SL Green Realty Corp (SLG) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Reckson Associates third quarter '05 earnings conference call. At this time all lines are in a listen only mode. Later there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, today's call is being recorded.

We'd like to begin with the cautionary disclaimer provided by the Company. The information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995. Such forward-looking statements and all other statements that are made on this call that are not historical facts or 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 and Exchange Commission which are available at the Company's website at www.reckson.com. Investors and others should read these factors before making any investment. Reckson undertakes no responsibility to update or supplement information dicussed 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 measures can be found on the Company's website in the quarterly earnings press release slide show presentation and supplemental package. I would now like to turn the call over to Scott Rechler, President and Chief Executive Officer, of Reckson Associates. Please go ahead, sir.

Thank you, operator and and thank you all for joining us. I know you have a very busy day of conference calls. With me today is Mike Maturo, he'll be joining me in the presentation. As well, we have the balance of our Executive Management Team that will be available for Q&A. We'll be working off a presentation that can be accessed from our website at www.reckson.com or you can contact Susan McGuire, who heads our Investor Relations group, at 631-622-6642. To keep the presentation brief and informative on the key points of the quarter, we've also included an appendix with additional slides for your review at your convenience.

I'd now like to start with the presentation on Slide 2 and provide an overview of what has been a very active quarter. This quarter is probably one of our most active quarters in our history. We continued to successfully drive our internal growth as well as we executed on a number of strategic initiatives that better position our Company for future growth. Specifically to the quarter we're reporting third quarter FFO per share of $0.61 which compares to $0.56 for the third quarter of 2004, which is a 9% year-over-year growth rate.

Our growth was driven by sector leading same property NOI performance. We look at that number net a minority interest in JVs since that is the part that actually affects our bottom line. And you will note there on a straight line basis, our office portfolio produced 5.3% same property NOI growth and our overall portfolio was 4.9%. And on a cash basis, our office portfolio was 3.2% and our overall portfolio was 3%. Our leasing activity was on track with 72 leasing transactions totaling 433,000 square feet. Subsequent to the quarter we've signed an additional 260,000 square feet and we have another 600,000 square feet of leases out for discussion.

So, activity remains brisk which is even more interesting when you look at our occupancy on slide 3. As you'll see we're fairly well occupied. During the quarter our same property occupancy was up 40 basis points to 93.3% on the office portfolio and 92.2% on the overall portfolio. When you look at the overall occupancy on all of our assets, the office portfolio ended the quarter at 94.1% and the overall portfolio was 93%.

We've still been very successful at pushing rents on new leases. Same space rents were up 15.8% on a straight line basis and 3.9% on a cash basis. In addition, as I mentioned earlier, we also had a number of strategic events we were able to complete this quarter. We completed a listing of our Australian LPT and closed on Tranche I, which we'll discuss more. We recapitalized and executed a contract for the sale of a joint venture interest in One Court Square, an acquisition that we made last quarter. We completed the construction of 68 South Service Road and we have some great leasing momentum going at that property. And we match funded over $1 billion of investments with approximately $900 million of dispositions. Clearly a very active quarter.

If you turn to Slide 4, I'll like to take a moment and provide a quick overview of the state of our markets and jump into some of our operating performance. Generally speaking, the Tri- State markets continued to gain strength as demand for quality office space continues to outpace supply. New York City, particularly Midtown and Long Island, have strong leasing velocity and rent momentum. These are two markets that would clearly have pricing power. Tenants are more focused on meeting their space needs than what they have to pay for their space in these markets.

Northern New Jersey is a little less consistent. The Route 24 submarket, which is the Short Hills and Giralda Farms market primarily for us, that market remains strong. 70% of our NOI in New Jersey is derived from that market. When you go to the other markets, they remain competitive. Tenants still have a lot of choices in terms of what space they can take and so there is more competition between the landlords in meeting the pricing parameters that we would set forth.

Stamford is showing an increase in activity versus last year, but the more it continues to experience churn resulting from M&A and corporate relocations that puts some space back onto the market as we start to build some momentum. The drivers of some of the growth in the market have been financial service firms, legal, and hedge funds. One big positive in Stamford this past quarter was Royal Bank of Scotland announced that it would be relocating its U.S corporate headquarters to downtown Stamford, which could be up to 800,000 square feet. And as we saw with UBS when it went to Stamford, typically that generates strong follow-on activity and so we are feeling somewhat optimistic about that market.

Finally, Westchester, where the vacancy rates continue to decrease and the market, in our mind, may be an inflection point having to return to 2001 levels in terms of the vacancy rates. Our large blocks of space have continued to be absorbed as Westchester has benefited from regional decentralization as well as good internal growth. Activity is inconsistent between submarkets, and this is really a big year in our mind for Westchester to start firming up particularly for the small to medium-sized tenant markets.

Tenanting costs continue to be high in all of our markets. It appears that tenants are willing to pay -- while they are willing to pay higher rents, they're still demanding higher rent concessions. Two positive trends relating to our portfolio this quarter. The first is that tenanting costs on renewal continue to trend down with this quarter's tenanting costs on renewals averaging 50% less than new leases. The second is we're still generating incredibly positive returns on tenanting costs with the incremental revenue that we're generating from our positive mark to markets. If you look on the right-hand side of Slide 4, you see on our 15.8% positive mark to market we generated 25.1% return on tenanting costs to put those new tenants in. So as long as we continue to generate those types of positive returns, while we like to see tenanting costs come down, they are greatly enhancing our topline.

If you turn to Slide 5, I'd like to look more prospectively. You'll see that 2006 is a big year for us. We have about 9.7% of our square footage rolling over that year, about 8.5% of our revenue. That's 1.6 billion square feet of space. I just wanted to give you a little bit of color as to where that space is located and the progress we've made to date. About 100,000 square feet of that space is from100 Wall Street, which is under contract for sale. So that would come out. Westchester makes up about 600,000 square feet of that space, of which about a third has already been signed for leases prior to the end of the quarter.

New Jersey has about 300,000 square feet of space of which about half of that relates to the Schering-Plough, one Giralda redevelopment which will be coming offline in June of '06 when that lease expires, and we take that through the redevelopment project. In Connecticut it's about 300,000 square feet of space of which a third has leases out for negotiations right now. Long Island makes up about 140,000 square feet of space mixed throughout the market. And then in New York City, other than 100 Wall Street, are the big chunks of space are 1185 and 1350 were we have some very attractive mark to market opportunities. While we have a lot of wood to chop this quarter, I think we're off to a good start and have some good opportunities to create some value as we work through that during this period.

As I mentioned last quarter you will see us being strategic in terms of pushing for rents and holding back in terms of occupancy in some of our premier spaces and trying to address some of our expirations of some of our more challenging spaces by being more aggressive. So there will be some dialogue on that as we go through 2006 and we see some of that activity come to fruition.

If you turn to Slide 6, you'll see the effects of some of the positive mark to market that we have. You'll note on a cash basis through '05 and '06 we have a 10.9% forecasted positive mark to market on leases that are expected to expire during that period and 13.3% positive mark to market on a straight line basis. So while we have a lot to do, as I mentioned earlier I think we have a chance to again push growth through market leases to higher rents.

I'd now like to turn to Slide 7 and shift gears to discuss our investment strategy and activity. Just a second on strategy. We've been having some of this dialogue in many quarters already, but I want to reiterate it. When we look at our investments, we basically break up the product that we purchase into four distinct categories, the first being strategic properties, which are the properties that we consider the highest quality properties in each of the submarkets in which we do business. They typically demand the highest rents in those markets, maintain very high occupancies. We generally like to wholly own these assets and keep them unencumbered. They really help define our presence in each of those submarkets.

Those strategic assets are generally surrounded by what we call core-plus assets which are suburban assets that can range from six-story 200,000 square foot buildings to two-story 125,000 square foot buildings. Very, very well located. As I mentioned they surround the strategic assets. Most of the time they're in the same office parks as the strategic assets, and these core-plus assets outperform the general core-plus assets in our marketplace because they get the benefit of being in these high quality parks. They get the halo effect of being around the strategic properties as well as being able to share the amenities that we have in these parks.

These are very efficient properties for us to own. They adept the product type to our portfolio, another price point for our tenants and very important to our franchise, and something that we think we can continue to execute on a growth strategy as we acquire these properties going forward. We target these properties to be contributed ultimately to the Australian trust that we set up and we'll talk more about that.

The third bucket is our value-added bucket which included the developments, the redevelopments, the repositioning, the buying of nonperforming notes. Typically, these are higher risks but higher-type returning type assets and one that we have cut our teeth on over the years.

Finally we have our structured finance bucket which we really look at this, not as a separate business but rather in adjacency to our business where we might invest in a form -- structured in a more highly structured fashion to get better risk-adjusted returns but it typically would be a property or investment that we would like to make under any circumstance in our core markets.

As we look forward into the year, we're going to continue to try to reallocate our capital into strategic and value-added. The markets continue to be robust in terms of product coming to market, but they're also pricey. It's an unique time, as I've mentioned in the past, where you have an opportunity to acquire assets that for many years we thought we would never have the opportunity to acquire. But we also don't want to be that acquisitive in a market environment where we look back and say this was the top of the market.

So to address some of that we've actually hedged our bet by deploying what we call our match-funding investment strategy. Really what that is is where we are actively buying properties that reflect the premium cap rates of today's market environment. We have the discipline to go out and sell properties that reflect a similar type of cap rates. By doing that we neutralize the impact of the first year cap rate and it becomes much more about the characterization of the cash flow of the properties we're buying versus the properties that we're selling. So that we're in a position as we look forward which cash flow has high growth potential, more stability, has better impact enhancing our strategy and the properties we are buying versus the properties that we're selling.

If you look on Slide 8, I think you can see we did a very good job of that in 2005 where we've purchased just about $1 billion of assets and sold $900 million of assets or interest in assets. Two things to note here. One is that on a cap rate basis, we reinvested at a cap rate of about 110 basis points higher than the dispositions but, again, when you really focus on the character of the cash flow, what we're buying and what it means to us strategically, we think it will enhance our overall growth rates on a going-forward basis. This is strategy that we will continue to pursue while the markets remain as competitive as they have, and we see the opportunities to create value by buying properties in these markets.

A good example of this type of strategy was on Slide 9 was our acquisition of One Court Square in Long Island City, which when you look at it with 20/20 hindsight looks like a great deal. You might recall it's a building we bought in May of 2005 after pursuing for two years. We paid $471 million. The building is fully leased to City for 15 years with cancellation rights in years 6 and, I believe, 8 or 9 for 20% of the building at a time. The going return was 6.5%, had 1% growth so the GAAP return was 6.8%. Again, the 6.5% was on cash flow which is an attractive number relative to the trades we've seen in the market.

There were two concerns we had when we purchased this property. The first was the proportionality, the size of this investment, relative to the size of our company and to the potentially modest long-term growth rates as compared to the balance of our portfolio. The second was this property had higher interest rate sensitivity than what we were traditionally used to because of the bottom like nature of the city lease. We dealt with the second concern right away in June when we actually got a commitment for a $315 million mortgage on the property for 4.9% interest only rate for 10 years. So we leveraged the credit of city to mitigate some of that interest rate exposure and get a very, very competitive rate at that point.

Just last week we actually executed a contract to sell a 65 to 70% interest in the property to a group of institutional investors led by J.P. Morgan who is a partner of ours at 919 Third Avenue and has been a very good partner. And with this joint venture we're going to promote structure not only on the reversion but also on the current cash flow. When you take that into account, we will now be moving our 6.8% GAAP yield to an 8% unleveraged GAAP NOI yield and our yield on GAAP equity will be about 13%, which again are very, very outsized type returns based on what we've seen in the markets even subsequent to acquiring this.

Through this recapitalization and joint venture, we achieved our goal of establishing a foot hold in Long Island City which is a market where we believe there will be attractive future development opportunities, while minimizing our capital allocation and getting an extremely attractive return on that capital. All in all I would characterize the execution of this transaction and recapitalization as a resounding success and is a model that we'd like to take forward in our repertoire in our acquisition game.

On Slide 10 just in addition to the sale of the JV interest we also sold or contracted to sell a number of nonstrategic operating assets. These are either properties that are located in submarkets and where we don't have a material presence or the more management-intensive properties or property that we don't think have the growth potential like the balance of our portfolio. One example is 100 Wall Street in downtown. It's the only asset we have in downtown Manhattan. It's 462,000 square feet. We signed a contract to sell the property for $134 million or approximately $290 a foot. Our more recent deals -- leasing deals in this building have been in the low $30 per square foot with heavy TI and capital costs associated with that. So when we look at that number taking a gross $30 rent versus selling it at $290 we think that's a very good price. There's also about 112,000 square feet of space expiring in the building over the next 12 months that was of some concern for us.

There was good demand in terms of the parties that were interested in purchasing this asset, and because of that we were also able to structure an opportunity for us to redeploy some of this capital and issued a $30 million mezzanine loan that carried a 15% rate that went up to about 85% loan to value, which we think is a very, very compelling piece of paper and a great way to reinvest some of these proceeds and mitigate some of the dilution. We'll be receiving -- generating a gain of $15.5 million on the sale of this asset. We also sold two smaller buildings on Long Island, three small buildings on Long Island rather, two medical office buildings and an R&D flex type building in the outlying market.

On Slide 11 just to give you an update on the Australian trust. I'm not going to repeat a lot of the information that we've shared in the past since we have shared it. Just a quick update. As I mentioned we floated the offering in September. We closed on the first Tranche, it's a $367 million tranche. The second tranche is expected to close in January, and the third tranche in October of 2006. Again, it enables us to mitigate dilution by breaking them out into these types of Tranches.

As we look at the Australian LPT structure for us, we believe it's going to play a key component of our capital recycling strategy. For many years we have been trying to find a way to gain scale on our balance sheet so we can be competitive in our marketplace without having to continue to go back to the common equity markets, and we think that this structure achieves that for us. We went and explored many different types of alternatives in terms of sources of capital, and this one really met our key objectives which were to maintain operational and investment discretion, to be in a position that we can move quickly and close on transactions in the time frame you need to close on transactions to be successful. To have a reliable source of equity capital that as long as we're producing positive results that we can actually have access most of the time to the equity capital versus having an institutional partner that might have other issues that would mitigate them from having interest in investing in our markets or in our product type at certain times of the relationship.

We're also looking for something that leverages our existing infrastructure that we have built in all of our market place and provides for a returning source of fee income, and this clearly does that and it's something that you see in this quarter with $3.6 million of transaction fees and we'll have ongoing recurring management fees of about $5 million a year. And it's long-term capital. It's the type of capital that is not [IRR] driven. So we're not going to be put in position where we have a partner that comes in and wants us to sell properties that are in the middle of our parks. Which either forced us to pay a premium to buy them back as a defensive measure or let one of our competitors into one of our parks. Raising permanent equity capital, I think, is a key factor for us. So we're very excited about having this done and our hope is over the next 12 to 24 months you see us use this as a key vehicle in our growth strategy.

On Slide 12 you see where we're taking -- reallocating some of the proceeds from the LPT. An example here is Reckson Plaza which was formerly EAB Plaza, which is the largest, one of the most recognizable office complexes on Long Island. It's a 1.1 million square foot property. It's one of the only truly premier assets on Long Island that we had not owned in the past and something that we had wanted to own for quite some time for obvious strategic reasons in terms of being able to push rents. We actually had purchased the mezzanine piece of the mortgage of this loan encumbered by this property and maintained regular contact with ownership and stayed current on due diligence so that when the loan was maturing, we were able to sit down and structure a deal to purchase the building without it coming to market.

We got an attractive price at $240 million, $226 per square foot, which is a significant discount to replacement cost. It's a 6.5% GAAP NOI yield. The building is 90% leased today to some credit tenants. Our portfolio on Long Island is 97% leased. So we think we have some upside in bringing the occupancy up in the building. We think we have some up side of pushing rents in the building as well as our surrounding 2.5 million square feet of properties that we have in that market to a higher level. And we believe we have upside in terms of enhancing -- reducing operating expenses by managing the building more efficiently. All in all, we're forecasting 5% NOI growth from this property. And then finally it was a key advantage here. We were able to use this property as a like kind exchange vehicle to defer almost $110 million of gains from the asset sales I discussed on the previous slides.

On Slide 13, we're laying out a little bit of our structured finance strategy. As I mentioned earlier we really look at this as in adjacency to our business. And there's really a couple of buckets. The first is the loan to own strategy as we saw deployed in the acquisition of Reckson Plaza formerly EAB Plaza and how that was successful and that is something we will continue to do on attractive portfolios that we would ultimately like to own, but find it better today or for some for reason can't own it today will come in as a mezzanine position.

The second area is that we are going to selectively participate in mixed use projects that are located in our core markets. We intend on doing that by leveraging relationships that we've developed in our markets for many, many years and the market knowledge that we have about what might be successful and not successful, what type of approval rights are needed, et cetera. And we will structure them in a means to reduce risk by coming in a preferred-type structure or a mezzanine-type structure. We're targeting 15 to 20% type returns for these mixed use investment opportunities.

When you look on the list below, you'll see we have about $100 million outstanding right now which includes the $30 million from 100 Wall Street that would come in place at a later date. I would say we will probably range around that 100 to $150 million at any one time. This is shorter term mezzanine so the life will probably be two-year type mezzanine, so we will be cycling our investments in and out of that pipeline.

In addition to that we have a long-term investment which we discussed about last call, which I 'm not going to go into detail here, which is 1166 Avenue of the Americas which was structured as a mezzanine, but in our mind really is just a structure on what we would perceive as an investment that we could have for many, many years. That would be yielding 9% and generating -- sharing in 30% of any profits at the reversion. So it's a high-risk adjusted return; in our mind, higher than what we could have gotten from owning the fee. We will use structured finance in that matter as well as we go forward.

Also, as mentioned earlier, we completed the construction of our 68 South Service Road base building this month. The project is on budget and ahead of schedule. We have given ourselves 18 to 24 months to lease out the property. The good news is that we have an active lease negotiation going on for a substantial portion of the building and so we feel very comfortable that we will exceed those leasing expectations. Our occupancy in this submarket on Long Island is 98.8% so as you could see we're in a very tight market delivering a very high quality building and we would anticipate achieving the stabilized NOI yield of approximately 10% that we set as our target.

On slide 15 review some of our other development pipeline highlights and it was really one of our objectives this year to accelerate the activity from our value creation pipeline as well as seed new opportunities for the future. During the mid to late '90s we accumulated a large land portfolio at significant discounts to today's market, probably 30% of what today's market is in terms of land costs, that gives us a real competitive advantage when we bring properties to market or being able to sell properties for higher and better uses. In addition to the 68 South Service Road development, we announced last quarter the kicking off of University Square in Princeton, a 316,000 square foot development that we anticipate finishing at the end of the 2006. Our retail development in Connecticut on 800,000 square feet Landmark Square development, it's the 37,000 square foot building on the last corner on that site and something we expect to finish by the end of '06.

In the middle of '06 we will, as I mentioned earlier, take one Giralda Farms where Schering-Plough was and begin the redevelopment of that 150,000 square foot single tenant corporate building into a multi-tenant building which is about a $10 million additional cost associated with that. Next probably in line would be our Reckson Executive Park in Ryebrook, which is a 315,000 square foot building that is in the park. We have six existing buildings at that point -- in that park as well. That would be about another 60 to $70 million to complete that project.

Finally a longer-term potential project is the opportunity to redevelop the Nassau Veterans Memorial Coliseum Site in Long Island. It could be a very exciting project. We've entered into a letter of intent with the New York Islanders to do a 50/50 joint venture on the mixed use development surrounding Nassau coliseum. This is going through an RP process with the county. With us having the Islander, I think we have a good competitive advantage in winning that RP process as well as the fact that we are the largest landlord in that market. This is very important to us under all circumstances because we actually have 2.6 million square feet of office space that surround this site. So the actual development of this site is, I think, very important in terms of ensuring that the value of our surrounding properties are sustained and enhanced by development, not hurt by development.

Ultimately, we believe you can build over 5 million square feet of office, residential, retail and hotel mixed use projects on this site, and it's something that if you get through the RP process, it's probably 2 to 4 years away before you get the final zoning approvals and Reckson would work with the owner of the Islanders and serve as the master developer in pursuing that project and getting those approvals.

With that, let me turn it over to Mike to go through some of our financial data. Mike.

Thank you, Scott. I'll pick up on Slide 16 with the operating data. Our operating margins were at the third quarter were 59.3%, and that compares to 57.7% for the same period last year. This quarter's margin was benefited by the addition of One Court Square, the net lease there. Net of that lease, the operating margin for the third quarter was 57% which is down from the comparable period last year and reflects increases in operating costs, primarily energy costs, that to a certain extent was mitigated by our ability to pass through such additional costs to the tenants. We also experienced a positive rollover in rents which helped offset some of the operating cost increases in the energy.

The decrease in operating margin sequentially from the second quarter reflects seasonal energy costs in the third quarter relating to the air cooling during the summer months. We expect operating margins to be impacted by high energy costs over the next couple of quarters as we go through the heating season. While we do recover a significant portion of this increased energy through pass-throughs, it will negatively impact our margins going forward. Termination fees for the third quarter were $267,000 compared to $1.7 for the year earlier, which is a significantly lower amount. This trend has occurred in -- these fees have moderated as we move through the recovery cycle and see less give back to space.

On the G&A, which came in at $8.2 million for the third quarter, that was in line with our expected run rate that we have previously announced between 8.25 and $8.5 million. I wanted to point out though this quarter that our G&A includes the amortized cost of the core portion of eight senior officers long term compensation incentive plan. If you recall the plan was put in place in January of 2003. It's a four-year plan that has two components. A core component which is earned annually by meeting annual absolute or relative performance hurdles and a special outperformance component that is earned at the end of the four-year period based on cumulative four-year absolute and relative performance criteria. The detail components of the plan have been disclosed in the Qs, the 10-K and the proxy. We are a year and a quarter away from the measurement date of that four-year cumulative plan which is at December 31, 2006.

Because it is an all or nothing plan and the uncertainty at this point of the outcome of whether there's any value in the plan, no cost has been accrued to date. The plan does have a cap as to the ultimate value. Based on the terms of the plan, the value can range from 0, where performance criteria would not be met, to a max of a low $30s million number in the aggregate for the eight officers. The maximum amount is based on a range of stock prices between $33 and $39 per share.

In the other income area we've provided some additional color on the other income this quarter. We've separated interest on notes receivable, which represents our investments in mezzanine note positions. Investments and other income captures miscellaneous income and service company income, our equity and earnings of JVs reflects our interest in the LPT JV and we'll also include going forward our interest in the One Court Square JV after we complete that. The fees earned through the JVs represent service fees for managing the activities of those JVs. In total the other income for the third quarter was $10.6 million which includes $3.8 million of interest income on the mezzanine notes, $1.4 million of other income and $243,000 of equity in JVs. That equity number reflects nine days of activity of our 25% interest in the LPT JV.

On the run rate basis we expect interest on the notes numbered to be between 4 and $5 million for the fourth quarter, reflecting the repayment of the EAB MEZ note and anticipated new activity which will come in during the course of the fourth quarter. Fees earned through JVs amounted to $5.1 million for the quarter, of which $3.7 million was attributable to the LPT JV and of that amount $3.6 million was one-time transaction in structuring fees that we received in connection with the completion of the LPT IPO.

As Scott mentioned earlier in the presentation, we do expect to derive a recurring fee stream from the LPT JV, which should increase as a growth portfolio. And then lastly on this page you'll see the tenant reserves for receivables continue to moderate as the credit in the tenant base continues to strengthen.

We move on to page 17. Financial ratios. As of -- and for the third quarter continued to be strong and will improve as we complete the capital recycling and recapitalization activities that we announced today. Our debt to total market cap was 41.3% at the end of the third quarter compared to 42% at the end of the second quarter. Our fixed coverage ratio was about 2.9 times on a pro forma basis assuming the acquisition and disposition activity that has or will close subsequent to the third quarter. Our debt to total market cap is 38% and our fixed coverage ratio is about 3.3 times. That will provide the balance sheet with significant flexibility and capacity going into 2006 to fund our growth initiatives.

Moving on to slide 18, our capital recycling program. I'd like to highlight some of our objectives in recycling capital and harvesting value that we have created in the portfolio to fund our growth. A primary objective in selling certain noncore assets and completing joint ventures with our core plus suburban portfolio is to allocate a greater portion of our invested capital into the strategic asset class. If you look at the graphs, pre-2003 restructuring our portfolio was 59% allocated to strategic assets and 41% allocated to other. Pro forma 3Q 2005 adjusted for the acquisitions and dispositions that we discussed today, we are 80% now strategic and 20% other. By virtue of our plan to purchase core-plus assets in the LPT JV we intend to keep this ratio at this level or increase it from the strategic side.

Moving over to the geographic allocation of pre-2003 restructuring, we were 66 weighted -- 66% weighted toward our strongest markets in New York City and Long Island and the Route 24 corridor in New Jersey. That percentage actually included the Long Island industrial portfolio at that time. From an office-only standpoint, the pre-2003 number was 63% weighted to these markets. We have increased that percentage from 63 to 72% on a pro forma basis for the third quarter 2005.

A significant benefit of this objective of adjusting the portfolio to strategic assets is to assist in accelerating the recovery of the payout ratio as strategic assets generally have longer term leases and less turnover, which results in lowering capital cost for the assets. And you've seen improvement in that number in the current quarter, and we would expect as we rotate out of the core-plus assets or at least as we purchase them with the LPT that that number will continue to improve.

As a result of the recent capital activity, we have created significant balance sheet capacity I've also established alternative sources of capital. The Australian LPT provides a new source of equity capital that we will use to expand our core-plus platform in all our markets. Over the next few years, we will refinance the number of long-term mortgage assets that are significantly under leveraged including, for example, 1350 Avenue of the Americas, a 551,000 square foot asset that has a $72 million mortgage on it. As these mortgages mature, we will add them to the unencumbered pool or seek joint venture opportunities to create additional capacity unlock value.

We will continue to sell noncore operating assets and complete the modernization of our noncore assets including RSVP where we expect to recover the $55 million of outstanding basis in that investment over the next three or four quarters. We also seek to realize gains from our value creation investments including, for example, 1185 Avenue of the Americas where we have released expiring space or vacated space with significant rent increases and fixed the ground rent at a favorable rate for the remaining term of the lease.

So overall, considering what we've done over the last few quarters, we believe we're well-positioned to finance our growth initiatives within the capacity of the balance sheet in using the alternative sources that we now have available to us.

Then moving on to Slide 19, our debt schedule, our weighted average interest rate on outstanding long-term debt as of September 30 is about 6.08% and 5.98% net of Minority Partners' interest. That percentage is down from 6.4% we reported last quarter and reflects pay down on mortgages that matured which were repaid with asset disposition and refinancing proceeds. The weighted average maturity of this debt is approximately five years. We've had very limited exposure to maturities over the next three years with no unsecured long-term debt coming due until 2007.

However, we do have approximately $170 million of property debt maturities over the next two years, and, as I mentioned, we will delever these assets and put them in our unencumbered pool to provide greater level of unsecured borrowing capacity.

Our line of credit had an outstanding balance as of the end of the quarter of $231 million, which is our only floating rate debt and represents 11% of our total debt. Subsequent to the quarter we will -- we have or will repay outstanding borrowings under the line from the net acquisition and disposition activity, which will bring the line balance to about $175 million and at that time will represent about 10% of our outstanding total debt.

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

Thanks, Mike. And then just on Slide 20 a quick conclusion and discuss guidance for a moment. And then we'll open it up for Q&A. Just in a quick summary and in conclusion, clearly the current portfolio continues to produce solid organic growth. We continue to expect that going into '06. As Mike just reviewed, our balance sheet remains strong.

We're positioned to be effective capital recyclers. I think we are better positioned today than any other time in our history as a public company. We're managing the sale of our noncore and core-plus assets in a manner to minimize solution and match fund our growth, which we think will enhance our long-term growth rate and cash flow quality. Our structured finance strategy will provide us with opportunities for future investments with enhanced returns and I think we're being very strategic about how we are executing about that.

I think we've done a good job and will continue to accelerate the development and value creation projects that we have in our pipeline. When you cut all through this, we have guidance target of 5 to 10% as our annual FFO guidance that we have laid out at the beginning of this year and as we look forward for the fourth quarter specifically, we're laying out guidance of $0.59 to $0.60 per share, which would result in 6 to 7% annual FFO growth over '04.

The fourth quarter is being impacted by timing, dilution from accelerating asset sales, high utility costs, as Mike had mentioned, which are 20% higher than our 2004 -- our fourth quarter -- anticipated 20% higher than our 2004 fourth quarter. And then lower termination fees and non joint venture related miscellaneous income that Mike had discussed also in his part of the call. I think it will mean getting that 6 to 7% year-over-year growth rate is very good considering the amount of asset sales that we've achieved this year. And the strategic initiatives that we've accomplished which frankly creates some short-term dilution but will create some long-term benefits that will enhance our growth rate.

As we look out to 2006, we will be setting guidance at $2.45 to $2.57 per share, which is again consistent with our goal of that 5 to 10% annual growth. It does not include, as Mike had mentioned, any impact associated with the special outperformance L-Tip that was discussed prior. And all in all I really am very optimistic about the state of our Company. I think that all of the components of our business are moving forward in a very good rhythm that will enable us to achieve our objectives.

With that, operator, I would be glad to open up for questions for myself, Mike, and the balance of our management team.

Thank you. [OPERATOR INSTRUCTIONS'\] Our first question comes from the line of Jon Litt with Citigroup. Please go ahead.

Hi. It's Jon Litt with Jordan Sadler. Just wanted to start with what you ended with, and that's the L-Tip. Can you refresh my memory on the terms on that, what would you have to achieve?

Yes. Just relating to the outperformance piece it's a four-year cumulative 9% return, and also having to meet a relative peer group return of being within the 60th percentile. Higher than the 60th percentile.

The starting point, that's a sharing of that -- of a 10% -- so 10%

-- 10% of the excess over the 9% hurdle.

So, if you hit 9%, that's the zero and everything else is 10% above that To a max of 15%.

Where are you now? [INAUDIBLE]

Well, there's been several equity issuances during the quarter, so -- during the period, so you have to measure off for each of those prices. But off the original price we're above the 9%, and we're right at about 60, 61% on the peer group metric.

Okay. And then I think Jordan had some questions.

Yes. I guess my first question just related to One Court Square and the pricing on the sale of that asset. Is that going to be done at cost?

Yes. It was at cost. Just the way it was structured is that we got a premium through a promoted cash flow structure.

So you juiced the GAAP yield by -- through the promote?

In other words, you getter higher proportion share -- you get more than your proportionate share of cash flow. To the extent that there is periods where it dips, then you obviously don't get the benefit of that, right.

What's the promote structure?

I don't really want to go into the details on it, because it's obviously something that we have a confidentiality agreement.

Okay.

I know we also have to promote, obviously, on any capital event so if there is situation where there's a cancellation on the lease and we're able to mark that lease to market, then on top of the cash flow return we'll get a higher total return.

Okay. In terms of Long Island City in the presentation, it seems you said you set your flag up there. What's the potential opportunities as you see it there going forward?

We look at Long Island City as one of the New York City's only sort of last underdeveloped submarkets, maybe that and the West Side of Manhattan. And if you think about it, Long Island City is to midtown Manhattan to what Jersey City and Brooklyn is to downtown Manhattan. The big difference is midtown Manhattan really does have a scarcity of large blocks of space and has a real rent differential between what you have to pay in midtown versus downtown. The city itself was identified, Long Island City, as an area for growth. They're putting into place programs that provide tenants with incentives that could reduce their rent costs by between $10 and $15 per square foot per year of lease term.

They've also rezoned a large chunk of Long Island City that has encouraged vast development of residential. There's about $2.5 billion of residential development occurring on the Queens west side. Citibank, as you know, just kicked off a 500,000 square foot expansion. The UN Credicorp is going next to it with 250,000 square feet. So there has been -- I think when we look at Long Island City we think it's on the cusp of turning the corner. It has great transportation infrastructure. So what we're spending our time doing is looking at potential sites that we think are well situated for that next round of development. They probably have some level of mixed use component but a large component of office. And plan on trying to tie some of those sites up or make investments in existing opportunities.

Would that be through the joint venture?

[INAUDIBLE - OVERLAPPING SPEAKERS] That would not necessarily be through -- it might be but it's not necessarily through the joint venture.

Okay. And then you talked a little bit about guidance and what was included, the L-tip is not included. Is the $55 million to be recovered from RSVP factored into guidance?

No, it's not.

It's not. Okay.

What about acquisitions in this position?

We have a range of it. I think really with our guidance for '06 -- we're just finalizing our '06 business plans right now. So I think I'd prefer to wait to the specific guidance for '06 in terms of all the components that make it up subsequent to that. I will tell you that the low end of guidance has, I think, something like $100 million of weighted average acquisition activity to do with some dilution. Not a number that we think is not achievable, but to the specific details in terms of what are the underlying components I'd rather work through all of our property by property business plans which we are doing this month.

Just the acquisitions? No additional dispositions?

That's a net number.

Oh, $100 million net.

Yes. Weighted average net number.

Then on 100 Wall, the MEZ piece, is that -- what percent cash pay versus accrual?

It's 100 cash pay.

It's 100% cash pay. And who's the buyer and is it going to remain as office use, do you think?

From everything we can tell it's going to remain as office use. We actually explored conversion alternatives on that for the last couple years and came up negative. In terms of the buyer it's been publicly stated. I'd rather not, just because of my confidentiality agreement in the contract, state who it is. But it's been publicly stated; you can find it.

Okay. I'll yield the floor. Thank you.

We have a question from the line of John Guinee from Legg Mason. Please go ahead.

Nice job, guys. On your Aussie LPT deal going forward, I guess stepping backwards a little bit. What do you think the pricing that you sold into the Aussie LPT which I think is a 71 on '05 and a 79 cash on '06 is or was relative to fair market value if you'd given the portfolio to CBRE or Eastfield to market?

I think we went through this the last time. I think if you looked at this and said we were just marketing the portfolio without the joint venture -- without any joint venture structure for sale it may be a situation where there's a -- we could probably have gotten a higher number from CBRE or someone else. What you have to take into account is that doesn't really achieve our strategic objectives because I went through in describing these assets in particular we really wouldn't want to sell 100% of these assets because it would have a vast impact on our strategy. So from a JV standpoint, I think we got a fair deal on both sides, but yet if you went out and actively marketed them across the board, that probably would have been a different pricing.

I missed a little bit of the call earlier so just tell me if I missed this conversation. What's the cost of capital or yield expectations of the Aussie LPT going forward?

It obviously fluctuates. The general scheme we like to see the -- trade as your shares perform over time is you probably want to be in a situation where you can generate north of 8% levered, call it 55% type levered NOI returns.

Okay. And that's their threshold?

When you run through the models, that's what creates accretive transactions. That would sort of level -- under normal scale -- there's been a little bit selloff in the Aussie market right now, so I'm saying that under normal pricing and looking at our peers what they traded over the past year, that's probably what would make sense.

All right. Great. Thanks a lot.

No problem. Thank you. We have a question now from the line of Ross Nussbaum with Banc of America. Please go ahead.

Good afternoon. It's John Kim with Ross. Had a couple questions for Mike on the straight line run adjustment this quarter. It went down a couple million dollars and I know it went up last quarter. Can you discuss why that happened.

I think last quarter we had a couple of assets come on. One was the asset in New Jersey with a pharmaceutical company that had now begun paying rent, and then we also had a lease in 919 Third Avenue that came on last quarter that has, again, has begun to pay rent. So we had two big things last quarter that were there that now have begun to pay rent. So that number decreased.

Okay and this number for this quarter includes the assets you contributed to the LPT as well?

Well, nine days of it.

Nine days of it. Okay.

No, no, no. Not nine days. Nine days without it. It was in for the quarter that we owned it and then taken out for the last nine days.

So, it should go down about 5 to 7% if it was proportionate?

Yes. That's probably right.

Going into guidance, your '06 guidance. Does that include -- what assumptions does it make as far as the LPT contributions? Is it just the tranched assets or does it include any other assets?

It's the tranched assets and we do have some level of LPT investment activity, but we also -- it's mixed into our numbers that I crafted before so it's not a big number one way or the other.

Mike, I think you mentioned utility costs. On a per-share basis how much does that affect your '06 guidance?

Just to put it in perspective -- I don't know about '06 particularly but the fourth quarter alone was $3 million of additional utility costs of which let's say 70% or so is recoverable so if you think about that if that carries through then obviously on-- I'm sorry. The third quarter that was. That carries through going forward and we obviously assume something similar to that is proportionately in the fourth quarter and carries through into '06.

I apologize. I missed this, Mike. You said the L-Tip, when does that start accruing?

It starts accruing when there is the probability that the number or the value is going to actually occur. The problem or the issue with that plan is that it's an all or nothing plan, and you really don't find out until the end of the period whether you make the hurdles or not, particularly because there's not only an absolute hurdle but a relative hurdle. So you have to measure yourself against the peer group so it's not only dependent upon the performance of our Company but how we do relative to our peer group. So what we'll do is to the extent that the plan is very much in the money and we feel that the probability of that occurring that there's actually value there will accrue at that time. At this particular point a year and a quarter in advance of that plan maturing, we don't have that level of certainty as to whether there will be value in that plan meeting both of those hurdles.

And when you say all or nothing, that means it's either 0 or $30 million or zero or --

No, no. 30 million-plus was the max so it could be between 0 and 30-some-odd million dependent upon where the ultimate performance is.

Okay. That's helpful. Thanks.

Thank you. We have a question now from the line of Jim Sullivan with Green Street Advisors. Please go ahead.

Hey, Jim.

Hey, guys. It's Michael Knott. Just a question on the $30 million mezzanine piece on 100 Wall. That's clearly not in the loan to own bucket since it was a disposition. So just curious your thinking on the capital allocation decision there, how you thought about that. Was it more of an earnings dilution protection mechanism or was it something you guys felt compelling on a risk-adjusted basis?

I think it's a combination of both as you said. I think that -- and again some of these things aren't necessarily loan to own as I mentioned earlier. Like the Madison Avenue you'll see that there is a note on there as well that is on our list this period. I think in our core markets we'll play opportunities where we think we can get compelling risk adjusted returns and that we feel comfortable underwriting. Clearly we feel comfortable underwriting. We owned the building. We owned up to a 86% LTV a great cash return in our minds and something that we felt we could negotiate strong for because of demand and interest in the building. So we would anticipate, as I said, keeping a book of that business between 100 to $150 million rotating in and out over time.

Thanks.

Thank you. [OPERATOR INSTRUCTIONS] And at this time I'm showing no questions in queue.

Great. Thank you very much, operator. Thank you all for joining us. And we'll probably see a bunch of you at NAREIT over the next couple of days. Thanks again.

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