SL Green Realty Corp (SLG) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Reckson Associates 2nd quarter earnings conference call. At this time all phone participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. If you should need assistance during the call, please press star, then 0. As a reminder, today's conference is being recorded. The information to be discussed on this earnings conference call may contain forward-looking state within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements and all other statements that are made on this call that are not historical facts are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those expected. Among those risks, trends, and uncertainties are the general economic climate, including the conditions affecting industries in which our principal tenant competes. Financial condition of our tenant changes in the supply of and demand for office properties in the New York tristate area. Changes in interest rate 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 slide show presentation and supplemental package. For further information on factors that could impact Reckson, reference is made to the company's filings with the Securities & Exchange Commission, Reckson undertakes no responsibility to update or supplement information discussed on this conference call. Also during the conference call, the company may discuss nonGAAP financial measures. The GAAP financial measure most directly comparable to each nonGAAP 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, slide show presentation, and supplemental package. I would now like to turn the conference over to Scott Rechler, President and Chief Executive Officer of Reckson Associates. Please go ahead, sir.

Thank you, operator and thank you for joining us for our 2nd quarter 2004 earnings conference call. Presenting with me are Mike Maturo, our Chief Financial Officer, Sal Campofranco, our Chief Operating Officer, Todd Waterman, our Chief Development Officer and head of our New York City division, the balance of the executive management team is available for Q&A post the formal presentation. For those who have not participated in our calls in the past, we're going to be working off a Powerpoint presentation that can be accessed from our website, which is www.Reckson.com. If you have trouble accessing you can contact Susan Maguire, our Head of Investor Relations at 631-622-6622. Let's keep the presentation brief and informative. We've also included an appendix with our slide show, which has additional slides for you to review at your convenience post the call. I'd now like to start with the presentation on slide two by providing an overview of our 2nd quarter. During the quarter reported FFO per share of 52 cents, which compares to 54 cents a share for the same quarter in 2003. These results are in line with our internal estimates and reflect strong operating performance, less other income and termination fees than the 1st quarter as expected. A full quarter's impact of our recent equity offering and additional option dilution due to a higher share price. Leasing activities are extremely strong this quarter. You might recall last quarter we had record leasing just under 800,000 square feet. At the time we thought this quarter activity would pull back closer to our normal run rate of approximately 400,000 square feet. Instead we leased 764,000 square feet resulting in our two best leasing quarters on record, almost two times leasing volume in each of the past three years. We were also able to achieve an 83% renewal rate and address 281,000 square feet of future expirations.

We grew our office occupancy by 70 basis points to 94% from the 1st quarter, 230 basis points year-over-year, for our overall portfolio we grew it 50 basis points sequentially, and 150 basis points on a year-over-year basis. Our office same property NOI grew 3.4% on a cash basis and 5.1% when you include straight line rent. When you back out the net minority interest and joint ventures out of that number, that really impacts Reckson, it was up 3.8% for the portfolio on a cash basis and 5.3% for the portfolio when you include straight line rent. Turning to slide three, you'll note that our rent performance during the 2nd quarter was very good. We had marked to market of 12.1% on a cash basis and 21 point 4% on a straight line basis. This does include the large Westpoint Stephens lease which had a significant impact on these numbers and we'll provide more color about that later in the presentation. From the investment disposition activity, we acquired a New Jersey 141,000 square foot class A office building. We commenced the development of 68 south service road in Melville, Long Island, 200,000 square feet development. We completed a sale of two Long Island operating properties for about $18.1 million, net of JB interest at a 7.2% forecasted 2004 an NOI cap rate and signed a contract for sale of an industrial building in Westchester for $7.5 million dollars. Capital market activity, quick overview, redeemed series A preferred also the board reset its common stock repurchase target for 5 million shares. If you turn to slide four, just a quick snapshot of our portfolio composition, not much has changed here. Our NOI is derived still from about 43% from New York City, 25% from Westchester Connecticut, 20% from Long Island and the balance in New Jersey. On the square footage, 15.4 million square feet.

Not much of a change, just one asset was sold, so we went from 86 properties down to 85 properties. Again, not much of a change in these statistics. Have you turn to slide five, I'd like to take a moment and talk about some of our market trends. Clearly our markets are strengthening. We would characterize New York and Long Island as good markets today, New Jersey, Westchester and Connecticut continue to recover. Sal and Todd will provide more color on each of these markets in the next set of slides. Leasing activity is becoming more vibrant as tenants become more comfortable with their future business prospects. Job growth is becoming more broad-based through all of our markets and industries. Even the investment banking industry, which just quarters ago was significantly reducing jobs and cutting back on space is now an actively in the marketplace looking for additional space. Just recently, Citibank, Lehman Brothers, Bear Stearns have all been in the market taking space or actively looking for space. It's been in an incredible quick turnaround from the investment banks, although not something too different from the past. Generally speaking, tenants are seeking to proactively address their real estate requirements to capitalize on the current market conditions before pricing goes up, they've taken expansions to prepare for future demand expectations. They're executing early renewals in advance for these potential higher rents and seeking to upgrade to higher quality properties or higher quality space. So while demand is strengthening, supply is contracting. In particular, high-quality space alternatives becoming less available to tenants, competitive sublet space is diminished throughout all of our markets and large blocks of space are becoming increasingly scarce. These supply and demand conditions are resulting in more balanced markets. We're seeing net effective rents recover faster than face rents as free rent and TI are adjusting at a faster pace.

We'd expect true pricing power to return in 2005 as the market continues to recover on its current pace. Long-term market prospects are extremely positive. Not only is there no material in any supply in any of our markets, there's shrinkage of existing or potential new supply due to conversion of alternative uses. In downtown New York alone there's been 10 million square feet of office space over the last couple of years that's been converted to multi-family. Just recently on Long Island, a piece of land that was zoned for a million square feet of office space, a prime piece of land, is now being converted to assisted living. And even us, about 50% of our land that is zoned for office is either under contract or being considered for an alternative use for residential. From a demand perspective this past cycle downturn proved New York is much more resiliant than it was given credit for. Demand is driven by a diverse group of industries. New York is no longer being driven solely by the financial service firms like in the past. It is industries like legal and accounting [audio interruption] throughout the downturn, consumer products, consumer services, media, and pharmaceuticals that make up the New York economy today. The long-term supply and demand dynamics are extremely positive and give us great comfort to be actively focused in this market. With that said, let me turn it over to Sal to provide some color on suburban markets and then Todd to talk about New York City. Sal?

Thank you, Scott. Want to give you a feel for where our suburban markets are playing out within the recovery cycle. Looking at slide number six, the Long Island market, I'd characterize this market as the most consistent market related to the recovery trends we're seeing. As you can see by the chart, Reckson's portfolio continues to outperform market as evidenced by the increased gap between our occupancy and the market occupancy. The Long Island market is our strongest suburban market showing consistent demand and related net absorption. The activity levels increased versus the 1st quarter and remain healthy throughout the entire market. We had good activity across all of the submarkets where we have properties in the broad markets. Vacancy rates continue to decline and have hit single digits in many of the submarkets on Long Island. Long Island is the only suburban market where we operate to have recorded an increase in the asking rents this quarter. So it's another sign of the continuing trend of recovery that we see here. There's only three blocks of space remaining in the market over 100,000 square feet that compete effectively with class A products. So again, scarcity of large blocks. Expansion activity is good, as is renewal activity. All in all, the above indicates the approaching conditions in the market which will favor the landlord, related to achieving pricing power. So Long Island is doing well in that area. The only headwind we see in the island is M&A activity is continuing to cause some churn amongst the financial service company, but with the strong demand we expect that to be absorbed without a problem. In turning to Westchester, this market has been inconsistent to date related to the recovery that we see under way there.

On the positive side, overall activity is good. The market activity continues to be driven by large deal requirements being sourced from within the tristate region, and we see this as being really a structural change to the absorption drivers in Westchester. The large deal increase continue to come at us from different sources and different types of companies. Job creation was good in Westchester, 12,000 new jobs here to date, which will start to drive velocity on the average deal site. The negative in the market is really certain submarkets show strong activity while others are weaker. So a little bit of inconsistency. The average deals, the 5 to 15,000 square foot, that velocity, in particular, continues to be slow. The Westchester market for certain as the submarkets continues to have some negative net absorption and we're looking to see a turnaround in that to indicate a little more consistency. Statistically I just want to point out Westchester shows a jump in vacancy resulting from the Altria headquarters being added to inventory in this quarter. This building is over 560,000 square feet and added about 2% to the overall marketwide vacancy. It's important to note the property is under contract and is proposed to be repositioned for office use. Reckson's view of the property is its indefinitely an A plus location, however the physical design is unique and has certain issues related to conversion to multi-tenant, which will prevent it from effectively competing in the market. So that's kind of our view of that asset. At Reckson in the quarter, we captured about 50% share of market activity for the submarkets in which we own properties, so it's a good indication of our competitive advantage, and we're pleased with that the majority of the leasing transactions, as Scott mentioned in this market in particular, impacted future explorations and did not result to significant change to our current occupancy but resulted in great long-term trends with clients renewing and expanding. Overall the market continues to show signs it's recovering, albeit slowly.

Turning to Stanford, I would categorize this as our weakest suburban market this we operate in. Stanford is definitely small related to overall leasing velocity. Reckson has achieved again in this market good leasing activity in this quarter with three big renewals accounting for the majority of the transactions. Total leasing is about 150,000. Renewed Paul Hastings and Watson Wyatt, which are great tenants and we're glad to have successfully renewed that tenancy. In finishings with Stanford, the financial sector continues to show some growth, UBS in particular, the boutique financial type firms, and we're hopeful this will become a demand driver in this marketplace. Shifting to New Jersey, northern New Jersey, we really feel this market is indicating it's bottomed out and will begin to turn upward in the near future. Already had a good quarter as evidenced by 1.6% increase in portfolio occupancy and we continue to outperform the market as evidenced by the dramatic spread between our occupancy and the marketwide occupancy. Indications we reach bottom the overall activity in the northern New Jersey market increased dramatically, over 43% from the same period in 2003. The short hills route 24 marketplace recorded 450,000 square feet of activity for the 1st six months of 2004, which almost equals full year activity recorded in 2002 and 2003. So very strong activity in this submarket, which, by the way, has our largest concentration of our portfolio. Employment shows signs of improvement with year-to-date job growth exceeding expectations. As a result of the increased activity, the market did absorb the new inventory which was brought on resulting from consolidations and some sublease, with the net result being overall vacancy remains stable. Although still at high levels by historical trends.

We continue to see a flight to quality buildings as companies take advantage of the opportunities in the market to upgrade. The short hills route 24 submarket, which contain some of the highest quality properties continues to benefit from this trend, and that is the submarket where we did our recent acquisition that Scott mentioned, whereas by contrast some of the other submarkets suffer from a lack of leasing velocity. And with that I will hand it over to Todd.

Thanks, Sal. In Manhattan during the 1st half of the year, we're really seeing all the classic signs of inflection point in the market. We're definitely recovering, all eight mid time submarkets had positive absorption, we had 9 1/2 million feet of gross leasing activity during the 1st half, which is about 73% greater than the same period in '03, the most since 2000. Job growth and the expectation of future job growth has really been driving a lot of large lease transactions among financial and law businesses, as well as consumers as Scott had mentioned earlier. This activity as we've seen in the past three cycles is going to lead to a trickle-down affect into the rest of the market affecting net effective rents and absorption among smaller and mid-sized tenants. We're seeing it in our portfolio as well. Our 1st half leasing activity and basically portfolio performance in the city was characterized by strategic early renewals of two large tenants, Westpoint Stephens, which I'll talk about a little more and Harper Collins at 1350 Avenue of the Americas. We also had good activity in the few vacancies we had been challenged with in past years coming into 2004, namely at 810 7th Avenue and to a lesser extent 100 Wall Street. I expect we'll talk more about that next quarter. We continue to be every optimistic at our investment at 1185 Avenue of the Americas and replacement of Westpoint Stephens, which is now going to be a block of space coming back to us in January 2007.

We executed a one-year renewal there really for the following reasons: We essentially doubled their rent with no concessions of any kind. It's also going to bring a major block of vacancies to Avenue of the Americas at a time when we expect little competition and excellent demand. It allows us to market that block of space with our capital improvement program to that asset finished or significantly finished, which is going to provide better visibility for tenants looking at the asset and the broker's community. It also positions us to possibly renew Westpoint Stephens as they are coming out of Chapter 11 reorganization shortly. Really to summarize, I'd say as you see from the charts and the slide show, where the bulk of our assets are in New York City, which is midtown east market and 6th Avenue market, we're vastly outperforming the market in terms of occupancy. We're doing fine in the other submarkets as well. To echo what Scott said, I'm definitely seeing improvement in net effective rent and do anticipate in 2005, we are going to see some pricing power come back to us. Thanks.

Thanks, Todd. Now everyone turn to slide eight, go back to our portfolio and some of its performance more specifically. Slide eight shows you our leasing and occupancy analysis and you'll see here our occupancy bottomed 3rd quarter of '93, from 91% from almost 96% to the end of 2002. Our record leasing over the past two quarters brought office occupancy to 94% and we'd expect occupancy for 2004, for the balance of 2004 to decline marginally. Turn to slide nine, provide just a little bit of a breakdown of the composition of our activity this past quarter, our leasing activities this past quarter. Just a few quick points. On the left hand of the slide when you see the composition you'll note between early renewals and 1st half 2005 early renewals we did about 281,000 square feet of leases addressing space that expired beyond 2004. We also 127,000 square feet of tenant expansions, which, again, is a great indicator as to where the market is. Composition by market, you see Westchester is 214,000 square feet, New York City was about 200,000 square feet of the activity this past quarter. Just have you turn to slide ten, let's just walk through our office leasing trends. We're actually providing these trends with and without the impact of Westpoint Stephens lease at 1185 so you can get a feel for the impact it has. Starting with the same space rents you can see without Westpoint Stephens we had a marked to market of 6.7% on a GAAP basis. With Westpoint Stephens it's 21.4%. Again, Westpoint Stephens lease at some point we're doing to lease that space long-term, so you will actually get this marked to market for a longer period of time and probably higher, because when we put our new tenant in there, there will be a higher rent than we're getting from Westpoint Stephens today. You can look at it both ways, 6.7 and 21.4.

Leasing activity on the bottom, we've talked about that already, so I'm not going to review that again. The effective rent spread, which is the base rent versus the effective rent, which pulls out the TI and leasing commissions, you'll see that without Westpoint Stephens we had a 9.6% spread, which I think is consistent or at the low end of our range that we had during the past number of quarters. You may recall we've said about a 12% target is what we were anticipating during this end of the cycle, so we've actually done better than what we originally anticipated. Lastly our average lease term without Westpoint Stephens was eight years, which, again, is a little bit lower than we were last quarter. I will tell you as the markets are improving and we're able to renew tenants with little PI packages and concessions, we will be doing some shorter term leases that may drag this number down as we go forward. So we may be an inflection point where we're not pushing for as long-term leases as the capital costs are starting to come down. For example this past quarter we leased a 75,000 square feet renewal in Westchester with no work and did a five year lease. Just on the focus on tenant improvements, you'll note this quarter reported $2.53 per foot per year of tenant costs, which, again, sort of in line with our trends. Without Westpoint Stephens -- or with Westpoint Stephens it would be $2.21 per square foot. You may recall our goal was to stay below $3 a foot at this point in the cycle. I think this, again, is a positive indication of how we're doing relative to what our expectations were. Turn to slide 12. I'd like to take a minute and just review the leasing economics. I like to focus on two metrics we use to evaluate the underlying economics of our leasing activity.

On the left-hand side, the first metric is the net effective rent which we've discussed before, which takes the per square foot net effect of the leases that occurred in the 1st half of 2004 against the per square foot cost basis on each of the corresponding properties. You see, when you look at this we're actually generating a 9.2% net effective rent yield on our cost basis, which is saying that we're not only getting positive net effective rents but we're getting net effective rents with good positive returns against our cost basis in our properties. The second metric we look at is the return we're deriving on our tending cost invest ments from incremental revenue being generated by the corresponding lease as we mark leases to market. This we've spoken about a number of times as we've evaluated our dividend policy. It's an important point as to where our capital dollars are going and the type of return we're generating on those capital dollars. If you look at the 2nd quarter of '04, you'll see we average $19.11 on tenanting cost, against $1.79 of incremental revenue being generated by the new leases that were put in place above the prior leases we're paying. That generates a 9.4% yield on our tenanting cost. If you look at this in the 1st half of 2004, you will get 11% yield of incremental revenue from marked to market against our tenanting cost of $15.47 averaged for the 1st half of this year. This metric in our view reinforces while tenanting costs have been high the resulting return on capital and higher earnings not only justify these investments but make them attractive relative to alternative investments. Being able to invest to get 9 to 11% in buildings we own to grow our top line and increase our asset value is a very good thing in our mind. If you turn to slide 13, we look forward, and you'll see that we only have now 2.6% of our revenue expiring for the balance of 2004. Also if you look at 2005, 2006, if you recall these are two years we believe we have a large marked to market opportunity.

But one of our objectives has been to reduce our lease exploration exposure for those years for the leases we don't have the greatest marked to market and position us to capitalize on the more attractive marked to market opportunities when we get there. We make good headway in this quarter reducing our 2005 explorations from over 11% to 9.6%, by signing 280,000 square feet of leases that were expected to expire post 2004. Also when you look at the GAAP same space marked to market opportunities on those leases, we actually generated 10% higher GAAP rents than what the prior tenants were paying. So while we did these early, we still got good marked to market results from renewing these leases. On slide 14, we show you our marked to market for 2005 and 2006, which echoes the comment I made on the previous slide. Two things important to know here. These are based on cash rents, the GAAP results would be higher, specifically in the suburbs where we had built-in rent increases contractually and also they're based on current market rent. As they expire in '05 and '06, rents could be higher. Based on these numbers we're showing 6 1/2% cash marked to market for '05, '06 expirations. Now like to turn to the investment environment on slide 15. The investment markets remain competitive. Clearly there's no shortage. Pricing for Manhattan high quality, stable suburban properties continues to be aggressive. At this point we do not believe that the investments markets are appropriately valuing risks, investors are underwriting vacancy and leasing risks to stabilize yields at which people would typically buy buildings at today. After robust closing activity in the 1st half of the year that was driven by many yields that were in the market at the end of '03 and beginning of this year like 1185, the GM building, the CS First Boston building downtown. Since that point, market activity has lagged.

It's our belief it's going to accelerate as refinancing alternatives become less attractive, transitioning assets become more stable as markets recover and our view is better sale opportunities by owners. Owners need to capitalize on the strong investment market. We would expect to see some of that activity starting to pick up at this point. In this environment we're pursuing off market transactions and properties where there are operational ownership issues. What's happening to our corporate local relationships, we're targeting assets with highly leveraged capital structures that may be impacted by increasing rates and assets with leasing risks. One of the things with these type of transactions is they take lot more time to cultivate than broadly marketed transactions and they are not as predictable, but they are worth it when you openly get them in terms of the type of returns you generate. We're also strategically developing inventory of vacant space in premiere locations to capitalize an improving markets for fundamentals. We're targeting Class A buildings with pending vacancies and developing key land parcels from our existing land bank. When the markets are competitive, while the markets are competitive, we are actively pursuing all market opportunities but we intend on remaining patient and disciplined. Where appropriate we will seek to use joint ventures to leverage our operating expertise and access the most competitive capital as we've done in the past. With all this in the backtrap, we still anticipate meeting our 2004 investment targets, which would be having a weighted average investment equaling our weighted average dispositions. Which is approximately another $100 million of investments in 2004 including our Giralda property we've completed at this point. Speaking of the Giralda property, on slide 16, let me turn to that for a moment. This is a recent acquisition that we're extremely excited about. It's 141,000 square foot building we're purchasing for $22.7 million.

It's at least a 30% discount to replacement cost. The property was developed in 1990 as Atlantic Mutual's corporate headquarter, it was built with materials and has amenities that you can never afford to put into a multi-tenant building, that you'd only put into a corporate headquarters. It's situated on 21 acres, almost all the parking is below grade, this is actually in Giralda where we have 164 acres of developable land, and it's a great location right off route 24 and I-287. Atlantic Mutual is in the full building until year end, and then will commence vacating after that point. Post releasing this building we anticipate generating a stabilized yield in excess of 8 1/2%. It's a very attractive and exciting project for us. Reiterating my comment from before on our development, as I mentioned we have broken ground on our 270,000 square foot 68 south service road development, which is a sister building of a 58 south service road building we completed and is now over 90% leased. We anticipate total cost about $60 million, completion the 4th quarter of 2005. We are forecasting an 18 to 24 month lease up period post construction and forecasting stabilized yield of approximately 10%. Now, let me turn it over to Mike Maturo to provide you some of our financial data. Mike?

Thank you, Scott. I'll pick up on page 18. If you would look at the operating data information starting with the property operating revenues, which are substantially up from a year ago period, which basically reflects the addition of 1185 Avenue of the Americas. But more importantly quarter-over-quarter from last quarter we see improved revenues and that's as a result of the increased leasing activity and rates that we discussed earlier. Termination fees was down for the quarter as we'd expected and is expected in a recovering environment. From an operating margin standpoint, we increased margins by 140 basis points from last quarter. Again, as a result of the increased revenue line item which we will continue to expect going forward in stabilized operating expenses. From marketing G&A, it's about where we were substantially down from last year as a result of the restructuring. We did expend some additional costs related to Sarbanes for section 404 work in the area of professional fees. Other income line item is made up of essentially two components, interest income of $1.9 million and service company and other income, miscellaneous items of $1.7 million. Going forward on the interest income line, we were given notice of repayment on about $15.5 million on notes which we have called the compelli notes. So that line item will reduce beginning in the 3rd quarter by about a half million dollars by the end of the year. The remaining line item, $1.7 million is a very volatile item, but going forward there is the potential for that number to increase as a result of some items including potential land sale gains.

From a tenant reserve standpoint as credit issues are really limited, as you see the number here, has been substantially going down, and we don't see any significant credit issues in the portfolio at this time. Turning the page on the financial ratio side, our debt to market capital was 40.3%, again staying stable. Our interest coverage ratio, 2.9 and fixed coverage of 2.4 to increase slightly as a result of increased cash flow, again resulting from increasing revenues. We expect that to continue to improve going forward, as occupancies increase and rent increases. During a 2nd quarter we also purchased 140,600 shares of our series A 7.625% preferred at 2445 off the market. In addition, in the 3rd quarter, we exchange 1.304602 common shares for a million 350 preferred shares out in the market. These two transactions will further benefit our fixed coverage ratio going forward by approximately 10 to 15 basis points. And this is in an effort to increase the flexibility in our balance sheet. Going forward on page 20, our debt schedule, we have $966 million of mortgage notes currently, $250 million mortgage on 1185 matures this week, which we will refinance with a combination of cash on hand and long-term unsecured debt. We're in the process of extending and amending the line of credit for an additional three years. We expect that to close shortly, Libor spreads will stay the same. We expect that to close in the next week or so. Other than that we have no nearterm maturities over the next couple of years. Our floating rate exposure is limited to about 10% pro forma for refinancing of 1185. Turning to page 21, and an update on some of disposition activity we've had year-to-date on income producing asset side.

We've sold four properties for a total price of $61.1 million, net of JB interest in some of those assets, representing a blended cap rate of 7.2% on forecasted 2004 NOI, which reflects strong valuations in our market. We signed a contract for sale of 92,000 square feet Westchester industrial building for 7.5 million. If you recall, we have about a million square feet of industrial space, not on Long Island, that we will seek to sell as appropriate, so you'll continue to see asset sales in this area. As I previously said, we received notice of repayment of $15.5 million of compelli notes that are currently yielding 10.5%. On noncore land sales we signed two letters of intent this quarter that are subject to municipal rezoning and site plan approvals. One is 40 acres in Westchester, carries the minimum price of $24 million, with some potential upside based on the number of units that ultimately would be approved, and then another parcel in New Jersey, 15 acres for approximately $8.8 million. Earlier this year we disposed of a 3.9 acre parcel of land for $1.8 million. We continue to pursue our municipal approvals and rezoning related to the [inaudible] farm sale, and that's going well. With respect to RSVP, no significant update there. ACC is conducting its road show, and we anticipate pricing of that transaction sometime next week. Hand it back over to Scott for some concluding remarks.

Thanks, Mike. Just in conclusion, and viewing our outlook, obviously the markets continue to strengthen at a pace that should result in 2005 pricing power. We're executing on our plan to capitalize on the improving market conditions to increase occupancy and pursue selective early renewals and this has been very successful. The investment markets remain competitive but we intend to allocate more resources toward pursuing some of the external growth opportunities. One of the areas we've been focusing on in the last 60 days is providing more focus and resources to this avenue. Past our post our restructuring we'll be very focused on operations and management transition. This is one area we hadn't allocated much resources to and it's something we've turned our attention to and turned up the heat on. Hopefully that will generate more opportunities what's go forward. Noncore asset sales are on track as Mike noted. We're still targeting $30 million in proceeds in 2004 and $50 million in each 2005 and 2006. While we have experienced a great dilution from note repayments and the option dilution, our strength of our quarter operations has been better than anticipated and has been helpful in driving earnings growth. We're reaffirming our 2004 FFO guidance between $2.20 and $2.25 per share, as we look out for the balance of the year, we expect that to be achieved by the same store NOI growth continuing to show the benefits of the recent leasing activity we've had, meeting the investment targets we discussed earlier and more normalized other income type items than we've had this past quarter. With that, operator, we'll be glad to open up questions for any of the people on the call.

Ladies and gentlemen, if you wish to ask a question, please press star, then one on your touchtone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from the queue at any time by pressing the pound key. If you are using a speakerphone, we ask that you please pick up the handset before pressing the numbers. Once again, if you wish to ask a question, please press star, then one at this time. We'll go to the line of John Litt with Smith Barney. Please go ahead.

Good morning, it's John Stewart here with John Litt and Andrew Calduit. Scott can you give us some color on the decision to go ahead and break ground on the third phase in Melville without a tenant in hand and what the status of any current negotiations or discussions you might be having there?

I think two points. One, the Long Island marketplace traditionally is not a build to suit market. I can only think of one building or two buildings in our entire history where we actually have actually pre-starting construction, maybe only one building where we actually have had a tenant in hand. It's just the nature of this marketplace. Until you start building, you're not able to do that. One of the key directions was the strength of the market, we're 96% occupied in this market. We have the benefit of living through the experience of leasing the sister building 58 south service road, which we actually leased up through the last cyclical downturn and are achieving returns today in excess of 11% on that. In forecasting the lease-up of this building, we're assuming higher construction costs, higher financing costs, and we're putting on top of that the same level of leasing that we had in terms of the program we got in 58 south service road, even hopefully the market conditions will be better. That's why we're assuming 100 basis points less yield upon completion on this building than the sister building. So there's any market in which we feel comfortable taking a risk of being -- starting speculative building in any project, this is it. The other thing, just to comment, we actually already have all the infrastructure on the site in, because of the first building. For us, really, this is something we can get done relatively quickly and without the extra work of having to put the site infrastructure in.

Okay, so it doesn't sound like you're in any negotiations currently?

No, we're not in any negotiations currently. As I said, we're giving ourselves the full lease-up period and then another 18 to 24 months following that to lease up the building. That's what's in our 10% forecast.

On the Giralda Farms acquisition, do you plan to take that off line, and, you know, do any work there, or will you commence lease up immediately?

That building is not going to go through a repositioning. That building will break up well for multi-tenants, so that will stay on line. We're forecasting in our numbers some dilution associated with it being vacant when Atlantic Mutual comes out.

Right. And what timeframe have you underwritten for the leaseup?

Sal?

About a 20-month period.

About 20 months. So we're being somewhat conservative on that, but that's about where it is. Twenty months.

On the land sales, can you give us any indication of the timing when those are expected to close?

On the land sales, other than maybe the Long Island industrial land, which is zoned and ready to go, the ones we're going through rezoning, they can take anywhere from 12 months for some of the smaller ones to 24 and 36 months for some of the bigger ones. I think the trick with the land sales is to have many balls in the air at the same time and get everything, you know, running on a parallel track. Some will work faster, some will take a little bit longer. It's really hard to predict exact time frames on that.

Scott, the rezoning is from office to residential?

That's right.

Is that -- is there much more of that in your portfolio, or is this it?

I think the last two contracts that Mike noted in here, letter of intent Mike noted, probably the last two we've identified at this point that would go for that. That would be the Giralda piece, the other piece in New Jersey and the piece in Westchester right now are the three we think are targets for that.

So you just do an assessment of the highest and best use of land value per square foot.

That's correct. Highest and best use. Also when we look at these sites, for example, in Valhalla and Giralda, we have a contiguous site also zoned for office. When we basically look at all of our landholdings, our view was if we're not going to be in a position where we think it makes sense to put the land into service for office use during this cycle, is there a higher and better use. And Sal and the development committee went through it and looked at every land parcel, and we then at the beginning of this year made a determination as to which ones we were going to put in service during this cycle and which ones we'd try to sell for higher and better use. That's what we're executing on.

How many acres are in your land portfolio?

I think it's over 300.

340.

Mike, you made a comment the early lease termination fees are coming down as you would expect as the cycle gets better, yet you show the square footage actually is accelerating since the 4th quarter. Can you maybe expand on what's going on there?

It's hard -- that's a very volatile number. It's really driven by what's happening in the marketplace.

Square footage you're talking about the square feet of leases that terminate, John?

Right.

If you look at the slide which we include in the appendix, which is the net termination slide, in an improving market as we saw in '99, 2000, 2001, and I'm sure you see it with other companies, you can actually be very strategic about pursuing lease terminations with tenants that want to do something else and actually release that space quickly. You'll note actually in that chart we focus on net lease terminations, meaning the difference between the terminations that actually occurred versus what we actually got leased up. So the difference between just getting space back that's vacant or negotiation a deal. Prime example was in Westchester, 1st quarter with Kraft, where we had a tenant that terminated the lease, paid us $4 million or so and we immediately signed a lease with Kraft to take the space. There's no down time in that.

So really, you're opportunistic, if you have a tenant ready to go --

That's sort of the positive lease termination type situation, versus when you're in the market we were in '02 where you're just getting a small fee and you sit with vacant space.

On the Westpoint lease, you say that's now at market?

It's not really at market, no. It's still below market, but they were in the low 20s and were at $40 a foot.

What we basically did was we took market and backed out what we thought the concessions would be associated for a normal market lease and gave them that number.

So part of the benefit that you're going to get out of this building, you've now realized, when you have to renegotiate the ground lease, they won't be simultaneous. That would be a net negative at that point.

I'm sorry?

You're getting incremental income from resigning the Westpoint lease now.

There's probably another 30% increase on Westpoint -- on that space, 35% increase on that space. Remember --

You're going to make a capital investment in order to get that increase.

Right. John, just remember, maybe for everyone else, in our numbers right now, we are forecasting -- we are including our forecast for what the new ground lease payment is going to be.

And you have Westpoint in the numbers as well.

And we have Westpoint in the newspapers as well.

But you don't have the balance of the building.

That's correct. If you recall we're forecasting in this building we'll be able to roll it up to 11 1/2% NOI yield over the next six years.

Great. Thank you.

Thanks.

We'll now go to the line of Carey Callaghan with Goldman Sachs. Please go ahead.

Thank you. Looks like 1180 Avenue of the Americas is potentially up for sale, obviously very close to 1185, back of the envelope if it sold at $400 a square feet, it would be something like a $150 million investment. Is that something you're looking at?

We're going to take a look at it, but probably isn't a good fit with our strategy for New York.

Good fit because of the building type or why exactly?

It's a small asset. You know, we have two premiere assets on Avenue of the Americas. And you know, I don't think we see the synergy between the two assets, just because they are across the street from one another.

Okay. Scott, did I hear you say correctly you thought 2004 occupancy could decline marginally over 2004?

No, increase marginally.

Increase marginally. Was there any impact at all of the Regis purchase of HQ on you guys?

No.

Then on the 32 million of land sales, can you just remind us of the accounting treatment there? Is there anything baked into your expectations for the 2nd half of the year in terms of an FFO contribution?

Nothing from the -- specifically from these land sales. What we do, we forecast other income, and we have in our other income number, we look at a -- there's sort of a wide range of things that can happen from termination fees, from tax refunds, utilities, selling of mortgages, a whole bunch of different things that are out there, that we create what we feel is a normalized bucket. There's nothing in there that I would say is materially assumed from a land sale, like when we had the first data land sale, that was a material number, which, again, first data burned off the 1st quarter, which is about $5 million in the 1st quarter. So there's nothing like that for the balance of the year. There is some estimate that something happens at more of a marginal way.

Can you give us a sense of what your basis is on the $32 million, more or less?

When you look at -- the basis of that plus Giralda, we're at right now maybe $30 million for all of our land, including the Giralda piece.

And the Giralda land holding was not in the 32 million that you talked about.

That's correct. The 32 is a Westchester sale. And the sale of another New Jersey parcel in east Hanover, which we call Eagle Rock.

It's not quite apples to apples.

Giralda is in the contract for 24 million.

Between 18 and 30.

18 and 30. Okay. What's the timing again on Giralda?

Again, as Scott said, going through the zoning process could be anywhere from 18 to 24 to 36 months. It's a process that's going well, but we can't really give a good estimate, a hard estimate of when that would potentially close.

Okay. And just lastly, given better occupancy, positive rent spreads, but still somewhat high TIs and lease commissions, can you give us an update on your thinking of when you covered the dividend?

Our sense theres I think nothing really changed. I think the big point of the dividend, which is the metric I tried to point out today, is on the capital that we are investing, we're getting a return on, for the beginning of this year, the 1st half, we had 11% gap marked to market gap return on that capital. And as that cycles through and we get through our '05, '06 leasing, we'll normalize our dividend. The metrics we and the company and board are looking at, are we growing top line by the dollars we're investing in the capital, are noncore land sales being affectuated as planned, and are we increasing our occupancy with this, and are market conditions going with us. I think all those things indicate that we're on course.

And you still expect to cover your dividend starting in '06?

I think as we go through -- again, timing as we do early renewals, it all depends on these things, but somewhere in '06 the right timeframe.

Okay. Thank you.

Thanks.

Our next question comes from the line of Tony Palone with JP Morgan. Please go ahead.

Scott, I just wanted to clarify, you said $100 million of investments. Was that in the 2nd half of the year or for the full year?

The $100 million, not including 1185, which obviously closed, but it's for the full year. Most of it is the 2nd half of the year, because the only investment we had in the full year was the $15 million structured finance investment.

So you're not including the New Jersey?

No. That's in that number, because that was 3rd quarter.

Okay. In terms of just American Campus, is there any impact on your income statement that we need to look out for in terms of that IPO?

No.

Okay. The IRS inquiry, is that still ongoing?

Yeah, it's ongoing to date. To date, there's been several meetings. For the most part it's been informational gathering. We've provided them with a lot of data and information relative to the return, in general. They are looking at generally all areas of the return. To date they are not focusing on anything in particular. It appears as though based on their questioning and information request, it's been just a general audit. There's nothing really to report as far as commentary from the IRS. We would expect this to continue for sometime. It could be up to six months or so, but there's really nothing new to report on it.

Okay. And then finally, with respect to lease termination income in the 2nd half of the year, any -- can you tell us what that is maybe on the high or low end of guidance?

I think roughly we're assuming not just lease termination but all income for the 2nd half of the year to be about $5 million or so is what we'd anticipate in our numbers. That as I said could be a mixture of lease termination fees, tax refunds.

Maybe a land sale.

Okay.

Things like that.

Great. Thank you.

We'll go to the line of Brian Legg with Merrill Lynch. Please go ahead.

Yeah. Just want to go back to the land sale gains. I believe you've been working on Giralda Farms for the better half of the year trying to get that redone. Is this a late '05, maybe early '06 hit.

Yeah, I would say late '05, early '06 would be --

I think that's the best guess as of now. Agains it's hard to really nail down when you're going to get through these entitlement processes. But so far we're kind of keeping on a schedule that would be late '05, early '06.

In looking at the 40 acres in Westchester, there's some at Lake Drive, the cost basis looks to be $24 million. I was surprised to see you're selling it for your cost basis.

I'm sorry, what was that?

Brian, that's a minimum price. As I indicated, based on yields, which are well within reason of what we expect, we would be above that.

And how much does that grow to?

Could be over 30 million, 30 million or so.

Okay. And this would be, again, late '05, early '06?

Yes.

Okay. And the 8 million, that's a stated contractual price. There's no upside to that, right? Your cost basis I think is $5.6 million.

No change. Flat price.

Okay. And can we just turn back to RSVP? What do you think after the student housing IPO what your net investment will be with RSVP, 65 million currently?

Next sale you're saying.

Yeah.

It will be the Tollway project, which is the rest stops along the Illinois turnpike.

I think he's asking -- I think the answer is until the IP is done, we'd rather not comment as to what our net investment will be.

Okay.

Obviously it's imminent. Once it's done we'll be able to give more commentary on that.

Will you run through gains in your investment, will you run that through FFO any gains on RSVP, and will it only be after you pulled out your full $65 million investment?

We're going to do cost recovery until 65, then we'll see where we are at that point.

Okay. So you probably won't really report any gains from --

Not until we recover to 65.

Okay. Which will probably not be until you actually sell your casino land.

That's probably correct.

Okay. Can you talk about -- can you quantify your discussion about net effective rents going up? Can you about that in terms of the reduction on a percentage basis of TIs? Doesn't sound like market -- asking rents have gone up other than Long Island.

Yeah, I think the big thing on net effective rents, if you look through downturn in the cycle, the net effective rents on new leases, meaning new deals, they did not move that much. Maybe they were down 10, 15%. If you look at net effective rents on renewals, they were down over, you know, 25, 30%, in some cases more than that. Because on the renewals, you were going from never having to put material TI and leasing commissions in space when the tenant was renewing, to all of a sudden having to provide full tenant work letters and leasing brokerage fees on renewals. What we found as the market recovered as we anticipated is you're now able to pay more normal concessions on the renewals. Like the examples I gave with the building in Westchester, 70,000 square foot lease in Westchester, where in that case we only had a broker to pay but no TI whatsoever. The more you're able to do that, the more net effective rents become stronger on a net effective basis. That's a trend we're seeing continuing to see occur.

How quickly do you think you can burn down the fact that in your table in the supplemental, average TIs were and lease commissions were $10 a square feet and now you're running an $18. How quickly do you think you can burn that back down to the sort of the average TI?

I think our sense -- first of all you've got to be careful. Our whole portfolio is not homogenous. New York City versus the suburbs had very different numbers, so depending the composition of leasing is swings those numbers. Moving away from that for a moment, when you see renewal rates like we've had, 85%, you're in the 75% rate, the trend of being able to renew tenants with more traditional renewal tenant concession packages, that's going to have a pretty significant impact on those numbers as we get into '05. Our hope is that we'll start seeing some of that. Alternatively I will tell you there are deals like the ones that we're going to be doing in 1185 and some other ones where we're getting such good marked to market you're going to put in big tenanting packages but you're going to get good returns on that, and we'll continue to do that part of our strategy is to marked to market the portfolio to higher market rent, increase our NAV increase our top line and earnings. We're not going to shy away from large tenant packages if economics associated with that lease are good.

And last question, you talked about the Wall Street firms are out there looking for a block of space. Can you sort of give an idea of if there's been a big change in the amount of large tenant requirements controlling the New York market?

Clearly the Wall Street firms, city made a recent announcement, I'm sure you saw, where they were moving about 800,000 feet to New Jersey and, you know, putting tenants there, looking for more space in New York and building a building in Long Island city. Lehman Brothers was on the market, Todd, for how much -- half a million feet. Bears Stearns. You're seeing some large tenants. Todd you want to give more commentary on that?

No, I think to net net, there's clearly a significant growth in the financial services sector. You do have some contraction I think downtown it's been written about in particular, JP Morgan, Bank One is going to be putting some space on the market in downtown Manhattan. Other than that we're seeing terrific demand. I think if you go through the top five firms, all of them are in the market.

I think PXP 300,000 square feet Times Square building is a good indication of what's out there.

Okay. Thank you.

Our next question comes from Chris Capalongo with Deutsche Bank. Please go ahead.

Good morning. I just wanted to ask the AC question a different way. What percentage of the proceeds that go to RCP make its way to Reckson.

85%.

85%. Okay. And then that cash will be used in part to fund the debt that's due or is there another use for it, the 250 million.

Yeah. It will come into the company, and it will be used to retire debt or pay, you know, short falls as we've indicated.

Okay. And then in terms of the guidance, it says excluding the post 2nd quarter accounting charges related to redemption, that is just the exchange, the charge associated with that?

That's correct.

So you're not planning on redeeming any additional series A preferred?

There's opportunity -- we take advantage of opportunities to redeem that preferred. There could be additional opportunities. If we deem appropriate, you know, we would reduce that preferred further.

Okay, thanks.

We'll go to the line of David Totie [ph] with Lehman Brothers. Please go ahead.

Good morning. Relative to the new service road development, can you describe a few of the assumptions underlying your projected 10% return, something like lease rates, initial occupancy, tenants cost.

I want to be a little cautious there, because I don't want to set myself up for marketing. Again, let me just reiterate, I think it serves a good baseline. We pretty much mirrored the assumptions that existed in the first building, which is the exact building that we started that construction in 1999 -- end of '99 and finished in 2000, leased it up to the end of 2003. And so, you know, if you think about that market environment, we basically mirrored those leasing assumptions, yet we increased our costs, construction costs because of steel, aluminum and other types of cost that have gone up and we've increased our interest rate assumptions due to where we view rates going. And so I think that's the basis of the analysis, without getting into any real specifics.

Okay. What's your overall feeling on speculative development relative to your appetite at this point? Is it increasing?

I think, as I said, I think we're going to be very selective as to where we buy vacancy. You know, buying the vacancy in New Jersey we think is a great opportunity to have product on the market right away. We're buying a great price per foot. It's a strong market. We will be selective and opportunistic is because the bias now, the markets are recovering, getting stronger. I think our sense right here is we're going to start with 68 south service road development because it is we think our best shot, we have the best cost basis in that building, best experience with the sister building and our strongest market right now. As we watch our other markets recover to a certain point we may kick off something else but nothing else is on the boards to be done on a speculative basis.

Okay. Just as sort of a side note, anecdotal comment, what's your sense of material in terms of cost increases? Do you have a rough idea of a percentage increase that you're seeing?

With some obviously there's been a big increase in steel, and there's been a big increase in concrete in some other areas. I think our overall number from this building to the sister building was up about 10%. What being said, what I will tell you when we bought out the sister building, it wasn't the low point in the construction market. In the end in 2000 we're still a vibrant construction market. Prices actually went down in between the two. If you went to sort of where prices were 18 months ago, we could be up 30%, but relative to where our pro forma for the first building was, we're up about 10% on hard construction costs.

Have you put forward contracts on most of that material for the new building?

Yes.

Thanks, guys.

No problem.

Our next question comes from John Lucas with Green Street. Please go ahead.

Good morning. With respect to your Giralda Farms acquisition number three, it looks like kind of a typical Reckson value-added deal with the tenant repositioning story there. Can you comment, though, on the pricing? You know, I look at it, 15-year-old building or so at a 30% discount to replacement cost an initial starting yield -- I'm sorry, stabilized yield projected at around 8 1/2. What's your level of happiness with this kind of pricing? To what extent is that kind of the new marked to market for re-positioning deals?

I think two things, John. One, did you ever see this building when you were out touring our stuff in New Jersey, by chance?

Not that I remember, no.

This is a real high quality building. Our true replacement cost, I think we're being conservative at 30% is probably more like $300 a foot. As I mentioned in the commentary, almost all the spaces for parking are below grade, what you need is structured below grade parking, it adds to the cost plus the amenities so. I think that we are buying it at a lower price per foot relative to the replacement cost we're actually seeing here. The 8 1/2% is conservative. We could do better than that. Would I like to do better? Absolutely. If this was a stable building and was leased today, you're selling this building for a seven cap today. I think part of what you've got to evaluate is what the spread is. You know, so it's maybe 150, 200 basis point spread onto where you could sell this building once it is stabilized. But clearly markets are competitive. This was an off market deal we worked very hard on for just about a year to bring home. And, you know, it clearly would we like to buy it cheaper? Absolutely, we like to buy everything cheaper. Relative to where we are in the quality of the building, I think we're comfortable. I don't think it is a policy shift or saying all our evaluated deals are going to be at this level. I think it depends on the quality of the building and what the stabilized yield might be.

But, you know, after a year's worth of work working on an off market deal, you get to an 8 1/2. I guess you're trying to point out the high quality and therefore maybe the potential value increase is more than might be suggested.

And we may do better than 8 1/2 is my point also.

Okay. All right. That's my only question, thanks.

No problem.

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