SL Green Realty Corp (SLG) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Reckson Associates' fourth-quarter conference call. At this time all participants are in a listen-only mode. Later there will be an opportunity for questions and comments. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to the Investor Relations Coordinator for Reckson Associates. Please go ahead.

The information to be discussed on this earnings conference call may contain forward-looking statements within the meeting 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 effecting industries in which our principal tenants compete, financial condition of our tenants, changes in the supply of and demand for office properties in the New York tri-state area, changes in interest levels and cost of capital, downturns in rental rate levels in our markets, and our ability to lease or re-lease space in a timely manner, changes in operating costs including utility, real estate taxes, security and insurance costs, and such other risks, including those specifically identified in the legend in the Company's slideshow presentation and supplemental package.

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 measure discussed and a reconciliation between these measures can be found on the Company's Web site at www.Reckson.com in the Company's quarterly earnings press release, slideshow presentation and supplemental package.

I will now hand the call over to Scott Rechler, CEO.

Thank you, Amy. And thank you all for joining us for our fourth-quarter and year-end conference call.

The past six months have been an extraordinarily active and transforming period in our Company's history, so we have much to report.

During this call, our commentary will be following a PowerPoint presentation which you can access from our website at www.Reckson.com. If you have a problem accessing this, please contact Susan McGuire, who heads to our investor relations, at 631-622-6642.

Joining me in providing formal remarks today are Mike McTier, our CFO; Salvatore Campofranco, our COO; and Todd Waterman our Chief Development Officer and Managing Director of our New York City operation. I'm also joined by the balance of our senior management team, who will be available to answer any questions during our q&a.

Now let's turn to the PowerPoint presentation. If you can turn to slide two, entitled -- Summary of Highlights. You'll see that during this quarter we reported funds from operations of 38 cents per share, which deducts about 18 cents per share for nonrecurring restructuring charges. If you add back those charges, that would be about 56 cents per share as compared to 55 cents per share in the fourth quarter of 2002.

For 2003, we reported $2.07 per share of FFO, which includes the same 18 cents restructuring charge. When adding back the 18-cent restructuring charge just to get a sense of run rate in comparison, that would be $2.25 per share for FFO, versus $2.32 per share of FFO for 2002.

If you turn to slide three, I would like to walk you through some of the highlights of the quarter. Starting with occupancy, you will note that our same-property office (ph) occupancy is up 50 basis points sequentially from the end of the third quarter, from 91.9 percent to 92.4 percent. On a year-over-year basis it is down 360 basis points from 96 percent.

When you look at our overall portfolio on the right-hand side of that section, you will note that we were still up 50 basis points for our office portfolio, but as 91.5 percent occupied versus 92.4 percent. And that is because of some of the development projects that we had in our portfolio at year-end. When you go year-over-year, you'll see that we went down about 420 basis points from 95.7 percent to 91.5 percent on our office portfolio.

When you include our industrial portfolio, the remaining industrial portfolio, in our overall occupancy, you will note that our occupancy is down to 90.2 percent at year-end 2003.

Turning to our same property net operating income, again, looking at our office portfolio for the fourth quarter, you will note our cash net operating income was up 2.4 percent on a same-property basis. When you include straight line, it went down 1.9 percent.

For all of 2003, it was down 2.5 percent on cash basis and down 5.3 percent when you include straight revenue.

On the right-hand side of this section we actually net out those numbers for minority interest in joint ventures, and the numbers for 2003 in that instance is, on the cash basis, down 3.8 percent. And when you include straight line its down 6.2 percent.

Our rent performance during the quarter, our renewal and replacements base on a cash basis was down 7.2 percent. When you include straight line rent it was up 1.8 percent. The cash number was impacted by leasing composition that took place this quarter with 75 percent of the activity was in Westchester in New Jersey, where we did not have as much mark-to-market opportunity. So that is not a number that we would consider a trend line on a going-forward basis, as we will talk about later.

When you look at all of 2003, you will note our cash -- the same-space rent up 0.4 percent, and when you include straight line went up 10.7 percent.

If you turn to slide four in continuing, (technical difficulty) with highlights and again focusing on our leasing activity, you'll note during this period since the end of the third quarter we completed almost 1 million square feet of leasing. We made very good headway, at least in some of the space that was vacated by WorldCom, by leasing 127,000 square feet of vacated WorldCom space on Long Island, and 50,000 square feet of space that was vacated in Westchester. On the investment disposition side, we closed on the Long Island industrial portfolio. We closed on our 1185 Avenue of the Americas acquisition, as well we sold or contracted to sell three additional office buildings for $58 million, which I will provide more color on later.

We had a significant amount of capital market activity that Mike will discuss later in the presentation, and then we had some strong restructuring activity. We completed our organizational restructuring. Our management transition was completed; the new team is in place and focused.

In addition, we announced the addition of three new independent directors -- Douglas Crocker, Stanley Steinberg and Elizabeth McCaul.

Turning to our portfolio composition, and you will note when you look at the pie charts on the left-hand side of slide 5, that our portfolio composition has really transformed since completing the sale of the Long Island Industrial portfolio and acquiring 1185 of 6th Avenue. You'll see at this point now, New York City makes up 42 percent of our net operating income, as compared to 34 percent at year-end of 2003, and Long Island makes up 23 percent of our net operating income, as compared to 31 percent at the year-end of 2003.

We have 15.5 million square feet at this point, and our net operating income is now 98 percent comprised of our office portfolio, and only 2 percent made up of our industrial portfolio.

Turning to slide 6 and looking at our tenant diversification, again, looking at the pie chart and level of -- the amount of diverse industries that make up our tenant base, you see that we have a number of demand drivers in our portfolio.

As would be expected, with our increased portfolio in New York City, our legal services now is our largest industry base, making up 15 percent of our revenue, followed by financial services at 13 percent, and consumer products at 12 percent.

On the right-hand side of the slide, you'll see a list of our top 25 tenants, and you will note there is really no major tenant dominating our roster. And also you'll note, when you look down this list, this is really a high-quality list of tenants without any unexpected tenant performance risks.

Now, I would like to turn to slide 7, take a moment and talk about some market trends. In our mind, markets are beginning to recover. Activity continues to improve as tenants are seeking to capitalize on what they perceive as the market bottom. From a tenant's perspective, it is the right time in the cycle to make a deal. The tenant psychology has shifted from being uncertain of the future and unwilling to commit, to having a more positive outlook of their business prospects and starting to plan for the future.

We see a number of positive market indicators in addition to leasing activity that we have recently had. First, sublet space is contracting in most of our markets and, as you will hear from Sal, it is more in some markets than others.

Second, we're starting to see tenants take expansion space throughout our portfolio.

And lastly, we're starting to see the recovery of the service sector and expect it to be a demand driver going forward. In particular, it is our sense that the capacity of most financial service, accounting and law firms is tapped out, and they are going to need to start increasing their hiring.

While we believe that the markets are beginning to recover, we expect them to remain competitive. Market activities will remain strong, but there will not be brought-based, positive net absorption until there is a pickup in job growth. Without material positive absorption, it's going to be difficult to generate pricing power, and leasing concessions will remain high.

That being said, Reckson is well positioned -- because as long as there is activity, we can gain market share and increase our occupancy.

Due to the strength of our franchise and the quality of portfolio, we compete very well in markets like this -- especially when there is a flight to quality by tenants, who want to be in the best buildings, and with the best landlords.

Now, I would like to turn you over to (indiscernible) Franco, to provide you a little commentary in each of our markets -- suburban markets. Sal?

Thank you, Scott. I am going to take you through the suburban markets. (indiscernible) the slide that's in front of you, and then Todd Waterman will take you through our New York City markets.

I'd like to just run through some trendlines related to supply-demand characteristics that were seen in the suburban markets. And if I had to rank the four graphs that are in front of you from better performing to lesser performing markets, I would start with Long Island as one of our better-performing markets over this past year and going forward, Westchester being the next in terms of good performance, relative good performance, Southern Connecticut, and then followed by northern New Jersey as one of our lesser-performing markets.

Keep in mind that all of these markets are classic infill markets with little to no new product coming online in the near-term -- or the long-term, for that matter. And I'll talk a little bit further about that.

In the Long Island marketplace, it's interesting to note that the trendline for our occupancy, if we were to adjust it for the County(ph) of nationalities (ph) that Scott talked about, as well as some of the additional leases we just recently signed, we would really be taking the occupancy that we have in this portfolio (indiscernible) to the mid-90 percent range. So, if you consider the County deal and other deals, we would be in the mid-90 percent range and having nice positive spread to where the overall market itself is.

Let me just talk about Long Island. The overall leasing velocity was good for the most part this year, and constant throughout the year. Our sublease inventory is down, with only one large block of space having a real impact, and we expect this block of space to be absorbed by the second half of 2004. This single block is really keeping down pricing pressure in one submarket in particular.

In the Western Suffix (ph) submarket, which we owed about 1.4 million of our portfolio is located in that market. That includes the Melville (ph)corridor. This submarket reported the highest positive absorption since 2000, and had the highest concentration of deals over 25,000 feet. It continues to be one of our better-performing markets related to both the absorption and the downward trend on vacancy. Its class A direct vacancy decreased to the 10.5 percent range from as high as 13 percent earlier in the year. So we saw a nice dramatic decrease to our class A vacancy in that market. And we expect that downward trend to continue.

We are cautiously optimistic that we may actually see some pricing power return to this market in the second half of '04, especially if that sublease block of space gets taken care of, as we expect.

The Central (indiscernible) where we own 1.7 million square feet -- that includes Omni and the 60 Charles Lindbergh property that the (indiscernible) lease was done on -- we see the sublease market there is stable. 2003 -- velocity was strong. The strong activity resulted in a downward trend to the direct vacancy throughout 2003, and our direct vacancy for class A product is now at 7.2 percent from a high of around 14 percent in that submarket. We have a nice trend going there.

In Westchester, the sublease market is stable and on the downward trend. The decentralization movement, which began post 9-11, continues to benefit the county. One of the largest transactions this year -- New York Life -- which acquired a former IBM building for 360,000 square feet, is typical of the follow-up type deals we're seeing post 9-11, and Morgan Stanley. The county is competing very well, related to retention of key employers. A large portion of transactions related to Companies coming into the county from the surrounding area.

As a result of that trend, we feel positive over the ability of the county to absorb large blocks of space, and that that climate has improved dramatically.

For example, the former Texaco headquarters is fully occupied. 900 King Street, big block of vacant space, is now spoken for. 333 Westchester Avenue, which was 600,000 square feet, is pretty much well leased, and the old IBM space has either been sold or leased. So we are positive and feel that the county has good momentum on large blocks of space.

It's important to note, there are two new large blocks coming to the market -- the former Kraft (ph) headquarters and Reader's Digest. We think that these blocks will be absorbed within a reasonable period of time. It will not be disruptive to the momentum we're seeing. We're actually benefiting from one of these transactions, and I am pleased to announce that we have signed a lease for 78,000 square feet for Kraft's new space, that will remain in the market once they vacate their existing headquarters. And they would be going over to our building at 120 Plains Road (ph). So that's an exciting transaction for us; and, as Scott said, there is (indiscernible) continue seeing a flight to quality that is happening in our markets, and this is a great example of it.

Our portfolio is also benefiting from a lot of the activity that done: White Plains, CBD (ph) and the Eastside. Vacancy has dropped dramatically, as well as in the central marketplace, where we experienced a 7 percent drop to the vacancy statistics.

Taking you over to Stanford, CBD in particular, both the overall and direct vacancy is down slightly fourth-quarter versus third-quarter. However, they are up from the year-end '02. We see the issue with Stanford as the lack of velocity. The activity run rate is off about 50 percent from what is the typical trendline for Stanford.

On the positive side, the sublease inventory is stable and on the decline, and there has been a significant absorption of large blocks of sublease space that have previously been in the market.

Keep in mind, our portfolio serves average to small-sized deals in Stanford, with our floor plates being from the 11,000 to 20,000 square foot range. We're seeing an improvement in the market segment which serves our space best, which is the 5 to 20,000 square foot average tenant size. So we're seeing some increased deal flow in that area.

The market continues to expand related to hedge funds coming in from Greenwich (ph) and the financial services sector. It's important to note -- potential new product is -- any potential for new product in Stanford is severely constrained, even more so than when we first entered the market, as the previous office sites which could have been developed have all been pretty much converted to mix-used type projects.

As a result, any momentum that picks up related to leasing activity is going to have a big impact and a quick impact, we feel, on the vacancy trendlines and absorption trendlines in Stanford.

Taking you into northern New Jersey, we have had a very busy year there, and we are very pleased with how we have performed in this market. And I would like to point out, on the graph on the bottom right, if you will notice that there is a very nice spread in our performance versus the overall market's performance in New Jersey. And I think that speaks to our competitive advantage on some of the high-quality assets we have and the great locations we have there as well as the team.

It's important to note that the 9.8 percent vacancy that is listed there -- if you take out our repositioned project, 101 JFK (ph), which I'll talk about in a moment, our overall occupancy in New Jersey comes up to 95 percent. So we have a wonderful spread between our portfolio's performance and the overall market's performance, and we are pleased with that.

The market overall in New Jersey remains weak with some big blocks of available space, both sublease and direct. There is considerable churn in the activity, and there is negative net absorption in New Jersey posted over the last year. The situation does vary dramatically from one submarket to the next; and overall, as I mentioned, Reckson continues to outperform the market as evidenced by the favorable spread to our occupancy I noted.

In the short-held marketplace, in particular -- that's in the Essex (ph) County category, related to Cushman (ph) and Wakefield (ph) -- keep in mind, in this marketplace we have our trophy property of 51 JFK, and 50 percent of our portfolio is located in this submarket. The vacancy is trending down, and the short-helds or Essex County market. Sublease remains stable. The year-to-date activity increased from '03 to '02, although we are still below the run rate, the historic run rate, slightly.

But for the most part, we had a nice activity.

The pharmaceuticals industry had a favorable impact on this submarket, and we also grabbed an incredible share of market activity. A lot of that for the benefit of our repositioned project at 101 JFK, which was very well received by the market.

Just to give you a little color on that, it was a 189,000 (ph) square foot building that we opened in December of 2003, and it is currently 73 percent occupied. So in the short time of around five months we leased 137,000 square feet at this repositioned asset.

This week, we're excited to announce the signing of an additional 50,000 square foot lease with Investor Savings Bank. That is our latest transaction there, and they join the Company of Volunteer Insurance and Citigroup in that building. So it has an outstanding credit rent roll, and we are very pleased with the performance of that asset.

Overall, one of the strongest submarkets in northern New Jersey is the short-helds or Essex County market. And it posted the largest decline to vacancy in 2003. So we're encouraged by that submarket's performance in particular, and look forward to 2004.

With that, I'm going to hand it off to Todd Waterman to talk about our New York City portfolio.

Thank you, Sal. Starting with downtown Manhattan, our building at 100 Wall Street, we have been challenged with about 70,000 square feet of vacancy there. The downtown market coming into 2002 was one were a number of people were theorizing that there would be a very large exodus of big Companies out of downtown post 9-11. Fortunately, as the year went on, that did not materialize at all, which really led to a number of very large transactions occurring in the downtown market, both on the Eastside of downtown and the Westside.

Cad Walleter (ph) with Forsham and Tass (ph) signed a 0.5 million square foot lease at the world financial center, reaffirmed their commitment to downtown. HIP and Teachers both combined for close to 700,000 square feet at 55 Water Street. Merrill Lynch reaffirmed to stay downtown. American Express is staying downtown.

So, in looking at the market overall, it really was -- the major loss to downtown to date was Lehman Brothers. And, the activity has been in large (indiscernible) space in that market.

At 100 Wall Street, we're going to experience, I think, a slow road to improvement. But the market is improving; we're seeing transaction activity in the first quarter of this year. Matter of fact, we signed two leases in the last few weeks -- one of which was with Bolger (ph) Insurance just this week. Sal just mentioned their name as a tenant of ours in the New Jersey market, so that was one we were able to take advantage of our franchise.

But, things will remain competitive downtown for the small and mid-sized tenant market, due to the amount of sublease space in those size ranges that remain.

In midtown, the story is very different. This past year and in the year prior, sublease space was the underlying theme that was really dominating market activity. And I think, as many of you probably know, there have been an enormous amount of those large blocks of space that have been taken off the market.

In fact, there were four transactions alone from the third quarter to the time period of right now, that accounted for 1.6 million square feet of this class A, large blocks of sublease space, that have now been absorbed. Those are -- Clifford Chance (ph) took 348,000 square feet at 51 West 52nd (ph) Street, Kramer Levine took about 300,000 square feet at 1177 Avenue of the Americas, Pfizer took 275,000 square feet at 685 3rd, and Price Waterhouse is going to occupy 300 Madison, which is the CIBC Shadow Space. So, those transactions, I think, really have provided the support for a return to a more -- a market that is more in equilibrium. We do expect to see that.

In addition, tenets in midtown are renewing, and they are in fact growing. Just two quick examples -- Louis Valentine (ph) was in the market, but renewed at 1301 Avenue of the Americas for 495,000 square feet, and News Corporation both renewed and expanded at 1211 6th Avenue, which is 794,000 square feet -- 100,000 square feet of that represented pure expansion of that Company in that building.

So, those 6 transactions alone accounted for 2.8 million square feet of renewals, shadow space and large blocks of class Along-term sublease space being removed from the market.

What we have seen in the wake of that, in our portfolio, is, both at 810 7th Avenue and 1350 Avenue of the Americas we have seen a number of transactions get signed. The activity is better than it has been in the years; and, I think, following on the heels of our acquisition of 1185 Avenue of the Americas, we now are in a position, for the first time, in a number of years to actually engage the large tenant markets because we will have a large block of space in that building in late 2005, 2006 to offer to the market. And we, I think, have been very encouraged -- just over the past six weeks -- in that we have had a number of inquires from large tenant that are now interested in direct class A space in midtown, because these other large blocks of shadow space have disappeared.

So, again, our portfolio -- I think slide nine shows -- across the board, midtown is on very firm fitting (ph). Obviously, the biggest spread to our occupancy and the market would be in Midtown East; that's at 919 Third, where roughly 40 percent of our gross revenue comes from. We are 100 percent leased there versus a market vacancy of 14 percent.

On sixth Avenue, as you see there, our portfolio is in very good shape versus the market.

And Midtown West at 810 7th Avenue -- we have four floors vacant. However, one of those will be removed from the market shortly. The economics are improving, albeit slowly. I don't -- to echo what Sal said, I don't see an enormous amount of pricing power coming back into our portfolio in the short term, but clearly, the fundamentals are moving in our way -- moving our way, which is why we are seeing more deal activity and leases signed.

Thanks, Todd. If I can have everyone turn to slide 10 and turn back to the office -- the portfolio performance. Starting with the office portfolio, as I mentioned earlier in the presentation, we had reported same-property NOI growth of 2.4 percent on a cash basis for our office portfolio. And on slide 10 what we have done is we provided a reconciliation of how we achieved that.

And I'm not going to go through every line item, but I just wanted to point out a couple of facts -- when you look at the last three months and the last 12 months year-over-year.

First, just on the revenue side for the quarter we were up 3.4 percent. The big line items to focus on is the weighted average occupancy decreased quarter-over-quarter on a year-over-year basis, and that created $831,000 reduction of revenue. Also, and you see for the year, that was about 6.4 million reduction of revenue.

When you look at the next points that go down to is the built-in rent increase, which was up a positive 1.8 million for the quarter. And for the year $7.4 million. And for a moment, I just want to comment, because I am not sure how many people focused on that.

Our portfolio, being the New York tri-state area, which is customary, is to have built-in rent increases. On Long Island for example, we have annual built-in rent increases of between 3 and 4 percent per year. In Westchester it's about 2 percent a year, and in New Jersey and the city, about between 1 and 2 percent per year in terms of annual rent increases. So that is something that continues to provide us with internal growth, whether or not we are getting to take advantage of all the mark-to-market opportunities.

Now, on the expense side, you note that our expenses for the quarter were up 4.9 percent. And for the year, 9.7 percent.

The operating expenses were driven up by an increase in labor costs, security cost, the impact of inclement weather. And then, earlier in the year, because of insurance, which now has normalized at a better level. But the first half of the year, we were seeing the insurance costs as being relatively high.

In addition, our real estate taxes have increased for the year about 10.5 percent. This remains a big issue as municipalities struggle with their budgets and something that we are watching carefully. So, watching the expense and trying to keep -- do everything we can to control expenses is a key priority for us, but some of these expenses -- like real estate taxes -- frankly, are out of our hands.

If you turn to the next slide, on slide 11, we provide you with a breakdown of our leasing and occupancy to show you how we got to our positive absorption for the quarter.

You will note that we started the quarter at 91.9 percent occupied on the same-property basis, which is about 12.2 million square feet. On the fourth quarter '03 you will see that in activity we had a total of 365,000 square feet of activity, leasing activity. Then we had negative adjustments; we had early terminations of 60,000 square feet and expirations of about 240,000 square feet -- totaling 300,000 square feet of adjustments, which resulted in about 65,000 square feet of positive absorption. Now, the key difference here from prior quarters is the reduction of early terminations.

And then if you turn to the next slide, on slide 11, you can actually see that the -- on this slide here -- that net terminations peaked in the first quarter of 2003, which -- if you look at this and just to give you a sense -- what we defined as net terminations is the gross early terminations less terminated space where leases were signed in the same period. So, it means -- if we got space back from a termination and re-leased it that same period, that would not be considered an early termination for this calculation, because the economics of that transaction were not necessarily bad for us.

And you see now that as, while they peaked in the first quarter of 2003, they have actually come down at the end of the fourth quarter to 56,000 square feet, and really have come down dramatically.

If you turn to slide 13, you see that the heavy level of early terminations (ph) (indiscernible) resulted in decrease of occupancy -- even in the face of good leasing activity. And so, as we were struggling, getting back that space, even though we leased, we saw our occupancies decline.

As would be expected, as the terminations normalized and our leasing activity increased in the middle of 2003, our occupancy bottomed. And as we said in this past quarter, has actually climbed 50 basis points.

You also see by this slide that we have had an exceptional level of activity quarter-to-date in the first quarter of '04. I would like to just take a moment to discuss this.

At the beginning of the fourth quarter, as we were preparing to close the restructuring, we recognized a significant increase in market activity and decided to aggressively pursue market share. We brought our new management team together, evaluated the economics of the deals in the market, and set a target to lease 1 million square feet by the end of the first quarter of 2004.

As you can see, we are well on our way of exceeding that goal with 950,000 square feet already leased, and we have another 150,000 square feet of leases that are out for signature. So, we are really being able to capitalize on a lot of that leasing that we had set our objectives to do. As you will see later, we have also gotten good economics with that leasing.

One of the largest transactions that took place during this quarter was a lease with Nassau County. And you will it, on the right hand side of the slide, we provide a little bit of data about that. Nassau County leased approximately 200,000 square feet, or the entire building, in concourse level of our 60 Charles Lindbergh (ph) property located at Mitchell Field, Long Island. The asset needs to be repositioned to accommodate the County's requirements -- they're going to have a fairly heavy density of people in this building. We are going to actually relocate up to 65,000 square feet of other tenants that are in the building to other spaces that we have around the marketplace, and we would anticipate through all this, occupancy in the later part of 2004.

It's also interesting to note that the County is relocating from five different locations and a total of 325,000 square feet. And because of the efficiencies we are able to create for the repositioning of 60 Charles Lindbergh, they are able to save costs and occupy approximately 200,000 square feet.

The good news for the market is that 325,000 square feet in which they are exiting, is most likely not going to come back onto the market as office space, and will be repositioned or redeveloped for a better and higher use from a valuation standpoint. So this will have a very positive impact to the overall vacancy statistics at (indiscernible) the market.

If you turn to slide 14, we provide you with a composition of our leasing activity, since the -- subsequent to the third quarter. And you can see, of the 950,000 square feet of leases that we signed during this period, about 50 percent of the leases were either new or expansion space. So, different than what we've seen and commented in prior quarters, where we talked about a treadmill effect where we were just leasing space and standing still, this is a type of space that actually creates positive absorption.

On the right hand side of this slide, you will note that we broke down our activity by market, and you'll see that Long Island/Westchester account for 70 percent of the leasing activity. And this is to be expected because this is where we had large blocks of vacancy due to the early terminations of some of our tenants like Worldcom.

On slide 15, which tried to provide some of the underlying economics and trends relating to our leasing. Starting on the top left-hand side, which I am not going to spend a lot of time on, is the rent performance on rent and -- on renewal and replacement space.

As I mentioned earlier, during the fourth quarter of 2003 we re-leased such space at 1.8 percent higher rents than what the prior tenants were paying and, while that's a significant drop from our prior trend, two points -- is I think the third quarter of 2003, as we mentioned the last time, was a little bit of an aberration because we had a significant amount of New York City leasing in that number. And the fourth quarter of '03, as I mentioned, had very little New York City leasing in that number. So this is not necessarily indicative of where the trend will be.

If you turn below that, to the office leasing activity, you'll see, as I mentioned, there is a 646,000 square feet of leasing year to date. Based on what we have in the pipeline, we would expect record leasing activity in our first quarter of 2004.

Looking on the top right-hand side of the slide, at our effective rent spread, which is where we look at taking the average rent against the gross effective rent, which backs out tending (ph) costs, TI and leasing commissions. And takes the difference between those two numbers -- really gives us a sense as to the cost of actually achieving that lease term. And you will see that we have been averaging in the last period of time between 19 and 13 percent. Our sense is, and that we've been giving the market guidance that we would expect to be between 10 and 12 percent for '03 and 2004. And I think that is something that we are still comfortable with.

Also, you will look at our average lease term. And one of the things that has been a priority of ours, to offset the heavy capital dollars that are required in this market is to actually increase the term of our leases. And I think we have been very successful at doing that. In 2001, our average lease term per lease was 5.4 years. In 2002, it was 7.1 years. In 2003 it was 9.1, and you see year-to-date, 2004, we are 11.2.

Continue (indiscernible) looking at the economics on slide 16, you will see we break down our tending costs. And you'll see this for the fourth quarter of 2003, we had tending costs of $2.15 per square foot per year of lease term. That is a lower end of our more recent trend, and I think -- and that's part of the composition. We would expect '04 to be at the same levels that 2004 had been at.

If you turn to slide 17, while our tending costs have been high and it has been costing us a lot of capital to put tenants into space, you will see we are still driving good economic deals. And one of the ways we measure the underlying economics of the transactions we do is we do a net effective rent to cost basis analysis. And what we do is we take the net effective rent per-foot against the per-foot cost basis that we have in each building. Now, to make this a true assessment of what is going on, we actually pulled out properties that were contributed at the IPO with carryover basis. So this only includes properties that we purchased since the IPO that do not have carryover basis.

And you see that, if you look over the activity for the last two quarters, we are generating a 10.5 percent net-effective (ph) rent yield, which is quite respectable. And this is a, obviously, a function of the economics of the leases that we have completed, as well as our cost basis in the buildings.

Now, if you turn to slide 18, I want to take a moment to look prospectively.

You'll see, (indiscernible) in 2004, at the end of the year -- at the end of 2003, we have a 950,000 square feet scheduled for expiration in 2004, which is about 6.5 percent of our portfolio, and makes up about 4.9 percent of revenue expiring in 2004.

In the leasing activity quarter to date, that reduced this number by another 100,000 square feet or so, so it would be about 850,000 square feet at this point -- or about 5.8 percent expiring less than 2004.

As you look at 2005 and 2006, you will see we have a substantial role in 2005 and 2006. And we have looked at this role as an opportunity, because the average rents today are below-market rents that are expiring. So we'll talk a little bit more about that later, but these are key years for us to, in our mind, to try to increase the underlying net asset value of our portfolio.

Turn to slide 19, we provide you with an analysis that shows the rents that are scheduled to expire in '04 -- their current rents, with the addition of operating and tax escalations that we would not get from the new tenant, against where we perceive market rents to be. And you will note, in this analysis, we expect our office portfolio on a cash basis for the leases that are expiring to have a 7.5 percent rolldown. And on a straight-line basis, they would have a 10.1 percent rolloff, or that we would re-leased for the spaces at 10.1 percent higher rents, including straight line than what the prior tenant was paying, and 7.5 percent lower when you look at it on a cash basis.

However, when you look at 2005 and 2006, as I had mentioned -- and again, if you look at this based on today's current market rents, not where we think rents will be in '05 and '06, you will see that we have a 6.1 percent mark-to-market opportunity using today's market rents.

Obviously, if you look on the slide that is made up of the 1.6 million square feet that we have expiring at (ph) our CBD portfolio where we have a 20-percent mark-to-market opportunity. If the markets begin to recover, and we do start gaining pricing power during '05 and '06, which we believe we will at some point in that area, these numbers will improve.

Turn to slide 21. I would like to quickly review the investment environment. The markets for stabilized assets remain extremely strong. The investment markets remain flush with capital, and that has driven pricing. And we do not see that subsiding anytime in the near future.

However, we do believe that investment markets for transitioning assets are beginning to rationalize. First, the higher TI and leasing commission costs are forcing owners to go out of pocket. They'd have to make a decisions. Do they want to continue to invest in their assets as they are going through some state of transition, or would they rather take advantage of the present market conditions and sell them?

Second, owners' views that interest rates are going to climb is forcing them to consider selling now, before they face having to refinance and have to deal with either higher interest rates or less proceeds.

As we look out to 2004, and where our opportunities are, we see them in three areas.

First, it's the corporations that are seeking to address their own real estate strategies. They are looking to achieve flexibility either by getting staggered lease terms or to better manage their business cycles, enable consolidation so they can consolidate in multiple locations. Or enhance the balance sheet by removing our (ph) real estate. We have been working on a number of these transactions. The thing with these transactions is they are very relationship driven, and they have a lot of leadtime. But we have a number on our plate. And hopefully, we will be able to be successful with some of them.

The second, obviously, is the investments in the transitioning assets, where we buy vacancy or other uncertainty, similar to what we did with 1185 6th Avenue, where there's a building where there is some issues that we feel comfortable that we would underwrite those risks effectively and build it into our pricing and be competitive.

And then lastly is to pursue highly leveraged assets with refinancing risks. Particularly in New York City and some of the suburban markets, there has been a lot of acquirers of assets that have used floating-rate debt, and are highly leveraged transactions. And as interest rates start to climb and their perception that they were going to actually increase the bottom line over the last three years, at a much faster pace than they might have done so, they may have an issue in terms of refinancing those assets for the same amount of proceeds that they got the last time. And so we are targeting those type of assets as potential investments to come in and deal with some of that liquidity issue.

In total, we're targeting between 0 and $150 million of net investments in 2004.

On slide 22 you'll see that in 2003 we completed a total of over $800 million of investments and dispositions. On the acquisition side, it was over $380 million. On the dispositions side we spoke about the (indiscernible) already. Just to mention, on the three additional office buildings we sold for $58 million, we did achieved a 7.3 percent NOI yield based on our 2004 estimation for NOI. These are not trophy suburban assets that we sold, but these are assets that we were able to achieve this pricing because we sold them to either users or strategic buyers. And that is something that we will continue to pursue into 2004.

In addition, we're spending a lot of time looking at our non-income-producing assets, and planning a monetization process with that. In 2003, we were successful; as you know, we signed a contract on 120 acres of land in New Jersey, which is going through an approval process now to be rezoned for residential. We would expect this to be a '05 type event, but something that we are actively working on.

We also completed the sale, the land sale on Long Island and the build-to-suit for $47 million. Most of this has flowed through in 2003, although it will be a small tail (ph) in 2004. And we completed the restructuring of RSVP, our real estate venture fund, which enables us to now begin the monetization process on that.

When you look at our non-income-producing assets, we have a series of non-core land parcels making up 200 acres with the a cost basis of $40.6 million. These are pieces of land that we have identified that would be better sold for a different use, not office use, and we're in the process right now of pursuing the sale of those land parcels.

In addition to that, we have other land parcels, about 135 acres, where that land is zoned for office. And we expect to develop most of this land, although we might sell select pieces if it was opportune to do so. With all of our land, we believe there has been material appreciation of value since we acquired it in total.

And lastly, we have RSVP. And I'm not going to spend a lot of time there, but we are carrying that on our books for $65 million. We're in the process of executing the monetization plan, and hopefully there will be some update as to that plan and see some activity over the next couple of quarters.

In total we're projecting to get $30 million of proceeds from the sale of these non-core, non-income-producing assets in late 2004.

With that, let me turn it over to Michael Maturo to provide you some of our financial data.

Thank you, Scott. Starting on page 24, on some of the operating data, we reported operating margin of 59.5 percent, which is pretty much where we had expected to be. We think that percentage will stay flat going into '04, with an increase 2004 as we start to realize the benefits of the increased occupancy from leasing up of the vacant space.

With respect to G&A, we started to realize some of the benefits of the restructuring during the quarter. For 2004 we expect a run rate of about 7 to $7.5 million as compared to what would have been roughly 8.5 to $9 million quarterly run rate.

With respect to the other income line, we reported about $6 million during the quarter, 2.6 million of that net of the tax effect is attributable to the First Data transaction of about $3.5 million is related to other income, about 1.8 million of that is interest income.

Looking forward into 2004, Scott mentioned, we have the (ph) tail end on the First Data transaction which we will realize in the first quarter of about $2 million, and then we think for the rest of the other income line item for the year, that will be about $4 million.

As far as receivables and reserves, credit issues have significantly decreased. We really don't have any major concerns out there right now. As far as termination fees, we reported about 600,000 for the quarter. $2.6 million for the year as compared to 7.8 million for 2002. And then, again, looking ahead, we would predict about $2 million of fees for next year.

Turning to slide 25, and some of the capital market activities, we issued $150 million of seven-year notes with a coupon of 515 and effective interest rate of 5.9 (ph) percent. And this issuance effectively refinanced $100 million of notes that we have coming due in March of this year.

Secondly, we exchanged all our class B stock for class A on a one-on-one basis. (indiscernible) outside of that, obviously, was to reduce the additional dividend that class B stock carried, which will result in about $9 million of dividend savings going forward.

We redeemed $50 million of our outstanding series B preferred stock. That was yielding 8.85 percent and 102 percent premium, at -- (indiscernible) for common shares valued at $26.05. We received an investment-grade rating from Fitch. We think that will enhance our ability to continue to have access to the unsecured market, and also allows us to retain our investment-grade pricing on our line of credit.

As far as our 2004 estimates, just updating that, that impacted by increased disposition assumption. Scott had mentioned, we had three assets that sold for about $58 million. Also, the conversion of series B to common shares -- we originally had anticipated to purchase that with cash. Mitigating those two items is the acceleration of the leasing activity, as Scott had given quite such detail on. Included in those estimates is about 3 percent NOI increase. So considering those factors both up-and-down, we are still comfortable with the 230 to 240 estimate for 2004.

Turning to page 26 and looking at the balance sheet and financial ratios, a 3.0 million dollar cap, a billion dollar cap as of the end of 2003. Interest coverage at 3.08 and fixed charge at 2.41. The debt ratio decreasing as a result of the industrial transaction and pay down of debt and some benefit of increased share price.

Going forward we would expect these ratios to improve, considering the conversion of the preferred to common. The increased NOI from the occupancy gains that we spoke about, and also the lower overhead cost going forward.

Turning to page 27, and the debt schedule, we pro forma this schedule for the 1185 transaction and the impact of the $150 million unsecured note issuance. If you look at the mortgage notes, that includes the $250 million on 1185, which comes due in August of this year.

The 550 of unsecured notes includes the new issuance, the $150 million issuance net of an assumed pay off of the maturity in March. And then the unsecured corporate credit facility gives effect to the 1185 purchase.

So, if we'd look down below and look at the maturities and then the floating versus fixed, it will be 12 percent floating on a pro forma basis. We had no unsecured maturities through 2007, and the largest maturity we will be facing this year -- and only maturity, actually -- will be the loan on 1185 6th Avenue.

Thanks, Mike. If you turn to slide 28, just wanted to go through some corporate activity with you.

First, just update on some corporate governance activity. We are going to be putting proposals for our annual meeting for shareholder approval on the (indiscernible) Board of Directors opting out of Maryland anti-takeover provisions and authorizing the modification of the ownership limit relating to the five-or-fewer rule. This is as what was previously announced.

Also, as I mentioned earlier, we have appointed new board members. We announced that Doug Crocker has joined our Board. He brings great real estate and capital market expertise. Stanley Steinberg, who brings extensive real estate development and operating expertise, and Elizabeth McCaul, who was a (indiscernible) regulator, brings expertise in corporate governance and regulatory compliance. So we are thrilled with the new competition of the board and the value that we believe they will add to our Company.

In addition, we announced that Irving Cavanitas (ph) who had served on our board since our IPO, has resigned at this time.

This past week, our newly constituted board completed a series of meetings at which we reviewed the Company's strategy, business plan, market conditions and balance sheet. At these meetings, the board also reviewed the dividend policy and has determined that, based on its assessment of the market and the Company's business prospects, it is currently maintaining a dividend at present levels.

During 2003, we had a dividend shortfall of $23 million. As we look towards 2004, we would expect that shortfall to be between 20 and $30 million. And then the payer (ph) ratio should normalize over time as the market continues to strengthen. In making the determination (ph) as it relates to the dividend policy, the board considered the following factors.

First, it is believed that the market conditions are improving, as evidenced by the Company's recent leasing activity.

Second, 10-related capital investments used to increase occupancy is expected to result in earnings growth due to higher occupancy and rental revenues.

Third, the 2005-2006 scheduled lease expirations are on (technical difficulty) market rents, providing the opportunity to increase earnings, as I showed you on that prior slide.

Fourth, dividend shortfalls are expected to be funded by the sale of non-core, non-income-producing assets that I reviewed with you.

And lastly, if it was necessary to fund the dividend shortfall with that, there would be a minimum impact on the Company's leverage ratios.

So, if you just turn now to our conclusions and outlook, just in summary, 2003 was a transforming year for our Company. We restructured and energized our management team, reduced overhead and promoted talent from within. We made sweeping corporate governance changes. We sold (indiscernible) industrial assets. We refined our focus of our portfolio to higher-growth, class A office assets, executing a strategy of being a premier owner of classic office properties in the New York tri-state area.

As we gave you the color, we believe our markets are recovering, although it's going to require greater absorption for us to get pricing power and see the cost of tenanting coming down.

Our leasing activity has been robust, and our occupancy is expected to normalize during 2004. We have a clear and visible pipeline that we're executing on.

As we go forward in 2004, we are going to continue to refine our portfolio through making acquisitions and dispositions that strengthen our competitive advantage and the power of our franchise. We believe we are well positioned to execute on our business plan.

And before I open up for Q&A, I would like to just take a moment to publicly recognize the tremendous efforts that our team have made over the last six months as we complete our restructuring and transition the team into their new roles.

During this period, we achieved extraordinary leasing results, completed a total of over $800 million of acquisitions and dispositions, and executed extensive capital market activity. Our senior management team, our new co-directors and our entire organization have been going at over 200 percent without losing any focus. I am proud of them all, and I appreciate the incredible commitment that they have all made to our Company. And I thank them.

With that, operator, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Brian Legg (ph), Merrill Lynch.

I missed your -- on the other income, the amount that you expect to be, to come from land sale gains in 2004. And can you also talk about 2005?

Well, for 2004 I broken up to two pieces -- one, First Data specifically -- which was about 2 million. The second being other income of about 4 million, which is made up of interest income and a bunch of other things.

And that 4 million is going to be in every quarter, and there should be 6 million in the first quarter, total?

The 4 million is for the year.

4 million is for the year?

Right. The 2 million is First Data for the first quarter. And for the year; there is a tail left on First Data that we should realize entirely in the first quarter.

Okay. And the 30 million of non-income-producing sales -- will there be gains reported on that? And can you talk about the potential land sale gains from some of your New Jersey properties that might get pushed back in 2005?

Right now, we are not forecasting as part of our earnings any gains in those sales (indiscernible) RSVP. The money that comes back is going to be, first, a return of capital. And on the land until we know which land parcels are sale and are recognized during that period, and what our basis is, we would not want to forecast that land.

We have a lot of different things going on at this time.

As I mentioned during my comments, that the land in New Jersey is going through an approval process. And as we have told you in the past, the ultimate proceeds of that is going to determine as to what the yield that we derive in terms of residential units on that site. And so that is something that I think, that when you really get through it all is sometime in 2005.

Louis Taylor, Deutsche Bank.

Mike, can you just help reconcile -- in your EPS calculation you had gain from the discontinued ops of 115 million. Then in your FFO reconciliation you had an back of 126 million. What is the difference there?

I think the difference is the gain in the FFO, the 126, is the actual gain on the industrial transaction. And then the difference is that gets put into discontinued operations, and then there's discontinued operations from other than the gain.

And what were those items during the quarter?

I think it includes the sale of the other three assets, and then just activity, the operating activities of those other assets.

And so, that would be a net loss of 10-$11 million?

Yes.

And then secondly, in terms of just your CapEx, and trying to tie the CapEx from your FAD calculation into the supplemental pages 30, 31 and 32, the numbers really didn't seem to tie at all. And I was just wondering if there were any particular reconciling items there?

When you say don't tie at all, don't tie where?

What are you comparing, Louis?

In your FAD calculation in the press release, you had got committed non incremental capitalized tenant improvement and leasing costs of 4.99 million. And just trying to tie that back either on scheduled 30-31 or page 30-31 and 32. Really can't seem to find that number, and I was wondering just what else may be in there.

One of the things, Lou, is on the financial statement, it nets out the impact of the minority interest. And in the schedules they are kind of done on a gross basis, (indiscernible) per-square-foot purposes.

But just the amounts on the schedules seem to be lower than the amounts here in this CAD calculation.

Does that answer your question?

No.

Then why don't we get back to your on that?

That's fine, Scott. And then last question is on the Nassau (ph) County, taking that least, in terms of the road (ph) reconfiguration, who pays for that and what is the estimated cost?

There's not our road reconfiguration. There is going to be an additional parking facility constructed on land that the County owns contiguous to 60 Charles Lindbergh. They are going to be paying for that cost, but we will be doing extensive renovations to the building.

And what do you estimate those reservations to be, in terms of dollarwise?

Somewhere in the 12 to $15 million range.

David Shulman with Lehman Brothers.

On the Nassau County question, so you're talking like 60-70 dollars a foot to the renovation, right?

David, one of the things that I don't really want to do is go through the economics of one particular lease. As a practice, we typically try not to do that.

Right. But that's what -- (indiscernible) is if you take a look at your lease roles, then you take a look at your dividend shortfall, this sort of explains where the dividend shortfall is going to come from?

I think one thing you'll see when -- look at our dividend shortfall across the board -- and all these are not the same. Obviously, if we did not think we were going to be getting a good economic return on any of our leases, we wouldn't pursue that lease. So this is a good example, just like another example that I like to point to in terms of investing capital dollars is the Debevoise that we signed at 919 3rd Avenue, where that's about a 170,000-square foot lease, where we are getting a 30-percent increase in annual rent, from what the prior tenant --

Well, we commented favorably on that lease, if you recall.

No, I'm just making, I'm just trying to parlay your --

But the national lease will show up somewhere as a TI; right? That's how it's going to get booked?

Yes, it's going to be booked as -- I think what we're going to do with all these types of TI's, it will be booked that way, but we'll make sure we segregated everything so everyone can see which dollars are going where.

Fine, because that would really shoot up the number. That's all; that's all I'm saying.

Now, in the case of the Debevoise's lease, how much of that has actually been spent? Because there's $8 million in TI and leasing commissions. How much of that has been spent so far?

That doesn't get spent till 2005.

So none of that has been spent, so that is sort of an outflow in 2005, basically?

You're absolutely correct. That 20 to 30 number may go up a little bit, depending on where Nassau County comes in, on the thing. But again, I think what we will do is make sure that we provide the detail on that project because, as I said, that is really a major repositioning --

You said 12 to $15 million. That's what you're saying?

For a 200,000 foot building, you know, you can imagine what we're doing to the building.

I can imagine. I wouldn't want to be the building. Let me ask you -- okay, so that sort of explains the dividend shortfall, then, because the other thing is -- I am also going to assume is, is that given that you don't have a whole lot of rolling this year and you got a lot more rolling in '05, you're going to try to do a lot of '05 leasing in '04. Is that correct?

If that's not -- if we do do that, then that would change our assessment of dividend shortfall. Really what's driving the dividend shortfall in '04 is the increasing of our occupancy -- you know, from 91 percent was going to be somewhere probably in the 94 to 94.5 percent at year-end.

To pay the TIs on that increase --?

Right. And it may even be a little bit more at the year and, but on a weighted average basis, it wouldn't be, because it would sort of work its way up.

Next question I have is the Kremer 11 (ph) is moving into the Price Waterhouse building, and they are in your building now. When does that happen, and what is the status of their lease?

Well, remember, that's the space that Debevoise's taking.

Okay. That's Debevoise's taking their space?

If you read all that lease, they wanted to expand into 919. You know, if you ask Todd Waterman, he could release 919 twice right now from the tenets that are in 919.

Okay. So basically (indiscernible) the Kremer 11 has already been (indiscernible)?

That's correct.

So there's no problem there?

That's correct.

How much FAS 141 income are you going to have in '04? From the buying of the building on Sixth Avenue? Any?

Yes, there definitely will be. I think it's between about $7 million, between 7 and $8 million, David.

7 to $8 million? That also goes into your dividend coverage, right -- because that's non-cash, right?

That's correct

So that's part of the dividend shortfall will be 7 to 8 -- part of that 20 to -- that 20 to 30 million shortfall, a quarter of that is this 141?

No.

No?

No, no, no. We will pull that out.

We pull that out before we get there.

Pardon?

We have already pulled that out when we calculate the 20 to $30 million. Right?

But the 7 to 8 million is going to go into FFO, though -- right?

Yes.

But that's included in the 20 or 30 million? It's already included in the 20 to 30 -- right?

When we say 20 to 30, we're talking cash shortfall.

Right. Okay, so that's already included; it's already there? That's all --

Yes, that's right.

And straight-line rent? What is that going to sort of run through the year, given that?

I don't have that number.

Roughly the same as --

I don't think it will be that much different.

Plus or minus? You know, I'm not going to hold you to -- plus or minus what you had this year?

Yes.

Okay, we did the debt. Giralda Farms (ph), then, I guess, is pushed back to 2005?

We already said that that was the late '04, '05 deal. I think there's just getting through the regulatory process is going to --

It's hard to call that with that level of precision.

So if it's late '04, your number is going to go up because that land sale is going to hit in '04, and if it sloshes in otherwise, it will be '05; right?

That's correct.

Because the land sale gain on that, we assume, will be substantial compared to the cost basis of the asset?

That's correct

So therefore, the number doesn't include -- so therefore, your guidance does not include that, and that would be a one-time up. And then, once the land is sold, it's gone?

That is correct. And as I said, we didn't include any land sales, really, other than the First Data --

Yes, because that was sort of in (indiscernible) and that is sort of the normal booking of the accounting; but you had no choice, you had a book?

That's correct

You had to book that.

(indiscernible) completion; right.

It was all done on a percentage completion. Now, in your filing on your 2005 estimates, when you took a look at rents in 2005, that's sort of based -- that's based on current rents today, your estimates of currents rents today, not any built-in gains that you foresee for that?

That's correct. That's correct.

That's why we are saying, when we look at either our mark-to-market opportunity for '05, '06, we think that (indiscernible) just so you know, for example, already -- Kremer Levine (ph) and Debevoise is in that space. So that's 170,000 feet that we already --

You already know is mark-to-market -- you already know that's built-in bond baking the cake, the lease is signed. So it's not an estimate?

Right.

It's an actual?

That's exactly -- it's an in-the-cake actual.

That's an actual, as soon as you deliver the space and assuming you deliver the TI's on-time?

Exactly, exactly.

Now, is there going to be downtime in the building during that transition?

There will be some downtime, but very little. There will be some downtime --

A few months or something like that?

Right.

Jonathan Litt representing Smith Barney.

Good afternoon. It's Gary Boston here with John. A few questions. On the 650,000 feet square feet that you have leased since year-end, Scott, I think you said -- that 100,000 out of the '04 role. I'm assuming that the balance is '05, '06. On the lease rollovers that you showed in the slide presentation, has that been adjusted for the -- I guess it's the additional 550,000?

It has not been adjusted for -- remember, it's not all -- some of it was vacant space. So if you go there's an (indiscernible) in the slide show that shows there is some vacant space, which about 50 percent of it was, I believe, was about 400,000 square feet, I believe, was vacant space that was filled.

And then, for the space that is taking existing space, either renewals or early renewals, that is not demonstrated in the bar graph. And it's '05, '06 and '07.

And those come out when they become effective?

Next quarter that will reflect that.

Then, of the 650, I guess, the 250 basis points in occupancy that you are talking about -- that's a real 2004 impact?

What that is saying, that is, if you took snapshot today and took the square footage of leases that we are filling just today against our portfolio, that's 250 basis points as of now.

Obviously, we have rollover on a regular, regular basis. So, that's why we did not provide an actual occupancy number today. At quarter end you obviously have an increase in occupancy.

On, I think it was slide 14, you sort of look at the leasing activity and showed new leases, renewals, expansions. Of the renewals and retained leases, can you give us any sort of breakdown between contractions versus expansions? It wasn't a sliver of that pie that sort of was retained but contracted?

I think we actually had very little contraction that I can think of right now. I think we may have had 10, 15,000 feet of contractions this quarter.

What we did have in these numbers was one of the leases that Sal spoke about, the 75,000 foot Kraft deal, was actually a tenant that we did an early termination with, and immediately put Kraft into their spot at the building. So that was a 2007, I believe, early 2007 expiration that we then replaced with a longer-term lease and better ongoing rents.

And my last question -- on the '04 mark-to-market, you showed a -7.5 cash and +10 and change GAAP. That seems like a pretty wide spread. What sort of lease terms are you assuming in that number, or built-in rent growth of the life of the leases?

One of the things that happens with that, again, is the composition. And if you look at the Long Island lease or leases that have big rent bumps in them -- if you are growing your rents year after year, 3 to 4 percent, by the time you get to your cash rent at expiration as compared to your average rent, there's a big difference. And so I think a lot of it is the composition of what leases are expiring during that period.

So it sounds like there's quite a bit of Long Island leasing?

That's just an example. Even the same thing would happen in Westchester, New Jersey, where we have the bumps in the leases. What that basically is saying is that we're forecasting signing longer-term leases with good bumps in them versus -- so the average rent we are getting on the new lease is higher than the average rent we were getting on the old lease.

I'm so is this 11 2 (ph) in terms of average lease term, I think that that was year to date. What sort of number should we be looking at when -- I mean, should we -- 9 to 11, 10 to 11??

With that, for the --

In terms of average term that you're expecting.

Yes, I would think we'll probably settle in at the 9 is the number. If we do anything more than 8, on average, for our portfolio, I would be thrilled -- you know, again, numbers are skewed, the County deal was a 17-year deal. That skews the number up in this period. But the New York City deals tend to be longer. But if we can get a 9-year average, that would be great.

Scott, you walked through how you have been increasing the length of the lease on leases you have signed in the past two, three years. At what point -- it's kind of like you're locking in rents at the bottom. Why wouldn't you be going shorter now, and then wait for the markets to firm up?

Yes, again, I think the way we look at it is twofold. One, we get in almost all of our leases, we get contractual rent increases. So in, for example, on that County lease, we get 2 percent a year annual rent bumps.

Still, the rents don't go up. I mean, market rents go up in steps and down in steps. And you know, once you get to 95 percent occupancy in a market, that rent is not going to go up 2 percent in a year.

But if you look at our portfolio, still, as you can see, look at our portfolio -- we're still rolling about 10 percent of our portfolio in average over the next four years. So we believe that does give us the opportunity to capitalize on that.

And then lastly, John, I just think it's just a function of the market. No matter what you do, it's going to require the heavy level of pending costs to make the deal.

And if we are going to have to spend that money anyway, the economics just do not make sense to do short-term leases. And we've run through our leases through MTV (ph) analysis, everything you can possibly run them through. And the economics make much more sense in terms of the values of the building if you go longer-term.

I'm sorry the call was so long. Operator, any other questions?

Yes, we have a question from the line of John Lutzius, Green Street Advisors.

One of the concerns that I had about the restructuring transaction was the potential for the loss of some leasing momentum, especially on Long Island, for example, as Mitchell left the team?

I'm very impressed with the performance on Long Island. Can you talk about who was responsible for the recent leasing there? Is this the new team, or was this something that was done, parlayed, with the help of the old team on the way out the door?

This was all the new team. And on Long Island we have our (indiscernible). If you recall what we did across all our markets, as we went through this, is we took the top two people sort of on operations and on revenue side and made them co-directors of each of our divisions. And on Long Island, we have a gentleman named Ken Bauer (ph), who is a real seasoned leasing person, came from Cushman in Wakefield and was recruited by us. I think about maybe five years ago. And Ken lead the team on this charge, and he has another senior person, Carl Winsor (ph), we brought in recently. And so, between then, they really have been driving that leasing.

Now, when it came to things like the County and some of the other transactions where I stepped in and got involved, where Mitchell might have stepped in, in the past, in terms of our Nassau County relationships, our market presence and where you needed sort of the principal type role, to play a role.

But these guys are seasoned, they are focused. And I think it's also a testament not only in Long Island, but all our markets to the structure of having a flatter organization, being able to take the team that are in the field, sit around a table and go lease by lease -- say, okay, let's go get them, here's the target, let's make it happen. And I think that's why you're seeing so much leasing activity.

And I am impressed by your focus, despite the restructuring.

I think that's been a key objective, and as I said, I'm proud of the whole team for maintaining it.

I appreciate your comments on the dividend. Can you make a guess as to when you think you will cover the dividend on a recurring CAD basis? How long will we have to wait?

I really don't know, and again, I think it's really a function of what happens in terms of the market conditions, and specifically, the ability to rein in some of the tenanting costs. That being said, I think, again, one of these that we spent a lot of time discussing with our board when we met and focused on is where the dollars are going and that -- not looking at all capital dollars as equal. And if we are investing into properties or leasing transactions that are creating incremental revenue for our Company, that that is something that, whether or not it, quote-unquote, is covering our dividend from operating cash flow, is worth continuing to make that investment.

I see that point, but at some point you lease up the portfolio, and we go (indiscernible)

I think the real issue, John, is that when you look at '05, '06, really, it's going to be a function as to, when you get to that period, how much -- where is pricing power and where is tending cost? Because when you have 12 percent of our portfolio rolling in 2005, and 11 percent in 2006, that's a lot of space to be leased. And so, you're going to monitor where we are and all that as we go through it. And where we're investing that money.

But I agree with you -- obviously, if the market conditions don't follow the process that we think they are going to, the road that they are going to follow -- and I just said, I think we have decent visibility right now, based on our leasing activity -- then we are going to have to reassess the situation.

Sal did a good job of ranking the suburban markets on a top-to-bottom basis. And then Todd talked about the Manhattan market. Can you give your assessment of Manhattan? I guess I mean Midtown Manhattan versus the suburbs.

It almost seems like kind of a win-win story here; we talked about decentralization out of Manhattan helping Westchester. But we're also seeing blocks of space getting absorbed in midtown.

I think that -- and I'll let Sal (indiscernible) any commentary on that -- I think that, if you -- just to contrast them, Westchester and Long Island right now, I think, are ahead from the recovery perspective from midtown.

I think, if you think about where we are seeing the activity that we are seeing in our New York operations right now that Todd referred to, that's probably about six months behind where we begin to see some of the activity in Westchester and Long Island. But it's clearly happening in the sublet spaces coming off the marketplace.

So my guess is that, over that time, that that should start to match what we are seeing in our other markets. I don't know, Sal, if you want to add anything.

I think there is a similarity, too, but there has been some big transactions in midtown, like Scott said, that made a significant sublease block there. And I think that's the first step to really getting equilibrium in the market. And we saw that happen in the suburban markets, and we are pleased to see it happening in the city markets.

I would say, another thing is that I think there's a great synergy, and we have really, over the years that we have been, now, in Manhattan and in the suburban markets, we have great connectivity between a lot of leads that are in the New York City marketplace that are looking in the suburban market and back and forth -- and that's really matured. And I think it has been a tremendous benefit for us.

Two good examples -- one was that Todd mentioned the Bollinger (ph) lease that was a New Jersey tenant that was passed on (indiscernible) and that relationship. And frankly, I think that (indiscernible) that the only reason they are going to 100 Wall at that pricing is because of the relation that they have with Reckson. And the other is -- I think even the Kraft deal, speaking a little bit Macro for a second, that they are vacating their building because they think there is going to be demand from the city for people to occupy their building. And they needed to empty it to go out and offer it for sale into other locations. And so we picked up 75,000 square feet because of the perspective that that's going to happen.

On page 22 you talked about a three-building disposition on Long Island. The price per square foot is about $130, I think?

You know what you are missing there? Is -- it is actually much higher than that. Maybe, Richard, you could tell him what that is. The 174,000 square foot building, John, we only own 51 percent of it.

Do you know what the math turns out to be?

Richard is running it right now. (indiscernible) we'll tell you in the second. It's definitely higher than that. 162.

And then just last question. On page 4, you have a presentation of -- I'm sorry, page 31, you have a presentation of non-lease specific CapEx, what we would call structure reserve. Which kind of suggests that the reserve should be in the 45-50 cent a square-foot range?

I'm sorry. You are in supplemental now, John?

Yes.

I'm sorry.

You mean -- for the amount per-foot for 2003, you're saying?

Yes. And for '02 -- it was 45 and then 52.

I think that's about right.

So is that starting to suggest a reasonable reserve of that amount?

I think that's about right, yes.

That's helpful disclosure.

Louis Taylor with Deutsche Bank.

Just one follow-up. On the non-core asset sales, if could you just maybe briefly go over -- other than the New Jersey residential parcels, what is the status of any of those assets in terms of under contract, letter of intent, et cetera?

Sure. Let me just get (indiscernible) slide. That's 23.

We are actually in discussions right now on the -- Jersey you know about. We're in discussions on the summit/lake drive Valhalla, with two different parties, or is it -- two or three different parties right now, with serious, significant interest, again, for a residential type development on that site.

On the Long Island industrial, our plan is to commence that process in '04 for a lot of that, although some of it, depending on maybe rezoning we might go through, we may push into 2005, but the objective would try to be moving that more quickly.

And then, on the Eagle Rockland, we actually had a contract signed for that land, again, for residential.

Now, the $30 million that you mentioned -- is that just to coincide with the book value, or is that what you expect market value to be?

The 30 million that we're talking about is not the sale of these assets. But we're saying is that the liquidity that will be created between -- we're targeting for an '04 liquidity -- because remember, you are signing these contracts on this land, just like in (indiscernible) you need to go through a zoning process. So when we book and say, okay, between what's happening at RSVP and the monetization of those assets, as well as the sale of land for 2004, how much actual cash do we think we would be generating from the sale of non-income-producing, non-core assets? And what we are saying there is we believe, by the end of 2004, we will bring in $30 million of cash. It speaks nothing about the ultimate valuation of the assets.

And, Lou, it's Mike. I just wanted to -- on your question regarding the difference in the extraordinary item, besides what I had told you, the financial statement also poles out the amount allocable to the minority interest as opposed to the FFO, which is done on a gross basis because we use units and shares.

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