SL Green Realty Corp (SLG) 2005 Q1 法說會逐字稿

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

[OPERATOR INSTRUCTIONS]

Before we begin today's conference call, I would like to take care of forward-looking statements. The information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements and all other statements that are made on this call that are not historical facts are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those expected. A list of factors that could impact Reckson is included in the Company's form 10(K) and 10(Q) filings made with the Securities & Exchange Commission which are available on the Company's website at www.reckson.com. Investors and others should read factors before making any investments. Reckson under stays 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 a reconciliation between these measure can be found on the Company's website in the quarterly earnings press release, slide show presentation and supplemental package.

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

Thank you. And thank you, all, for joining us for our first quarter 2005 earnings call. Presenting with me today is Mike Maturo, our Chief Financial Officer. We have the balance of our executive management team here with me and they will be available for Q&A. As you know, the last few quarters I've had Sal Campofranco and Tod Waterman provide some market color. In the attempt to try to keep the formal remarks relatively brief so we could be available for Q&A, we will save some of that additional commentary for questions relating to the market although I will give a brief summary. As usual we're going to be working off a presentation that can being accessed from our website, which as the operator said is www.reckson.com. If you have a problem accessing it, you can contact Susan McGuire who heads our Investor Relations department at 631-622-6642. We also have a attached an appendix to our formal presentations providing additional data that we're not going to review, but that you can access and utilize to understand more about the Company or ask questions.

Now I would like to turn to the presentation. I'm going start on slide two by providing an overview of our first quarter results. For the first quarter, we reported FFO per share of $0.55, which compares to $0.58 per share for the first quarter of 2004. If you look at this sequentially to the fourth quarter of 2004, we were flat at $0.55 in the fourth quarter against the $0.55 in the first quarter. Leasing activity continued to be brisk. We signed 75 leases totaling 660,000 square feet. Our renewal rate was 50% which is lower than the last couple of quarters which were closer 70% and that primarily is due to one lease in Connecticut with United Distillers, 127,000 square foot lease, who relocated to a more northerly suburb out of Stanford. It was something that we had been contemplating for the last couple years. When you back out the 127,000 square feet, our renewal rate is actually 70%. For the bulk of the portfolio, our renewal rate is pretty much as expected.

If you turn to slide three to continue with our highlights, you notice from an occupancy perspective, we had a 30 basis point increase in same property occupancy from the end of last year to the end of the first quarter bringing our occupancy to 94.4% for our office portfolio and 93.4% for our overall portfolio. Year-over-year, that occupancy increased 100 basis points on the office portfolio and 80 basis points on the overall portfolio and I think that's actually better than we had anticipated in terms of our occupancy increases. As you know, we had a lot of leases rolling in the first half of this year; a disproportion amount of the leases were rolling in the first half of this year and we were able to address many of them. One point to note, 60% of the leases that were signed in the first quarter were actually signed in March. So when you look at that level of activity, most of that activity had very little impact on our first quarter results and will flow through the balance of the coming quarters.

Our same property NOI also was very strong during the quarter. On a straight line basis for the office portfolio, it grew 5.6%; for the overall portfolio, it grew 4.8% and on a cash basis, for the office portfolio, it grew 3.9% and for the overall portfolio, it grew 3.2%. Again, very strong same store NOI performance. Our same space rents were also positive on a straight line basis. Our same space rents for the office portfolio were up 9%. On a cash basis they were down 8%.

With all this strong core operating performance, you might wonder why we went from $0.58 a year ago to $0.55 and one thing to look at from a year-over-year growth per share basis, when you look at our FFO in the aggregate year-over-year, we were actually up 22% year-over-year and that's even though we had these termination fees and other income that were about $8 million less in the first quarter of 2005 than the first quarter of 2004. But when you go down and look at our balance sheet, you will also note that our diluted share count was up about 30%. What this really says is our core operations were actually extremely strong, but we were suffering the dilution on a per share basis from the equity offerings that we did in 2004 and the delay in reinvesting that capital into new investment opportunities, which we'll talk more about later in our presentation.

Continuing onto slide 4, you will see during the quarter we still had maintained good leasing volumes. I mentioned 654,000 square feet, which is higher than our historical average. Based on where our occupancy is now at 94.5%, I would expect it to normalize to the more 400,000 to 500,000 square feet per quarter that we've had historically before this big run up in occupancy and leasing activity in the beginning of 2004. That being said, just to give a little commentary about our markets, our market conditions remain strong and really conditions haven't changed that much since we shared our commentary with you on our last call for the 2004 year end conference call. We're still getting good pricing power in Manhattan and Long Island where our markets are now approximately 95%. 96% lease in Long Island and high 90s in Manhattan. When you look at our suburban markets, they are more balanced between the landlord and tenant in terms of where we are in supply and demand. One positive note though to mention, we have seen additional leasing activity in Westchester and Stamford, Connecticut, which has been one of the laggards for quite some time. This is good, obviously, for us. We are finishing up a 160,000 redevelopment in Stamford at Landmark Square, 6 Landmark Square, which is coming out extremely good. That activity will help that. And we have some remaining vacancies in Westchester, even though we've actually increased our occupancies to 91.5% at the end of the first quarter. It is good to see some of the that activity starting to follow as expected when Sal gave his commentary last quarter.

If you turn to slide 5, focus on the leasing trends and economics. You will see on the left-hand side of the slide, our effective rent spread. We are having 9.3 effective rent spread which is the difference between our average rent and effective rent. This is in line with our past performance over the last few quarters. We still expect it to be 10% or a little bit above 10% for the balance of the year based on the present market conditions and the type of concession packages that we need to give out to our tenants. You know on the right-hand side of our slide, we have actually our average lease term for leases that were signed during this period. That actually dropped to 6.6 years on average. This is obviously shorter than we have been trending. It's really just a basis of the makeup the leases that were signed during the quarter.

Turning to slide 6, going to some of our capital costs, you will see our net incremental tenant improvements in leasing conditions were $2.33 per foot per year. This is low, obviously, for this quarter. We would think its more of an aberration based on having some large leases that were signed with no material tenant costs. They were leases that have renewal options at lower rent, but no TI and I think that swung numbers down this quarter. We would expect, again, for the balance of the year that number to be more on the trend line that we have seen over the prior four quarters.

Continuing with leasing economics on slide 7. Again, this is the slide try to point to and spend time internally evaluating and sharing with our board and our investors -- as we continue to invest money in re-leasing space in our buildings, are we driving good economics and top line growth? And if you look at the left-hand side of the slide, I would provide what we call our net effective rent yield analysis, which takes our net effective rent on the leases that were signed during quarter on a per foot basis against our cost basis on a per foot basis and determine what type of yield we would get. And you'll see this quarter we had a 7.5% net effective rent yield. So we are not only doing deals that have positive net effective rents, they're actually generating a return of 7.5% on our cost basis in the properties in which we did transactions.

On the right-hand end of the slide, it is an analysis that shows our return on tenanting costs which takes the additional revenue that's generated by the higher rents we're getting when we sign leases. So this quarter, you will see we had $2.72 of additional GAAP revenue per square foot based on the leases we signed during this quarter or 9% over what the prior tenants were paying, against the costs to put those tenants in of $17.65. So effectively, what we're able to note here is we're actually getting a 15.4% positive return on the investments that we're making into the -- putting those new tenants into that space. That really reflects our point that as we're putting tenants in the space, we're getting a positive return, which ultimately will result in our increase in our top line revenue.

If you turn to slide 8, I would just like to focus a little more on a perspective basis. You see our lease expiration schedule here. You'll see in 2005, we have about 5.9% of our square footage expiring for the balance of the year or 900,000 square feet. That is down about 500,000 square feet from the end of the year. On our last call, we had about 1.4 million square feet expiring. I think we made very good progress of addressing some of our 2005 expirations, as I noted in one of our earlier slides. When you look at our percent of revenue expiring for the balance of 2005, it is now down to 5% from 9.4% at the end of last year. So again, that reflects that we actually had made good progress on that front.

Turning to slide 9, our mark to market slide, you will see for the office portfolio we still have a large mark to market opportunity and it continues actually to get stronger from this quarter over last quarter. You will see on cash basis, we are now anticipating the new rents on leases that we put in being 8.8% higher than the expiring rents and on a straight line basis, the new rents being 13.6% higher than the expired rents. And again, this is off of today's market rent -- that would be obviously a higher spread by the time we release these spaces.

If you would turn to slide 10, I'd like to take a moment and talk about the investment environment. As many of you know, the investment markets continue it be extremely competitive. This past quarter three very high profile transactions traded in New York City and they traded at extremely strong premium prices. Met Life sold 200 Park and 1 Madison and Verizon sold their headquarters on 6th Avenue. These buildings not only were competitive, but they ran very, very tough auction processes that were time consuming and costly and as you note in our press release, we had dead deal costs associated in participating in some of these auctions. Really, this type of environment and these type of properties forces us to be much more selective as to which opportunities we're going to pursue and which opportunities we are just going to pass on totally and not pursue at all. That is something we'll continue to do and we'll talk about maybe in Q&A a little bit more.

Based on this environment, we would anticipate sales activity to remain robust for the balance of the year as owners seek to capitalize on some of this premium pricing. If you look even at the activity through April in New York, we are on pace to actually exceed what happened in 2004, which was an extraordinarily active year of investment sales. There is not to be a slow down on the type of activity. Whether or not this activity meets our investment standards, is a different question, but there is a lot of activity happening.

We continually look to refine our investment focus and what we're going to focus our investment activity on is maximizing risk adjusted returns by pursuing the following -- opportunities that are valued at material discounts to replacement costs; opportunities where in place rents are below market; well located high quality assets that can be purchased with near term vacancy that we think we can get leased up quickly and create value; opportunities sourced through corporate relationships like we've done in the past few quarters and this quarter as well; value added redevelopment and development opportunities in our core markets like we're doing with 68 South Service Road here in Melville, Long Island; long-term preferred investments at high quality properties; structured finance investments at properties where the risk adjuster return is more compelling than acquiring the property itself and maybe offers us an opportunity to ultimately get to the property at a better valuation and with less risk; and finally, we intend on match funding investment opportunities with this disposition of assets at values that reflect the current state of the investment market. That being said, one thing we will be talking about is now we anticipate accelerating our disposition / joint venture of non- strategic suburban properties that we spoke about in the past based on both of the current investment market conditions and the acquisition of One Court Square. And we will talk more about that through the presentation.

Now turning to slide 11, I would take a moment to provide some background on our One Court Square acquisition that we announced yesterday. We're extremely excited about this acquisition. As you can see in this picture, it is a great trophy asset that we acquired for $470 million. It has a 6.5% initial unleveraged cash flow yield and 6.8% GAAP yield. It is a 50 story building, 1.4 million square feet. It was constructed in 1989, really built like most buildings that are constructed for corporations with a tremendous amount of infrastructure, high level of construction that you typically would not build for a multi-tenant type building and that's things that we've seen consistently when we bought corporate owned type assets. The building is 100% leased -- or will be 100% leased to Citibank under a 15 year net lease. Citi is going to be paying approximately $22 per square foot of net rent, which we believe is below market, especially when you take into account the REAP incentive program, which can lower the rental costs for tenant by over $10 per square foot per year. So we think we're in a very good rental rate relative to where market is today. Citi does have the right to terminate up to 20% of the lease in years 6 and 7 and 20% of the lease in years 9 and 10. They can only do this by providing extensive notice and paying a penalty of equal to one year's rent. This is not something we would anticipate they would be doing, although it is an option that they did negotiate for. Obviously, Citi is a high credit worthy tenant and our transaction actually has 1% per year contractual rent bumps. The property is extremely well located. Look right here on the picture. You see it's right across the east river. It is one subway stop away from the heart of midtown Manhattan. As a matter of fact, from our offices on 55th Street, it is a 5 minute subway stop away from our offices on 55th Street. So that really shows you how into the heart of midtown Manhattan this property market is. We identified this has a property that we would like to acquire a couple years ago and I think exemplifies our strategy of working with our corporate relationships to source and execute investment opportunities early on. This is something that's been in the works for quite some time for us as Reckson.

If you turn to slide 12, I would like to review our investment basis. There are really 5 primary reasons why this investment is attractive to us and let me just run through. First, it is a risk adjusted returns for a trophy asset like this. As I mentioned earlier, we're getting a 6.5% initial cash flow yield, 6.8% GAAP yield. When you look at 6.5% cash flow, though, as multi-tenant owner typically, if you were purchasing a multi-tenant building that would equate to an 8% NOI yield. Typically, it's 150 basis points of ongoing capital and tenanting costs that play into that. Effectively, it would be the equivalent of an 8% NOI yield that would result in a 6.5% net cash flow yield to the bottom line and we think that is very attractive for a building of this nature and lease and credit like Citi. If you look at this on a leveraged basis, you have about 10% to 11% return on our equity based on where interest rates are today and that's something again that we also think is very attractive.

The second reason is with the potential of Long Island City. As you know, we obviously are big believers in the strength of midtown Manhattan in New York City and what's going on with rent growth in those market places and we have seen it so far through our portfolio. And frankly, if you do believe in the strength of midtown Manhattan, it is hard not to believe in the potential of Long Island City. It is obviously extremely well located and it is a great alternative to midtown Manhattan from a cost effective basis. It's got a great transportation structure. Not only does it have the one subway stop that I mentioned earlier, but it's extremely well located to the midtown tunnel, to the 59th Street bridge. It has a great work force capacity and attractiveness for Queens, Brooklyn and Long Island, particularly Nassau County from that perspective and so it is a market we think long-term will be extremely strong and do extremely well. We also look at the purchase price that we're paying for this building at about $335 per foot and think based on our view of what's going to happen in Long Island City, we have potential for material value appreciation of this asset as Long Island City continues to grow in value and attractiveness. That's our third reason.

Our fourth reason is we believe Long Island City offers us potential for future value added transactions. When you think about New York City and the markets surrounding New York City, Long Island City is the last truly underdeveloped submarket of New York City. As a matter of fact, after 2001 and 9-11, when the city officials came together and politicians came together and said "Where are we going to focus on growth to be able to support large corporations that want to come to New York City?" They focused on Long Island City and identified it as the fourth CBD behind midtown Manhattan, downtown Manhattan, Brooklyn and then Long Island City being the one that they would develop next. And when you really think about it, if you're standing in an office building in the heart of midtown and you look west over the Hudson River, you have to look south, towards downtown and you see all of these buildings in Jersey City. If you look east, over the East River, we see one building. You see One Court Square, but you see a great infrastructure to build around One Court Square. And that's what the city recognizes and that's what's happened. With this REAP program that I mentioned earlier and the tax incentives associated with that, they rezoned 37 blocks for high density. They are doing everything possible to provide the incentives for development in the Long Island City market place and it is actually starting to pay real dividends. Like most of these things, it starts with multifamily in this case here and potentially a tremendous amount of multifamily developments, particularly in the Queens west area right on the river.. Many of you Avalon Bay owners may know that they're there right across from our side. There's some condominiums being developed. You're starting to see, first, the multifamily residential and then you see the retail and entertainment and night life and then commercial will follow in a much faster pace.

Even at that, commercial has already started to come into Long Island City at a faster pace. Met Life made a commitment to Long Island City and has moved into about 600,000 or 700,000 square feet in Long Island City. Citibank has made a commitment to begin another 475,000 phase II project and move more employees to Long Island City. The U.N. is looking at moving to Long Island City . New York City is moving offices to Long Island City. When you by think about this whole concept that Reckson believes in, which is regional decentralization, Long Island City should absolutely be a key beneficiary of regional central decentralization and Reckson wants to use our presence now with One Court Square as the anchor to see new opportunities and pursue growth there over the next 3 to 5 years. As I said, this is not going to be a tomorrow thing. It is going to be something we will continue to pursue long-term. And I think it is interesting that even since we announced One Court Square yesterday evening, we've got a number of phone calls from potential owners of land there asking if we were interested on joint venturing with them or other opportunities or tenants that we've had in our different market places that may have some interest and have been looking in the market. So we could see that level of development and we think it will be good opportunities for growth and investment for us.

Our final rationale to making this investment is that we think it provides an opportunity to efficiently reallocate capital in advance of executing our joint venture strategy that we discussed many times in the past, and we think we can do this in efficient manner both from a dilution standpoint with One Court Square, as well as a tax structure in terms of dealing with the potential gains that we will have from some of the dispositions and we're structuring the transaction to accommodate that. This is something we think makes a lot of sense. When you look at the risk adjusted returns of some of our non-strategic suburban assets that we might drop into some of these joint ventures, as compared to Long Island City, they're very comparative and it's very compelling type trade. It's something that makes a lot of sense from our perspective. And then later on, we would look to monetize a portion of our interest in Long Island City when it is appropriate to do so.

With that, why don't I turn it to Michael who will walk you through some of our financial data and then I'll provide some concluding remarks and open up for Q&A.

Thank you, Scott.

I will start on slide 13, which is the operating data slide. Operating margins for the quarter was 59.3% which was flat to last quarter, compares to 58.4% for the same quarter last year, which is a pick up of 90 basis points and that pick up is primarily attributable to improvement in the rent. Our G&A for the quarter was about $8.2 million. That number is in line with our expected run rate of about $8.25 to $8.5 per quarter going forward. Our other income number was $3,000,345 for the quarter which includes $2,447,000 of interest income on mezzanine and other notes receivable and $747,000 of miscellaneous income. That interest income number should increase by approximately $500,000 in the second quarter as we receive a full accrual on the Long Island portfolio mezzanine transaction that we did this quarter. We had budgeted about a $1.25 million to $1.5 million in the first quarter for miscellaneous income and we fell a little short on that number. That miscellaneous income number is difficult to predict from quarter to quarter and we do have some third party service activities in the construction company that we think will make up some of that difference over the remainder of the year.

As Scott mentioned, we also had incurred about $500,000 of dead deal costs relating to the bids on the Met Life and Verizon transactions that we picked up in the numbers this quarter. As far as capital market activities, we had no significant market transactions this quarter on the balance sheet other than the recent announcement of One Court Square which we'll acquire for $470 million and initially finance with a bridge facility. That bridge facility will have terms similar to the terms of our line of credit. We plan to take out that bridge loan, with a combination of long-term corporate debt and proceeds from the asset sales that Scott mentioned. These asset sales will most likely be part of a joint venture structure and we have been working for some time on a strategy to access joint venture capital and we've identified approximately $500 million of suburban assets that we will use to seed a joint venture relationship.

We continue to work hard on monetization of the non-income producing assets. We have a number of land parcels that we have identified for sale; one is under contract in Westchester and two others under contract negotiations, including the Giralda Farms land. As far as RSVP, we have begun the marketing process on the Illinois toll way project. We believe the consummation of that transaction should occur in the third quarter or early fourth quarter this year.

With respect to the Catskills, RSVP executed the merger agreement between the RSVP Catskills entity and Empire Resorts during the first quarter. If you recall, RSVP will receive 18 million shares of Empire Resorts in that transaction. That merger is now subject to a proxy vote with Empire shareholders. As for the status of the casinos in the Catskills, there was a process set back that occurred during this quarter. There was a ruling by the Supreme Court regarding Native American property and taxation. This ruling impacted the proposed land claim settlement that the Pataki administration had negotiated which in part offered certain land to Indian tribes, including the Cayuga tribes which had been designated to the Concord and Monticello Raceway sites that Empire and Concord effectively own in their development sites for casinos. The bottom line is that the land settlement, the land claim settlement that had been negotiated with Cayugas will have to be revised and renegotiated, but from a New York state standpoint, particularly from the Pataki administration, there is still a very firm commitment in support for casinos in the Catskills and those negotiations are currently undergoing. It will take some time, though, to get clarity as far as the direction of those negotiations and we'll keep everybody abreast during the course of the year as to how that progresses. Then that being said we still expect we will receive non-core asset sale proceeds of $50 million in 2005 as we have said on a prior calls.

Moving to slide 14 financial ratios, our financial ratios at the end of the first quarter continue to be very strong. Our debt to total market cap is about 37% at the end of the first quarter compared to about 34% last quarter and that increase is primarily attributable to stock price movement. Our interest coverage ratio improved by 10 basis points to 3.23 times and fixed coverage ratio improved by 15 basis points to a similar 3.23 times. That was primarily due to elimination of the preferred dividends in the first quarter as a result of the redemption of the remaining preferred stock last quarter. On a pro forma basis considering the One Court Square transaction, we would expect these rates to still remain at a healthy 3 times.

Moving onto the next slide, slide 15, which is the debt schedule. That lays out our debt profile. Our weighted average interest rate on long-term debt is about 6.9% and maturity of about 5 years. We have very limited exposure to maturities over the next two years with no unsecured long-term debt coming due until 2007. Our line of credit has an outstanding balance of about $358 million and floating rate debt represents about 22% of total debt. These amounts are at the higher end of our standards and we would expect to term out some of this debt in the near future, and we have hedged against interest rates in anticipation of this activity.

One last item I wanted to cover was with respect to the outstanding IRS audit. I'm happy to inform that we've received a no adjustment letter from the IRS and that audit is now closed without with any negative financial impact to the Company. That's my summary for now.

I will hand it back over to Scott to conclude.

Thanks, Mike. And just again, in conclusion, our core operations obviously remain strong. We feel very good and comfortable as to how they are -- our portfolio is performing and how our team is executing. Obviously, this quarter we successfully redeployed the capital from equity offerings that we had in December of 2004 with the closing of over $575 million of investments year-to-date, which I think is ahead of where we would have estimated. Based on that we anticipate accelerating our disposition / joint venture strategy of non-strategic suburban properties. Mike already noted, we anticipate this being about $500 million of assets or interests in assets and when we take all this in, we look at FFO guidance for 2005 -- we're going to make some adjustments, obviously, based on our performance and the investment performance. We would be raising the low end of our range from $2.32 to $2.36 and keeping the high-end at $2.40, which, really, if you remember in our last call, we talked about targeting a 5% to 10% growth rate. This puts us at the higher of the end of the 5% to 10% growth rated based on our performance.

Some of the assumptions that drive that, first, from same store NOI we would anticipate 3% to 5% of same store NOI growth for the year. From an investment perspective $250 million to $300 million of net weighted average investments. That's net of any weighted average dispositions. If you recall in our prior guidance it was $0 to $250 million. So we now moved it from $250 being the low end to $300 being the high-end. Other income, being a little bit more of the wild card, we're now still feeling that $7 - $9 million of other income, but as you saw this quarter this is a little bit of an erratic number and something that's not as predictable as some of other other components of our business at this point. So that's really what makes up the assumptions. We're also this quarter providing guidance for the second quarter of '05. We're providing guidance of between $0.58 and $0.59 per share so that everyone has some sense of where that might be. I think that's important, as we're trying to ramp up into our more normal run rate.

With that all being said, Operator, I think we're prepared to open up for some questions.

Thank you.

[OPERATOR INSTRUCTIONS]

And our first question is from the line of Jonathan Litt with Smith Barney. Please, go ahead.

Hey, guys. It's John Stewart here with John Litt. Scott, is the Long Island City asset subject to a ground lease?

No.

It's not. Okay. Quick question on the rent roll down in the quarter. Can you kind of help us reconcile the 8%, the cash roll down with the positive mark to market that you're showing in the slide show?

Sure. Two things. One, this quarter we had a couple of large leases that had renewals that were discounts to market. So we had, for example, an 85% renewal. So 85% of market rent, which as I mentioned in my commentary, those tenants did not actually get tenant improvement. So their actual rent number was less, but their effective rent probably isn't that much less. It was more accentuated, because they didn't take tenant costs associated with that. That made it a little bit worse. Interestingly enough, if you look at our numbers last quarter, I believe our mark to market on cash basis was 3% and now it's up to 9%, and so you could see some of that has rolled off and reflects itself in the minus 8% on a cash basis that we reported in the first quarter.

So it sounds like change is primarily due to leases that you put to bed and not movement in market rents.

That's correct.

Can you talk about the Long Island City property and what percent of that you plan to JV?

Again, I think we're going to do that over time. I think from our standpoint, we probably would JV up to 75% of the asset. When exactly we do that is going to be tied into the work we're doing with non-strategic suburban properties. So I think we will try to cycle in the non-strategic suburban property and then evaluate what the appropriate thing to do in terms of monetizing Long Island City. But the part of the number that would make sense from our standpoint, would be probably up to 75%.

If you were doing a $500 million JV of your suburban assets, this would makeup a majority of that portfolio sounds like.

That's correct.

I guess I just struggle with -- why buy this thing? It has a low growth rate. It's a long time until you will be able to realize rent if the rent is below market as you suggesting there.

I think I went through it pretty clearly. I think that the return we're getting is a very good risk adjusted return and specifically when we compare that to the assets that we would be disposing of in JV on a relative basis. We feel it's actually a very good trade on a risk adjusted basis. And then we would then seek to monetize this, to fund additional growth opportunities and I think we will be successful at doing that, because of the credit of Citi, the quality of the asset, our view of what's going to happen in Long Island City and I think that that's just going to enhance the value of this asset long-term.

Can you talk a bit more about your mez program? Your structured finance program and how big that might get to be?

We don't really look at having a structured finance program. I think we view using short term structured finance opportunities to participate in selective investments that is we select to buy, but the pricing got to a level where it didn't make as much sense and we felt that we were better off on a return perspective, participating in the mez and then ultimately potentially owning a part of that portfolio or that asset on the next trade or when it comes to time for refinancing. We don't have a dollar amount to it. It is not something we go out and actively seek. It rather is something that's opportunistic driven by opportunities in our market that we have been pursuing.

So if we were to think that it wouldn't exceed 5% of total market cap, would that be a fair way for us to think about it.

I think so. On the mez, absolutely. On the one thing that I will differentiate in that -- you knew it when we said a list of all the things we're working on. What we call long-term preferred investments and there are some instances where for structuring purposes, we're better off buying a portion of the fee or making an investment into the asset in a manner that may not be a direct fee trade, but a long-term preferred investment that gives us good returns. I don't look in the same way I would look at the mez investments.

What would you call good long-term preferred investment?

We're looking at things, in the city, for example, that get us 9% type returns with strong credit and provide and have -- I think you get better and better, because it's amortizing debt and so we participate in part part of that structure, as an example.

Isn't that a fairly competitive market place right now?

It is if you're trying to buy the mez piece. I think the preferred piece -- it's more an equity type instrument and it has tax structure into it and we will be announcing a couple of them.

Okay. Thank you.

We have a question from line of Chris Capolongo from Deutsche Bank. Please, go ahead.

Hi. Good afternoon. Mike, just a quick question on the GAAP yield on Long Island City. At 6.8% , why isn't the spread greater between the cash yield if the rent is so below market?

The rents -- the spread on the GAAP field is just the difference between the increases going forward.

The 141?

There isn't really a 141 adjustment here.

When you can't take into account the 141 -- the tax incentives.

Okay. Got you. And then just in terms of the JV strategy, does that accelerate the time it will take for you to really get into the black on covering the dividends? In other words, are you kind of JVing out some shorter term type properties with more leasing, I guess, issues perhaps?

If you look at the characteristics of the assets that we've identified, they are assets that have more regular roll and higher tenanting capital costs. That's been one of the characteristics that we've identified as assets that would drop into that. I don't know exactly what the dollar amount is, but intuitively, that was part of our plan.

Okay. And who is interested in the suburban non-core assets? Just general type investor? If you could.

The off shore type and domestic type investors. I don't want to be more specific than that.

Thanks.

Our next question is from the line of David Fick of Legg Mason. Please go ahead.

Hi, David.

Just two subjects. One, just intellectual curiosity more than anything else. The give back options for Citibank, which floors and is that one year penalty on net or gross rent?

It ison net rent and the floors are negotiable at the time it happens. There is agreement as to what type of blocks, et cetera.

And secondly, can you walk through the timing and economics to get to break even on your AFFO pay out ratio?

I think what said from a timing stand point is that we think that 2005 is probably the roughest spot, because of level of leasing that we have and the type of leasing that we have.

And then in '06, we should see moderation of that significantly, particularly in the second half. So I think '06 is really the swing year right now. Looks like it is going to be much stronger. We have to get through 2005 to be certain of the leasing.

Again, one thing I wanted to again reiterate -- in the slide we showed you in terms of getting the return on invested capital. While we're actually again spending money and it's costing a lot, we are getting incremental revenue by investing that money, as seen in this quarter with the 15% return on invested capital. We look at it as something that we're comfortable spending the money on, knowing that ultimately it is going to be growing our top line.

Thank you.

Our next question is from the line of Carey Callaghan from Goldman Sachs. Please, go ahead.

Good afternoon. To be clear, the suburban portfolio JV, it sounds like you are contemplating, you could include One Court Square in that?

I don't think we would include One Court Square in that. I think what we were commenting earlier was that having One Court Square in place helps us to accelerate that a little bit and I was commenting on a comparison of the underlying economics of the assets that we have identified for either disposition or JVing relative to the economics of One Court Square and how I think it is a good trade from a risk adjusted basis. And then also commenting that there is the potential on some of the assets that we've evaluated to have a gain that we would be able to address in our structure in One Court Square to address dealing with that gain. And finally, I said at some point we might look to monetize One Court Square, but probably it would be different JV partners than some of the other ones we're talking to for the suburban assets.

That's where you said 75%. So you might retain 25% interest?

That's correct.

Structure 25% interest retained.

What was that?

On the suburban joint ventures, is that a similar 25% interest you would retain?

That's correct.

Again, this is also the fluid. So that's a target. It could be a little bit more, a little bit less, but that's the target right now.

Okay. And then could you help us think through what the spends per square feet might be to come up with what gross rents might be at One Court Square? Just thinking ahead to when it might be a multi-tenant building?

It is hard to predict when you get down to it being a multi-tenant building. In today's world I guess it is probably around $10 to $12 a foot.

Okay. So you have on top of $22 you would be talking about maybe a low to mid-30s rent versus -- ?

No, then you have to recognize there is about $12 a foot to $15 a foot of benefit you get from the REAP program that the tenant gets. If you took that -- it takes you down on gross, but effectively on a gross basis in around $22, $23 a foot.

That each rent differential versus midtown?

Exactly. So midtown Manhattan is $60 a foot today, for example. You're talking $23. It's what's been attractive. Met Life moved out of 1 Madison into Long Island City and took advantage of these programs for that reason. And the interesting thing about this program, just to give you a sense, is that the programs actually apply to companies that are actually leaving Manhattan and coming to Long Island City. If you actually are in New York City, but not but you're in Manhattan, they will still attract you to come to Long Island City. You don't have to be out of New York City to get the benefit of this program.

Okay. And when you talk about additional value added opportunities in Long Island City, I am assuming that has to be by definition, because there is not much else there, ground up development?

Correct. Either that or redevelopment.

Okay. And then lastly, could you -- Scott, you mentioned that it's a 6% GAAP yield but it's equivalent to an 8% NOI yield. Can you walk us through how that works again?

Again, just looking at our own assets that we've evaluated for purchases and things we have purchased, there is about 150 basis points on multi-tenant building. There is about 150 basis points over spread between NOI yield and cash flow yields for TI, leasing commissions and ongoing capital over a 10 year period. And so I think that that would again being intellectually honest as to what you're getting while it may not necessarily impact FFO right away, as strongly, the reality is when you get down to the bottom line from the economics, it is really the equivalent 8% on an NOI basis, that nets down to a 6.5%.

So it is primarily that up front capital you won't need to -- ?

Not up front. Ongoing capital. The recurring capex TI and leasing conditions that necessary to keep a multi-tenant building in place.

Got it. Okay. Great. Thanks.

Next question is from the line of David [Toti] from Lehman Brothers. Please go ahead.

Good afternoon. A couple of quick questions. On One Court Square, I know have you given us a lot of information. Are there any air rights, expansion rights or development parcels attached to that project?

Not attached to us although Citi has a site that they will be developing next door.

Are you involved in that potentially?

Not at this point.

Was there any initial capex requirements upon assuming ownership of the building.

Any Cap Ex requirement is Citi’s responsibility.

Do you have a target CAD pay out for year end '05.

I think right now it's not in terms of percentage, but I think that we're looking at a short fall somewhere between $35 million and $40 million. That's really what we have been anticipating.

Right. With regard to some of the projects you have been planning that you disclose in your supplemental, is there any way to disclose where they are in planning? If any of them are likely to become reality and a potential time line?

Hopefully they all will become reality or at some point, but obviously on 68 South Service Road we're well into the process of development there. We hope to have the building completed by the end of this year and ready for tenants at the end of this year. I've have had good leasing activity early on now that the skin's up and it's spring time we're starting to see an increase increase in that activity and that makes us feel good. As we said, if you go down the listour objective is we keep all of these projects in a state where they can kick off right away and so what we'll do is we'll look at our own development exposure. We'll look at the state of the markets and then kick off the next project. So when you finish 68 South Service Road, for example, you might jump to the Reckson Executive Park in Rye Brook, which is ready and we're showing -- sending out RFPs at a regular basis. Sal's here. If you want, he can comment on that and then we have some great sites in New Jersey and Giralda Farms. Same type of thing which going through getting all the all the approvals, stay on, stay ready to go so that as soon as the tenant comes around then we're prepared to go with full trigger and move forward.

You don't see overlapping? You still see it as a sequence of one at a time?

I would say so. There may be incidents where as smaller ones, like Landmark 7, which is a project on the corner of Landmark Square, a smaller project where we will probably do a retail development attached to that. We overlap on something smaller or we might kick off something when we have decent progress. As we get past maybe the 50%, 60% mark. On 68 South Service Road in Melville, we will probably get ready to kick off the next round.

Okay. And lastly do you have a year end office portfolio occupancy target?

We think it is going to be pretty flat to where we are now.

Okay.

As is predicated in our numbers.

Thank you.

No problem. Thank you.

Our next question is from the line of Fred Taylor from Lord Abbett.

I had a lot of similar questions that have already been answered. Just comment, on the bridge facility to buy the building, as well as the proceeds from the joint venture and just possibly your intentions for a longer term public bond sometime later in the year.

That's pretty much how it's going to lay out. We have a bridge facility in place that will take the building down with and we've spoken a lot about the joint venture transaction that we think is going to occur sometime in the next couple, few quarters and in the interim, we would have some sort of corporate type transaction that we would be looking to do.

Because in addition to those other things your revolver is about 357 right now?

That's correct.

Thank you.

You're welcome.

Our next question is from the line of Jim Sullivan from Green Street Advisors. Please go ahead.

Hi, Jim. How are you doing?

Great. Long Island City, your investment there strikes me very much like you're buying a Citi bond and then taking on residual real estate risk. As such, why postpone doing a joint venture? It seems to me to the extent interest rates rise the value of your bond will go down or be negatively impacted, which might diminish or even eliminate the opportunity to do a JV down the road.

That is a fair comment and that is what we're very cognizant of. I think the only balancing act for us is we think there is a good opportunity with some of the non-strategic suburban properties and we'll try to balance the execution of that with the joint venture. I think you raise a fair point and one we're cognizant of and don't disagree with. At least in terms of as it relates to the fact that interest rates really do climb and we do run a risk of doing that. The other thing I will tell you is obviously we plan on -- and one way we look at this is we are matched, in our mind, matched funding by selling some other assets that I think capitalize on the current interest rate and evaluation market, as well as, as Mike noted, we also plan on covering ourselves with the debt market today, which we have been locking in rates to capitalize on the current debt environment.

I am still confused by the tie in between the suburban joint venture and the prospect of joint venture in Long Island City. Can you explain that to me again? Sorry about that.

No problem. I think there are two tie ins. One is a strategic tie in which we stated when we first restructured. I guess now 18 months ago, whatever it was. We talked about looking to reallocate capital out of a non-strategic suburban assets into higher quality assets that offer, in our mind, new growth opportunities. So part of this is a venture consistent with doing that and one department is we're only drawing a comparison as to the economics in which we would be able to, in our mind, dispose of some of those non-strategic joint venture suburban assets rather relative to what we would be getting on a risk adjusted basis for the Long Island City property. That's just one, just a strategic comparison we're making and showing consistently so what our thought process is. We look at that and that matter. The second is more pragmatic, to execute the sale of the properties that we've identified, at least to date, there is the potential for a large gain that needs to be addressed. And in doing that, we would be looking towards Long Island City as providing us with like kind exchange 1031 structure to address that gain, which we need to address in terms of relating to thinking about when we bring in a joint venture partner.

So the $500 million you're talking about doesn't include Long Island City? Long Island City would be in addition to that?

That is correct.

With respect to portfolio occupancy, is your office portfolio effectively full?

You know, it's interesting. It is not effectively full, because if you look at our portfolio and you look, for example, at some of our New York City peers and see what they would have their general occupancy. They operate more at 97, the 97.5 level and when you have New York City type assets in the portfolio it skews some of the numbers. If you look through that, for example, and look at Westchester and Stamford. Stamford is 88% occupied today. In addition, we have another 160,000 square feet under development that's going to be ready for releasing when we complete the Landmark 6 in Stamford and in Westchester we're 91% occupied. I think you have those two pockets. If you go back to 2000 / 2001 our overall portfolio was in the 96.5% occupancy level and I would tell you it probably can get higher today because of some of our New York City exposure -- the greater amount of New York City exposure we have today than we had back then. And then finally, of course, we have the development projects like 68 South Service Road that has the vacancy. But it is interesting. On Long Island, for example, where we're 96.5% leased, we're leasing spaces in for example, the Omni, one of our premiere buildings here, that we haven't leased since we built the building. So we are going in now and leasing some of the more challenging spaces to have been leased. We're now at that level, but we're getting them leased.

In a submarket like midtown where rents are rising, how do you balance going to 98%, 99% occupancy versus keeping some of that space off the market and garnering higher rents down the road?

This is Tod Waterman. I think that the good news for us with respect to your question is when you look at some of our major assets, we actually do have vacancy coming up in some of our better assets. This should capitalize on the trend in rent. Two examples would be 1185 Avenue of the Americas where we have about 175,000 square feet coming up in about 16 months, which we're marketing now so we're capitalizing on the economics available today. We also have vacancy in 2006 at 1350 Avenue of the Americas. That is just two examples. We do have a multi-tenant portfolio there that allows us to constantly trend with the market.

Right, and one of the things that we do do is we'll choose to maybe do renewals on some of the lower spaces or maybe less attractive spaces in buildings where we may have higher floors coming due and we'd wait longer on higher floors, so we can get premium prices. Like at 1350. We did renewal of the base floors today versus leaving them in and bringing them to market.

Thanks for that and finally, can you provide some commentary with respect to northern New Jersey? You have done very well there, but the market hasn't improved at least according to a lot of different statistics. Within your own supplemental, you show the vacancy rate in northern New Jersey is actually up year-over-year. A little better sequentially, but still stuck in the 18% range. Can you provide some commentary with respect to the northern New Jersey and perhaps why your performance has been somewhat stronger than the market.

Again, it is interesting. When you think about us in northern New Jersey, we really have been very selective and focused on owning the highest quality properties in some of the best submarkets and I think when you do that, you're able to out perform the markets. Of course, I also like to say, I believe our team does an exceptional job of staying focused, staying on top of our properties. But it is very much owning very high quality properties in some of the better submarkets. It also highlights the point we've been mentioning about looking to continually redeploy capital and evaluate which properties long-term have good potential rent growth viability versus others that may just have normal stable growth and I think when we talk about our non-strategic suburban joint ventures, those are the assets we would be evaluating for that type of joint venture or disposition. Even in New Jersey is some assets that would probably be more of a disposition, where we continue to refocus our efforts back in the more premiere markets. Sal, do you have anything to add to that?

No. I think certain markets, like Scott said, have great employment trends and good occupancy and we see good deals a lot through there and some of the periphery markets that kind of continue to struggle a little bit. You see a little bit of that in the statistics.

Thank you.

Our next question is from the line of Anthony Paolone from JP Morgan. Please go ahead.

Hi. Any blocks of space in 2006 or any quarters that look particularly challenging in terms of your expiration schedule.

Every year you have large blocks of space that can be challenging. We have blocks up in Westchester in Connecticut in 2006 and I don't want to go into too much detail because we're in discussion with different things with them that tend to be -- any time you have big blocks of space like that, that's probably the only ones that may jump out -- and probably also 100 Wall Street. We have a block in the upper floors. The very top of the building. So those are probably -- some blocks in Westchester, Connecticut and 100 Wall Street. Sal, can you think of anything else?

I think the good news is we're engaged with the majority of those tenants that fall into that category.

Okay. And just a second question. Can you just address prospects for Verizon, MCI merger and any implications for your portfolio?

I can't tell you what the prospects are one way or the other. It's been, obviously -- it's hard to really understand what's happening. I know we renewed a small Verizon lease this past quarter in Long Island for about 40,000 feet or so. We have both Verizon and MCI in Westchester, and so that may be a benefit. I know as Verizon is right now is moving out of midtown, they've prepared to move back some space into New Jersey. They're also looking at many other of their other locations to try to back fill people and so as they continue to expand, there may be some good opportunities for us, but it's really hard to predict. I am not sure they have a clear handle nor should they until they get this thing finished.

Okay. Thank you.

Our next question is from the line of Alan Calderon from European Investors.

Good afternoon, guys. For some of us who haven't been with your story for about two years or so, could you please talk about which assets are non-strategic suburban assets you have? What markets?

Let me give you an example. You were in New Jersey recently, right?

Right.

So you were in Short Hills, you were in Giralda Farms?

Exactly.

The assets you didn't see in New Jersey would be non-strategic.

Okay.

When you really think back, it is probably some of our earlier acquisitions in some of the markets. For example, West Orange in New Jersey. When I say non-strategic, again, it's that redeployment and focusing on really owning just the prime high quality assets 100% of our capital and then being able to get the benefit of having the broader product type in the market place but without having as much capital allocated to that and getting the fees associated with having a joint venture structure as part of that. That's something that we have we've been contemplating, as I said, for some time. Those are examples of the type of things we would drop into it. From our tenant's perspective, it would be seamless. Most have joint ventures and every other joint venture we have right now, which is a capital allocation and potential increase enhancement of returns by doing some of these trades.

Any of your Westchester, Long Island assets fall into that?

Sure.

How about industrial R&D assets?

Probably not. Usually the way we look at it is we've identified some assets that we think are what we consider non-core, which are either they're out of one of our submarkets, too far away to really manage them, whether we owned them in a JV or owned them wholly owned. We're probably better off in today's environment, just selling them. At the type of valuations that are out there. And some of the industrials that way -- there's some assets on Long Island in -- that are further west in Great Neck Long Island that we consider in doing things like that and then there is assets where we think are valuable for our Company to own and manage relative to our market share, our market presence, servicing our tenants in our market, but from capital allocation perspective we think we would be better served by taking that capital allocation and reinvesting it into more premiere type assets into each of the submarkets and new growth opportunities, new value added opportunities.

And is there any guidance on the cap range you would be looking for?

I don't want to provide the guidance as I said, more assessment as to where the markets are and that's why I'm making the comparison on Long Island City for risk adjusted return basis. We think that that's a good positive trait.

Right. And obviously the investment environment is very challenging in New York City, but can you talk a little bit about the investment environment maybe in Long Island and in Stamford?

I think I made this comment the last time, that I think showed the investment environment getting tough is they became less discriminant on quality and I would also say that you had a lot of investors that typically invested in New York City coming to the suburbs, but they didn't change their investment perspective. I think some of the opportunities we've seen in the suburbs, some of them have gotten more pricey than we would think is reasonable long-term and that's why we maybe would look at investing through more of a structured finance or preferred basis as I described, but again because of our ties to these markets and the relationships we have, I think we will get our reasonable share of some additional opportunities in the markets that we think are valued appropriately, like we did in the $76 million of deals we did in New Jersey recently.

Right. Okay. Your guidance really implies a pretty big second half ramp on a quarterly FFO basis. Can we assume that ramp is -- really a lot of that is the One Court Square acquisition?

Right. It's a redeployment of One Court Square and the continued performance of the leasing that we've done.

Right. Okay. And then final question, this quarter, I think you had a pretty big lease spread on a retail space in Manhattan. Do you have some of that retail space rolling by the end of the year, some more of that retail space?

We don't have any more left.

Okay. Thank you very much for your time.

Thank you.

Our next question is from the line of Ross Nussbaum from Banc of America Securities. Please, go ahead.

Hi, Scott. Good afternoon. Most of my questions were answered. The only one that wasn't was 1185. What's the update there in terms of the rent reset on the ground lease in terms of the timing of when that happens and is there anything you can tell us relative to what you've already got in your numbers?

Sure. I can tell you the best I can do. We finished the process -- the arbitration process and now that they're going through they're evaluation of that arbitration and conferencing and I think our sense on timing as we said the last time, hasn't changed. By the end of the second quarter we should have clarity as to where that stands. And again, I think from our standpoint I think we feel pretty comfortable with what we have in numbers right now, that based on where the feeler is and where we are and where the process is -- there's not going to be any material change whatsoever that would impact guidance on scale basis.

Great. Thank you.

We have a follow up from Chris Capolongo. Please go ahead.

Sorry. I wanted to make sure of something. Are there land sales included in the guidance?

No.

There's not? Okay.

In the other income there may be some small land sales, but nothing of substance.

Nothing of substance. Okay. But there could be more perhaps?

It's probably more next year event, but you never know.

Thanks very much.

We have a follow up from David [Tody]. Please go ahead.

Hey, guys. I ask you this every quarter. Can you give us a little bit of a sense of pressure you may be feeling from the residential market to potentially sell your land faster or potentially raise some of your more under performing assets?

From the residential market?

Yes.

I think it's a fair statement. When you go through and talk about, for example, if you look at Long Island east through 110 where it is the most eastern commercial market all the way through Nassau County, either every piece of land that could be built as offices is under construction, which is ours and really one other major site right now that are in the midst of construction or is being rezoned for residential, that was once commercial. So there clearly is a squeezing out of potential commercial supply in markets like Manhattan, Long Island, downtown clearly, some areas of New Jersey, maybe not as prevelant because there is a lot more land in New Jersey, but in the land constrained areas there clearly is a squeezing out. That is one thing interesting about looking at Long Island City which is that it really is one of the last under developed sites in locations in New York City, submarkets of New York City that you tend to go out and develop but pricing is high for land because of residential which is ultimately good for the value of our office buildings, but not necessarily good for expanding them.

Do you see yourself getting involved in any residential ventures in the future?

I don't think directly. I think there may be instances where there's mixed use projects where we would participate in some mixed use projects with partners. I wouldn't say that's out of the question.

Great. Thanks.

We have a follow up from David Fick. Please go ahead.

I understand completely the economics of you're better off laying off a joint venture of your suburban portfolio than the Citibank because of some of the subtle issues you will have on either one. I guess my question would be why would you choose to retain a 20% or 30% interest in smaller non-core suburban assets?

I am sorry. I am sorry. I may have misspoke. The smaller non-core suburban assets, we're going to sell outright, which would also be in the $500 million. That's the example of buildings in Long Island I gave you and some other buildings. What we are saying is that there is what we consider non-strategic, which aren't necessarily small. There is a couple of 200,000 - 250,000 square foot office buildings. They're quality buildings, but not what we would consider strategic, which are buildings that are really key to our franchise value in that marketplace. And so as joint venture partner overtime if we were being driven by an IRR, we could ultimately sell those buildings and not have any impact to our franchise value, persae, and to our competitive advantage we have in those markets, but only in those properties in our markets make sense for us and I think having the alignment with our JV partner and being in a position where the returns that we would get with those fees are appropriate for and make sense to us.

All right. Thank you.

We have no further questions. You may continue.

Thank you and thank you, all, for joining us on our call and look forward to speaking with you soon.

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