to acquire assets at good value, and then enhance that value by doing what we do. So there are a couple of things like that that we look at in the marketplace. We've also seen corporate users who have a series of different types of properties on their portfolio that they want to get rid of, that need to go through redevelopment phases. Maybe they want flexibility over time to get back some space, that we're having discussions with them about doing sale-leaseback, redevelopment type opportunities, as well. We're seeing some opportunities again where there are individuals and families that now have come out and are considering thinking about trying to do something strategic again, as I think capital costs have gone up in terms of people having to invest back into their buildings. They are determining whether or not this is something they want to do themselves, or maybe now is the time to take some money off of the table. So we're seeing a number of different things there like that. I would tell you the market for stable assets is still an aggressive market, and you saw the GM building, which is, I think, the prime example of what type of pricing people are getting for high-quality, stable assets. But I think there's holes and there's some inefficiencies in markets where you have transitioning assets, as people are afraid to underwrite the risk of lease-up and other things associated with that.

In terms of the mezzanine loan you made in the quarter, could you just talk about the thought process there, what the potential for that becoming an acquisition is? And is this something we should expect to see you guys taking a look at more and more?

The last, I would say, 12 to 18 months, we have been looking at a lot of different mezzanine opportunities of assets that are in our markets that we could underwrite for ownership, and then we'd underwrite them for ownership and then try to say, okay, if a better place for us to play in that opportunity is in some form of structured financed type position. But I think the answer is, then, if we could find ones that makes sense for us at values that makes sense for us, then you would see us do it more. But it's going to be in our markets, and assets that ultimately we would be willing to be the owner of, is core to our strategy.

I think in this asset in particular, we did bid on that. And we felt that, based on where pricing was going, and some of the stuff going on in the market right now, that we would be better off playing the position, in the mezzanine position, gain that return. And then, if we ended up owning the asset at where we come out, we'd be very comfortable.

Do you have any target, in terms of how much of your balance sheet you commit to these type of opportunities, or a dollar amount?

I don't see enough of these type of opportunities. They are somewhat erratic. So I think, again, it's opportunistic. We're not in the program, like some of our peers, where we are saying we want to X percent of our balance sheet allocated to this type of investment. Again, we look at it as a value-added investment. We have done them in the past. Again, just to give you a sense, we did them back in 1997/98, I believe it was; we did some on three Long Island office buildings that we ended up getting paid off and making a 20 percent internal rate of return. So where we see an opportunity in our markets, with assets that we'd like to own, at the right valuation, right pricing, we will jump into it and do it. But we are not setting any sort of guidelines as to what that would be.

Carey Callahan, Goldman Sachs.

I just wanted to follow up on, and go through some of the disposition activity, if I could, and some of the yields. The $43 million that you're talking about -- I think you put it in the context of a range of 23 to 46. So that's the most likely case, you think, is toward the high end?

Well, the way that the contract is structured, it essentially is based on how many units you get to build. So it's going through a zoning process, and there is a target amount of units that are initially specified. To the extent that you get more than those units, there's a price above that target on a per-unit basis. To the extent that you get less than the amount of units that are targeted, there is a price per unit underneath that target. So that is kind of what we are working with, and it's got to go through that zoning approval, to see where the ultimate yield comes out.

Would you then get paid kind of on a piecemeal basis, as the parcels get sold?

It would be fixed at the zoning. I think there is a payout over two years, but at that point -- or 12 months -- but it's committed with the credit of the purchaser, which is a real credit company. So it's not -- you really earn it, and it's committed at the time that you actually get the zoning completed. It's lifetime (ph) approval completed.

And there is no income currently from this asset at all, these assets?

No.

No.

On the 538 Broadhill Road --?

Broadhollow, yes.

-- what's the yield on that?

It's a user buying it. Based on our 2004 business plan, because of the expirations and stuff going through, we probably thought we'd be getting a 7 percent or so return in our 2004 business plan. Since the user is pretty much emptying out a lot of tenants to take the space themselves, it's hard to describe the yield to it.

And that's an opportunity, again, going back to on the disposition side, we do think are are opportunities in our markets to look to sell certain of our assets to users that are better owners that can pay a higher price than what an investor might pay.

And just lastly, on the effective yield slide that you showed, on the underwriting activity, New York City comes out kind of the low end, obviously, at 9 percent. Does that make make you think any different about the New York City market, at the current point in time?

I don't think so. You are getting two things on that point. One of the reasons that we like New York City -- you expect to get lower yields, but you are also getting assets that in our mind have more long-term liquidity than you might have on your suburban assets. And also, in many cases, you are getting the potential for some good growth on the upside, i.e., why we saw the rent growth that we saw on this deal.

But on 919 in particular, as I noted, I think, when we were talking to David Shulman, the basis in that building is fully grossed up. We already sold down a 49 percent interest in that basis as a significant profit to what we have in that building. So, while it's 9 percent yield on that basis -- if you really took our economic interest left in the building today, it's much higher than that, which is part of the strategy when you do things in New York City. You create value, sell an interest, and you hold a portion of it and take that there. So my guess is you are well into the double digits when you adjust for the fact that we sold down the interest at a good profit.

Chris Capolongo (ph), Deutsche Bank.

Just a couple of quick questions. First, could you be a little more descriptive on the leasing pipeline, or the prospective leasing pipeline, if you could?

Yes. Again, I think from the pipeline, right now, we have about, I would say, 1.5 million square feet of space that were in the -- what I call the -- in the proposal stage, which means that we made a proposal, they've come back to us, and we're having discussions beyond that, which is a good number. I think more specifically, some of these I noted before was we had activity and good negotiations on the suburban Worldcom space, which gives us some level of comfort. We also see, when you look out in some of our suburban markets, tenants that are in those markets today that have requirements for '04/'05 that need to do something. And so they are in that marketplace, and so the question is, will they fall into our portfolio? Can we actually bring them in and do that? I don't know if Todd or Sal (ph) or anyone wants to add to that.

I think, in Westchester and Connecticut, we're seeing some continued uptick in the market activity. Albeit it was a slow year in Westchester, we're optimistic over what's gone on over the last 30 or 45 days, and in the varying size of tenants, somewhere between the 10,000 and 40,000-square foot tenants. And in Connecticut, I think there is definitely a movement afoot of some increase in velocity in that marketplace, in a real broad range of size of tenants, which suits us well. At Landmark, because of the depth in the varying sizes of floorplans we can offer there. So I think there's some specific deal velocity picking up in both of those markets.

Todd, do you want to (indiscernible) New York City?

I think the headlines are that there are some very large transactions happening in both downtown and midtown Manhattan that are absorbing this sublease space that's really eroding some activity and value. Downtown, obviously, I think the Cadwalader, Wickersham and Taft has been downtown for 200 years, is taking almost 0.5 million feet. I'm sure most of you are familiar with that, at 1 World Financial Center in midtown. There are three major blocks of sublease space on the Sixth Avenue corridor, all of which have deals on them. And we've chosen in midtown, in the one major block of space that we have, which is at 810 Seventh Avenue -- it's about 50,000 feet -- we've just simply chosen not to chase after some of these lease transactions that are being done in subleased space, where we think that -- I think to David's point, signing 15- to 18-year leases at 20 to 30 dollars below what we were doing deals at, even a year and a half ago, wouldn't make sense for the asset. So the subleased space numbers are moving in the right direction. And midtown subleased space is still about 39 percent of all our inventory, but it's down from a high of 45 percent. Historically, it's been around 20 percent. Downtown, subleased space is definitely declining -- 29 percent of availability now, and it was 52 percent at the end of '01. So we are moving in the right direction, but we are being somewhat selective.

Turning to RSVP, I was wondering if you could remind me again how much you expect to see in proceeds from the liquidation? And then also, if you could help me get an understanding of, I guess, a good way to analyze that? Or how are you looking at it? Are there buyers that you have in mind, or have you come up with some sort of cash flow analysis that gives you --?

Okay. Our strategy in RSVP is to go through a disposition strategy there, and right now, we have on our books $65 million remaining on our books against the -- besides the reserve, at the reserve. And so, what we have targeted for '04 is to bring in $30 from RSVP. And I think that we will go up, now that we have restructured the preferred debt, which we were able to actually restructure and purchase at a significant discount to its face, using the proceeds that we got from selling other RSVP assets -- we sold the parking company, we sold the correctional facilities company, we sold the medical office building company. And so, in selling those assets, that created proceeds to buy out the preferred holder. Now that we're in that position, the ability to go out and pursue a smart disposition program is in our control, whereas before, it wasn't as easily in our control to do that. So we would seek, as I said, to hit that 30. And then, some of the projects, which are going through more of the development phase, like in the Catskills, where there is a gaming situation going on around there and the potential for building of a hotel, and in Chicago, where the development project for over a tollway -- they take a little more time to mature. And will seek to go out and take the time to achieve that -- maximize the value associated with that.

I just want to clarify one thing. With respect to the RSVP restructure and the purchase of the preferred interest, all that activity was contained inside the RSVP vehicle, meaning there was no additional investment made to buy out those positions. RSVP, through the cash at hand and the sales of some of the platforms that Scott had mentioned, executed and purchased that interest contained in that entity.

Thanks. One last question. On the Stanford acquisition, the 80 percent that's leased -- when do the expirations kind of lay out for that?

There's two major tenants. One expires in '04, and another one expires in '05, and we're in discussions with both of them, and we're pretty optimistic about renewing both of them, on long-term leases.

Anthony Paolone, JP Morgan.

Did you guys give a timeline for the land sales? I just didn't remember.

Yes, we did. We said that the -- for this particular land sale. Obviously, we own land in our books that we'll be working with, as well. But for these particular land sales, we said that we think that end of '04, beginning of '05, we'd be in a position where we have the zoning process underway, completed.

Mike, on the G&A, just to clarify, the 2 million that you look to save in '04 -- is that in addition to the run rate, where it was at in Q3? Or is that another like 0.5 million a quarter that it goes down?

I'm not quite sure of your question. But what we have here is the 8.3 million; it's a good run rate, pre the industrial transaction. However, embodied in the 8.3 is a $500,000 reduction for the discontinued operation. So what I'm saying is that, while we projected $7.5 million of G&A savings on an annualized basis as a result of the industrial transaction, 2 million is already included in this number, because the discontinued operation reporting pulled it out.

But the answer to your other question, which I think -- more specifically, you are referring to the $7.5 million of G&A savings, plus an additional (multiple speakers). That does not include the $2 million of additional overhead.

I'm sorry. That 2 million, Tony, is essentially embedded in the development and service companies. So it doesn't hit that G&A line; it's in the service company area. So, depending upon the activity in there, it would be -- from a revenues standpoint, it will dictate how much profit we get out of that.

In other words, it won't show up in the G&A line; it's just other overhead.

So we could see maybe just higher other income? Is that how it (multiple speakers)?

Yes, exactly. And to the extent that it does produce additional profit, there is a 60 percent tax on it, because there's --

Well, we counted the 60 percent tax; it's calculated in the 2 million.

For fourth quarter, in terms of the sale of the industrial and the items surrounding that, any change to any of the charges that you talked about taking relating to that? If I recall, it's like maybe 12 cents or something in that ballpark?

You're talking about (multiple speakers)?

Yes.

No, it's about $11 to $11.5 million. It hasn't changed.

Any way of narrowing down the guidance, then, for the fourth quarter here?

As I said, until we determine exactly when the industrial portfolio is going to close, we just think it's not really worth doing that because, if it closes earlier, obviously, that's going to result in some dilution in the fourth quarter. Right now, it's predicated on a year-end closing.

And the '04 guidance hasn't changed from last quarter?

Correct.

John Lutzius, Greenstreet Advisers.

Thanks for making the change on page 15 in your analysis; I think that's a better presentation. Is the presentation there consistent with the presentation on page 3, with respect to the rollover performance on a cash basis?

Yes, it is. So in other words, the cash rollover and the straight-line rollover is also the rent plus the pass-through of operating expenses.

Can you provide the numerator and the denominator for your presentation on page 13?

The numerator and the denominator for our presentation on page 13? Can I provide the numerator and denominator? Not at my fingertips, I can't provide the numerator and the denominator, no. But yes we can; obviously, that's how we calculate it. But I don't have it on me.

I'd love to maybe call up and get that. I think that's a good presentation.

Just one last question. If you folks were to make, for example, a large acquisition in the future -- for example, buy a big building in Manhattan -- do you think you would go in there on a wholly-owned basis, initially, or on a JV basis?

On a JV basis. It depends on -- I'm not answering this question that way. But the answer really is, we are focused on redeploying the industrial asset proceeds. If you look at how we're looking at it right now, we would look to deploy those proceeds in a manner that maintains a flexible balance sheet. We have already allocated a portion of the redeployment of those proceeds to the redemption of the units and the redemption of the Series A preferred that we plan on calling. So that's the target. So if there is something larger than that, then we would do a JV basis. But again, it's going to depend on whatever deal it is. You have to look at every transaction as it stands.

(OPERATOR INSTRUCTIONS).

Okay. If there's no additional questions, we appreciate everyone taking the time and joining us on the call, and look forward to speaking to you during the quarter and the next quarter. Thank you, operator.

Thank you, sir. And ladies and gentlemen, this conference will be available for replay after 7:15 PM today, and will run through November 14, 2003, ending at midnight. You may access the AT&T replay service at any time by dialing 1-800-475-6701 and entering the access code of 701671. International participants, please dial area code 320-365-3844. Those numbers, once again, are 1-800-475-6701 and 320-365-3844, with the access code 701671. That does conclude our conference call for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.