SL Green Realty Corp (SLG) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Reckson Associates first quarter earnings conference. [Operator Instructions]. I would now like to turn the conference over to the Reckson Associates realty corporation. 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 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 rate levels and cost of capital; downturns in rental rate levels in our markets, and our ability to lease or release space in a timely manner; changes in operating cost, including utility, real estate taxes, security, and insurance costs, and such other risks including those specifically identified in the legend in the company's slide show presentation and supplemental package.

For further information on factors could impact Reckson, references 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 website at www.reckson.com, in the company's quarterly earnings press release slide show presentation and supplemental package.

I would now like to turn the call over to our Chief Executive Officer, Scott Rechler.

Thank you, Amy, and thank you all for joining us for our first quarter 2004 quarterly earnings conference call. Presenting with me today is Mike Maturo, our Chief Financial Officer, Sal Campofranco, our Chief Operating Officer, and Todd Waterman, our Chief Development Officer and Managing Director of our New York City division. We are also joined by the balance of our executive management team that will be available during the Q&A session.

As usual, our discussion will be accompanied by a PowerPoint presentation that you can access via our website, which address is www.reckson.com. If you're having difficulty obtaining the presentation, please contact [Susan McGuire], who heads our Investor Relations Department at 631-622-6642. We are extremely pleased with our first quarter results, and believe it demonstrates that we are successfully executing on the business plan that we outlined in conjunction with our recent restructuring, and our focus on capitalizing on improving market conditions.

Let me quickly review a summary of this quarter's results, since I believe they speak for themselves. If you turn to Page 2 of the presentation, you will see a slide entitled, "Summary of Highlights." During the quarter, we reported FFO per share of 58 cents, which compares to 59 cents for the first quarter of 2003 and is in line with consensus.

We had record levels of leasing that led to sequential occupancy increases of 240 basis points on the total portfolio, and 180 basis points on the office portfolio. When you look at a same property statistic, our office portfolio climbed to about 100 basis points, 93.5%, and our total same property portfolio climbed to 92.7%, or 160 basis points. Our cash same property NOI, before termination fees and net of minority interest and joint ventures, was up 1.9% on the office portfolio and 2.3% for the overall portfolio on a cash basis.

On a straight line basis, our office portfolio was up .6% and 1.1% for the overall portfolio. We also have provided for you total consolidated same property NOI stats, but the one that really impacts our bottom line is net minority interest in joint venture. Our rent performance on renewal and replacements [inaudible] during the first quarter of 2004 was down 1.8% on a cash basis, and up 6% when you include straight line rent in the office portfolio.

If you turn to the next slide, Slide 3, I'll continue with some of the highlights. As I noted, leasing activity was robust. We executed 61 leases, totaling 885,000 square feet and generated a 75% renewal rate. From an investment disposition perspective, as expected, we closed on 1185 Avenue of the Americas for approximately $321 million. We sold three operating properties for approximately $36.6 million at a blended cap rate forecasted at 7%. This was in addition to about the $24 million asset that we sold at the end of last year.

And lastly, we purchased the remaining 50% interest in a junior Mezzanine loan that we had made prior -- in the prior year, on a Class A Long Island office building. From a capital markets perspective, we took a number of steps to further strengthen our balance sheet. Mike will go through this in more detail, but just quickly, we sold 5.5 million shares of common stock at an effective price of $27.35 per share.

We redeemed $50 million of outstanding 8.85% series B preferred stock, which we redeemed using common stock valued at $26.05 per share. We issued $150 million of 5.15% seven-year senior unsecured notes, and we repaid $100 million of 7.4% senior unsecured notes that matured on March 15th of this year.

We further enhanced our corporate governances quarter with the appointment of Jack Ruffle to our Board of Directors and also to serve as the Chairman of our audit committee. If you read Jack's bio, you'll see he's very well equipped with a background to serve in this role.

In addition, we adopted policies -- corporate governance policies, which requires independent directors to own a minimum equity stake in our company, and it also requires at least one independent director to rotate off of the Board every three years.

If you turn to Slide 4, I would like to take a moment and give you a snapshot of our portfolio composition. Starting with the composition by net operating income, you'll see that New York City this quarter made up 42% of our net operating income; Westchester and Connecticut made up 25%; Long Island made up 22%; and New Jersey made up 11%.

In terms of the overall stats, the portfolio size is 15.5 million square feet, made of 86 properties, 940 leases. We are a multi tenant office portfolio, so our average office size lease is 16,000 square feet. Now, 97% of our NOI is derived from our office portfolio and only 3% relates to our remaining industrial portfolio.

On Slide 5, we have given you a breakdown of our 10 diversification. You can see on the left-hand side of the slide a pie chart that breaks down the major industries, and you see how diverse our tenant makeup is in different industry bases. Legal services makes up the largest at 14%, which actually has grown about 3 percentage points as we've continued to expand in New York City; followed by financial services, which we've grown about 1%; consumer products, which is about 12%, which is down about 2% from a year ago. And then telecom, just to point out, actually used to be 7%, now it's down to 5%. So that's been one of the areas as we've shifted to more New York City, you see a shifting in some of our industry bases.

On the right-hand side of the slide, you'll see our list of top 25 tenants. You'll see it's a stellar list of tenants. Just a couple of things to point out in terms of some new additions. King and Spalding at 1185 and American Express 1185 have moved into those top slots, 2 and 3, since the completion of that acquisition. Banc of America and Fleet Bank has moved into the top five spot, based on its presence in 1185 as well as the consolidation of Banc of America and Fleet as part of their merger. And also just to point out that WorldCom MCI, which is still on this list, is now out of bankruptcy and all of our pending leases have been reaffirmed.

If you turn to Slide 6, I would like to take a moment and provide you with an overview of the market. I'm going to keep my comments fairly general to the markets, and then Sal and Todd will provide more market by market detail in the following slides. It's our view that the markets continue to improve. The tenant psychology has shifted; they feel a sense of urgency to do something, and they are much more active in the market. As you can see, we have leasing velocities increasing in all of our markets. More deals are being bounced around the market.

Many of these deals, frankly, are deals with tenants who have lease expirations in '05 and '06 and are trying to capitalize on what they believe to be the bottom of the market, and good market conditions, to sign new leases today. It's our view that the playing field is starting to balance; it's not yet a landlord's market, but is not as much of a tenants market as it has been in the past. We're able to push back on tenants and get them to bend a little in terms of structuring transactions.

Let me review some of the positive market indicators. One thing across all of our markets is we've seen positive job growth, and more is expected throughout the year. Tenants are starting to take expansion space as they plan for their future. Shadow space overhang is no longer a factor.

As you recall, specifically in New York City, there was a big issue with space that was not formally on the market but that when an opportunity or a tenant came to the marketplace, it was offered to the market. And that shadow space was somewhat destabilizing; that is no longer a factor.

Our markets and sublet space is becoming a diminishing factor in all of our markets. Most importantly, I think, is that high-quality space alternatives are becoming much more limited throughout the New York Tri-State area. So tenants do not have as many choices as they've had in the past. With all that being said, our pricing power does remain elusive in most of our sub-markets.

Leasing concessions remain high and until there is really more of scarcity of opportunities, and a continued change of that tenant psychology, we're not really going to see a shift in our ability to extract pricing power. Right now, our sense is that something that will develop in most of our markets in 2005. It may come earlier in some of our other markets, which Sal will touch upon in his comments.

When you look at Reckson's portfolio, we are outperforming the market recovery in all of our markets. As I noted, we achieved record leasing in the first quarter. As we look out, we have -- activity continues to be steady, but our perspective right now is that we're going to use the accelerated leasing that we had in the first quarter to be more tactical for the balance of the year. And that's going to position us where we can be more selective and start pushing back on pricing in some of our markets, and [inaudible] beating the markets in terms of just trying to increase our absorption.

If you turn to Slide 7, I've just walked you through some of -- our view on the demand side of your markets. One of the key attractions to the New York Tri-State markets is its constraint on new supply as you can see demonstrated by the graph we've provided you here on Page 7. And if you look at this graph, you'll see this provides you with the construction starts as a percentage of total supply for the top 23 MSA's.

And you look on the far right-hand side, you see the least amount of new supplies percentage of total inventory is New York City at .2%, in Northern New Jersey at .2%, Nassau and Suffolk at 0%, and actually if it made it into the top 23 [inaudible], Westchester would also be 0%. So you can see, we have improving demand fundamentals, constraint on supply, which in our opinion, positions us well for a good '05, '06 recovery in our marketplaces.

With that, I'm going to hand it off to Sal, who will walk you through the status of suburban market, then open it to Todd to talk about our markets in Manhattan. Sal?

Thanks, Scott. Going through the Long Island marketplace first, as you can see from the graph on Slide 8, Long Island continues to outperform most of the surrounding metropolitan markets. This marketplace has the most consistent recovery trend line of any of our suburban markets. Vacancy on the overall, end-direct basis is down significantly from the first quarter of '03 and as well from the fourth quarter of '03.

The current Class A overall vacancy is below what it was in December of 2001, and it is only 2.6% away from year-end 2000, which would be the peak of the market in terms of occupancy. Our occupancy has increased by 3.7% versus the fourth quarter and now stands at 95.5% for the Long Island portfolio. We continue to widen the favorable spread between our portfolio occupancy and the market occupancy.

For the most part, sublease inventory consists of one large block of space which currently has activity, which should remove this block from inventory in the near term. And we do not anticipate any additional significant sublease inventory coming to the market. In both Nassau and Suffolk County, there's only two blocks of contiguous Class A quality space of over 100,000 square feet which remain available to perspective tenants. So we have seen a dramatic drop in those large blocks of space that were previously available.

Although the first quarter's market-wide leasing activity was slightly below first quarter '03, we expect the second quarter of '04 to have a very favorable trend line both in activity and net absorption. In certain markets, we are beginning to see some pricing power returning, specifically, in the small to medium size transaction.

Employment trends remain favorable, as Long Island unemployment rate remains stable at 4.1%, which is under the national average, and Long Island is one of the only markets in the country which has maintained a very positive employment-growth trend. In our portfolio, we are experiencing increased renewal activity as well as expansion requirements by existing tenants, and we continue to be encouraged by the strong recovery which is under way in our Long Island market.

Taking you to Westchester, as the graph indicates, our occupancy dropped slightly in the first quarter, with a couple of smaller-size units being returned to inventory. The spread between our portfolio occupancy and the overall market remained healthy, at 6.3%.

You should note that the overall market vacancy for Class A product is down 4.4% from the first quarter of ‘03. And most important, in the central sub-market -- where we have the largest concentration of our portfolio -- the vacancy rate for Class A property has declined by approximately 12% from a year ago to 13.5%. The statistics in Westchester only tell a part of the story.

We need to spend a moment discussing what has been the driver of the overall activity for the last two years, versus what type of transaction we expect to try the market activity going forward. Since the beginning of the down cycle and end of '01 or beginning of 2002, Westchester has attracted significant, large relocations of major companies into the county, and retained some of its largest employers. This activity totaled 10 transactions of more than 2 million square feet, with the average deal size being over 200,000 square feet. So there were 10 deals that were in excess of 100,000 square feet, with the average being very large by any measure.

These large transactions impacted the Westchester market dramatically. First, they insulated the market during the recent down cycle, as the typical transaction volume of 5-15,000 square feet slowed down as expected. In addition, these high-profile deals by major firms created momentum and established Westchester as a very viable alternative for companies looking for quality blocks of space in excess of 100,000.

And finally, these large deals reduced dramatically the large block inventory which for years was the drag on the Westchester marketplace and its ability to have sustained pricing power. Keep in mind, Reckson reaped some benefits from this large transaction flow with the signing of Fuji, Pepsi, and most recently Kraft Foods, as well as in backfilling previously vacated MCI space and [inaudible].

However, the majority of our inventory was in the 5-30,000 square foot range, where the large deal activity had no impact. Going forward, we see the market transforming itself, with leasing activity returning to the more historical average transaction size of 5-15,000 feet.

We anticipate future activity will benefit by follow-up demand generated by medium size companies which serve the newly located major firms. We would expect to see over the balance of '04 greater impact to our portfolio occupancy as a result of this shift in transaction size. And in addition, we anticipate a favorable trend on pricing power as a result of the dramatic reduction to the inventory of space in excess of 100,000 square feet.

Moving along into Stanford, we believe this market has bottomed as indicated by the positive net absorption for the first quarter, which is a big improvement over the previous negative absorption numbers posted throughout 2003. In addition, the overall Class A vacancy rate declined by 1% versus the fourth quarter of '03.

Sublease inventory has been dramatically reduced, with the exception of two large blocks of space, which for the most part, make up the remaining inventory there. Overall activity levels are down from the fourth quarter levels, and versus historical run rates, however, we're encouraged by the potential deals in the pipeline and would expect the activity to return to more normalized levels during the balance of '04.

Renewal rates are increasing, and expansion opportunities by tenants are becoming more prevalent. This market has been impacted in a huge way by the slow turnaround in the financial services sector, which has become a much bigger part of the employment base in the Stanford CBD.

The recovery to this segment of the employment base will bode well for Stanford in the near term. In addition, we continue to see favorable impact resulting from the expansion of the hedge fund and money management industry, particularly those firms looking to relocate out of Greenwich.

Let me just talk a little bit about the northern New Jersey market. Although northern New Jersey remains one of our slower markets and it is clearly lagging behind related to the recovery which is evident in our suburban markets, we are starting to see some signs of recovery beginning.

For example, negative absorption has slowed dramatically. Vacancy has remained stable, and transaction activity increased slightly from year earlier levels. Contrasting with our other markets, Northern New Jersey continues to have downward pressure on rents, mainly the result of the sublease space continuing to be a drag on the market.

In addition, the conversion of subleased space to direct vacancy has put added downward pressure on rental rates. Also, the fact that many opportunities remain available for tenants looking for large blocks of quality space is keeping pressure on the rental rates that we're seeing in our markets.

Against this backdrop, RA's portfolio continues to dramatically outperform the general market. Reckson's overall occupancy increased in the first quarter by 2.8% to 92.4%, resulting in an impressive gap between our occupancy level and that of the overall Northern New Jersey marketplace.

In spite of the overall negative absorption in our sub-markets, tenants continue to seek out high quality properties and as a result, our portfolio in Short Hills continues to achieve above market rent -- above marketshare of activity and realized top of the market rents. Average rental rates in the sub-market for Short Hills continue to achieve highest levels in the state.

Our reposition project at 101 JFK continues to increase in occupancy and to be well received in the market, and the Investor Savings Bank transaction was the fourth largest deal signed in the quarter and our follow-up activity is strong and will allow us to hit target occupancy well ahead of pro forma.

And with that in closing, for Northern New Jersey we would expect to see some continued turbulence in the marketplace, with a more stable market towards the end of '04 and the recovery trends clearly in place by mid to late 2005. With that, I'll hand it over to Todd Waterman.

Okay. Thanks, Sal. In New York City, midtown during the first quarter, leasing activity was brisk. The numbers showed that there was about 5.3 million square feet. A leasing transaction is done; that's about 70% more than last year at the same time. Net absorption's been positive so far, which is a big reversal. It was about 1.4 million feet versus a negative 2 million feet a year ago in the same period. Availability dropped to about 12.5%.

Despite all this, we don't see tremendous pricing power. I think that's consistent across our entire geographic area. However, concessions absolutely are starting to slowly decline in Manhattan, particularly, in midtown. Due to that, I'm confident that you'll see net effective rents in 2004, particularly in our portfolio and other similar portfolios in New York City, particularly in midtown, should be better than 2003. I'm very comfortable with that.

As Scott mentioned earlier, blocks of 100,000 square feet of Class A sublease space and shadow space, which had been a big issue for our market, is really becoming very insignificant. Shadow space is insignificant at this point, and the Class A sublease blocks have really been absorbed as well. Downtown, on the other hand, I think remains very competitive.

The good news is that the major corporations that are downtown, big law firms, aren't leaving. [Cadwaller or Wickersham and Taft, Morgan Finnigan],two big deals that were done primarily on the west side of downtown; that accounted for the big increase in absorption, but I think it's important to dissect the statistics and realize that it was just a few very large deals that accounted for the activity.

We are continuing to see a very, very competitive marketplace on the east side of downtown with small tenants at our building at 100 Wall Street. We have done a number of smaller transactions, but tenants with credit are very scarce, and the economics are very challenging.

Given that our portfolio is so leased, we are reluctant -- continue to be reluctant -- to very capital intensive deals in that building given the lack of credit behind the tenant base at the current time. Tenants in New York City are certainly engaging the market. There is universal agreement that the market turned sometime in the fourth quarter of 2003, so real estate departments of large companies are making decisions and they are planning.

We know this because we are engaged with a number of our existing tenants with 2006 expirations. They want to renew now, if possible, so that's an indication of my former point. Also tenants needing to move are in the market with much greater lead time than they had been any time in the last two years.

Job growth was about 22,000 during the first quarter. It's important to note, though, that the majority of that was in January. I think on a seasonally adjusted basis, according to the OMB, it looks like it's going to be the best year in about three, and the financial services industry is clearly entering a period of hiring as a result of stronger M&A activity and capital market activity.

I think people that are familiar with this marketplace know that, you know, the financial services industry is and always has been the driver for real estate fundamentals in the city. And I think it's very encouraging to all of us, looking out over the next year to two years, that the hiring process has definitely started in earnest.

Just one last market note. The budgetary turn around in New York City I think will significantly help the office market and large corporations planning their future in the city. When you think about the fact that a year ago in the last budget year, we were looking at about a $3.6 billion deficit; just this morning, [Alan Havasee] came out with some numbers and the mayor's budget shows that in the year forthcoming, we're looking at about a surplus of about $1.3 billion. And I think that's just going to add to business confidence and should translate into better fundamentals for us.

Turning just briefly to our portfolio, specifically, in three of the four markets we're in, from an occupancy standpoint we are better than the market averages. The statistics show that. The one where we're just basically at around the market is, again, at 100 Wall Street in the financial lease market, but Midtown East, where we have 919, we're virtually 100% leased. We are 100% leased in the office space; we have one small retail space vacant.

Midtown West, where 810 Seventh Avenue is, we were able to sign -- we had four vacant floors there. We signed our first new lease in over a year with Constellation New Energy during the first quarter. The remainder of that floor, we are building out into speculative prebuilt units.

We anticipate those being leased soon, and we are seeing better activity on the three remaining floors. It does continue to be a competitive marketplace on the Seventh Avenue corridor. That's really because we compete with some of the vacancy at the Equitable Center and BXP's property at Times Square Tower, which is clearly-- those are premier assets with vacant office spaces priced very, very competitively.

So that is a little bit of a factor on demand for 810 Seventh, but things have improved. Occupancy in the portfolio is just under 96%. That's slightly better than we anticipated. And the renewal activity and expansions that we were able to execute in the first quarter were really ahead of our expectation. MGM at 1350 did a renewal; [inaudible] at 100 Wall Street actually renewed and expanded, and we are in the process of renewing and expanding two large tenants at 1350.

To conclude, I would just say that 1185 Avenue of the Americas, our most recent acquisition, our capital improvement plan is under way. That's been met both by the tenant and the market with, I think, a lot of anticipation of what we're going to do with that asset. And what I will say is that the major block we have coming back in January of 2006 of about 200,000 square feet, in the couple of months that we've owned this asset, I've been surprised in the amount of interest that we have from the marketplace in that block of space and in what we're going to do with that asset. So we're encouraged there. And that's it.

Thanks, Todd. Just talking a bit more about our leasing for the quarter, and leasing activity, turn to Slide 10. I would start with historical trends. And you can see that really, I mean, you look at our overall occupancy, it bottomed in third quarter of 2003 where he we had 91% occupancy, and then climbed, obviously, in the -- a little bit last quarter, and this quarter really took its big jump to 93.3% for the office portfolio with 796,000 square feet leased.

As we look out for the balance of the year, for the overall portfolio, which today is at 92.6% as I said earlier, we would expect at the end of the year to have a weighted average, overall occupancy of about 93%, which is about a 40 basis point increase from where we are today. Which I think reflects our approach to be somewhat more strategic as we go forward, and not necessarily meet some of the market terms and conditions and some of those economics, and try to push back a little bit. So it's a little bit, I think, of a conservative approach on that front.

If you turn to Slide 11, you'll see a key contributor to the turn-around in occupancy was the net termination trends. You can see in the-- it peaked, the net terminations peaked in the first quarter, again, of '03, where terminations resulted in us getting back about 239,000 square feet. If you look at this quarter, we only got back 8,300 square feet of space that was terminated by tenants that we weren't able to re-lease. And I think that's a big -- that net termination trend is a big factor in us being able to have continued positive absorption.

Just looking at the composition of leasing activity in the first quarter, you'll see that the new space of about 500,000 square feet, made about 64% of it. Renewals and early renewals made about 225,000 square feet of the space, and then 62,000 square feet of expansion. We also provided a detailed absorption analysis that I'm not going go through now but it's on the appendix on Page 27, so you should feel free to look at that.

When you look at where the markets were, where the leasing took place, Long Island, obviously, was the largest at 46.8%, where we had some of that WorldCom space to lease up, then followed by Westchester, and then New York City.

Just continuing on the next slide, just looking at the trends as it relates to leasing, this is, I think an important slide just to give you a sense of how the underlying economics are, of the leases that we're signing. If you look at the top left-hand side, the average rent performance, including straight line rent on renewal and replacement space, was up 6% in the fourth quarter, which is in line with the single-digit, positive rent growth trend that we have seen over the last number of quarters. Leasing activity, as I mentioned, was record leasing at 796,000 square feet.

As we look out into the second quarter, we expect to be more normalized in the 400,000 plus or minus square foot range. And we expect our renewal rate, which is 75% this past quarter, to moderate into the 50-60% as we progress in the year. As many times when you have renewals, actually, the ones that you think you're going to renew hit earlier in the year and not later in the year, but we'll continue to watch that.

From an effective rent spread, which I think is an important metric to see the difference between the average base rent pulling out the impact of tenanting cost, TI, leasing commissions and free rent, you'll see we took the average base rent, less the TI and leasing commissions; we have a spread this quarter of 10.8%, which is sort of consistent with the target that we expect during this point in the cycle of 10-12%.

Then the last thing is lease term. As we stated a number of times now on our calls, one of our strategies has been to compensate for the additional tenanting costs by pushing for longer lease terms with rent increases. And you see we were successful this period getting a 10.7 average lease term on leases that were signed.

On Slide 14, to talk about the nonincremental tenant improvements and leasing commissions, as I noted earlier, tenant cost continued to be significant in the marketplace. You'll see this quarter, we did $2.67 per square foot, per year of lease, which, again, seems in line with our trends. This-- our [cad] payout ratio for the quarter was 125.8% on a committed basis, which means leases that were actually signed and committed this quarter, all those expenses were taken into place.

If you looked on an as-paid basis, dollars going out for the quarter was about 115%. These are incremental costs, so they exclude the costs associated with the redevelopment of 60 Charles Lindbergh, where we're putting the Nassau County in and repositioning that property for that, because that's considering incremental and we'll get a return on that invested capital.

While tenant costs are high, if you turn to Slide 15, you'll see that we are still able to execute leases with strong underlying economics and we turn a lot to looking at what our net effective rent yield is. This quarter, it was 9.7% on 664,000 square feet of leases that were used in this calculation. The reason there is a difference, in terms of amount of space, is we do not include assets that were contributed at the IPO for this calculation, because the basis in those assets are somewhat distorted and don't show the true economics.

But when you think about the 9.7%, that's a net effective rent, net of TI, leasing commission, and operating expenses per foot, against our total cost basis in the building on a per foot. And that shows you that we're getting good returns on the transactions that we actually consummated this quarter.

If you turn to Slide 16, take a moment and look forward, you'll note that when you look at our expiration schedule, we only have about 4% of leases making up 4% of revenue expiring in 2004, which is about 5.5% on a square footage basis. So I think that's a very manageable level. If you look into '05, '06, these are years that we consider to have big opportunity for mark to market.

Again, sort of consist with what we're saying, we plan on being very strategic as it relates to the '05-06 leases, so that we are best positioned to capitalize on what we believe will be significant mark to market opportunities when we get to those years. What we'd like to try to do is bring down the percentage of expirations to more like the 9% range by the time we get each of these years, and target leases where we think we have the least amount of mark to market opportunity and leave the leases where we have the best mark to market opportunities, so that we have more staying power in terms of negotiating those leases.

And that's something you'll see us focus on. And sort of echoing Todd's comment about having those discussions with tenants, we're being very selective with which tenants we'll do those, sort of, blended extends or early renewals with at this point.

Just looking again at 2004, quickly, you'll see that the space that's expiring during the year by market, the two largest markets where we have space is Westchester, Connecticut and Long Island make up big bulks of it. New York City has 130,000 square feet, which maybe not be as much in square footage size, but obviously in dollars, that's somewhat meaningful because of the rents in that marketplace.

When you look by quarter, you'll see that more than 50% of the space that's expiring is in the fourth quarter of this year. So it's back ended, which also speaks to where you look at our weighted average occupancy of a lot of space coming back to us, at the end that we need to address.

Just a comment, when you-- the rents on the space that's expiring from now until the end of the year, we calculate a negative 3.4% mark to market on that space, so that's what we would anticipate with that. And again, that's expiring rent versus what we believe market rent is adjusted for passthrough operating expenses that we're not going recover reimbursements in operating expenses. We're going to recover it from a new tenant.

When you look out to Slide 18, it's a different story when you look at '05 and '06. And I think it reinforces the mark to market opportunity I was talking about earlier, where you see that our current annualized cash rents versus market rents is a 5.3% mark to market on 3.5 million square feet. We believe this improves as our market conditions improve. Clearly, if you look on the right side of the slide, the CBD has a 17.9% mark to market, while the suburban's a negative 9.5% at this time. So the CBD market, really, is where we're offered a big opportunity.

Shifting weight from the portfolio for a moment and talking about the investment environment, a lot's happened, I think, in the investment environment since our last call. We believe that the investment pricing will be impacted by increasing interest rates. It's just a question as to when and by how much. That being said, markets for stabilized assets remain extremely strong. The investor markets remain flush with capital and in chasing these assets with these type of characteristics.

We do believe, however, that investments markets for transitioning assets are beginning to show signs of rationalizing. Lenders are stress testing underwriting with higher interest rates today because of their perception of where interest rates are going. They are requiring significant tenant cost reserves. They are also requiring more equity by the leveraged buyer, and institutions are being more cautious in pricing these transitioning assets as well.

Our investment pipeline is becoming more visible, but whether or not pricing will be attractive remains unclear. We've been very, very busy looking at a lot of opportunities that are floating around in the marketplace. We're still just trying to determine where the pricing might clear. And the type of assets that we're looking at are the transitioning assets, where we can buy vacancy and underwrite some sense of asset transition or repositioning with our expertise in the market and, I think, get a competitive advantage of doing that.

The structured finance opportunities, similar to the one we completed this quarter, and corporate real estate opportunities like the ones we discussed with you last quarter. The thing about the corporate real estate market opportunities is that these are off-market type assets. They are not typically shopped to the marketplace, which I think is a good competitive advantage. The disadvantage is it takes a lot more time to close these deals and they need to get a lot of internal approvals and mandates to get them done. So it's a little bit more time sensitive to try to get these things done.

We believe that the present interest rate environment calls for patience and discipline, and that we may very well be at an inflection point of valuations where the cap rates that have been -- in our mind -- in many cases, overly aggressive over the past 12-24 months will start to normalize. There, is however, a good opportunity to create value with our existing land inventory. And one of the things we are considering is commencing development, in particular, on our Long Island project in Melville. And that's something we're gong to be going to our Board with this quarter.

Now, let me turn it over to Mike to walk you through the operating end. Mike?

Thank you, Scott. I'll begin on Page 20. If we look at our net operating income of 77 million, 821 for the quarter, that represented a margin of 60.2%. That was somewhat higher than we forecasted, mainly attributable to termination fees that we had during the quarter, which were higher than expected. Backing out the termination fees for a more regular number would have resulted in a margin of about 58.7%.

Looking at the expense side of that equation, we had real estate taxes increase by about 9%, which was just about where we expected. And operating expenses increased by 1.6%, which is lower than we had expected in the budget, further contributing to a little bit better on the margin side.

Looking forward, we would expect that margin to be around an average over the next three quarters of around 58% or so, being a little bit lower in the third quarter as a result of energy costs and then recovering somewhere above that, probably around 59-60%, as some of the cashflow from the leasing that was done early in the year kicks in.

Going down the line here in looking at the G&A line, as you see, we had a significant reduction from last quarter, where we already had started to realize some of the savings. Looking before we did the restructuring, we were running at around $8.5-$9 million per quarter prior to year-end adjustments. So we think it's pretty much looking at the $7 million that we ran for the quarter about where we thought we were going to be on savings. So we think that run rate will be around $7 to $7.25 million on a go-forward basis.

Other income this quarter of 5.7 million, includes $3 million of First Data income. That is a little bit higher than we expected and is just a result of the job coming in a little bit better than we thought it would, and about $1.6 million of interest on notes and $1 million of miscellaneous income.

Going forward, the First Data monies will not be there, so we're looking at a run rate of about $2-2.5 million a quarter, which will essentially consist of about 1.6 million of the same interest on notes, plus about $450,000 of additional interest as a result of the additional Mezzanine investment, and about 500 to $1 million of miscellaneous items that flow through on a quarterly basis.

On tenant receivables, the number was 1.95 million for this quarter, but that number included a write-off of some straight line rent receivable related to some of the terminations. So looking at a more normalized number of 600,000, net of that amount, net of that write off is pretty much where it was last quarter and reflects a situation where we really are not seeing any major credit issues in our portfolio; no issues that we see with any large tenants.

And from that standpoint, we don't really see any problems. Termination fees was $3 million on net over JV interest. They were about $5.3 million on a gross basis. A significant portion of those fees related to the Cigna and Dannon terminations, which Kraft has taken a majority of that space, as Scott had mentioned. On a net basis, the space was very limited in the amount that we weren't able to re-lease. On a go-forward basis, we believe the termination fees will be much more moderate, and we're forecasting about $1 million or so over the next three quarters.

If we turn to Page 20, we had a significant amount of capital market activity this past quarter in an effort to strengthen our balance sheet and provide ourselves with increased liquidity and capacity. In that respect, we sold 5.5 million shares of common stock, and raising about $150 million at an effective price of 27.35 per share.

If you look at the graph to the left, you will see that over the prior 21 months, we had a buy back program where we had repurchased about 7.3 million shares at an average price of 22.30, and then recently with the 5.5 million share issuance plus the buy back in connection with the industrial transaction, we issued 8 million shares at 26.83 at a 20% premium to where we bought back.

So we think that, overall, that's a good execution on both sides of these trades. We also redeemed $50 million of outstanding 8.85% series B preferred stock at 102% of par, converting into common stock at a price of 26.05, again, in an effort to strengthen our balance sheet and reduce our, or positively impact our fixed coverage ratio. We also took advantage of the interest rate market and issued $150 million of 5.15% senior unsecured notes with an effective rate of 519. That was actually earlier than we had expected to do that in connection with $100 million that was due in March.

We used $100 million to repay those March maturities and, essentially, took another $50 million in advance of the 1185 mortgage that's coming due in August that we will refinance. We have $50 million of proceeds remaining from the equity offering, and about 20 or $30 million of additional cash as a result of asset sales. We also executed a treasury lock hedge agreement on $100 million notional amount, locking in 10-year treasury at 3.94%, as compared to today, where I believe it's about 4.6. That looks right now to be a good trade. That's, again, in anticipation of refinancing the mortgage on 1185.

Turning to Page 22, looking at the ratios, our debt to market cap heads have gone down, obviously as a result of raising the equity, which has provided us with additional capacities. If you look at our interest coverage, that has actually gone down temporarily as a result of issuing the $150 million of notes earlier than anticipated, and then holding the $80 million of cash on our balance sheet. As we redeploy those funds into acquisitions or pay down debt, and our cash flow increases as a result of the leasing activity that we reported this quarter, those numbers will improve.

If you look at our fixed-coverage ratio, that stayed neutral, and essentially those interest expense was offset by the fact that we've reduced payments on preferred as a result of the conversion of the series B to common. That also will get better for the same reasons as cash flow increases, as a result of the leasing activity and future acquisition activity.

Turning to Page 23 and looking at the balance sheet as it is right now, $1.5 million of debt outstanding at 6.7% interest rate for 5.5 year maturity. We have paid down our line down to $90 million, and again, we have $80 million of cash on hand. We are contractually obligated to keep that $90 million on outstanding, and that essentially relates to certain contractual obligations in connection with acquisitions of portfolios that we have outstanding which provide for the ability of those partners to guarantee outstanding debt. But even with the 90 million, we have a $500 million line, which provides us with $410 million of additional capacity.

Looking down below, we have included in this graph showing our flowing rate debt level 6% as opposed to 94% fixed. The $250 million mortgage on 919 has a LIBOR floor of 215 basis points, so, and it matures in August. So [multiple speakers].

I'm sorry. 1185, 215 basis points LIBOR floor, so we effectively look at that as fixed through that maturity. And looking at our maturity schedule, other than the 1185 mortgage, we really don't have any refinancing pressures through '04, '05, and then even in '06, there's two property mortgages at that time.

Lastly, I just wanted to give a very quick and brief update on the IRS examination that was announced last quarter. We did have a meeting with the IRS examiner and, essentially, we've been requested of a broad range of data. And that process will begin shortly and we anticipate that it will take some time to get through that process. That's all we really have on that right now.

Thanks, Mike. And just in conclusion and sort of outlook, we turn to Slide 24. As I said, our markets recovering, although greater absorption in the general markets and broad-based pricing power is not going to be there, we don't think, until 2005. The accelerated first quarter leasing activity enabled us to be more tactical for the balance of the year, but with the '04 expirations as well as the '05, '06 blend and extend opportunities, and we plan on being very strategic about how we approach it now.

The interest rate environment warrants, in our opinion, a more patient investment strategy and potentially a more aggressive disposition strategy for certain assets that we've targeted for disposition, to the extent we think we can get good pricing. Our non-core asset sales are on track. If you recall, we target $30 million of proceeds in '04. We're still comfortable with that.

Turning to our earnings guidance, our 2004 guidance really impacted by two things -- one, the opportunistic capital market activity that Mike and I have discussed; and two, by the improved operations. Just to walk you through it, if you recall our prior guidance was $2.30 to $2.40 per share. That guidance assumed 0 to $150 million of net investments, and net investments meaning investments incremental above dispositions.

If you look at the adjustments necessary because of the two equity executions we did, both the class B, the series B preferred stock redemption using equity, which was originally going to be used with debt, and the 5.5 million share offering and adjust that guidance down for the dilution with that it would be an adjustment of about 15 cents, to 2.15 - 2.25 per share.

In addition, there was a dilution associated with the $150 million early refinancing that Mike spoke about. Originally, we contemplated $100 million in March at the expiration of that note and another $50 million in August. Because of opportune market conditions, we decided to do the whole $150 million at the beginning of the year, and that's obviously in addition to the 15 cent solution.

We forecast being able to make up between 5 and 10 cents of the dilution associated with the equity activity, based on better operating results that we're seeing in our marketplace. And then based on that, we would establish new guidance of between $2.20 and 2.25 per share, but this guidance would assume zero net investments for 2004. And the reason we have gone to zero net investments is, as I mentioned earlier, we do think we're in an inflection point in terms of where evaluations are, and time -- it pays to be a little bit more patient in this environment.

In addition, we've had more dispositions than we've anticipated, and maybe more than we originally anticipated. So I think this is where we feel comfortable. If the investment environment turns out to be more robust, then obviously, we'd have to revisit that range. With that being said, Operator, we would open up for questions.

Thank you. [Operator Instructions]. And the first line we'll open is Jon Litt at Smith Barney Please go ahead.

Good afternoon. This is Gary here with Jon. In terms of -- you briefly touched on it there at the end, but I just wanted to get an update on the RSVP assets and central monetization of that and timing for the balance of the year.

Sure. Just in RSVP, as many of you may know, it’s -- one of its subsidiaries, ACC, has filed with the FCC for a public offering, which, if that public offering goes successful, we would look to not have an interest in the entity, at that time be able to pull out proceeds from that. We also, as you recall, if you look at RSVP, that was the first modernization platform [inaudible] we planned on monetizing.

We have two others of substance. One is the Toll Way in Illinois, which we already are working on some monetization plans for that. Then we have the Catskills at the [Concord at Grossingers], which really is more of a longer term gaming play. And so I think we feel we're progressing well there. In addition, that $30 million of non-core, non-income producing assets also includes certain land dispositions, which we're progressing well on that front as well.

Just in terms of, Mike, in terms of your guidance, anything in there in terms of lease termination fees?

We have $1 million for the remaining three quarters.

Is that based on things you know, or is that just --

No, that's really just an estimate of, you know, where we thought we'd be for the full year after considering some of the things that hit this quarter.

Okay. Great. Thanks a lot.

Thank you.

The next line we'll open is the line of David Fick with Legg Mason. Please go ahead.

Hey, David.

Hi. Mike, what assumptions are you using on the refinance this fall, in August?

In August, we are going to most likely do an unsecured financing of that $250 million mortgage. We have $80 million or so of cash. So depending on where we are with that balance at that time, we'll use a combination of in-house funds and unsecured notes.

Okay. I know this is very sensitive, but it's obviously a pretty big wild card in a lot of people's minds. This IRS situation, based on what they are asking for, do you have any sense of where they are headed and what the issues might be?

Absolutely none. We've met with them. They've given us a broad range of information requests, and that is pretty much it.

I mean, from our perspective, at the very least, we don't know there is anything out of matter of fact of their usual audit process. There was no indication that there was anything unusual about it.

Okay. On your last slide show -- and I might have missed this earlier -- but you mentioned that you had a lease that requires certain municipal approvals. It was a pretty substantial transaction. It was for occupancy later this year. Have you gotten those approvals?

Yeah. We're almost complete with the approvals. One of the biggest stumbling blocks was we needed an approval from a federal authority, which we received, so we're just going through the process now, but we're confident that it's on track.

Okay. Great. Thank you.

No problem.

Next line we'll open is the line of David Shulman at Lehman Brothers. Please go ahead.

Yeah, hello.

David, how are you?

Hi. Fine. Question for Todd. What do you perceive of asking [RANSA] or where deals are being done in Times Square, the Boston properties deal?

I'm sorry. I couldn't quite hear you.

Where do you perceive rents for being done, deals for being done in the Times Square Tower that Boston Properties is doing-- your competition?

David, I think that there is a really wide range on that. And, you know, I frankly would rather not comment. I mean, I think you should ask them.

I'd rather ask you.

I didn't lease any space there.

Yeah, but you know what tenants are telling you. What's the street talk?

You know, I think the rents there, David, are in the 50s and $60 per square foot. I think that's the range.

That's the range on a gross basis.

On a gross basis.

With a low tax deal in there?

Well, I think as everyone knows, there was a pilot program in place there, right.

Okay. Now a question for Mike. How much depreciation did you take for 1185 in the quarter?

I don't know that off the top, David.

That'd be approximately, what? About $2 million? If you did 40-year life and something?

Yeah.

And then when you calculated your FFO, you added back that depreciation into your FFO?

That's correct.

And even though this is a lease hold, that depreciation is real?

Yeah. I think we told you our underwriting, David. We've had this discussion in the past. We feel very comfortable that the way we've underwritten this is a total return basis, and we've underwritten both with an assumption as to not giving the, you know, getting the fee or restructuring the fee, but it's 39 years off, and we think there's a lot of different things that might happen here.

But if in fact the depreciation is real, there's something like FFO's 12 cents too high.

We don't believe the depreciation is any realer than any other depreciation.

No, no. But this is a lease hold. This is different --

I understand.

This is a different situation here.

Right. We have lease holds in our portfolio elsewhere as well.

All right. But it's just an exceptionally big lease hold. Okay. Last question, have you gotten any discussion -- I know it's early from your New Jersey tenants on the [McGreevy] tax proposals, impact on leasing there?

No. We have not.

Okay. Thank you so much.

No problem.

(Operator Instructions). Next line we'll open is John Lutzius with Green Street. Please go ahead.

Hey, John.

Couple of clarifying questions. The term fees, Mike, that's a million dollars over three quarters, that's not a million per quarter, right?

That's correct.

And Scott, you had talked about a projection for year-end occupancy. Was that 93.0?

Yeah, 93.0, weighted average, not office. That's office and the industrial properties.

Okay. So comparable to your quarter end of 92.7?

92.6, yeah, [inaudible] something like that. Yes.

Okay. The $30 million of non-core sales in '04, how much of that is land? Is that mostly land, is there much RSVP in there?

That's forecasted? You know what, this stuff is sort of-- it's very hard to pick a time, so we are looking at it as a bucket of many things that are going on right now. And it's going to be the blend. If it's 50/50, maybe you can assume for now, but, again, it's going to -- as far as we're concerned, we're sort of -- we don't really care if it was land or RSVP at this point. It's more a matter of keeping old things moving. So if it's more this quarter, it means that the next -- I mean, more that’s in '04, it means there will be a different blend in '05.

How does -- how do the proceeds from RSVP sales get to Reckson? Do the first dollars of proceeds need to go to pay off debt?

That's correct. There is a GMAC loan at the RSVP level of $60 million.

Yeah.

That is secured by all the interests in the assets that RSVP owns.

Okay.

So by right of the loan agreement, that would get paid.

So like ACC, assuming that goes successfully, that would go against that debt first?

That's correct.

Okay. Okay. And then just last question on the dividend coverage issue. The CAD payout this quarter was still pretty high. Can you talk about your expectations for the future payout as you adjust for things like the termination fees being high in this quarter, but on the other hand, dilution being somewhat high due to some of the capital market activities. Can you kind of update us on the dividend question for the next several quarters?

As we've said, I think that we've expected '04 to be in the $20-30 million range in terms of having to subsidize the dividend. And as we go into '05, '06, I think depending on what type of invest -- on type of re-lease -- early leasing we do, and some of that space is really going be a function of investing to generate higher revenue and take advantage of the mark to market opportunities. So nothing that we've seen so far has changed our position that the Board took on a dividend last quarter.

If anything, I think it's just reinforced that the strength of the markets and the things that we're seeing, that it was the appropriate decision in terms of being comfortable subsidizing the dividend with the sale of non-core, non-income producing assets, and investing that money into tenanting costs that's throwing off incremental cash flow.

I was just a little bit surprised that the leasing didn't move that payout needle a little bit more. I guess you weren't?

Maybe [inaudible] as a good point, John. And actually listening to some of our peers' conference calls, let's take -- just think of this sequentially. When we sign a lease, that automatically impacts our occupancy.

I would say of all the leases -- that 240 basis point change in overall occupancy -- I would say about 75% of that is not yet into our numbers and will not come into numbers, as Mike said, until throughout the year. Because you're going through either a) they were early, and we have tenants that we have to get the space ready for them, or they have dates -- commencement dates -- that are later. We recognize all the TI, though, in this quarter.

So in that 125%, we're taking all the tenanting costs in this quarter but we're not getting any of the cash revenue until later in the year. And so the occupancy reflects it. So I think that's the biggest issue, is the time issue -- I wouldn't be surprised. That's something as Mike said -- it's like a snake and it's going to flow through. And I would say in the fourth quarter, you'll start seeing that trend line reflect the change in occupancy.

You have that issue, which works to the benefit of your coverage. Then you have, for example, the lease termination fees in this quarter being high, which works again against you. [Inaudible] where you would be given your --

Again, part of what I think Mike had said is we anticipated about $4 million of termination fees in this quarter. We're not anticipating more -- I'm sorry, for the year. We now took three.

We're not anticipating more than that three for the extra million dollars for the balance of the year. So it's sort of, what we're looking at is it was front-loaded a little bit. Think about how much -- you do 800,000 square feet of leasing. That has a material impact to your tenanting costs.

Right.

And that's all front-loaded. For example, BXP, they recognized occupancy when the lease commences, when a tenant moves in, or they hand over the space to the tenant. What we do is when the space is actually committed, the lease is signed, that [inaudible] with a little bit more of a traditional real estate approach, that's when we change our occupancy level because we can't lease it to someone else.

But we may not-- there is a lag between when we're starting a lease and we actually see the cash flow.

Right. Okay. Thanks for that discussion.

No problem.

The next line we'll open is the line of Frank Greywitt with Key McDonald. Please go ahead.

Just real quick, going back to the TI issue. In the second, third, and fourth quarter, what do you expect the run rate to be? Significantly lower, I assume?

Again, it's going to depend on leasing, and what we do in terms of leasing from an early renewal area and where we are. But I think as I said, we're still comfortable with that 20 to $30 million range in terms of having to just invest the non-income producing asset sales into subsidizing the dividend. So on a run-rate basis for the year, we feel comfortable where we're expected to be.

Okay. And finally, when did the leases commence? I mean when were the-- any of the occupancies that were -- any leases signed, did any of them commence during the quarter or that early, or when are they expected to?

Again, there is a handful that commenced during the quarter, especially if they were certain renewals or things like that. But the reality is most of them will start commencing in the second and third quarter, and then really, you start feeling its full effect in the fourth quarter.

Okay. And what's a good run rate for the straight line rent level?

3 1/2 million a quarter.

Okay. Thanks.

Next line we'll open is the line of Tony Paolone of JP Morgan. Please go ahead.

Thanks. Scott, can you give us any color on what 2Q leasing volume is shaping up to look like, being almost halfway into the quarter?

Yeah, as I said, I think that we would expect about signing in the 400,000-plus type range of leases in the second quarter, although we have a material pipeline of deals that we're working on behind that. And so, some may swing into that quarter and some of that may swing into the third quarter, but, again, there is good, steady activity.

We haven't seen a drop off in activity, although as I mentioned, we're sort of pushing back in terms of, on some of the transactions for seeing about getting better economics.

And so if it ends up shaping out to be around 400, it leaves you with a fairly low level for the third and fourth quarters?

Well no, because some of that would be early renewals. That could be for different periods of time, so there is--

-- it's not just the expiration that's leasing.

Right. It may not be '04, it may be some vacant space as well.

Okay.

So it's not -- we're not just looking at the renewal numbers. I would say there is a couple hundred thousand of that square feet is renewal, but I'm not sure exactly how much of that would be early renewal -- or not early renewal, I don't have the number in front of me.

Okay. And then on the guidance are there any land sale gains in there for the balance of the year?

You know, there may be a million dollars in other income that throws through; nothing of substance.

Would that have been part of the other income, Mike, that you referred to earlier on the other income line item, or would that be separate?

Yeah. No, that's in there.

Okay. Thanks.

And we have no additional questions in queue at this time. Please continue.

Thank you. Thank you, Operator, and thank you all for joining us for our quarterly conference call. We look forward to speaking to you during the quarter. Thank you, Operator.

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