SL Green Realty Corp (SLG) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Reckson Associates third quarter earnings conference call.

[Operator Instructions].

The information to be discussed on this earnings conference 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. They could cause actual results to differ materially from those expected a list of factors that could impact Reckson is included in the company's form 10K and 10Q balance made with the securities and exchange commission which are available on the company's web site at www.reckson.com Investors and others should read these factors before making any investment. Reckson undertakes no responsibility to update or supplement information discussed on this call.

Also during this call, the company may discuss non-GAAP financial measures. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and reconciliation between these measures can be found on the company's web site in the 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 all for joining us for our third quarter conference call. Presenting with me today are Mike Maturo, our Chief Financial Officer, Salvatore Campofranco our Chief Operating Officer and Todd Waterman our Executive Vice President who runs our New York City office. The balance of our executive management team will be available for questions and answers.

As usual, we will be working off a presentation that can be accessed from our web site, which is www.reckson.com if you have trouble accessing it, you can call Susan McGwire who, runs our investor relations at 631-622-6642. In an attempt to streamline our presentation and leave adequate time for questions and answers, we have relocated some of the slides to an addendum rather than including them in our formal presentation. The addendum includes valuable analysis regarding our portfolio and recent performance and I encourage you all to review it at your convenience.

Now I would like to turn to our presentation on slide number two, which is a summary and highlights. I am pleased to report that we had an extremely strong quarter producing positive results for our corporations, investment activity and capital market activities. Our third quarter reported FFO of $0.47 per share, which includes $0.09 of non-cash charges related to the deferred redemptions that we did during this past quarter.

Adjusting the non-cash charges, our normalized FFO was $0.56 per share as compared to $0.56 for the third quarter of 2003. Our leasing activity continued to be brisk where we executed 673,000 square feet of leases and renewed 75% of our expiring leases.

Turn to slide three and continuing on the summary of highlights, you will note that our portfolio occupancy was up 320 basis points from September '03, and 280 basis points on the same property basis. When you are looking sequentially on a quarter over quarter basis, it was relatively flat. Our same property and a (inaudible) for our office portfolio grew about 5% on a cash basis and 4.5% on a straight-line basis.

Rent on renewal and replacement space was down 1.2% on a cash basis and up 4.2% on a GAAP basis. Our same property NOI, as I mentioned, was up 5% on a cash basis and 4.5% on a straight-line basis.

Turning to slide four, you will see we had a lot of investment and capital market activity during this past quarter. We are going to provide details of this activity later in our presentation, but you can review it quickly on slide four.

I'd now like to turn to slide five and discuss our markets, when you see the slide entitled "market trends." Our markets continue to gain strength as activity remains brisk. Midtown, Manhattan, Long Island and route 24-corridor in northern New Jersey are markets that can be characterized as landlord markets where we believe demand is outpacing supply and we are able to generate some pricing power.

The remaining tri-state markets are at or approaching what we categorize as balance markets with landlords and tenants on a more even playing field. Clearly the tenant psychology has shifted. Tenants are pursuing space decisions with a greater sense of urgency. They are seeking to capitalize an opportunity in advance of the potential increasing rents and we are continuing to see early renewals and early lease extensions becoming more common practice throughout our portfolio.

The other thing we have seen in the market was a continuation of attractive space alternatives becoming more and more scarce. Tenants are also focusing on expansion, although they remain measured. Let me share some indicators that we believe is still on a more expansionairy approach that the tenants are taking in our market. First we seen tenants plan for future expansion when they did develop space plans.

A year ago, tenants were just taking the amount of space they thought they needed. Today, they are thinking a year ahead, three years ahead and trying to plan for that expansion in the amount of space that they are signing leases for.

Second, we are seeing space levels normalizing. Again, a year ago, tenants were trying to fit as many of their employees in as small space as possible. Now we are starting to see space density normalize to the 250 square feet per employee, which is more than industry norm.

Lastly, which is new to this quarter, we're starting to see significant qualities on all of the company's development sites. We think this is being fueled by tenants from Manhattan that are seeking regional decentralization and local tenants that are looking to consolidate into higher quality assets that are in better locations.

We believe that there is potential for acceleration and tenant demand in 2005. Corporate America appears to have been cautious about aggressively expanding due to the recent macro uncertainty, the elections, oil prices and geopolitical unrest.

For example, we have seen local offices have their expansion plans reigned in by their corporate offices. It is our belief that if global uncertainty subsides, expansion could accelerate and materially -- make material effects on pricing power as demand broadly outpaces supply.

With that, I would like to turn it over to Sal, who is going to quickly run through our suburban markets and then Todd is going to run through the CBD.

Thank you, Scott. As you can see from the chart on slide six, Reckson is out performing on all of our markets related to occupancy trends of our portfolio versus the overall markets occupancy trend. In Long Island, if you noticed there, we have an occupancy around 96%, very strong occupancy in our portfolio and we continue to do very well in that marketplace.

Long Island continues to be the strongest of our suburban markets. Leasing activity of over 730,000 square feet is the highest total for any third quarter since 1999. Long Island overall year to date, we've seen about a 40% increase in the activity versus 2003, so it's a very strong activity.

The market has strongest net auction numbers across the suburban markets that we operate in. the Malvo sub market, vacancy rate dropped to about 8.5% overall in this quarter. The market continues to tighten and be very strong.

This sub market contains our highest concentration of properties including our recent acquisition of 300 north Hollow Road and our development project at 68 South Service Road, so we expect the Long Island market to continue this very positive trend line in Westchester, you can see their occupancy remains stable, around the 90% mark and we have a nice gap in our performance of our occupancy versus what's going on in that market.

The large tenant requirements continue to drive the market, some of which Scott had mentioned, related to the development site, although no large leases were signed in this quarter. We have a good pipeline and potential transactions for requirements of 50,000 square feet or greater.

Westchester continues to compete every well for the business interruption uses and diversification programs currently being considered by many companies in the tri-state region. The transactions are 20,000 square feet or less, the activity remains sluggish and off historical trends. We do not have a consistent deal flow for transactions of this size, which is holding back the general recovery in the Westchester marketplace.

In the third quarter, we did see increased activity in the west and central sub markets, which is where a portion of our available space is located. For Stamford, as you can see there our occupancy is around 90% which is very good, and again is a very favorable gap between our occupancy and the overall market. This market continues to lag behind the recovery we're seeing in other markets.

The third quarter activity levels were up from the second quarter, especially in the core of the CBD where all properties are located. The overall activity levels remain lower year to date than '03 and significantly off the historical run rate. Although the market is gaining some traction, a negative net absorption is kind of holding back a broad based recovery.

We would expect the third quarter activity trend, which is an upward trend, to continue driven by uses such as financial services firm, hedge funds, etc, considering moving from type Greenwich market next door into the Stamford marketplace.

We are seeing a number of large requirements looking in the Stamford markets if any one of these requirements would land in Stamford, it would dramatically accelerate the recovery that's underway there.

Our inventory in Stamford consists of both smaller spaces and one large block, which is the reposition of landmark 6 so our inventory matches up with well the potential activity that's in the marketplace today. Northern New Jersey, as you will notice on the chart, our occupancy moved up to 93.4. It was a very favorable spread in that marketplace as well. Northern New Jersey is really a tale of two markets. The 10-24 market continues to have very good activity with quality properties such as rations in high demand.

The periphery markets continue to struggle with inconsistent activity levels and subleased space still putting a drag on potential recovery there. The short hills and chatham area where our product is located is seeing strong activity and we continue to have good opportunities in front of us in these markets, and I think the AG transaction that you will hear more about is a great example of the types of opportunities we are seeing in our ability to execute and capitalize on the strength of these markets.

Trends that we're seeing in New Jersey, job creation continues to be very strong across a diverse set of office users. The outlook for employment growth is one of the strongest among the markets that we operate in the suburban markets, and large user activity has increased consistent with what we're seeing in New York City, Westchester and Connecticut. Based on these trends, we expect to see the recovery continue to gain strength in northern New Jersey over the coming quarters.

And with that, I'll hand it off to Todd Waterman.

OK, thanks, Sal. Again, consistent with what Scott went through on slide five, the Manhattan markets, particularly midtown's, continue to improve, and the momentum we saw in the last quarter continues through the third into the fourth quarter.

All eight midtown sub markets have had positive absorption year to date. There has been about an 8 million square foot swing in absorption from last year where it was negative four through the third quarter this year, it's positive 4 million. Growth activities up 66% at 13 million square feet plus, the most is 2000. and in our view through midtown coupon rents have risen about 5% in the last year.

What's shaping the market are really a number of very large lease transactions by financial services companies, Citigroup, Bank of America, Time Warner, Bear Sterns all in the market for you know between 100 and 500,00 square feet as well as a group of other tenants. This is really leading to a derk of large loss of quality class A space that's available now and into the future, a classic sign of the midtown recovery. The large tenants are really, as Scott said, extending their vision forward and are interested in early long-term renewals. You see this in the market as well as our portfolio. We are seeing to see an ability to increase rental rates in our premium midtown assets and I anticipate that will continue.

Our leasing performance in the city during the third quarter and into this quarter has really been characterized by just that, large tenants, all of which seem to be characterized by a need for more space and we're actually starting to see a trickle down now into the smaller tenants expanding, and this is really the first time we've seen that since '01 and we're very encouraged by it.

In downtown, the environment is still challenging. We have been able to get some leasing down to 100 Wall Street, although vacancies declined slightly in that market, we are concerned about potential for future availability of large blocks of space there.

However, as midtown continues its momentum, I really do think that the downtown market will follow its historical market and begin to firm up. I think you can see this by the third quarter of '05. Just turning to the major project we're working on in the city right now, and that's the reposition of 1185 avenue of the Americas, as I said last quarter, we're optimistic about the releasing of the west point Stevens block of space, which we'll, have you know, seven. We've got very good interest on that space.

I think the market's moving in our favor, and we're really in the middle of repositioning that asset from the Capex side and the aestetic side as well and we're very encouraged and that's it, thanks Scott.

Can everyone turn to slide eight. I want to talk about the leasing trends. You will see on slide eight that our leasing volumes continues to be strong. What's interesting to me is the past three quarters; we've actually signed big leases in each of these quarters that has created significant incremental value. In the first quarter, we signed a 220,000 square foot Nassau county lease and a 540,000 investor savings lease bringing our 101 JFK repositioning to stabilization.

In the second quarter we had big leases in Westchester and New York City where we signed Kraft and Westchester, which grew to 125,000 square feet, renewed Pepsi for 75,000 square feet in the city if I mentioned we had two big renewals with West Port Stevens and Harper Colins for 75,000 square feet and in the third quarter again, we had AG, which Sal referred to and I will talk more about later in the presentation, signing on to our new acquisition in New Jersey for 141,000 square feet, and then a large renewal and expansion at tower 45 in the city.

So we've had large transactions and not only adding volume but creating good value for our company. Also just to point out in the third quarter, in those numbers, there is also a 126,000 square feet related to an early lease extension with North Port bank. And this lease extension is based on a lease that expires post 2010.

So, you will see as we go through some of our metrics, we pulled out the impact of that lease in terms of the trends, the underlying trends of our business. That would still be 550,000 square feet of leasing during this quarter and very, very strong.

Going to slide nine and the leasing trends, starting with the effective rent spread, which you'll see here, is 10.9% and again, this is the difference between our average space rent and our gross effective rents, which pull out our TI our tenant costing, TI and leasing commissions. This 10.9% is in line with our expectations of 10% to 12% range that we have set for ourselves during this point in the economic cycle. From the lease term perspective, we continue to be able to get a good term. I have got 7.8 years of average lease term on leases that we signed during this quarter.

As I mentioned in the last quarter, this number may come down more if we are able to sign renewals with little tenant costs, but if there is large tenant costs, we push for longer-lease terms. Referring to tenant costs on slide 10, you will see that we have provided analysis of tenant cost per foot per year of lease for the trend in this past quarter.

You will see this quarter was $2.81 per foot per lease, which was impacted by a higher proportion of pre-built units in New York City. The pre-built units have higher costs and shorter terms so you get a double hit on this analysis here, but in theory, the next tension move in with very little tending costs associated with that tenant moving in, and so long-term, that investment should pay itself off. Again, this does not include the North Port Bank lease extension it did; it would be about $2.21 per square foot per year.

Now I just want to talk about leasing economics on slide 11. And I want to focus on two key metrics that we believe reflect the incremental value created by our leasing activity. The first is the net effective rent yield analysis and the second is the return on invested capital.

Started with the net effective rent yield analysis, which is how we do this. We take the rent effective rent per foot on the leases that were signed during this period and against our cost basis, our full un-depreciated cost basis of the properties where those leases took place on a per foot basis and determine net effective rent yield against that cost basis.

And you see this quarter was 9.6% was the NER yield. We actually do back out the assets that were contributor's part of our initial public offering because we believe the cost basis is lower than would be the norm. The second thing that I mentioned, we turned on invested capital. This is a very important metric. And what we do here is we look at the additional revenue that we're generating from new leasers versus old. So in this quarter, for example, we generated a $1.32 of additional GAAP revenues on new leases that were signed.

And we compare that or take that against the tending costs that were required to put these leases in place, which was $14.51, and we can see here we generated a 10.7% return on those tending costs that were put in place, so that was a 10. 7% I'm sorry, 10.2% return on that number. I am sorry, 12.8, I am sorry, I misspoke the 1,228 is the committed non-incremental capital, generated 10.7% return on that investment. So this is a great metric because in our mind any positive return is good since the capital cost is fully loaded with all of recurring tending costs.

As you look at both these metrics, I think in our mind they reinforce our view that while tending costs had been high, the result of return on capital and higher revenue justify these investments. And will continue to do so as long as these metrics trend in the same direction.

Turning to slide 12 and getting a sense of looking at a lease expirations from a perspective basis, you will note for the balance of '04, we only have a 1.09% of our portfolio expiring in 287,000 square feet. As you look to 2005, I would work down this group was expiring to 8.50%.

We really made some good progress here. If you looked last quarter, it was 9.6% of our portfolio was expiring in '05 and actually a year ago, it was a 11.6% of our portfolio was expiring in 2005. When you look at this from a percent of revenue, only 7.50% of our revenue is expiring in '05.

Staying looking forward on slide 13, you look at our potential mark to market, and you will note in 2004, 2005, we have 2.2 million square feet of space expiring. On a cash basis we are forecasting a 2% mark to market, and on a GAAP basis a 5.4% mark to market. In 2006, we have 1.6 million square feet expiring and we are forecasting a 10.7% cash mark to market.

If you add the GAAP numbers, which we do not forecast, we believe the number would be higher, because here the rent increases built into those numbers. It's important again to note these are based on today's market rents, so if the markets improve, as we discussed earlier in mine and Sal's comments, our mark to market opportunity can be much better than what exists on this slide but it gives you good feel for the potential building growth we have in our portfolio over the next couple of years.

Now, if you turn to slide 14, I would like to discuss the investment market, and our recent activity. You might recall last quarter that we noted -- that we expected supply of for sale office assets would accelerate as owners start to capitalize on improving market conditions and a strong market before interest rates rose. Well that's exactly what's happened over are the last 90 days as property increased dramatically, particularly throughout our suburban markets.

That being said, the markets remain extremely competitive, and in this environment, we continue to pursue off-market transactions and properties where there are operational or ownership complications that we can effectively underwrite better than some of the other people out there competing for the properties. We are finding the suburban markets to be less competitive than Manhattan.

As I noted earlier during this reporting period, we closed on four investments for approximately $117 million, which meets our 2004 target. We expect to generate a 2005 GAAP and a Y yield of 9%. These were all off-market transactions where we had our corporate and local relationships that was also waiting for some time and required us to move in accelerated pace.

As a matter of fact of all these investments, we signed a contract and closed simultaneously. So I think it shows you how star rated our pace was. As we go forward, we are going to continue to pursue purchasing vacant space and premier assets so that we can capitalize on improving market fundamentals that we discussed earlier. We are also considering using joint venture relationships in certain assets to leverage our expertise and enable us to be more competitive on at price.

If you turn to slide 15, I would quick like to review our recent acquisitions, which I believe demonstrate how we are able to create value through leveraging the strength of our franchise and executing on our investment strategy. You see on 15 is Giralda Farm you may recall we discussed this acquisition on our last call. We purchased a building from 22.7 million from Atlantic Mutual and expected to have the entire building vacant at the beginning of '05 and we released over an 18- to 24-month period. I am pleased to note that we have already signed a lease with IHE pharmaceutical for the entire building greatly exceeding our original underwriting. We now expect to generate a yield of approximately 10% on a NOI basis and over a 11% on a GAAP NOI basis.

This for what we believe one of New Jersey's best trophy assets. I would like to commend our team in New Jersey for this execution. They did a great job, and I think that this is it really speaks well to that team and their efforts.

Turn to slide 16 just to look at the 300 broad our road another acquisition from this quarter. This is one of the top three buildings on the group one quarter Long Island. It's located right across from our corporate headquarters and new our new development project, 68 south service roads. When we purchased this building from AFR simultaneous with the closing of their Bank of America a portfolio acquisition. We purchased it for $157 per square foot, which is a significant discount to replacement cost. To put this in perspective, the cost of our new development is forecast to be about $220 per square foot.

So, we really bought some good value out of "Bricks and Mortar basis". Bank of America will be giving back about 70,000 square feet of space for this transaction. Once we re-stabilize the building we are expecting an NOI yield in excess of 9.50%.

Turning to slide 17, a quick of last acquisition 44 Whipping road, we acquired this property for $30 million. This building had been a long work out for some time. We structured a deal to accommodate the fee owners and mortgagee by using operating partnership units. This 215,000 square foot building was constructed in 1985. It is on the route 24 corridor, a sub market where we are developing a material concentration in New Jersey and Sal commented on -- in his presentation a little earlier. We expect to generate initial GAAP NOI of 9.25% and increase it to 10.50% over the next 24 months or so.

Finally on slide 18, I would like to provide a quick update on our 68 South service road development. As you recall last year we now said we are breaking ground. As you see in the photos, the foundation has been completed. Steel is currently being erected. We're targeting construction completion by the end of 2005. At this point, all major contracts have been issued, and are in line with our budget. So, we feel good about how this is going, even in a more expensive construction marketplace. With that, let me turn it over to Mike to review some of our financial data.

Michael?

Thank you, Scott and good morning everyone. I am starting on page 19. You will see we reported property operating revenues of $128.511 million and termination fees of 2.266 million. That resulted in a net operating income of 76 million 133 and a margin of 57.5%, which is similar to the margin reported a year ago same period and down from a last quarter, which essentially reflects seasonality due to the high energy costs incurred during the summer months.

Our goal is to try to push this number close to the 60% level. We are still battling some of the utility and additional costs, some security costs, but we do believe going into next year as some of the increased rents that Scott mentioned kicked in, we will be able to get close to that number. Marketing G&A was 7.6 million, slightly up from the last quarter, but that included a $200,000 of costs related to the Sarbanes-Oxley section 44 effort. Let me give a couple of comments on that, because I know it's been an issue on a number of the calls lately. Last year, we established an internal audit function on an allocated resources both internally and externally.

So we were very much ahead of the game relative to getting our work done there. We are well into the process of completing the internal control tests that we have had to do from an internal perspective and also having our external auditors begin their work, so we're very well into the process here, very much on target and getting completed, and we think we're in good shape there. As far as costs, we anticipate, in addition to the $200,00 that we have already incurred, probably another 100 to 150, so I'm thinking the total cost for this effort for this year will be in the area of $350,000 or so. We would hope that our investment this year could carry forward and that we could substantially reduce that going into next year.

As far as other income, $7.4 million, which was up from last quarter is made up of basically two components, $1,963,000 of interest income that is from the Capelli notes, the Odyssey note and AB plaza mezzanine notes that we have outstanding. Just a note on that, the Capelli notes were actually pay down substantially this quart, $15.5 million of the 19 million of notes were repaid, in addition about 2.5 million of the 30 million of the AB loan was only prepaid. Going forward we expect that number to be about 1.5 million in the fourth quarter and a similar number into '05, barring any new additions or deletions.

The other income number was $5.358, which is made up substantially of tax refunds and also the sale of the -- the assignment of mortgage on the 11-85 property that made up roughly $3 million. Again, this is a number that fluctuates, depending on the amount of activity, but we have roughly estimate $1-2 million per quarter on a go-forward basis.

As far as the tenant receivable balance, a little bit up this quarter, 1.282 million. That really doesn't reflect any trend from a credit perspective. We still see very positive trends on the credit side. Five hundred thousand dollars related to a reserve of specific tenant in our Florida property that was taken over by another company, and as we work through a revised lease, we have taken a conservative position and reserved against the old receivable. We may recover that in the future, but we decided to take the reserve.

You can turn to page 20, in the capital markets activity. We were very active in the capital markets this period. We completed a 5 million share common stock offering, raising $137 million. Proceeds were used to redeem our outstanding 7 and 5/8 series aid for preferred shock. We have redeemed 6.8 million preferred shares at 2,576 per share, we also converted 1.9 million preferred shares for 1.8 million common shares. Also during the period, holders of preferred operating units converted 15.4 million of preferred units into common shares at $29.30 per share. As a result of these redemption and conversion transactions, the company has eliminated 17.5 million of annual fixed charges on a net basis after considering the increase in common dividends attributable to the common shares issued by the company, we realized annual cash savings of about $2.6 million.

In connection with preferred redemption and pursuant to EITF topic D-42, the company incurred an accounting charge of 6.7 million in third quarter and will incur a similar charge of 9.5 million in the fourth quarter and that's because if you recall, we did an initial redemption of $50 million, and then later called the remaining amount of the series A, which actually was executed in the fourth quarter.

During the third quarter we also issued $150 million of 5.875 percent coupon ten-year notes, we had any - no money hedges in place, in closing that --we will reduce the interest rate on the $150 million to 7.5%. Proceeds were used to repay the maturing mortgage note on 1185 avenue of the Americas. In early August, we refinanced our $500 million line of credit for three years, the spread on that line is based on a ratings grid that is currently 90 basis points over live wire.

During the quarter we also -- RSPV completed the IPO of ATC, a student housing company, whereby its entire interest in the company was sold, based on the valuation realized Reckson expects to receive $30 million of proceeds. Today we have received $10.6 million through our joint venture interests in the real estate assets. The balance has to work its way through the creditor process. We would expect to see that money very late in 2004, first quarter 2005.

If you turn to page 21 in the financial ratios, we reported total debt of September 30 of $1.37 billion with total capitalization of approximately $3.8 billion. That results in debt to total market cap of 30.62%. That compares to 40.3% at June 30 and 44.9% at September 30, 2003. This reflects our continued effort to strengthen our balance sheet during a period where our stock price has been at attractively valued.

As I mentioned earlier, we repaid a $250 million mortgage balance on 1185 avenue of the Americas with proceeds from the unsecured debt issuance in residual proceeds from issuance of unsecured debt and common equity early in the year. This has reduced on a secured debt ratio from 26.4% at June 30 to 18.9% at September 30th. In addition, earlier this week, we repaid or prepaid an approximate $100 million mortgage loan that was subject to a significant interest rate reset, pro forma for this payment on secured debt ratio is now down to 16.2%. Also on a pro forma basis are unencumbered now represents 60% of total NOI.

If you look at the coverages, which continue to get stronger, our interest coverage ratio improved to 3.12 times for the third quarter and fixed charges increased at 2.69. Again, pro form for the redemption and conversion with preferred stock and units fixed charge ratio is 3.12 times as compared to 2.54 times for the prior year. The capital market transactions executed this year complete post restructuring growth substantially strengthening the balance sheet, which is evidenced by the improvement in the financial ratios.

If you turn to page 22 and look at our debt schedule, we have approximately $1.4 billion of debt with a weighted average interest rate is 1.6% and weighed immaturity of 6.5 years. Floating rate debt at September 30 is 6% of total debt. Pro forma for the repayment of tower 45 mortgage that was paid off at the line, that moves to around 12. We have very few debt maturities over the next 2 years, which limits our refinancing risk. This is the result of accessing the unsecured markets during the low interest rate environment and turning out short term borrowings. The loans that do mature over the next couple of years have are very under leveraged assets, we planned to refinance this loans with unsecured borrowings, further decreasing our secured debt levels and increasing the encumbered for.

With that, I will hand it over to Scott to finish up.

Thanks, Mike. I would like to provide some concluding remarks and then jump into our outlook for 2005. 2003 was about transformation for Reckson that culminated in the announcement of corporate restructuring that is actually almost one year ago today at the anniversary of that closing.

As we go in to 2004, our focus was on executing for the newly restructured company. In 2004, we increased our office occupancies from 91% to approximately 94%, completed over 450 million of new investments. We constitute our Board of Directors and enhance our corporate governance. We strengthen the company's balance street through over a billion dollars of capital market activity that Mike walked through.

Our accomplishments in 2004 exceeded all reasonable expectations that we had. I'd like to commend and thank our management team for their incredible efforts and commitment to success. I'd like to thank our board for their continued support and guidance, and finally, I'd like to thank our shareholders for maintaining their confidence in us as we went through this process.

Now, as we look forward towards 2005, we're going to seek to capitalize on the company's strong franchise, healthy markets and flexible balance sheet to execute on our growth strategy.

Our management seems aligned, energized and focused on succeeding. So turning to guidance for 2005, we're establishing guidance of between $2.23 to $2.44 per share, which is approximately a 5% to 10% year over year FOO growth rate. The assumptions that underline that guidance is 3% to 5%, same store GAAP NOI growth zero to $250 million of weighted average net of dispositions. 79 million of other income, and this is done similar, as Mike laid out how we reported this past period, it does not include interest income, so when you look at this, this is really termination income, land sales and items like that, and it is a 50 to 60% reduction from what we had in -- or expect to have in 2004.

And lastly, portfolio same store occupancy is forecast to increase somewhere between 50 and 100 basis points for 2005 and that results in a 232 to 234 per share guidance that I noted.

As we look at 2004, we're narrowing that guidance a little bit, pre the adjustments for the redemption charges. We are narrowing that guidance to $2.20, and $2.22. This was an expectation of lower other income.

We had more in the third quarter than we expect to have in the fourth quarter as well as some of the higher security and energy costs that has been going through our portfolio. When you include the redemption charges, the guidance would be $1.99 to $2.01. Even on the comment just on '05 again for a second, what I would note is we typically do not give quarterly guidance, but what I would focus on if people establish their quarterly guidance for annual guidance, I would start toward the low end of the range and then wrap up as our investment starts up well and through our portfolio, which is I think would be more accurate than just taking the mid point and working our way through that. With that, operator, we would like to open up for questions for myself, Mike or any other members of my management team.

Operator?

[Operator Instructions].

Our first question comes from the line of Brian Legg with Merrill Lynch. Please go ahead with your question.

Hi, Scott and Mike. Looking at your '05 guidance for the $7 to $9 million of other income, is that consistent with the expected sales of $50 million worth of non-income producing assets, and can you give an update on Giralda farms, the timing of the sale for that and also your Ball Halla (ph) property?

Sure that is consistent with the $50 million of dispositions of land and other non-core assets. This does not include -- this is not an expectation for Giralda farms land being completed in '05.

Obviously that would have a much higher gain associated with it, and just on the update with that, we are working through the process. We made some good headway on some of our approval processes, but anyone who has done business in New Jersey knows this process takes time, and so, we're looking at that more of an '06 type of event then '05, and I understand with Ball Halla, the forecasting has to be more of an '06 event than in'05. There are no land sales that are expected in here that would be in the other income, but are not material in size or especially as it relate to the gain, and --

That $50 million Brian is more weighted to the continued recovery of RSVT Investment.

OK. So that's where most of the 7 to 9 million is gains really coming out of RSVT?

No, that 7 to 9 million is the ongoing termination fees, traditional other income, real estate tax refunds that we get, things of that nature.

There is some smaller land sale gains.

OK. OK.

Not the large tracks. We may have 2 to 3 million of land sale gains is what probably in that number, if there was more than that, it would be higher. (inaudible) that other income line is the hardest one to forecast.

Right.

You know you get some amount every year. You just don't know exactly where it's going to come from, so that's an area that we try to give ourselves a little bit of a reasonable expectation on.

Can you just talk about your three Giralda farms. Did you have Diachi sort of were you talking to them before you made the acquisition? I know you had a lease downtime of 18 to 24 months and to come up with a lease that quickly -- is that how you're approaching making these, you know, these leasing risks corporate-type headquarters or do you usually have tenants in the back of your mind that are out there looking for large space and that's why you make these investments?

Although it is hard to believe we had know idea about Diachi when we made this investment. But we did know when it is consistent with our investment strategy is, if we can buy quality assets in good locations in markets that have some level of reasonable activity, you know, we try to under write like we did when we announced last call, underwrite with a conservative lease up but know there is a potential that you may hit something more quickly. This is an instance where it is, if you recall in the last call, Todd Rechler who, runs New Jersey was on the call, he was actually was the first time he went out and met Diachi at the building and he was trying to close that transaction.

And can you just turn to TI's, looking at the effective rent yield, the lowest of all your markets was New York City,. Why was that only 5.4%? Can you just talk about what you are seeing in your markets? Are you seeing a backup of capital costs and concessions in your markets?

Just, again, I thing I mentioned in my comments, in New York City we had a higher proportion of pre-builts down at under wall and as well as we had some in the mid town markets, and so the pre-builts have a big impact on those numbers, and that's really what drove that. Generally, as I think we have seen across all our markets, the concessions are moderating to a degree, and specifically, as we had mentioned last quarter, we are actually able to renew tenants without concession package is that they are equal to what new tenants would be getting, and that's something that we continue to see trending in our direction specifically in some of the stronger sub markets.

OK. Last question the $2.2 million of lease termination fees, how many square feet does that represent?

The $2.2 million of lease termination fees?

Yeah, end of quarter.

I don't know the exact square footage to be honest with you, so we'll have to get you that number.

OK. Thank you.

Thank you.

Our next question comes from the line of Tony Paolon with J.P. Morgan. Please go ahead with your question.

Thank you, can you walk me through just when and what to pickup would be just from an earnings point of view with the DIACCI lease?

The DIACCI lease is going to start phasing in '05 as the Atlantic mutual phases out of the space and what's going to happen is we are going to deliver them the space for them to start their construction, etc, into '05 as Atlantic mutual moves out. I guess it is at the end of the first quarter, we are getting into the second quarter, right.

So is that from a GAAP point of view, is there much change in just income coming in?

Yes, there would be because.

Well, there is a change from the standpoint of we're going to get income earlier than we originally expected, Tony, because we had a lease up here.

Right, what about in terms of straight lining and things like that, is there a free rent period? or out numbers?

It is again the numbers that I gave you in the GAAP numbers it is what's in there, it is about 11% GAAP and a Y yield and that includes the best of any free rent that would be given as well as the point from when they take possession.

OK. So the 11 is roughly what phases in, in '05 and again how does that compare with what's kind of in there now?

It's about a 9.5% return we're getting there now from Atlantic mutual.

OK, and then on the lease termination, just one more question there. It was that a number of leases? Was there anything big there? Just seemed a little higher than what you had been trending.

There was one large tenant in New Jersey, about 60,000 square feet.

OK and then on RSVP, can you give an update on the toll way project and maybe how much you think you can get out of that, and how that -

The toll-way project continues to go well from the standpoint of pre-leasing. If you recall, there's seven rest stops, so to speak, that are getting redeveloped. Two are completed, and the remaining five are under development. The pre-leasing is in the 80+% range. The other feature in that deal is that there is a 20-year ground lease that exists with the transit authority that we're trying to increase to a lengthier period, which would add some value. So we're waiting for some additional development to be completed to potentially get that lease extension and a little bit more pre-leasing, and then we will be in a position to market that for sale, which potentially could probably be in the first quarter.

So any money you think you might be able to get out of that would actually probably come in 2005?

Yes.

OK. Any sense as to how much ultimately gets back to Reckson?

Yeah, I can't -- I don't really have a good estimate of that, because we haven't really gone to market with it yet.

Again, I think when you think about '05, think about $50 million. When it comes to RSVP and our land holdings, when we try to establish our objectives for 30 million for '04, 50 million for '05, 50 million for '06 is what we think our reasonable expectations where exactly they come from and exactly what timeframes and which quarters they fall, we need to leave ourselves some flexibility.

OK. Thank you.

Our next question comes from the line of John Stewart with Smith Barney. Please go ahead with your questions.

This is John Stewart here with John Litt. Just to follow up on that quickly, Mike, what is the current level of pre-leasing at the project?

It is about 80 to 83%.

OK and can you refresh our memory as far as the -- you call it 130 million of expected total proceeds. What was your original basis?

I'm sorry. That's a whole collection of assets -- of investments, so it's not something that is a simple answer to say what our original basis is.

How about the $50 million that you expect to recover next year?

We have -- prior to this quarter, we had $65 million of carrying value. As a result of receiving $10 million back from the ACC, our carrying value on -- we carry on the books on all those investments is $55 million.

All those investments meaning all of the RSVP's.

All of RSVP.

OK. Thank you. Just to be clear on the guidance, the 7 to 9 million of other income that you are talking about excludes interest income?

That's correct.

And you expect to get about one-and-a-half million a quarter of interest income?

Right.

OK. Scott, you mention in your comments that you have seen significant increase on your development projects, can you quantify that, especially the Melville project.

I was talking of large users for the whole building and in Melville we have a request for RPF from a large user. But it's again its not something that I would want to say is anything other than a request of our site as well as multiple other sites. The point I'm trying to make is that now in Melville which is in the ground and not been Reckson we have a better expectation to receive an RFP for that site, it's the other markets where we have our land holding that you are not yet to the point we are actually starting to develop those sites.

We have actually asked for RFP's in Westchester, in Stamford, in New Jersey, and so, I think that's an indication of a trend that we're seeing of companies being more expansionairy and focusing on looking in the suburban markets for higher quality spaces.

OK.

John, it's Mike. I want to step back to your past question just to make some clarity. The 130 that you are referring to, remember what we're saying is 30, 50 and 50.

Right.

Those numbers are not exclusive to RSVP. Right now we are saying between RSVP, (inaudible) and land sales in '04, '05, '06, we are swift budgeting right now 30, 50 and 50. That may not be all of our inventory of RSVP and land sales. We are just giving you an indication so we can really look to those numbers to what gain is in there.

Right.

OK. Lastly, Scott, you also mentioned that you have seen, as far as investment activity, that the suburban markets are not surprisingly less competitive than New York.

Right.

And obviously the deals that you've done in this quarter were primarily geared towards the suburbs. Can you give us a sense for -- to what extent your marginal investment dollar is earmarked for the suburbs rather than New York?

There is no earmarking because we are opportunistic and to the extent we can find a deal in New York, we will be as aggressive as we can be on that but I think just to give you a sense of our current pipeline of deals that we are looking at right now, from dollars standpoint, 85% of the dollars are in the suburbs versus New York, and so I think that's an indication as to where, you know, where the opportunities where we think we can be competitive are, and are taking hard runs on.

And what is the dollar size of that pipeline?

I would rather not comment on the dollar size of the pipeline, but obviously it is enough of a pipeline that gave us a comfortable, saving of 200 to $250 million of investment opportunity. And again, you know, what we are seeing here is we have this pipeline, which is great, but we are yet to the point where we know whether or not our pricing if going to be competitive. And so that's why we're cautious as to, you know, we have been in this cycle before, where there's been a lot of activity, but we have just been so far off the markets on what we thought the right valuations were.

Some of the things that we are looking on, where we are emphasizing our efforts are again areas where this vacancy or pending vacancy or market or complications associated, where we are allocating our time, and we think we have the best shot on some of those transactions because of our ability to underwrite them, but again, it is yet to be seen whether the pricing meets our expectations.

OK, and then just lastly, can you give us any update on the Pokeness (ph) projects.

I suggest that again we are making, you know, we are continuing to push forward on, that we have all the zoning. You are talking about the catskills, right?

Right.

All the zoning is in place. Again, we look at it in the cycle of RSVP, ACC, is done. We will be done with Tollway, and then last would be the modernization of the catskills, because that, we think, has -- the more that matures, the greater the bank cooperation we will get.

OK, thank you.

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

Good morning, just a quick question on the broad hollow acquisition. Could you give us a little background on how that came about and how involved you were with AFR in that process, and then if you could speak to how you got the building at 30% below replacement.

Right. The big thing -- let me just start with we have been targeting that building for quite some time as a potential opportunity, and especially when the Bank of America fleet merger went through, Bank America being the prior owner, we thought that would be a great opportunity.

We targeted discussions with Bank of America, but then recognized that they were going to be selling the entire portfolio as a whole versus this single asset, so, you know, in our discussions, we underwrote the building to the best that we could underwrite it, and the key is because B of A is giving backspace and B of A, the dispatch they are keeping has low market spaces in there, acquisition does where we can develop and offer that we are getting price per foot and as a long term holder, I think we can move that value up.

Frankly, if you think about it, we are taking the space, the vacancy risk, we are to reset the building or we are buying the building at such a discounts of replacement cost, you would think we would do better than 9.5% return on investment, especially going back to our service building, we expect to do double digit returns on our development project. The reason we're not getting a higher return is because in the near term, you have Bank of America having below market leases in the building that's you are going to have to address, and over time, hopefully that gets phased out and you mark those leases to market. That is your long term potential.

And I think from our standpoint with AFR, where we would be accommodative is when they were ready to close. That's a very, you know, we are doing portfolio transactions, you are extremely comprehensive. They called us. They said you can close year-to-date simultaneous with us, we will take your bid and go forward.

We were able to accommodate that because of our knowledge of the market and be able to come up with $40 million without having to go through-having a lender involved and others. I think having that access to capital and doing a move quickly, is what enabled us to do this.

Were there other bidders involved?

There were -- it was well known that B of A wasn't going to be after this building. While it wasn't in the market, there were a lot of people trying to log in offers to B of A and AFR to take the building. As I mentioned, it is a pretty high profile building in this market.

Mike, will this be capitalized the interest on this building -or the space that is quarter-on-quarter development?

No.

No, it won't be?

No, I didn't mean to confuse you.

I mean just out of service, I guess.

No, it is a non-operating building.

OK, and then just last one on the G&A, as far as the guidance is concerned, what is the total G& A for the next year expected to be?

It is about $30 million?

It is between 30 and 31 million.

Thanks very much.

Our next question comes from the line of David Totie with Lehman Brothers. Please go ahead with your question.

Hi, good morning.

Hi David.

The first question is where is your land rent accounted for on this statement?

In land rent expense?

Yeah, where does that show up?

What are you looking at, David?

In your income statement. Where would that expense show up?

Why don't you ask the next question while Mike looks for. That.

OK. I might have missed this. On page 11 of your slide show that the effective yield on the New York City leases was 3.5%?

Yes. I asked the question because we had a lot of pre-built in that space.

OK, that's right. Is that GAAP or -

They are averaged to the GAAP, so they are GAAP.

Do you have the two available?

I don't know. And again, what you are looking at is the net effective of rent yield so it is against the cost basis.

Those ground rates would be in property operating expenses.

OK, do you have a value for that for the quarter?

I don't have a value. It includes the 1185 payment, which we're not disclosing because of the fact that we're undergoing negotiations to finalize that.

OK, great. Thank you very much.

Thank you.

Our next question comes from the line of Michael Knott:t with Green Street Advisors. Please go ahead with your question.

: Good morning. Just a quick question on page 7 of the slide show, just looking at Midtown West, it looks like the only sub market where your vacancy is above the market, just curious when you talk about the decline since the second quarter for that sub market as it relates to your position in 8 and 7. Obviously, you see an upside in that property?

Sure. It moved up, I think, very slightly. It was just a small vacancy that came back to us, which was scheduled. What I will tell you is that we have --which I mentioned last quarter, we have some leases that have actually been signed so far in the fourth quarter and we do have activity on the other basis as we have primarily three vacant floors there but there is equity on that and what we're competing with is just a large sublease that's come on-line in a building adjacent to us, as I said we have put activity on the basis there.

: OK thanks and one last question. You talked earlier about your perspective on IRR's on the deals you're looking at and deals that you did recently in terms of how that compares to maybe a year ago or two years ago?

Sure. I think that we're very focused on sort of risk adjusted internal rate of returns, and by that, I mean not only risks associated with the initial investment and lease up but also the quality of the asset long term and I think what we've seen to a large degree, we think that the IRR's on some of the more commodity-like assets in the market have dropped lower than warranted on a risk adjusted basis, and on the higher ones, they have dropped but they have dropped, but they dropped, I think, in a more reasonable manner in the sense that you are getting better long-term value. My guess is if we look ahead and see it in the suburbs, we probably seen the general IRR's in the market drop 200-plus basis points, maybe 200 basis points toward the expectations of the investors that are in that market place, and, you know, what we're looking at right now from ourselves, is we're trying to find ways, that we can outpace some of the those IRR's. If you look at this quarter's activity, these IRR's will be in the, 15 you know use normalized leverage, 15-plus percent IRR's, when I say normalized leverage, probably for us, it's 45% leverage, not using market leverage. I would not say that's what we underwrite to, because I think from an underwriting standpoint, depending on the asset, if we can underwrite from a 10% to 12% in 45% leveraged IRR, I think we're doing a good job.

: That's all. Thank you.

Our next question comes from a line of Frank Greywitt with KeyBanc Capital Markets. Please go ahead with your question.

Thank you. In regards to development, looking to the route 24 corridor, what are your opportunities near term, especially giving to the fact that it is new to you in what you called a landlord's market.

Well, you know, in all the farms we have 450,000 square feet, almost 500,000 square foot development site. As a matter of fact our guys are out there showing it to a tenant that asked for an RFP. We have somebody else looking at it. It is going to be activity driven. I think that's a big project.

Again, when you look at doing development of that scale, I think we would not begin a project of that scale without having a major tenant signed up for a part of the building versus in Melba where I think it is a marketplace where we feel more comfortable that we can actually accomplish that. You know we are also looking for development sites, maybe of a smaller scale in that market place site, could we think that's there and we are looking also to buy other potential vacancies in that market place. So I think there are opportunities. We are actively working on a number of things. It's an area we would like to concentrate on.

OK so it wouldn't be a phase development, this 450 or1?

You could be potentially phased into two parts and we might do that if it make sense but it will depend on activity. We have actually done a lot of site work. Just if you think about this, this is also in Giralda farms right where Giralda 3 is with that development and really it's a beautiful park setting. It is one of the premier parks in the country, I mean, when you look at it from a park setting standpoint. Most of the parking is underground, you have these, and you know very high quality buildings on top of the great lawns and lakes and vegetation. So we have been working on the site works so we're ready to move forward as quickly as possible.(inaudible) One of the advantages we have right now, which we're seeing, as I mentioned with those, that piece, is that we have continually worked every one of our development sites in the approval processes so that we are if it was a tenant demand of interest we can move much faster than most of our peers by getting the building started and getting them in the building.

OK. Moving to the acquisition environment, last quarter, would you indicated you were moving more corporate resources towards the acquisitions. Some of those sounds like the ones you closed and recently one more something you already had in the pipeline. Can you talk a bit about the effort to remove the resource to the acquisitions and if that's being fruitful?

Absolutely. I think that that's a good analogy to say this is true, that these acquisitions that we have been working on have been assets that we have been working on for quite some time there as we mentioned in the last quarter, when you do off market deals they tend to have a longer time frame to come to fruition than a deal that is actually seeing market and in our process, because there is no process around the off market transaction. We have allocated more resources. As a matter of fact, the increase in our G&A that is forecasted for 2005 has a chunk of those resources allocated for it. We stepped up some of the team with rich conners' team in terms of the amount of people on that front and we've worked with try to make in taking a much more active role on seeking out new opportunities for us in the marketplace, so I think, hopefully, if our efforts are functioning, we will start seeing some of the fruition of those allocated resources.

OK. Can you indicate what percentage of your pipeline today is off market acquisition opportunities?

It's hard for me to really come up with that a number on that front. It's you know, I really don't have it off the top of my head. We are looking at more on market transactions right now than we were, because there are on market transaction that have vacancy and have, you know, underwriting issues surrounding them that we're fighting with which didn't exist, you know, back in September. I mean, there is a significant, significant difference in pipeline today than it was back in September. I don't know that it's going to be long-term. We may be hitting people to just hit year end close and get to the first quarter and that dissipates, so we're running hard on both the off market transactions as well as the ones that are on market.

OK. Can you touch on your JV strategy that you indicated, you're thinking about ramping one of those up.

Our JV strategy is something that we mentioned on in the past and got more active on and it really is a attempt to be more competitive on some of the investments in our markets. I mean, you think about where we've been focusing. You have certainly the trophy-type assets, the assets that demand the top 10, 20% represents in each of our sub markets and then you have the real value added assets, the vacant buildings and major repositionings. Those are things that we would like to do and we would like to have a 100% ownership on it. A feel then we can underwrite them competitively and get a good risk adjusted return in (inaudible) objectives, its been middle assets, the assets between those value creation and the top 10 to 20% of each of the buildings in our sub markets that we think we're not as competitive on. That's where we would be targeting our joint venture relationships where we can then utilize a partner and the fees that are generated by that joint venture to increase our returns to measure it with the target that we would need for those types of investments.

OK. Finally, on your 141 rents, can you indicate maybe where they were in the quarter? I didn't see that anywhere, and then with 300 broad hollow, where it might be going?

We had 141 rents related to 1185 for the quarter. I don't know the number off the top of my head. It will be disclosed in the 10-Q, which is coming out today.

OK.

And as far as going forward, I don't think there's really big numbers on 141 side in the acquisition we have recently acquired.

The 141 would depend on the 300 that will be (inaudible) because of the bank of America lease. There is some offsetting leases in that as well.

OK. Then on 1185, going forward, I mean, the West Point Stevens has moved out. Has it dropped this quarter or do you know that much or is that expected to continue to fall in 1185?

What's that?

141 again?

No.

So it's a pretty steady state?

Yes.

OK. Thanks.

Our next question comes from the line of Scott Oschea (ph) with Deutsche Bank. Please go ahead with the question.

Yes, thank you. A quick question on the motivation for the mortgage payoff just after the end of the quarter. Was that potentially to facilitate the sale of the Orlando property?

Not necessarily, Scott. the mortgage had a reset interest rate reset provision that was quite onerous and essentially would have driven the interest rates up quite substantially, so it gave us the ability to prepay that loan. As you know, we've been wanting to un-encumber our portfolio for quite a while. As part of our goal, you know, our balance sheet initiatives, so we took it as an opportunity to repay that mortgage.

OK, great.

It obviously also provides some flexibility on the assets, but it was more driven by the circumstances of the provisions of the mortgage, number one, and number two, what our overall plan to un-encumber additional assets.

OK. Looking at the line balances today, do you think you've got enough head room to go through the balance of the year? Are you looking for additional capital markets, transactions, early next year? Any thoughts there?

Yeah, I think we have good capacity. I do think, though, based on what we acquire for the rest of the year, we're going to have to take a look at that, so, it really depends on where our acquisition pipeline goes and what we close by the end of the year.

OK. That's helpful. Thank you.

[Operator Instructions].

We have a follow-up question from the line of David Totie with the Lehman Brothers. Please go ahead with your question.

Hi, sorry one follow-up question on, the 10% yield; that also a blend?

No, the 10% is the stabilized cash NOI yield. I noted it was above 11% would be the GAAP yield, which is the blend.

OK. Great. Thank you.

Thanks. OK, Operator?

We have no further questions at this time sir. Go ahead.

Thank you for joining us on the quarterly call. We look forward to be available to answer any questions you might have.

Thanks again for your support.