SL Green Realty Corp (SLG) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. Welcome to today's Reckson Associates fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, the conference is being recorded today.

Before we begin the conference today, I would like to read a disclaimer notice. Information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation and 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. A list of factors that could impact or extend this -- included in the Company's Form 10-K and 10-Q filings made with the Securities and Exchange Commission, which are available on the Company's website 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 in a reconciliation between these two measures can be found on the Company's website in the quarterly earnings press release, slideshow presentations and supplemental package.

I would now like to turn the call over to Scott Rechler, President and Chief Executive Officer of Reckson Associates. Please go ahead.

Thank you. And thank you all for joining us for our fourth-quarter and year-end 2004 earnings call. Presenting with me today are Mike Maturo, our Chief Financial Officer; Sal Campofranco, our Chief Operating Officer; and Tod Waterman, our Chief Development Officer and Head of our New York City Division. The balance of our executive management team will be available for Q&A once we're done with the formal part of the presentation. As usual, we work with an offline presentation that can be accessed from our website at www.Reckson.com. If you have trouble accessing it, you can contact Susan McGuire, our Head of Investor Relations, at 631-622-6642. Also to keep the presentation brief and informative, we have included an appendix with additional slides for your review at your convenience but will not be part of the formal presentation.

So turning to the slideshow, I'd like to start with slide number 2 by providing an overview of our fourth-quarter and 2004 results. For the fourth quarter, we reported funds from operations of 44 cents per share, which includes an 11 cents per share accounting charge in connection with the redemption of our Series A preferred stock. This compares to 38 cents per share for the fourth quarter of 2003, which included an 18 cents per share nonrecurring restructuring charge. If you pull these one-time charges out, the fourth quarter of '04, FFO would be 55 cents per share, and the fourth quarter of '03 would be 56 cents per share. For 2004, we reported FFO per share of $1.99, which includes 21 cents of accounting charges in connection with the redemption of our Series A preferred stock. This compares to $2.07 per share for the year ended December 31, 2003, which included 18 cents per share of nonrecurring restructuring charges. Again, if you pull out the one-time charges, our 2004 FFO would be $2.20 per share, and our 2003 FFO would be $2.25 per share, about a 2-percent difference, which is primarily a result of our balance sheet initiatives that we will talk about later in our presentation.

If you turn to slide 3 to continue the summary of our highlights. During this quarter, we signed 61 leases totaling 793,000 square feet. Our largest lease was King & Spaulding's early extension and expansion at 1185 Avenue of the Americas, which is a 225,000 square foot lease. During the quarter, our leasing transactions resulted in a 74-percent renewal rate. This is not including the King & Spaulding lease, since it was originally scheduled to expire in 2013. Obviously, if the King & Spaulding lease was in the mix, that would be a higher number. But 74 percent is a great number as it stands on its own.

From an occupancy perspective, our office portfolio ended 2004 at 94.1-percent occupancy versus 91.5-percent occupancy at the end of 2003, a 260-basis point increase. The overall portfolio occupancy ended at 93.1 percent, a 290-basis point increase off of the end of 2003. From a same property perspective, our office portfolio occupancy ended the year at 93.7 percent, which was a 220-basis point increase off of the same property portfolio at the end of 2003, and the overall portfolio ended the year at 92.7 on a same property basis, a 250-basis point increase off of where the occupancy was at the end of 2003.

When you look at our same property NOI performance before termination fees -- and we look at that net of minority interest in joint ventures, you'll see first our office portfolio on a cash basis. Our same property NOI increased 3.3 percent for the year and 2 percent for the quarter. And on a straight line basis, it increased 3.5 percent for the year and 1.7 percent for the quarter. When you look at the overall portfolio -- slightly different. For the year-on-a-cash basis, the same property NOI increased 3.4 percent. Our quarterly basis on a cash basis was 1.9 percent. And when you include straight line rents, it was 3.7 percent for the year and 1.5 percent for the quarter for the overall portfolio, so still very strong same property NOI growth for our year in 2004.

If you turn to slide 4, continuing with the summary of highlights, you'll note that our rent on leases signed during the fourth quarter decreased 2.2 percent on a cash basis versus what the expiring leases -- rents on the expiring leases were and increased 25.9 percent on a straight line basis. However, when you include the early renewals for Hess and King & Spaulding at 1185 -- when you look at the fourth quarter, cash rents actually increased 8.2 percent, and straight line rents actually increased 29.1 percent. And for the year-on-a-cash basis, the rents increased 4.8 percent, and straight line rents increased 18.7 percent for 2004. These were actually the increases that will be flowing through our numbers in '05, but we excluded them since the Hess lease was again an early renewal. But this is the impact that will impact us in 2005.

Also we have a very active investment program in 2004, acquiring $488 million of assets, which I will go through in more detail later. In the beginning of 2005, we acquired two other assets for $78 million, which I also will go through in more detail. And lastly, we continued to execute on our active capital market strategy, which has been designed to further strengthen our balance sheet. And Mike Maturo is going to give plenty of color on that later on in the presentation, so I won't take time now.

What I would like to do now is turn to slide 5 and provide an overview of our markets. And then, I'm going to hand it off to Sal Campofranco and Tod Waterman to provide some color of both our suburban marketplaces and Manhattan.

Generally speaking, our markets continue to gain strength as leasing activity accelerates throughout the region. We would still characterize Midtown Manhattan, Long Island and the Route 24 Corridor in northern New Jersey as landlord markets, where we actually have pricing power. The remaining tri-state markets are at or approaching what we can characterize as balance markets, which means good activity but not in a position yet for us to start pushing effective rents up. The tenant psychology reflects a more optimistic business environment and view that the real estate markets are becoming tighter. Because of this, tenants are pursuing space decisions with a greater sense of urgency. They're focused on growth and recognize their growth plans will require additional office space in a market where attractive space alternatives are becoming more and more scarce.

In addition, many tenants are seeking to capitalize an opportunity in advance of potential market rent increases, as can be seen by the fact that early renewals are becoming more common, not only in our portfolio but throughout all of our markets. And finally, more tenants are pursuing higher quality assets with better locations and infrastructure. This is obviously a positive for Reckson.

As we look towards 2005, we perceive a more accommodative business environment than we saw in 2004. The elections in the U.S. and Iraq are over, companies are no longer immersed in the Sarbanes 404 process, and most New York area companies are better capitalized than ever before. Companies are focused on growing their earnings by growing their business versus cutting expenses. This should result in a continued improvement in tenant demand during 2005.

Now, one area that can negatively impact this outlook is corporate combinations. The New York market has benefited from the recent financial services M&A, as you saw with the J.P. Morgan and Banc One and Fleet and Banc America mergers who consolidated back in New York. However, the recently announced telecom M&A's can be more challenging and is something that we continue to monitor and will obviously have an impact on our outlook as new supply could be added to the markets as companies consolidate. So that is something that we're watching carefully. With that, let me turn it over to Sal to provide a little detail on the suburban market. Sal?

In all of our suburban markets, we continue to maintain an impressive positive spread between our occupancy and the overall market, as indicated by the slide on page 6. In the Long Island market, this market continues to outperform all of our suburban markets. Vacancy rates on Long Island continue their decline with overall vacancy dropping by over 4 percent in 2004. Our portfolio continues to outperform the market with 95.6 percent occupancy at year-end.

In the Melville submarket, where our new building at 68 South Service Road is located, the highest positive absorption of any submarket on the island was recorded at over 500,000 square feet net absorption for 2004. Overall vacancy dropped in this submarket from 14 percent at the end of '03 to 6.6 percent at the end of '04 with a direct vacancy at 5.5 percent in this submarket. We expect the Melville market to continue to tighten throughout 2005, which will work nicely with our scheduled delivery of the new building in the fourth quarter of 2005. We are achieving pricing power in this market and expect that trend to continue throughout 2005.

Turning to Westchester, the leasing velocity in 2004 was 300,000 square feet higher than 2003. Relocations into the county accounted for 15 percent of the overall activity, an indication that the county continues to compete well for the decentralization programs, which companies are moving forward with. Large blocks of space are becoming scarcer with a 30-percent drop in inventory for blocks of space of 50,000 or greater. Negative absorption recorded in 2004 was the result of two large sales of previously owner-occupied buildings -- one of them being the former Altria headquarters, which is 595,000 square feet, and the Reader's Digest former headquarters of 760,000 square feet. If you remove those buildings from the mix, the overall market would have had positive absorption. The Altria inventory -- we would expect would be absorbed over the next 12 to 24 months, as that building competes well in the market. The Reader's Digest property does not compete as well. And as a result, we would expect it to drag the vacancy statistics for some time.

We're experiencing an increase in activity in the small to medium-sized tenant range, expansions and renewals of tenants in 2,000 to 10,000 square foot range have increased over the last couple of months in Westchester. This is important, especially for the inventory that we have on the west side of the county. The recent new activity matches up well with that inventory.

In the eastern market, which includes our Ryebrook property, where MCI is located, the current activity is comprised for the most part of larger requirements, 15,000 square feet and up. We even have some large 100,000 square foot requirements booking in that marketplace. This market includes a number of the large blocks of available space that remain in the market. And as a result, it is a competitive sub-market.

In the Stanford CBD, we're experiencing some improvement in this market as evidenced by the significant drop in overall vacancy. For 2004, the Stanford CBD market posted positive absorption for the first time in 2 years, which is a good indication the market is gaining momentum. Activity levels have increased across all size requirements. We have 11 proposals out with prospective tenants, which is the most activity we have had in the last 12 months in that marketplace, so we're encouraged. We're starting to see increased activity from companies looking to locate into the CBD. This activity is key to the market recovery in 2005 and was absent in 2004. We're seeing an increase in the number of large requirements in the market, which is creating good activity on our reposition property at Landmark Square.

In the northern New Jersey marketplaces, you can see from the graph, our portfolio continues to outperform the broader northern New Jersey market by a large margin. Our northern New Jersey markets remain stable with some indication that the broader market is seeing increased activity and greater momentum in absorption of inventory, both sublease and direct. Pharmaceutical and financial services firms continue to be the drivers of employment growth and space absorption in 2004.

Our strategy of focusing on high quality assets located in the Route 24 submarket continues to serve us well as demand for this type of product and location continues to increase. The Route 24 submarket recorded 1.1 million square feet of activity, which was the highest of any submarket in northern New Jersey and double the rate of the historical average for this submarket. Net absorption of over 300,000 square feet to 2004 dropped to Class A vacancy from 32 percent at year-end '03 to a current 12 percent in the Route 24 submarket. With our recent acquisitions in this submarket, we own approximately 32 percent of the Class A inventory with our current occupancy at 98 percent for our portfolio located in that submarket. So we're very impressed with the performance of that market.

And with that, I'd like to hand it off to Tod Waterman to talk about Manhattan.

In the city -- just running through the statistics briefly. In the fourth quarter, we finished up with an 8-percent direct vacancy in Midtown, 11 percent total vacancy. For the year, we've got positive absorption of 4.2 million square feet. And while that's a very significant number, the more significant issue is that this was the sixth quarter in a row where Midtown has seen positive absorption. We haven't had that since '99, 2000. The big blocks of space, which have typically driven pricing in the city, of over 100,000 square feet in Midtown number now -- less than 25 of those units of space on my count, cobbling together all the research. 12 months ago, that count was something like over 40.

What does all this mean? We really believe that going forward, you see an absolute return in the Class A market in Midtown to an environment where owners have pricing power. Rent velocity and increases in rent are definitely occurring. This is typically and classically being led by some of the mid-sized and smaller super premium assets in the market. But it is certainly having a trickle-down effect, which is making us bullish on the rollover that we have forthcoming over the next few years.

As we go forward, we see continued strength in midtown. I think our tenant base is of a similar mindset. That is why we've been able to execute some of the major early renewals at very favorable economics that Scott will touch on later at 1185 Avenue of the Americas.

Just briefly turning to downtown -- a little bit of a different story. I would still characterize that market as one that is improving, albeit slowly. It's still sloppy in the smaller commodity-type buildings. Again, a sign of a classic market trend is that we have all read about some of the very large transactions that have occurred, which is a good size -- sign for downtown. Morgan Stanley, Fried Frank, American Express -- all committing to multiple 100,000 square foot transactions. For the year, there was 1.7 million negative square feet absorbed downtown. But coincidentally, World Trade Center Number 7 has just been put back into the inventory, which is a building of 1.7 million square feet and is obviously all vacant. So if you take that out, the downtown market for the first time for the entire year has held its own in the post 9/11 era. So I think that things are improving albeit slowly.

With that, I will turn it back to Scott.

Thanks Tod, and thanks Sal for the quick overviews. And if you turn to slide 8, you'll see that we actually took advantaged of these improving market conditions by leasing almost 3 million square feet of office space and bringing our occupancy to 94.1 percent. The 2004 leasing volume was almost two times as much as we did in 2003. So clearly, we got a lot of leasing done, and it was above our normal averages.

Based on where occupancy is now and our outlook, we would expect our ongoing averages to be more in the 400 to 500,000 square feet per quarter, which is closer to our historical run rate. If you turn to slide 9, you can see that we're also able to improve the underlying economics on our leases. So we didn't just lease a lot of space; we leased them at good economics.

Starting on the left-hand side, that slide where we talk about the effective rent spread, which is the difference between the average rent and the average rent less tenanting costs. So the lower the number is, the better the economics of that lease. And you'll see that we reduced our effective rent spread from a high of 12 percent in 2002 to 9.4 percent in 2004, almost a 22-percent reduction.

In addition, if you look to the right hand side of slide, you'll see that we're successful at increasing our lease term to an average of just over 5 years in 2001 to a 9.1 average in '03 and '04, which was part of our strategy to address some of the heavy tenanting cost requirements that the market was demanding.

Turning to tenant costs, on slide 10, you'll see on the left-hand side of the slide that for the quarter, we averaged $2.71 per foot per year, which was down from $2.81 in the third quarter of this year. And if you look on the right hand side, you'll see that for the year, we stayed below our $3 per square foot per year target that we set. And we're at $2.70 per foot per year for tenanting costs.

If you turn to slide 11 and continue with our discussion on leasing economics, on the left-hand side of the slide, we provide our net effective rent yield analysis. And this basically takes our net effective rent against our cost basis, where the corresponding properties are relating to those leases. And you'll see, you not only have positive net effect rents, but we actually generated a 9.5-percent return on our cost basis on the 465,000 square feet of leases that qualified for this analysis.

On the right hand side of the slide, we provide an analysis of a return on our tenanting costs. And what this does is it takes the additional GAAP revenue that's generated by the rent that the new tenant is paying versus what the old tenant was paying against our tenanting costs -- all of our tenanting costs. And you see here -- so, in the fourth quarter, for example, we had $2.04 of additional GAAP revenue being generated by the new tenant versus what the old tenant was paying. And it cost us $25.23 of TI all the leases that we did, generating 8.1 percent. And then when you include just the Hess expansion space, which is about 53,000 square feet, it goes up to 32.2 percent. And you look at the whole year 2004, you see return on tenanting costs was 5 percent and with Hess, it was 10.2 percent. So while we've been investing a lot of money into leasing up our space and doing a lot of leasing, we're generating a positive return on that investment.

I would like to take a moment to discuss our dividend policy. You might recall last year on this call, we outlined three metrics that we planned to closely monitor relative to our dividend policy. The first was to monitor our tenanting costs and to ensure that they were resulting in higher future revenue. And as you can see from the study above, they clearly are. As we invest in putting tenants in, we are driving our top line.

The second was to assess our ability to monetize our non-core, non-income producing assets to finance any dividend shortfalls. And in 2004, our shortfall was the approximate $30 million that we originally forecasted. And as Mike will discuss later, we were successful on monetizing over $30 million of non-core, non-income producing assets.

And the final metric that we outlined was to monitor whether market conditions were continuing to improve in line with our forecast so that our dividend payout ratio would ultimately normalize. And this clearly has been the case.

So we believe that these metrics are strong and will continue to remain consistent in 2005, and we forecast no change toward dividend policy based on this analysis.

Now, starting to look forward on slide 12, we provide you with a breakdown of our lease expirations through 2009. You'll note that we had 9.4 percent of our leases expiring -- of our portfolio leased expiring in 2005. It's about 1.4 million square feet. Also what's interesting is 65 percent of 2005's expirations actually occur in the first half of 2005. So we're actually jumping on that early, and these are areas where we need to focus on right away. This actually is up a little bit, the 2005 lease expirations, and it reflects the purchase of properties that had 2005 leased expirations in them, which is consistent with our strategy of opportunistically acquiring properties with near-term vacancies to capitalize in improving market conditions.

You'll also see in 2006, we have an additional 10.7 percent of our portfolio rolling over. And then, there's a material drop in '07 through '09. So where we have a lot of our portfolio rolling -- about 20 percent in '05, '06, the good news is if you turn to slide 13, you'll see that we're still forecasting positive mark-to-markets on the space that is scheduled to expire. You see of the 3.5 million square feet that is scheduled to expire in these 2 years -- on a cash basis using today's market rents, we're forecasting a 3.9 percent positive mark-to-market. And on a straight line basis, we're forecasting an 8.7 percent mark-to-market. Now, obviously, as time progresses and if market rents continue to recover, these mark-to-markets can be greater than the numbers that are outlined in the slide.

Now, I would like to take a moment and turn to our investment markets on slide 14. Just starting with the investment environment -- the supply of office properties marketed for sale continues to be extremely strong and is expected to remain strong in 2005, as owners are seeking to capitalize on the strength of the market to put their assets up for sale before interest rates start to climb and potentially market prices start to drop a little bit. That being said, while there's a lot of supply out there -- the competition remains fierce, and cap rates continue to compress.

In addition, a new development is that there is little discrimination for asset quality or location. And the processes have become risky, as purchasers are closing in accelerated timeframes and are willing to waive due diligence. This environment actually had neutralized one of our material competitive advantages, which is when a seller made a deal with Reckson, they knew that deal would get done without being retraded. Now, as purchasers are willing to put up large percentages of their purchase price in non-refundable deposits and wave due diligence, that is not longer an advantage because there is no chance that they're going to be retraded to sellers. So that has impacted our ability to be as competitive as we would have liked.

The active buyers remain individuals with highly leveraged capital structures, and there's absolutely no scarcity of debt funding at this time. When deals are brought to market, there are many, many institutions out there willing to finance them at high leveraged balances.

I am pleased that even in this environment, we were able to successfully meet our 2005 investment targets by closing on $158 million of investments in addition to the 1185 Avenue of the Americas investments. These were all deals that were not broadly marketed and that were sourced through corporate and local relationships that we've been cultivating for some time.

As we go forward, we're going to continue to focus on these type of opportunities, and we intend on being selective as to when to be aggressive. As I said, we intend on being active, but we're going to maintain our disciplined investment approach that we have had to date. In addition, we're going to still seek opportunities where we can purchase or develop vacant space and premier assets to capitalize on improving market conditions. And that's something that hopefully will source new transactions in 2005.

On slide 15, we provide you with a summary of our investment activity as well as a forecast of our 2005 GAAP yields from those acquisitions. And you see again, just to recap, that 2004 almost $488 million of investments at a forecasted GAAP NOI yield of 10.8 percent -- so you see they really have all matured and are performing extremely well in 2005 and getting us above market type returns.

One investment I would just like to point to quickly, which is one that we made at the end of 2004. We noted here is a structured finance investment in New York City. This is an investment that is secured by an interest in a Midtown, Manhattan Class A office building. It's part of a larger transaction that we are working on, and we hope that we are able to move forward the Phase 2 of this transaction and increase this investment to over $60 million as in 2005. And some of that will hopefully progress.

Moving down, you see we also commenced the development of 68 South Service Road. To date, we have invested just under $20 million into that project. The construction is on budget and on time and is expected to be completed by the end of 2005.

As I mentioned earlier, we also closed on two acquisitions in 2005 to date in New Jersey, which I will go through more detail momentarily.

On slide 16, we provide an update on our 1185 acquisition. When we -- those who recall when we announced the purchase of 1185, the investment thesis was that we would be able to increase NOI by generating operating efficiencies and marking below-market leases to market as they expired over the next 5 or 6 years. I am pleased to report that we're far exceeding those initial expectations thanks to the over 425,000 square feet of early renewals and expansions that our New York City team signed this year and Tod referred to earlier. Just a quick recap, the three major ones -- WestPoint Stevens, we have signed a 1-year renewal on 86,000 square feet, where their rent is 94 percent higher than what the expiring rent was. And there's no tenanting cost.

We signed an early renewal with Hess for 120,000 square feet, increasing their cash rent by 38 percent and their GAAP rent by 50 percent. In addition, they took a 53,000 square foot expansion for 2 years at a rent of 128 percent higher than what the prior tenant was paying on that space.

And lastly, we signed an early renewal with King & Spaulding for 168,000 square feet. It was originally scheduled to expire in 2013. We increased their GAAP rent by approximately 22 percent, in addition they are expanding by about 57,000 square feet first by subleasing some space in the building that then turns direct when that sublease space expires. Current occupancy in the building is over 99 percent, and when we take all this into account, our 2005 cash NOI yield is expected to be approximately 8.5 percent and our GAAP NOI yield approximately 11 percent. And I think we are on a course where we –are able to continue to get the growth at this building at a faster pace than we originally anticipated and are extremely pleased with its results.

Now, turning to slide 17, I just want to profile one more investment strategy that was very successful for us in 2004, which is in New Jersey, where we decided to focus our growth on some of the best, most sought-after and healthiest submarkets, as Sal had mentioned. In particular, we targeted expansion at Route 24 Corridor that Sal gave you the good market color on. And we were aiming to establish a foothold in Giralda Farms, which has been known as one of the most exclusive office parks in northern New Jersey. You will recall in July, we announced we purchased Three Giralda Farms, a 141,000 square foot building, that was the former headquarters of Atlantic Mutual and then quickly leased it to Daiichi Pharmaceutical.

In the beginning of this year, we acquired One Giralda Farms, a 150,000 square foot building which was the headquarters for Schering Plough, for $24.3 million. Schering-Plough is going to lease the entire building until May 2006. Then our plan is to reposition the building into a multi-tenant building similar to what we did with Three Giralda Farms and release it and anticipate generating GAAP NOI yields of approximately 9.1 percent.

Shortly after purchasing One Giralda, we purchased Seven Giralda Farms from Morgan Stanley, a 200,000 square foot building that was developed in 2000. Originally, Global Crossing was the sole tenant. Subsequently, it's been released to such companies as Wyeth, Atlantic Mutual and Wells Fargo. It's now 100-percent leased, we would be purchasing the building for approximately $53.7 million, and we expect to generate a GAAP NOI yield of approximately 8.5 percent and cash NOI yields up to 9 percent, as the burn of scheduled rent abatements occurs.

So now, Reckson now-owns all the non-owner occupied office buildings in the park, as well as development rights for 1.2 million square feet of office space. So this really was a very successful strategy, and I'd like to commend our New Jersey team for doing a great job on executing it and establishing such a strong market position for us.

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

I will start off on slide 18, which is the operating data information. Our operating margin for the fourth quarter was 59.3 percent compared to 57.4 percent for the third quarter. The sequential increase of 200-basis points was expected and primarily results from the seasonality due to the higher utility costs reflected in the third quarter. The fourth quarter margin of 59.3 percent is consistent with the prior year fourth-quarter margin. And we continue to work on maintaining and potentially increasing these margins as we go forward.

G&A for the quarter was $8.8 million and compares to approximately $7.7 million for the third quarter. The increase is attributable to $600,000 of year-end bonus compensation, and approximately $100,000 of stock compensation, which amortized at a higher rate due to a higher stock price. We've had $200,000 of higher-than-expected Sarbanes Section 404 costs and $100,000 of accounting fees related to the tax audit that we're undergoing right now. In respect to the Section 404 process, our independent auditors reported yesterday to our audit committee and noted that they found no material weaknesses or significant deficiencies in our internal controls, and that they would be issuing a clean opinion. With respect to the tax audit, that is latter stage of the process, and we have not been informed of any significant issues to date. We would hope to have this audit concluded during the first quarter.

Looking at G&A going forward for 2005, it is currently budgeted at $33 million or about 8.25 million per quarter. And this rate provides for some growth in personnel during 2005.

As for other income, which was approximately $3 million for the quarter, that includes $1.7 million of interest income on mezzanine and other notes receivable. That number should increase to about 2.4 million per quarter in 2005, as we realize the full-quarter accrual on the advance on the New York City structured finance transaction that Scott had mentioned earlier. Other income also includes about $1.3 million of miscellaneous income. $1 million of that was from the assignment of a mortgage we paid off this quarter in Tower 45. The rest is from utility refunds and smaller items.

For 2005, we're budgeting this portion of our other income at about 1.25 million per quarter. As far as tenant receivables and reserves, the bad debt continues to moderate, which I believe is a reflection of general recovery in the market.

If you turn to slide 19, capital market activities -- in the fourth quarter, we continued to be very active in the capital markets. We capitalized on a strong stock price and continued our efforts to strengthen our balance sheets and provide the Company financial capacity to fund growth opportunities. We issued 4.5 million shares of common equity at $32.90 per share. The highest issuance price we have ever realized in a common equity offering, raising total proceeds of $148.1 million. We also completed the redemption of our Series A securities, and we received a ratings adjustment from Moody's, who upgraded their rating on our senior unsecured debt from Ba1 to investment grade level of Baa3.

We continued to -- our efforts to monetize our non-core asset portfolio with an agreement with Empire Resorts Inc., a publicly held gaming company, where RSVP and its partner agreed to transfer rights to certain landholdings in Catskills to Empire for 40 percent of the outstanding stock of Empire. I will provide a little bit more color later on this.

But to recap the 2004 capital market activity, it was by all means a very productive and transforming year for Reckson. We issued 15 million shares of common equity, raising $435 million in 3 offerings at an average price of $28.97 per share. We issued another 4.3 million common shares in connection with preferred stock conversions. This contributed to the increase in the Company's total market capitalization from 3.1 billion at December 31, 2003 to almost 4.2 billion at December 31, 2004. We redeemed or converted all of our outstanding Series A and Series B preferred securities, reducing fixed charges by approximately $22 million. We took advantage of low interest rate environment and issued $300 million of senior unsecured notes at a weighted average interest rate of 5.5 percent with weighted average maturity of 8.5 years using proceeds to repay maturing unsecured notes and and unencumbering assets.

We refinanced our $500 million line for a new 3-year term. And we repaid $350 million of mortgage debt on 1185 Avenue of the Americas and Tower 45, adding those assets to our unencumbered pool.

To turn to page 20 -- laying out the financial ratios. As a result of the activity I just mentioned, we now enjoy a very healthy balance sheet, more so than we have had in many years. Our total debt to total market cap is now 33.8 percent, which compares to 41.2 percent at the end of last year. Our ratio of secured debt to total market cap is now at 11.4 percent, as compared to 19.3 percent at the end of last year. We have very strong interest coverage, which was recorded at 3.13 times this quarter. And as a result of the redemption of the preferred securities, our fixed charge ratio for the fourth quarter was 3.08 times compared to 2.41 times at the end of last year. And that number should improve even more so in next quarter, as we realize the full benefit of the fixed charge reductions.

Finally, during 2004, we made a big effort to monetize our non-core assets, at particularly RSVP. We completed the IPO of ACC, where we received $10 million of proceeds. Based on final proceeds and the sale of some residual assets in student housing platform, we would expect to receive another 20 to $23 million. These proceeds have to work through the Frontline bankruptcy process, and we anticipate ultimate receipt of these funds most likely in the third or fourth quarter of 2005.

With respect to the Catskills project, it continues to enjoy very positive momentum. During the quarter, RSVP and its partner decided to join forces with Empire Resorts, a gaming company. In efforts to bring the gaming to the Catskills. RSVP and its partner entered into an agreement, whereby it agreed to transfer the rights to its hotel and golf course land in both the Concord and Grossinger sites to Empire in exchange for approximately 40 percent of the stock of Empire, which amounted to 18 million shares. RSVP owns 50 percent of 94 percent of the entity that owns the Catskills properties. And the Empire stock is currently trading at about $11 per share. It's important to note that this agreement excludes the residential land RSVP and its partner will continue to own on which there are approvals for over 3,000 housing units. The next step in the process now will be for Empire to file its proxy for shareholder approval.

With respect to development of the sites, Empire has agreements with two Cayuga Indian tribes to develop casinos in Sullivan County. And the strategy would be to build one casino at the Concord and one at the Monticello site. Recently the Sullivan County legislature approved the proposed plan to develop five casinos in Sullivan County by a vote of 6 to 3. We are hopeful that this local endorsement for the development of casinos in the Catskills represents a significant step toward the approval by New York State Legislature and ultimately federal approval. However, these two approvals are subject to normal political process, so it's difficult for us to comment at this time as far as when that would occur.

The other significant asset at RSVP is the Tollway redevelopment project on the Illinois interstate. The redevelopment and leasing of the Oasis rest stops is going very well. We believe we're at a point where we can begin moving forward with the marketing process for the monetization of that asset. We believe that consummation of the transaction is most likely a third or fourth-quarter event.

As we have mentioned in earlier calls, we would expect these non-core asset sales proceeds to amount to about $50 million in 2005. And that's inclusive of the RSVP activity as well as RA land sales but excludes the residual ACC proceeds that I mentioned earlier.

If you look at slide 21, it lays out our debt profile. At December 31, 2004, we have $610 million of mortgage notes outstanding, approximately 210 million of those notes come due over the next 3 years. These assets are significantly underleveraged due to the depreciation in value of the assets, since the mortgages were placed. What is important to note is that we plan to refinance these mortgages with unsecured debt adding these assets to the unencumbered pool over time.

At December 31, 2004, we had approximately $236 million of borrowings outstanding on our line of credit. That computes about 15 percent of total debt, which is floating -- which we're comfortable with. That percentage will fluctuate as we refinance those borrowings over time with long-term fixed-rate unsecured debt.

If you look down to the bottom of the schedule, our weighted average maturity on fixed rate debt is approximately 5 years. And we have very limited exposure to maturities over the next 2 years with no unsecured fixed rate coming due until 2007. So we feel very good about where the balance sheet stands today. And we have good actual spacing in the 5, 7, 10-year level for a new issuance as we look forward.

That's my summary, I will hand it back over to Scott for some conclusions.

Just to conclude, clearly 2004 was a milestone year for Reckson. We integrated our new management team without losing focus on our core businesses can be seen by the leasing activity that we had this year and where we ended up with our occupancy. We executed our investment strategy with the closing of almost $500 million of investments, as Mike just outlined. We materially strengthened our balance sheet to a point where it's as strong as it has ever been. And lastly, we've been executing our monetization of non-core, non-income producing assets.

So in all, we believe that 2004 positioned us to execute our long-term strategy of establishing Reckson as the New York tri-state area's landlord of choice, which is a competitive advantage that we believe enables us to create significant value and produce sustainable and reliable annual FFO growth. We are targeting the FFO growth of 5 percent to 10 percent per year, which corresponds to our 2005 guidance of $2.32 to $2.40 per share.

This guidance is derived from the following assumptions. It includes the 4.5 million share common equity offering that we did in December; a 3 to 5 percent same store NOI growth; $100 to $250 million of weighted average investments, which is netted against any forecasted dispositions; $7 to 9 million of other income, which is compared to over $20 million that we had in 2004. So we obviously are forecasting a much lower number. And this $7 to 9 million does not include any material gains from any land sales or RSVP.

So that's the basis of our guidance. What we would suggest in developing quarterly estimates, that you start the low-end of guidance due to the timing of our '05 lease expirations and the ramp up of our investment activity. We feel we are leaving 2004 with a lot of positive momentum. We are very focused and energized and look forward to producing in 2005.

With that, Operator, we will be glad to open -- answer any questions that anyone might have.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Smith Barney.

It is John Stewart here with John Litt. Scott, can you remind us how much you are paying in ground rent at 1185?

We cannot remind you.

Can you tell us?

Yes, we don't disclose that.

Okay, can you let us know how the revaluation works?

Yes, as you recall, we're actually in the arbitration process now. And something that probably gets done sometime in the end of the second quarter, beginning of the third quarter. And it assumes that you look at the land as a vacant piece of land -- and value it as a vacant piece of land as of June 2003. It gets a multiplier effect to determine what the ground rent would be, and that ground rent would then stay flat for another 37 years.

And just again, so you know, when we quote in our numbers on that property and in our GAAP numbers today, we have an estimate of that increased ground rent to calculate what the GAAP ground rent for 1185 is.

In percentage terms, how much do you think the increase will be?

From a cash basis, it's going to be multiples to what it is today, and that is what we are forecasting. Again, it doesn't do us or our shareholders any good to tip our hand in any matter as to what we think it might be.

Can you give us any additional details in terms of the structured finance investment in Midtown?

Again, this is something that we've been working on for quite some time. And we're hopeful that it grows into something more The objective is to increase it to a more of a long-term sort of preferred structured instrument versus a short-term type structured finance. And it's a well established, very, very high-quality asset that is well-leased.

But it would not be a fee simple acquisitions.

That would not be a fee simple acquisitions. But it would be a long-term piece of paper.

And what's the yield?

Again, I would rather not disclose at this time just because of the sensitivity of the ongoing negotiations.

Michael, what is your straight line rent forecast for 2005?

I don't know that number. You are asking what is the straight line rent in the forecasted number for 2005?

Yes.

I don't know the number off of the top of my head.

Ultimately what I'm getting at is -- when do you expect to grow back into dividend coverage?

Based on what I said in the beginning of the conversation, if you look at where we are right now, we have a lot of leases expiring in '05. So we think '05 is going to still be an area where we have a lot of capital outlay. In particular, for example, at 919, just to give you a sense on a lease that was signed a couple of years ago with Debevoise to take Kramer's space over there. We have a $15 million tenanting cost just with that one lease alone. So we expect '05 to still be an area where we would not have a comfortable payout ratio. We think in '06, we would start to show some growth back into it and then normalize in '07.

Thank you.

David Codyansfar (ph), Lehman Brothers.

A couple questions -- are you -- do you have a growing appetite for development, given the current acquisitions pricing environment? And if so, is there any sort of update on your pipeline that you could provide?

Well, again, I think we definitely have an appetite for buying strategic or building strategic vacancy. And as you know, we're building a 275,000 foot building here in Melville, and we have a pipeline behind that. And as Sal chairs the development committee, what we basically have done with that pipeline is -- we've prioritized what our next series of development projects would be as we make progress. I think we'd like to get de novo project from a development standpoint more underway and see some of that lease up before we kick off a second development project. But as that picks up, strength and momentum -- clearly the markets are as they are today, and we see some good visibility of demand, we would jump on that.

But we're also coupling that strategy, as I mentioned, of really looking strategically as to where we can buy vacancy in assets below replacement costs or pending vacancy and assets below replacement costs and take advantage of the improving markets.

Also, do you feel like you might be increasing your structure and asset portfolio going forward unrelated to specific deals, just as a portfolio in itself?

Again, I think we look at our structured finance more as sort of -- as either what we call -- at a process of things that are very strategic to us. So we don't see it having it as a business that we just do this sort of arbitrarily. But assets that are closest in our markets that we consider owning ourselves if we ended up doing so is some the area that we play in. Or specifically in Manhattan, based on certain valuations of where there's something that is attractive to us, so the risk-adjusted return of having a long-term structured position is sometimes more compelling. So I think we're going to be opportunistic about doing it, but the initiative is more just to be opportunistic, not necessarily to go out and grow that business.

I might have missed this, but did you provide any update on land sales at Giralda Farms?

No, we did not. It's a good point, you brought it up. Land sales in Giralda Farms, we have been going through the zoning process. We had a contract with a group that had a pretty extensive site planned initiative that then got a little bit complicated. That contract expired. We are, hopefully, shortly to sign a contract with another company at similar pricing -- but a plan that we think is more palatable to the municipalities. And then, we're going to try to accelerate that process. But again, that is still something that is a 2006 type event before we would actually see the closings book from there.

Thank you very much.

David Fick, Legg Mason.

Just following up with the Giralda Farms -- can you talk a little bit more of that -- the development schedule in terms of what you might end up doing there?

Well, again, there have been some changes in New Jersey. There were some issues in terms of some regulatory issues on as it -- what is called the C1 (ph) Waterway program. So we looked at the plan and then adjusted our plan a little bit. We had maybe not as many housing as we originally thought and maybe have another use on the the site, whether that is hotel or office is to be determined as we go through the process. But we think we put together a plan that would be more palatable to the community that works better with our site. And frankly actually now, with our significant presence that we have in Giralda Farms and being the largest owner there, I think that actually helps our ability to get this done more expeditiously.

I guess to clarify my question -- you might do more office there as opposed to more focused residential.

We would do office -- we will do office. We already have part of that site designated for office and always have had part of that site designated for office. So we plan on doing that. And as a matter of fact, when we bought the Schering Plough building, we actually bought some more development rights and some more land. And so we actually have a smaller site that we could do office on. So we do plan on building additional office in this park over time. But as it relates to the residential site that we had under contract before, it is not now our plan to build additional office on that site. It's still to go residential and maybe some hotel or some other use.

This was a little bit tougher. Can you make any comment at all on the process for the Verizon building?

In Manhattan?

Yes.

The only comment I can make is it is something that interests us. It is competitive. And that our guess is that because of the situation where Verizon is not something that is going to move very, very quickly. But they have a process that they are going down the road on, and we're participating in it.

So you're still involved. Would you be able to do this kind of building on your own, or would you be looking to have a partner?

We've been working with a partner.

Thanks a lot guys.

Ross Nussbaum, Banc of America Securities.

It is John Kim with Ross. A follow-up on the ground lease evaluation -- have your expectations changed at all about the magnitude of this change since you acquired the building?

No, it's been pretty much in line to what we originally anticipated.

Okay. (multiple speakers)

And the thing about this is and again just to reiterate it, the way the appraisal works is based on the land value in 2003. So for the market conditions as of today, those aren't relative comps as it relates to figuring out the land value.

And you mentioned there is going to be an announcement on this in the second quarter this year?

Well, I said, hopefully this will be brought to closure in the late second, early third quarter.

Regarding the mezzanine loan investment, can you comment on who the owner of the building is and how this transaction originated?

It's a relationship that we have had and been cultivating for some time. And again, a lot of the things that we have completed have not been things that just came quickly. They have been working things that we have been working on for many, many months. And this is one of those types of relationships. Obviously, I do not want to comment on who it is because we're in the second round of this program. So I do not want in anyway increase the bill to competition.

Your maintenance CapEx actually decreased this year compared to -- or in 2004 versus the previous year. Was this unusual and where do you expect to see it in '05?

Yes, I do not know. If you're including the industrial in there from last year, I think overall, on a per square foot basis -- let's take a look.

I'm just looking on page 31, it is non-incremental CapEx.

It looks like $9,900,000 versus $9,700,000. I think that's probably a number that will be fairly consistent going forward at least in 2005.

Thank you.

Brian Legg, Merrill Lynch.

Can you talk about the Tillis portfolio? Are there any updates on that?

Well, that portfolio traded. And it went to a group of individual investors. We bid on it obviously, and we put what we thought was a strong bid in. But it went at a higher price. And we're looking at the opportunity -- there may be some opportunity to participate in that investment in other venues. But it did trade to someone else.

And if you had South Service Road, is that going to be -- are you still looking at that as a multi-tenant building?

Yes. Our sense is it is most likely a multi-tenant building. It's been designed as a multi-tenant building. And in Long Island, once every 10 years do you build something like this, and it does not become a multi-tenant building.

And just for some clarification, the 50 million is -- you're not going to really earn much of a return in '05 on the 50 million of cash that you plan to pull out of your non-income producing assets, correct?

Well, it is more likely than not that that will be received in the latter part of the year. So it won't be back into the cokers for a period of time, which it could be reinvested and earning income for a long period of time.

Yes, but my question is that you won't record gains on the 50 million of sales?

Yes, the way we're doing that at least as a respect to RSVP -- is we have $55 million of carrying costs on RSVP, which will recover our costs before any gain. Now, to the extent that there are land sale gains from sale of land on the RA side, we would report that -- those gains. But as I said in our estimates, we really aren't -- there is no material gains accounted for land or RSVP in our estimates.

So that $6 to $7 million of other income does not include any land.

Right, that's really termination fees and the other income that Mike referred to in his presentation.

Thank you.

Carey Callaghan, Goldman Sachs.

Scott, is the MetLife building too big for you guys?

It's too big for us to do alone. But we obviously are looking at it and looking at it with a perspective that we would do with a partner.

Okay. Let me ask you on the net acquisitions, you talked about a 100 to 250 million for the year. Can you break out for us kind of what the gross acquisitions and gross dispositions might be or ranges?

Yes, to be honest with you, it's really in our models. And again, we look at this, so we can fluctuate. We have identified a pool of assets that the timing being right we would consider selling or selling interest in assets. And so that could play a role into it.

And so if we're successful on executing a more robust investment program, we would then start looking at some of those strategic joint ventures or dispositions of assets in our portfolio. The low end of that range pretty much is being that we have done -- or identified to do, and are in the way of getting done right now. So that is something that's pretty much embedded. And I think in total, if you think about it, it is probably gross of $300 million or so of investments in '05. And I think that we might have something like 35, $40 million of dispositions figured for the year. But that again may grow depending on what our investment program looks like.

And if you did do something big on the order of MetLife or even the Verizon building, does that imply that you would accelerate dispositions or not necessarily?

Again, I think that part of our whole program is to balance that. And that's why we are pretty proactive of keeping the pipeline of assets that strategically would make more sense either being thrown into a joint venture or sold. So that we have that availability. So I think the answer is -- whether it's one of those or any other type of more robust investment activity would lead us to be more robust on the dispositions side of the equation.

I think we are really trying -- I do not know if I communicate it well. We're really trying to position the Company that we can be at that sustainable sort of 5 to 10 percent FFO growth. And if there are periods where -- because of investment opportunities they were broader, we would then look to sell assets to strengthen our balance sheet so that we have more flexibility going forward.

Thanks. And just lastly, on page 15 of your presentation, the 10.8 percent 2005 GAAP yield. I guess it's 2004 investments. What is that yield on a cash basis for all of your investments?

On a cash basis, it's about 8.5 percent. But I ought to caution you with -- there is a few assets in there that are in the releasing stage or free rent stage, so you have cash numbers that are much lower. Like for example, the Three Giralda, which is going through a transition where Atlantic Mutual is moving out and Daiichi is moving in -- has, I think, a 1 or 2-percent cash type return but a much higher GAAP return. So it's about 8.5 on a cash basis, but again, a lot of these things are going through flux right now.

Thank you.

(OPERATOR INSTRUCTIONS). Tony Fallone (ph).

Just want to follow up one last thing on the Giralda Farms residential land. Did the partner there -- I was under the understanding that they made security deposits on it as you all went through the process? Was that the case?

That was part of the contract, but it never reached the stage where those deposits were actually made.

The way these things that work is -- you need to show some level of approval progress before certain things go hard. And it progresses from there. And so for example, in the transaction that we're in now hopefully culminating in the next week or so, it's again -- it ties into that -- okay when the change of zoning is approved, they go hard x dollars. Then a few months after that, there's another increment to it. And when the cycling goes, it goes hard x more dollars. And then, it works like in that type of format. What we did in this case is -- we had shifted our strategy. We have gone with a more local developer than more of a national developer within -- and the same similar to what we did with the contract we signed on land now in Westchester -- with the view being that we could work more hand-in-hand with them and be more in sync as to what the local community needs to be successful.

Then, another question -- the gain, you have $706,000 in the quarter gain, what was that from?

That was the sale of a small industrial land parcel.

Okay that was land. When I looked at your expiration schedule, it's net of pre-leased space. So when I think about your fourth-quarter NOI and think about using that as a run rate going into 2005. Are there any leases that are not on that expiration? You know, kind of off to the side that still need to hit and come into GAAP FFO that were like preleased?

I don't think so.

I don't believe so.

And then last question -- Scott, you mentioned sort of the focal point on some of these telecom mergers. To the extent -- I guess where do you think in your portfolio are you most vulnerable like to the extent a deal happens? I guess you have exposure to Verizon, MCI, and maybe some others.

Our exposure is really Verizon, MCI. And again, I do not know if it's exposure or not exposure because I do not know what the outcome of it will be. And one thing that's clear -- as regulated industries, telecommunication companies are under a lot of pressure to get approvals, which means they are under a lot of pressure not to just leave marketplaces bare in terms of if they do M&A. So I think they are pretty conscious, trying to keep geographic concentrations sort of more normalized in these type of events. But I am raising the point because it is something that we are watching carefully. We do not know the outcome, as I said, the direct area where we have some vulnerability is Verizon and MCI. But then of course, AT&T being a large user and owner of space in New Jersey has an indirect impact to that market.

Okay. Thank you.

Alan Calderon, European Investors.

First of all, you issued 150 million of equity on December 9th. What was the immediate use of proceeds?

We paid the line down.

So line ended the quarter about 235, 500.

That is right.

Second of all, I just wanted to confirm that in your guidance, you have the 7 to 9 million of other income. And there are really not any land sales gain income in there?

That is correct.

That is correct.

And then, I just want to confirm -- in your guidance you are -- pretty much your fully diluted shares outstanding for the year in the 84 to 85 million range?

Yes. That is not a weighted average. That is the ending number.

Right, but for 2005, you're expecting it to remain kind of in that range?

Yes.

And then finally, you said -- I believe you said that in the beginning of the year, we should be looking towards the low end of your guidance for kind of first quarter. That would be about 58 cents it sounds like if I did a straight line on the $2.32. Is that kind of what you're feeling for the first quarter in that range?

We don't give quarterly guidance, and so I think we would rather not comment specifically to that. But again, the view is that the lease expirations are overweighted to the first half of the year. And part of what we are executing is -- that would be the top end of the guidance -- is executing on our investment strategy. So we feel good about that low end really because we've got it all baked. And so we just need now to move forward with the investments reports -- starts flowing through.

Right, but I guess you had 55 cents in this past quarter on a normalized basis going up to a little bit higher I guess in the first quarter, and that's including a big increase in the shares outstanding.

Right.

Okay, thank you very much for your time.

And ladies and gentlemen, we have no one else queued up for questions. So please continue.

Thank you very much for everyone joining in. I look forward to catching up all of you and speaking to you during the quarter. Thank you.

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