SL Green Realty Corp (SLG) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Reckson Associates second quarter earnings conference call. [OPERATOR INSTRUCTIONS] 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 the factors that could impact Reckson is included on the Company's Form 10-K and 10-Q filing made with the Securities and Exchange Commission, which are available on Company's Web site at www.reckson.com. Investors and others should read these factors before making any investment.

Reckson undertakes no responsibility to update or supplement information discussed on this call. Also during this call, the Company may discuss non-GAAP financial measures. The GAAP financial measures most directly comparable to each non-GAAP financial measures discussed and a reconciliation between the measures can be found on the Company's website and the quarterly earnings press release, slide show presentation and supplemental package.

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

Thank you, operator, and thank you all for joining us for our second quarter 2005 earnings call. Presenting with me today is Mike Maturo, our Chief Financial Officer,and have the balance of our executive management team available for any Q&A, once we're done with our formal presentation. We'll be working off a presentation that can be accessed off our website at www.reckson.com. If you have any trouble with that, you can contact Susan McGuire, head of our Investor Relations at 631-622-6642. To keep the presentation brief and informative, we've also included an appendix with additional slides for your review at your convenience.

Also, as it relates to this call, as most of you know, we are in the midst of a public offering in Australia. Due to these circumstances, we are limited as to what we can say about those activities. We've included a series of slides that we believe provide additional insights about our Australian LPT strategy. Unfortunately, our commentary will be limited to the information in those slides and we'll be not taking any questions regarding the Australian LPT on this call. I'm sure that you can understand the nature and sensitivity of that.

Now, I'd like to start with the presentation. If you turn to slide 2, as you'll see, we had an extremely good second quarter. Not only did we continue to generate sector-leading operating results, but we made significant progress in moving the ball forward on many of our strategic initiatives.

Let me start by reviewing our operating highlights on slide 2. During the quarter, we reported FFO of $0.59 per share, which is a 13.5% increase on a per share basis of the $0.52 we reported in the second quarter of 2004. This FFO growth was driven by strong same-property NOI growth. You'll note that we had same property NOI growth, net of minority interest and JV's,of 6.1% for the office portfolio and 6.3% for the overall portfolio on a GAAP basis. And on a cash basis, the office's portfolio growth was 4.3% and 4.6% for the overall portfolio, so very strong same-property NOI growth.

During the quarter, we executed 69 leases for a total of 374,000 square feet. This is more in-line with our historical run-rate than the above average leasing run-rate we've been experience over the last five or so quarters. That being said, activity remains brisk and we have over 700,000 square feet of leases presently under negotiation, and a large pipeline of deals behind that. Continuing with the highlights on slide 3, as noted on our last conference call, occupancy dropped for our office portfolio on a same-property basis about 40 basis point on a year-over-year perspective, and 90 basis point sequentially. Leasing economics remain strong with same store mark-to-market of 10.3% on a straight-line rent basis and 1.3% on a cash basis for our office portfolio.

Also during the quarter, we completed the arbitration proceedings related to the resetting of the rent-under-the-ground lease at 1185 Avenue of the Americas. We know this has been something that the market has been anticipating for some time. We settled at approximately $6.50 per rentable square foot of the building, which is fixed for the next 37 years. We're pleased with these results, and the continued performance of the 1185 investment, where we anticipate over a 8% cash NOI yield in 2005 and over a 10.5% GAAP NOI yield in 2005. So we're happy with that outcome and happy to have that behind us.

Investment activity remained brisk during the quarter. We actually did another $400 million of new investments during the quarter, bringing our year-to-date activity to approximately $1 billion. And finally, we were also very busy from the capital market perspective, as we start to capitalize on the low interest rate environment and strong debt markets. We issued or refinanced over $600 million in debt, with a weighted average interest rate of 4.5%. We amended our line of credit, which decreased our spread, enhanced our covenants and extended our term. As we'll talk later, and as I mentioned earlier, we began the marketing of a LPT on the Australian Stock Exchange .

Turning to slide 4, I'd like to discuss our markets and leasing trends in a little bit more depth. Our markets continue to gain strength, as demand for quality office space continues to outpace supply. This is particularly true on Long Island and in midtown Manhattan. In our other markets, it is more sub-market and product-type specific. That being said, we are pleased with the increased activity we are seeing in our Westchester and Connecticut markets, as well as in some of our northern New Jersey sub-markets. As noted on the on the prior slide, we did anticipate a small decrease in mid-year occupancy performance. This is due to a couple of factors. The first is we had some expected expirations, one in New Jersey in Clifton and the other in Connecticut, where Landmark Six was taken off-line when we began a redevelopment of effort.

In addition, as our markets have continued to improve, we continue to make a strategic approach in new leasing transactions, and execution of early renewals and early lease renewals. We're clearly trying to push economics and we're willing to suffer a little bit of occupancy reduction, based on where we are right now, to try to push those economics in our marketplace. At this time, we're forecasting to return to beginning of the year occupancy levels by the end of 2005, , which is consistent with what we reported when we first established guidance for 2005 at the beginning of this year. We continue to deliver positive returns on our tenanting our costs, although they are high. We had about $3.29 per square foot per year of lease term this period. That includes some pre-built space in the city. But on that expense, we realized a 12% return in the second quarter and year-to-date, a 13.6% return. So while we're investing capital, the additional rent we're receiving from those leases that are going in -place versus what the prior tenants were paying, are throwing off positive returns on investment, which is one of the key metrics that we focus on, quarter in, quarter out.

Just looking on a prospective basis on slide 5, we show our lease expiration schedule. You see we have about 3% of our leases still expiring for the last three quarters of 2005. And as we look towards 2006, we have about 10% of our portfolio expiring in 2006. We have, actually now, leases under negotiation for about 300,000 square feet of that 1.7 million square feet today. On slide 6, you'll see we're still forecasting positive mark-to-markets, as we release expiring leases with new tenants. On a cash basis, we're up 8.2% forecasting for '05 and '06 and on a straight line GAAP basis, we're up 11.8% for '05 and '06. So, still positive mark-to-market opportunities in our portfolio are being forecasted.

Turning to slide 7, and let me take a couple of minutes and talk about the investment environment in some of our activities. As I mentioned earlier, we closed or have contractedto-acquire about $975 million year-to-date 2005. Obviously a very active year for Reckson. We anticipate the investment environment to continue to be active, as additional product is being brought to market. It's our opinion that there are two primary factors driving the acceleration of products coming to market.

The first is there's been a number of high-profile transactions trading at perceived premium pricing, which give owners the belief that it's a good time to sell, when they look at some of the pricing that people are getting in the market. The second is it's a flattening of the yield curve, and it's forcing owners to accelerate their sell-hold decision. Many owners have capitalized their recent acquisitions using floating-rate debt. And as short-term rates increase and the long-term rates have stayed relatively low, they need to make a decision, should we be financing the assets long-term or should we be taking advantage of the premium pricing environment and sell the asset today? And so that is, in our opinion, something that's resulting a more product coming to market, and we see a vibrant pipeline of opportunities.

Now that being said, some of that pipeline of opportunities are going to be at premium pricing, but we do believe there will be opportunities to capitalize on good investment opportunities in that mix, and we'll talk more about that. Strangely enough, this is an unique time from our perception. It really is a time when, I think, it's as good to be a seller as a buyer, and that's something that we're doing. We're selling our non-core properties at premium valuations, particularly properties in non-core sub-markets, and we're reallocating our capital to strategic and value-added properties that we think will enhance our local competitive advantage and build a pipeline for future growth.

In terms of the type of property that we think offers us good opportunity in these markets, we look for ones where our unique operating model can create value. Where our operating efficiencies, our leasing capabilities and, our creative structuring can find ways to create values or underwrite opportunities where other competitors may not be able to underwrite those opportunities. And really, in today's environment, you need to take an evaluated approach to the investment market place if you're going to be able to create value long-term. And I think that's something that Reckson has to offer.

The other area that we've been focusing on is leveraging our long-term relationships to acquire properties before they come to market. And a good example of it this past quarter was our acquisition of EAB Plaza, a $240 million acquisition I'll talk about more later. Or last year, where we did $450 million of acquisitions that were all not broadly marketed. For 2005, we're forecasting approximately $1 billion of investments, matched by approximately $800 million to $1 billion of dispositions or sale of joint venture interests. The by-product of these activities should be a stronger portfolio, higher returns on our equity, and greater access to future growth capital through newly formed JV relationships.

If you turn to slide 8, I'd like to talk about the One Court Square acquisition. We think it's a good example of how we can create value in this competitive marketplace. If you recall, we announced this in the first quarter. It was a $471 million acquisition. The initial cash-flow yield on an unleveraged basis was 6.5%. We actually havecommenced a recapitalization and put long-term debt on this for $315 million. We got 4.9% rates locked in, ten years, interest only. So we got, I think, very, very compelling debt to match against the 6.5% starting unleveraged cash-flow yield.

We're also negotiating with an institutional joint venture partner for to sell down about 60% to 70% of this asset. And when all's said and done, between the low interest rate debt and the promote structure with our institutional partner, we should getting somewhere between a 12% and 15% return on our equity, which is again secured by a Citibank credit lease. So, here is an opportunity where we actually were able to purchase a trophy asset and achieve what we think are superior risk adjusted returns, as well as positioning ourselves in a sub-market where we believe there will be additional growth opportunities in the future.

Also this quarter, we announced the acquisition of EAB Plaza, as I mentioned and you'll see on slide 9 provide a little bit of an overview of that acquisition. EAB Plaza is the largest and most recognizable office complex on Long Island. It's approximately 1.0 million square feet. We purchased the property for $240 million or $226 per square foot, which is in excess of a 20% discount to replacement cost. The complex sits on a - 75-year ground lease, but the rent is $0.53 per square foot per year, so in our mind that is not a meaningful impact to valuation. You note the property's 90% occupied, as compared to Reckson's Long Island portfolio, which is over 96% occupied. We anticipate generating initial GAAP NOI yield of approximately 6.5% and we believe that, though our leasing and operating initiative,s we'll be able to grow our NOI on average of 5% per year. This is a classic Reckson investment. I think our market dominance will enable us to create significant value.

We believe the complex has been under-managed for a number of years now, as a good example of that, is that the operating expenses in this complex are 20% higher than the operating expenses than in our OMNI project, which is across the park here in this marketplace. And, as I already mentioned, we're over 96% occupied on Long Island, while this property is 90% occupied. So we believe we'll be able to grow that NOI. Also this acquisition validates the use of our structured finance investments to source off-market deals. As you know, we've commented a couple times in each quarter that we plan on using structured finance strategically to seed potential new investment opportunities. This is exactly what EAB Plaza has turned out to be. If you recall, we had $30 million structured finance investment the last couple of years in this property and, through that position, we were able to negotiate an off-market deal with the ownership to purchase it. And finally, we would anticipate using this property for the like kind of exchange vehicle for the gains that may be generated from the LPT or other joint ventures.

Another investment that we made this quarter can be seen on slide 10. It is a structured finance investment, although different in nature then the EAB structured finance invesment. This one I would consider a much more long-term investment and it's structured as a preferred-type long-term investment. You'll see it's a participation in an almost $95 million investment in a 550,000 square foot condominium interest at 1156 Avenue of the Americas in New York City. They're really two components. There is a debt component, which is about $85 million, of which Reckson's share is $55.3 million. This is a 15-year loan that will have interest that compounds at 9% per year, and that has a 30% profit participation upon a capital event. There is an equity component of about $9.5 million, of which Reckson's share is $6.2 million, and that will just participate at a pro rata basis of the ownership in the condo interest. The property is 100% leased, supported by JP Morgan Chase and Marsh McClennan Credit, Marsh subleases space from JP Morgan. So it's a very strongly backed from a credit perspective with this long-term lease and also, just if you recall, we had a $34 million mez loan out there, as of December 20, 2004. This actually refinances that portion of the loan with this investment. So again, here is a very good example of using the creative structure to find a way to get out-performing risk-adjusted type returns.

Turning to slide 11, I would like to discuss our value creation pipeline. Asyou may recall, we have two active projects in our activity being built right now, or redeveloped. One is the 68 South Service Road, which is a ground up development. The project is on budget and ahead of schedule. We estimate construction completion at the end of this year. Leasing activity is very good, and we have activity going on for a significant portion of the building. We feel very good of getting leased well ahead of schedule, based on the activity we have right now on that building.

The second was the redevelopment of 6 Landmark Square, which is part of our Landmark Square development in -- in Stamford, Connecticut. This is 162,000 square foot building. We went through a material repositioning to bring it to a Class A nature, and one of the premier buildings in downtown Stamford. We're just completing that repositioning, and I'm pleased that we actually have executed or negotiating leases that would bring the occupancy to about 65% of that building and, again, well ahead of schedule. So I think both these examples show good execution of our value-creation approach, as well as the strength of our markets.

Based on the anticipated success of these two projects, we decided to kick-off two additional development projects, which you can see on slide 12. The first, another ground-up development in University Square, Princeton, New Jersey a five-story, 316,000 square foot class A building. It's in a great location, located on main on main -- main Route 1 and Alexander Road. Princeton is one of the strongest New Jersey markets, where occupancy is at the highest level of the past five years. You might recall, we'd actually commenced this project in 2001 and then stopped it, due to our assessment of the current market conditions. We actually own all of the steel and granite, and have begun the site work. This actually will enable us to bring the project to market at a faster pace and with more certainty of construction costs. We're anticipating incremental investment of about $47 million, bringing total investment to just over $70 million, which includes our extremely low land-basis for this project. We'd anticipate completing the project at the fourth quarter of 2006.

The second value creation project we'll be kicking off is another one at Landmark Square, the last piece of Landmark Square, 7Landmark Square, which sits on the corner of Broad and -- and Atlantic Street, which is a major corner relating to the Landmark Square office park. What we would look to do is build a 37,000 square foot two-story retail project on this site. We think it will enhance the overall park and we had a very good initial interest from tenants to take this site once it's built. This market has actually really become a much better retail market over the number of years that we owned Landmark Square and seems to be a very successful development.

Now I'd like to move to slide 13 and provide some detail regarding our plev -- previously announced Australian-listed property trust. We've commenced the marketing of the property trust. It'll be Reckson and NYPT a newly formed listed property trust that will trade on the Australian exchange. We are looking to raise AU $271 million, which is about $203 million U.S. Reckson would own and manage the responsible entity to oversee the LPT, and we actually have obtained a financial service license to do this. We think there's a number of advantages of going this route versus the joint-venture structure. First, it will provide ongoing access to capital based on performance. Our experience with the Australian investment community is that they are extremely sophisticated and it's a mature property market right now. And so our perspective is that, if we perform and lay out a business plan and execute that business plan, that there would be an ability to have continued access to capital from that marketplace because of that level of sophistication.

We've just gone through a fairly extensive diligence process with the investors, which I think highlights how sophisticated and how detailed they focus on their investments and something we look forward to. The second, obviously, is the ownership the responsible entity provides us with greater discretionary control, than if we were in an U.S./Australian joint venture structure, and enables us to move more quickly, which is critical in today's market. Transactions are getting done in 30-45 days. It's very difficult to move quickly if you have to bring in a joint-venture partner along at the pace that Reckson would need to keep to be competitive.

And then, finally, Reckson would receive 100% of the fees with no leakage to a joint-venture partner. We structured the LPT to assure alignment with Reckson shareholders. There'll be no separate management compensation from the LPT to Reckson's management team. No ownership by the Reckson management team in the LPT. We appointed three independent LPT directors that are well known in the Australian marketplace and very sophisticated about those markets. And we're relocating a Reckson officer to serve as fund manager and lead a local team that we're building in the Australian marketplace, so that they can focus on that component of the business.

Reckson affiliates are going to serve as the property manager and leasing agent, asset manager, construction manager and provide other services, and there's actually a breakdown of the fees in the appendix for you to review and see how that breaks down. Clearly, the key is that we believe the Australian markets will offer Reckson the opportunity to raise additional capital, as we grow our business. And so, we structured our transaction to perform so that we have ongoing access to this capital. The properties that are contributed have all been at reasonable valuations with internal growth potential. We've established option properties to provide for reasonable external growth, without having to rely on third-party acquisitions. And the vehicle was organized with an extremely clean, transparent and aligned structure.

Just continuing on slide 14 to discuss about our rationale. As many of you know and we've had discussions in the past, one of our strategic challenges has been gaining scale in a marketplace where acquisitions and investment opportunities of a large scale relative to the size of our Company. We believe that the Australian LPT structure will enable us to achieve this objective of increasing scale without diluting existing Reckson shareholders. It will enable us to focus on operating locally and financing globally, getting deeper and deeper in our New York Tri-State area markets and enhancing our competitive advantage, while sourcing capital globally the most competitive priced capital that we can find.

It's anticipated that the Australian LPT will focus on core-plus investment opportunities in the New York Tri-State area market. Generally, Reckson will continue to wholly own strategic assets, which are the CBD assets and the suburban assets that define Reckson in each of our sub-markets. And, also, Reckson will wholly own value creation opportunities. We will focus the trust activities on the core-plus opportunities, an area where we have not allocate a lot of capital to lately, but believe there is going to be a lot of opportunities as we go forward, at reasonable risk-adjusted returns based on what we've seen in the marketplace. Typically, these type of properties are undermanaged and offer Reckson the opportunity to, very quickly and efficiently, increase their values as we go forward, so this is an area that we would like to continue us to grow.

Initially, we're going to seed the trust with a 75% interest in 25 properties that we own today, suburban properties, core-plus properties, contain about 3.4 million square feet. The purchase price has been set at $563 million or $183 per square foot for the pure office properties. As noted, Reckson will continue to own a 25% interest in in these properties, and we're going to maintain anti-dilution protection and anticipate 25% interest in ongoing growth opportunities. As I noted in the earlier slide, we've set this up where there is ten properties that will serve as option properties, 1.2 million square feet. They can be acquired by the trust at fair-market value, and it was structured in a means to minimize dilution or manage dilution as we go forward, so they would be done over a two-year period, with certain additional tools to manage that dilution.

The initial transaction has also been structured to mitigate dilution and will take place in three different tranches It is anticipated the first one would take place at the the end of this quarter, or the beginning of the fourth quarter, the second tranche in the first quarter of 2006, and the third tranche in the fourth quarter of 2006. Based on the properties that we are contributing, we will be contributing about a 2005 forecasted NOI yield of 7.15% and a 2006 forecast in NOI yield of 7.91%. This does not include the newly acquired 225 High Ridge property, which we are contributing at our cost. From a 2006 perspective, we anticipate Reckson's annualized cash yield, including the one-time fees, to be approximately 18%, and excluding the one-time fees, but including the ongoing reoccurring fees, to be approximately 15%.

Turning to slide 15, and just to run down the additional strategic benefits of the property trust, in our view the formation of the property trust will enhance our competitive ability to acquire core-plus assets. They provide potential counter-cyclical benefits. As those who've watched the REIT market over the last few days you've noted, obviously, a material sell-off , that material sell-off with the average about 10%. If you look at the Australian publicly traded companies that have big asset bases in the U.S., they are off somewhere around 50 to 60 basis points during this same period. So there's a potential for that counter-cyclical benefit. It's also a very efficient source of capital as, if you perform and you're executing and can do transactions, it's an efficient means to quickly raise capital in the Australian marketplace, once you are up and running.

In addition, it leverages Reckson's infrastructure and will, as I mentioned, provide a reliable fee income stream. It will provide the vehicle to us to efficiently recycle capital, especially through the sale of the option properties that we've established, enhance our ability to acquire core-plus assets at superior risk-adjusted returns when the fees are taken into account and, finally, enables us to achieve our stated objective of reallocated capital to strategic and value-added properties. As you see when you look on the right hand slide of slide 15, in 2003 60% of our NOI came from strategic properties. Pro forma for the transaction with the LPT and the other transactions that we're working on, 83% of our NOI will come from strategic assets and 17% from other properties.

With that, let me turn it over to Mike, and then I'll get some concluding remarks and we can open up for questions. Mike?

Thank you, Scott. I'll start off on a slide 16, looking at our operating margins for the quarter. For the second quarter, the operating margin was 61.7%, and that compares to 59.8% for the same quarter last year. This quarter's margin was benefited by the addition of One Court Square, which is a net lease. Net of that lease, the operating margin was for the second quarter was 60.7% and still a 100 basis points improvement over last year, which is attributable to some of the positive rollover we had in rents and stable operating expenses. We would expect operating margins to be around 60% going forward.

On the G&A side, we reported $8.4 million for the second quarter. At that was in line with our expected run-rate range of about $8.25 to $8.5 for each quarter of this year. As for other income, we provided some additional detail on the other income slide this quarter. We've separated interest on notes receivable, which represents our investments in mez notes and the preferred equity positions. Investment and other income captures miscellaneous income and service fee income, which will include more activity going-forward as we close on the JV transactions that Scott discussed earlier. And then lastly, we have a category of equity and earnings in JV's, which again, going forward, will include our interest in the LPT and other JV's, like One Court Square.

Other income for the quarter was $3.9 million, $3.3 of interest income on the mezzanine notes, $569,000 of other income and small amount of the equity in JV's. That number relates to 520 White Plains Road property, which we actually repurchased our partners, 40% interest this quarter. On a run-rate basis, we would expect the interest on notes to be about $3.6 million for the third quarter, and then decrease in the fourth quarter by approximately $1 million, as a result of the repayment of the note on EAB Plaza, which, of course, will be repaid in connection with the purchase of the property. We had budgeted approximately $1.25 million for the quarter for investment and other income, so we were a little bit short there. This category is generally difficult to forecast because it makes up a number of smaller items. However, we do have third-party fees relating to the LPT, which we expect, which should make up those shortfalls that we incurred in the first couple quarters and the remaining of the year.

We move to slide 17. On the capital market side we've had significant activity during the quarter. We completed or are about to close on approximately $850 million on long-term financings. We're fortunate to have completed these financings or locked rates prior to the recent run-up in the treasury market. The weighted average interest rate related to this financings is approximately 4.7%, with a weighted average maturity of about seven years. We issued $287.5 million of 4% exchangeable debentures with a 25% exchange premium. There's a put-call on these notes at the end of five years. These debentures were issued with a net share feature, whereby the Company will settle the principle amount of the notes in cash and have the option to settle any incremental value in cash or stock. As Scott mentioned, we are very pleased with the pricing of these securities. We also obtained a $315 million interest-only loan on the One Court Square property. There's very competitive pricing in the market.

In addition, in connection with the LPT transaction, we obtained a $247 million five-year, 5.19 interest-only mortgage, secured by certain of the assets, which will, in part, be contributed or in part sold to the LPT, and we expect it close on that loan in the very near term. During the quarter, we also amended and extended our $500 million line of credit. We now have a full three-year term with an one-year option. We reduced our spread grid by 10 basis points across the board. Our borrowing spread, based on our current rating, is now 80 basis points over LIBOR. We modified certain valuation provisions that provide us with greater capacity going forward. And at the end of the second quarter, subject to these new provisions, we had a borrowing capacity under the line of $372 million. On the financial ratios, as of and for the second quarter, they continue to be quite strong. Our debt-to-market cap was was 42% at the end of the second quarter, compared to about 37% at the end of the first. The increase is primarily due to the debt incurred to acquire the One Court Square asset.

Our interest coverage and fixed coverage ratios were approximately 3.02 times the second quarter. This is slightly down from 3.2, times last quarter, and again reflects the additional debt on the bridge facility incurred to by the One Court Square asset. We expect these ratios to strengthen over the next couple of quarters, as we complete the sell-down of One Court Square asset into related debt and we complete the LPT transactions, which will provide us with substance proceeds, which we'll initially use to repay floating-rate debt .

Moving along to slide 18, there's a schedule of our debt. Our weighted average interest rate on outstanding long-term debt at June 30 is about 6.4%, and the weighted average maturity is about five years. Again, these numbers will improve next quarter, as a result of the latest refinancings are incorporated in the numbers. We have very limited exposure to maturities over the next two years, with no unsecured long-term debt coming due until 2007. However, we do expect approximately 200 million in property debt maturities over the next two years. These are significantly under-leveraged, these assets, as a result of the increase in value since origination.

Our plan is to repay these mortgages with unsecured debt or the property sales proceeds, which will enhance our unencumbered pool and provide us with a greater level of unsecured borrowing capacity going forward, Our line of credit had an outstanding balances as of the end of the quarter of 128 million and floating rate debt, including the bridge facility, was approximately 27% of our total debt. Subsequent to the quarter, we've reduced our exposure to floating-rate debt with the refinancings I mentioned earlier.

In terms of slide 19, I try to give a pro forma, balance sheet assuming completion of the transactions we spoke about today, which we believe will occur through the fourth quarter. Pro forma for the completion of the initial trunch of the LPT transaction and the related financing, the acquisition of the EAB Plaza, the joint venture sale of One Court Square and the repayment of certain maturing mortgages, are debt to total market cap, based on the June 30 price would be 37%. We've moved floating-rate debt all the way down to 7% of total debt. The bridge facility would be completely repaid. The outstanding balance on our line would be approximately $100 million. These transactions essentially put our balance sheet back to the position as of the end of the first quarter, and position us with significant capacity to execute our growth strategy heading into 2006.

That's my summary. I'll hand it back over to Scott.

Just some concluding remarks, and then we'll open it up for Q&A. As you see, during this quarter we made significant progress in executing our strategic plan of: one, reallocating our capital with strategic and value-added properties, which should enhance our internal growth and normalize our dividend payout ratio faster; two, enhancing our value-creation pipeline. We're executing on our existing projects, we're commencing development of other key land parcels that we own today, and we're leveraging our existing relationships to create new opportunities; three, we're developing strategies to gain scale, enhance returns, and we're gaining buying power without diluting already common shareholders, which has been key for us, and developing vehicles that leverage our infrastructure and develops reliable fee-income streams on a going-forward basis; and then finally, we're strengthened our balance sheet to provide for financial flexibility, enabling us to maintain our strong investment grade rating, and also to become effective capital recyclers, which has been a key objective of ours.

We've been executing on all of this in a manner that has minimized dilution and are reaffirming our '05 guidance of $2.36 to $2.40 per share of FFO. We're aiming to hit, at this point, the midpoint of this guidance. The wildcard is the timing of the dispositions, and the realization of the unidentified, other income that Mike referred to, which is something that is not necessarily that visible until you get there. Also, we are setting guidance for the third quarter of '05, between $0.60 and $0.61 per share. With that, operator, we're open up for question.

Thank you. [OPERATOR INSTRUCTIONS] Our first question will come from the line of Jon Litt from Smith Barney. Please go ahead.

Hi, guys. This is John Stewart here with Jon Litt.

Hey, guys.

Scott, can you give us a bit of additional color on the leasing activity that you referenced at the 68 South Service Road development?

Yes, we have very strong activity in terms of leases being out for negotiation that, you know, if all goes well, you know, before year-end, we could have that building stabilized.

I'm sorry.

No. I was going to say but I'm being vague because a deal is not a deal until the deal's signed but we have, you know, actual leases out on a negotiation.

But no leases currently signed?

That's correct.

Okay. Can you just refresh our memory what the anticipated expiration in New Jersey was?

In Clifton New Jersey, it was had -- it was actually we announced, I think last quarter, we had a termination, what was the name of the tenent? Scientific?

Scientific Games.

Sal Campofranco – Reckson Associates Realty Corp. – EVP & COO: Scientific Games in Clifton for 70,000 plus square feet.

Okay. Can you also share with us what the loan-to-value was on 1166 Avenue of the Americas, and are you pari passu partners with Greene or how do your economics stack up against theirs on the deal?

We're pari passu with Greene, and I think the the LTV was somewhere near 70%, Rich, is that about right? –What is interesting about this is that there's a lot of amortization, so every year our position gets better but the cash-flow for that amortization's coming out of the common holders, so effectively they are reducing the debt, there's heavy, heavy amortization on this, so they're reducing the debt out of the remaining rental income stream, practically, for many -- for each of the years.

Okay. And lastly, can you give us an update on the Illinois toll road?

We have engaged an advisor to begin finding potential buyers. The book is being put together and we expect that marketing process to begin very shortly. Hopefully that'll bring us to a close to end-of-year type of timing relative to either a contract or closing.

Okay. Thank you.

Thanks, John.

Thank you. And our next question is from the line of Ross Nussbaum from Banc of America Securities. Please go ahead.

Thank you, it is John Kim with Ross. First question was on 225 High Ridge Road. I understand it's going into the LPT at cost. But having said that, it was acquired at $335 a square foot. Can you discuss what the cap rate was on this acquisition, and why the costs appear to be high?

Well, first of all and I can also let Rick and Sal speak to this, too. I mean, this is a great boutique building that is in Fairfield County where, I do not know if you read, actually, I think it was front page of "The Wall Street Journal" last week that in Greenwich, for example, properties are trading north of $700 a foot. And so the building has had -- does have good rental rates on it. The yield on it was in excess of 8.5% going in, which I think reflected the higher price per foot.. Sal, if you wanted to add anything?

Yes, it's simply probably the best trophy class asset between Stamford and Greenwich. I mean, the quality of the building is outstanding in terms of the bricks and mortar, the tenant base in there, structured parking, outstanding location, so I think on a relative basis it was a good purchase and compliments our downtown CBD presence, as well.

And are there development opportunities on the side and if so, will that contribute to the LPT?

No, it is fully maxed-out from a FAR basis.

Okay. Regarding One Court Square, your joint venture there, is it fair for us to assume that you'll have the same standard asset and property management fees, similar to the fees that you have with your LPT?

Well, you know, remember, there's more of a net lease to Citibank-type structure. So it doesn't require as much in that -- I think this is more -- this is more structured with some level of promote-type structures and allocation of income type structures. But I think we gave guidance to where we think the returns would be based on the type of transaction at that we're structuring with the institutional investor.

And just for modeling purposes, are this any one-time fees up-front, like an acquisition or a placement fee.

No.

No.

No? Okay. I'm trying to understand the straight line rent adjustment this quarter. It seemed like it was a pretty big adjustment from last quarter. Was that due to 1185 Avenue of the Americas or One Court Square?

It is a couple of things, John. The run rate was about seven, $7.5 million. And then we had the Giralda site kick-in in New Jersey, which added about a million or so dollars. And then we've had a few leases in New York City that -- that added about a $1.5 million or so, and then One Court Square is about $0.5. million. And so there were a number of different leases that came on that did pick that number up a little bit.

So this is a pretty good run-rate, except for the $0.5 million that may go away with the-- with the One Court Square?

Yes.

Okay. Final question, there was a report yesterday in Crain’s that said Citigroup was close to signing a pretty large lease at 485 Lexington. Have you been in any recent discussions with Citigroup regarding its use of your space, and do you believe this changes, their outlook on Long Island City, at all?

I think that Citigroup has really been committed to Long Island City. As you know, they've actually commenced phase two. And I think they have been one of the more strategic New York-based firms, focusing on regional decentralization, and Long Island City, I think, plays a big factor in that. And so I think that it doesn't change their view at all on Long Island City.

Okay. Thank you.

No problem.

Your next question is from the line of Tony Paolone from JP Morgan. Please go ahead.

Thank you. Scott, on page 14 of the slide presentation, I just want to understand the 18% return to Reckson with the fees or 15% without the one-time, what is that based on?

It is basically contributing our interest at the same valuation that we're contributing the properties into the trust. So basically, marking our interest to market. And then just taking the first year as the after-tax fees on the acquisition fees and other fees, the structuring fees that would go with that, and the second part, the 15% just relates to management fees and other fees on the after-tax basis that would be attributable from that.

Okay. So it's the return on your 25% interest.

Correct. At the same valuation that the assets are being contributed to the trust.

Including the -- the benefit of the fees, after taxes.

Right. Okay. Got it. On your development pipeline, when I looked at your supplemental, projects and planning could be quite a bit of dollars back there, where do some of those projects stand and how quickly do you think that you might accelerate some of those potential developments?

I think –what we've said at last quarter, too, that we keep all these projects in a position where we're ready to go as soon as we decide that the markets warrant it or we're comfortable in terms of level of risk that we have within our portfolio of projects under development. A good example is University Square, which we say, okay, the market looks ready, let's pull the trigger and we started pulling the trigger.

We evaluate this on a regular basis and, clearly, you know, the Ryebrook site, which is the building seven, 315,000 square foot's ready to go, you know, as we're ready to go, The Giralda sites may need a little bit more time to get through some the approval processes that would be there, especially since we're making a couple adjustments now that we have some more land as a part of some of our recent acquisitions in Giralda. And the Valhalla site is something that can be ready to go relatively quickly. So, you know, a big part of our strategy on the development pipeline has been and will continue to be to have everything teed-up so that when we make an assessment of demand that we're prepared to -- to move forward.

Okay. And then in Princeton, what kind of ramps do you need to make that project work?

To make the project work, you still didn't see the numbers where -- you know, we gave you the per foot numbers, so you can think about a net basis.

But the market rent today in Princeton are rent in the low $30 range, it's $31 to $32 today. And we underwrote that with a good range of sensitivity to, you know, new pricing on the -- on the low 30s and the -- you know, based on different scenarios of how the market may behalf, as we go forward.

And Princeton, similar to how we underwrote 68 Service Road, we're underwriting a two-year lease-up period, following the completion of construction. So I think we're pretty conservative in terms of how we underwrite these things and that's what's in the numbers, when we quote those numbers to carry in terms of our cost number, the carry includes the interest carry-on that -- that construction period, as well as the lease-up period.

Okay. And then last question, Mike, $55 million note investment in the quarter, you mentioned, like a 9% IRR, but it looks like six -- there's a 6% coupon going in. What is it on a GAAP basis? Is it six or is it nine?

It's nine.

It's nine.

It's contractually nine, so we're accruing at nine.

Okay. Thanks, that's it.

Thanks, Tony.

Thank you. And our next question is from Brian Legg from Merrill Lynch. Please go ahead.

Yes, Mike, could you just update us on the -- the non-income producing properties, the -- the expected return of capital in '05 and '06 and the potential gains in '05 and '06?

Sure. I do not know if you heard, we spoke about the toll way project, which is in Illinois.. We're begun the marketing there, we've hired somebody, engaged a professional to lead an effort there. They're putting the -- the marketing booklet together and we, hopefully, will that that out in the short-term. That process would probably bring us, we think, to a late 2005, early 2006 contract and sale.

ACC is virtually complete, as you know, and that money is essentially sitting in at the RSVP level, until we complete some of the other activities there. There is a small asset which relates to an assisted living assets that we actually have some activity on, that could bring RSVP somewhere in the area of $5 to $10 million that we're still working on. That's something that'll probably take a few months to get through. But it's being worked on now.

And then, lastly, is the Catskills project, which obviously is teed-off with the gaming, which is still in a state of flux now. The land claim settlements that appeared to be on their way ,suffered a setback recently, and that's going to have to go back through a political-type arrangement, and we'll hopefully start to see some activity when Congress comes back in to session on the stateside.

That all being said and we're very, you know, secure, we feel relative to the $55 million that we have on the balance sheet that we would recover that amount. We would expect to see monies come back from the ACC side and from the toll way project at the end of this year, again going into next year, along with the small asset on the assisted living facilities. And then Catskills is something, you know, as we've also said, it is something that's going to stay out there, and when it settles, it settles and hopefully that will be a positive upside.

And then, just on the other land holdings that we have, you probably have -- I think saw last quarter when they announced, we have a -- a contract again that we signed with Giralda Farms, we talked about that's, probably, you know, later than '06-type period, by the time we're said and done with that, and our other land holdings is probably a few million dollars of items maybe, $3 to $5 million of other income between Long Island and some of the some of the other smaller parcels around that we'dbe getting between now and '06 sometime.

Okay. And, Scott, just looking at the leasing activity in this period, it -- it slowed. You said that you are pushing rents, can you talk about -- is that the real reason that the -- the amount of leasing that you did in this quarter slowed, and can you just talk about the economics, how -- how much you're trying to push rents?

Yes. I think again there's two things. You know, we've had five quarters of over -- you know, almost 700,000 square feet a quarter, whereas our normal historical run-rate's been 400,000 square feet a quarter, so we've come back to the mean a little bit this past quarter.

That being said, when you look at our numbers, you know, we've been conscious of, at the occupancy we're at with the level of internal growth that we've had from the mark-to-markets in the prior quarters, we've had some room. And particularly in markets where we have real dominance, we haven't been willing just to lease space at economics that we didn't think were -- were as justifiable as we could've gotten. So we held-up some space in our buildings in the city, 810 Seventh, where we're looking to push rents a little higher in that market, held out some space in Long Island and in Westchester. And so, you know, where you have some areas, particularly in Long Island and in Westchester, where you have dominance, we take a little bit of responsibility for, not necessarily meeting the market, but actually leading the market, And, particularly, when have you some of the higher occupancy that we have generally across our portfolio. So I think it's a part of it. I don't know how much of -- of it is.

But also, as I said, from what we see in our pipeline right now, there is -- there isn't any slowdown of leasing activity. You know, when you are 94% leased, you need the bi-product that's got vacancy, you've got a build product that's got vacancy, and you'll have a natural roll to have that level of 700,000-plus square feet of volume, a quarter. And I think we've actually built that pipeline up, and you're going to start seeing that come in the next couple of quarters.

I think we're very aggressive on early renewals.

Right, that's the other point Sal raised, which as you look, one of the other areas is early renewals, we've pushed back on probably more so than others which is that when tenants have come to us on early renewals, where maybe a year ago we may have been willing to give them some discounts today, for that we've been holding out in some of our markets and not be willing to structure some of the early renewals. And that was a big component of areas that have driven some of the total volume in prior quarters.

And when you say you are holding out, can you just sort of quantify what the -- how much you might be pushing rents in -- in some of your markets.

Well, it depends on every market. We're also looking not on just rent, but the total net effective -- or gross effective rents that we're getting. But, you know, we're what's called, you know, 5%ish. We're trying to achieve additional, beyond what the markets have come to. That's a big thing, by the way, with the EAB Plaza acquisition for us as example on Long Island. Now, here's a marketplace that the majority of the key trophy assets are now owned by Reckson and so, you have an ability to start pushing the rents up and being a little bit more patient in filling space, to ensure that you get the rents that then set the rents below that and set the rents below that and set the rents below that in terms of price points for other asset quality.

Okay. Last -- last question, any -- any further discussions on extending your land lease at 1185 after you've gone through the arbitration?

We've had not discussions as of late, only because we've been busy.

Okay. Great. Thank you.

Thank you. Our next question will come from the line of John Diney (ph) from Matt Kelly. Please go ahead.

This is John Guinee at Legg Mason. I just happened to be in Matt Kelly’s offices. Mitchell says hello.

I always knew that Mitch listened to our calls, but this is going too far.

No, no, no. Just to clarify, you're contributing on 100% valuation basis into the Aussie LPT, the portfolio at a 7.1 NOI yield form '05 and a 7.9 NOI yield for '06?

That's what it said, yes, in the slide show, yes.

Okay. If -- if you had taken this portfolio and given it --

John, I'm going to cut you off. I'm not going to answer any other questions about the LPT. I don't -- you might have missed my preamble, but my preamble was that we're in the midst of an offering.

Okay. Oh, I'm sorry.

And because of that, I really can't answer any questions regarding the LPT.

I'm sorry I missed that.

No problem.

I'm done. Thanks.

Thank you. Our next question will come from the line of Michael Knott from Green Street Advisors. Please go ahead.

Hey, guys, quick question on your market. Can you talk a little bit about the increase in market vacancies in northern New Jersey and Long Island, and if that concerns you?

I'll take Long Island, and Todd or Sal take northern New Jersey. Just on Long Island, I think it's really a function of our developing our building and a couple of other pieces. Every indication that I have is most of the large blocks of space on Long Island, including our buildings, has tremendous real activity on them, so that doesn't have any level of concern to us at this point

I think activity levels remain very strong on the Island, so we're really comfortable that the inventory that's being brought on-line is going to get digested in an orderly manner and not really have any impacting on pricing power. In Jersey, I was just mentioning that I think it is some of direct space, public space that's coming direct, and there again, we see an up-tick in overall activity, which encourages us that the market is going to start to absorb that inventory and have a favorable impact on the-- on the vacancies, Todd, I do not know if you want to add anything.

Well, within our markets, directly, we're also seeing positive movement within the vacancy rate.

So those are sub-market specific.

Yes. Does that answer your question.

Yes. That's helpful. Thanks.

No problem.

The next question will come from Edwardo Bush (ph) from Millennium Partners. Please go ahead.

Hi, Scott, Mike. Just a quick question, I mean it seems here that the market is not recognizing fully the value that you guys are creating for shareholders in all of these activities. I mean, given the strength of your balance sheet as you look forward, I mean, how would you handicap a potential stock buy-back or something like is that?

I wouldn't really want to comment on a stock buyback. I had tell you, one thing that just generally, from market standpoint and we've been a little bit cognizant of, is that we have a tremendous amount of activity going on right now, and frankly, you know, as we've tried to communicate in this quarter, this quarter, I think, we made some significant headway of trying to bring many balls that were in the air down to earth here, and give people clear perspective of what we're doing and what the benefits are to Reckson long-term, in terms of having sustainable growth without having to continually, you know, dilute our markets or dilute our shareholders or leverage-up our balance sheet. And I'm hopeful that, as we bring these things to closure in this third quarter, that there'll be a level of greater recognition, in terms of what we're trying to achieve, and what our potential is.

Thanks. And just last question, I mean in terms of the spread between your cap rates and acquisitions and dispositions, could you give us a little bit of guidance in terms of what you think it's -- it's going to be?

It's clearly going to be positive. Would I rather wait until next quarter when I've get them -- get these things signed up, and then I'll share with you better on that.

Thank you very much. Appreciate it.

Thank you, Eduardo.

At this time, we have no further questions. Thank you. Please continue.

Thank you operator, and thank you all for joining us, and look forward to speaking to you during the quarter, as we bring these transactions to close. Thank you very much.

Thank you. And ladies and gentlemen, this conference will be made available for replay after 4:15 today through August 17. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 786496. International participants can dial 320-365-3844. Again, the numbers are 1-800-475-6701 and 320-365-3844, with an access code of 786496. That does conclude our conference for today. Thank you for your participation, and for using AT&T executive teleconference. You may now disconnect.