SL Green Realty Corp (SLG) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Reckson Associates fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded.

The information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements and all other statements that are made on this call that are not historical facts are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those expected. A list of factors that could impact Reckson is included in the Company's Form 10-K and 10-Q filings made with the Securities and Exchange Commission which are available on the Company's website at www.reckson.com. Investors and others should read these factors before making any investment. Reckson undertakes no responsibility to update or supplement information discussed on this call.

Also during this call, the Company may discuss non-GAAP financial measures. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and a reconciliation between these 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 over to Scott Rechler, President and Chief Executive Officer of Reckson. Please go ahead.

Thank you, Operator. Thank you all for joining us for our fourth quarter 2005 and year-end earnings call. We had an extremely active quarter and 2005. We achieved an incredible amount during the year that we believe will better position Reckson for long-term growth and value creation.

I'm going to start by reviewing our quarterly highlights, discuss the state of the markets and our strategies for 2006. Then Mike Maturo, our Chief Financial Officer, is going to present our financial results and balance sheet. I'll then wrap it up with our expectations for 2006 and our guidance for the year. Following the formal presentation, we're going to be open for Q&A for Mike, myself and the balance of our management team that's here with us today. As usual, we're going to be working off of a presentation that can be accessed from our website at www. reckson.com. If you have a hard time accessing, you can actually contact Susan McGuire, the 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.

So with that, let me turn to the presentation starting on page 2 of the presentation. You'll note on page 2 we put together a table of our results during the quarter. We reported diluted FFO of $0.32 per share. This includes $23.4 million or a $0.28 charge in connection with our long-term compensation plan which Mike Maturo will go through in more detail. When you back out the impact of that plan, we actually reported $0.60 per share of FFO as compared to $0.55 on a normalized basis for the fourth quarter of 2004. When you look on a full-year basis, again adjusting out the one-time charges for '05 and '04, we reported $2.34 against $2.20 per share of FFO.

If you turn to slide 3, to continue with our highlights, you'll notice that our portfolio continued to performe extremely well. Our same property NOI was up across the board. Looking at our office portfolio on the left-hand side, you'll note that we actually broke it out for the first time by pro rata share and overall. where the pro rata share just shows all pro rata share of ownership, backing out minority interest or interest of, consolidated interests that don't belong, benefit Reckson. So focusing on that pro rata share for a moment on the office portfolio, you'll see same property NOI was up 3.7% on a cash basis for the year and 6.7% on a straight-line basis for the year. For the quarter, it was 2.3% and 4.2% up, respectively. When you look at the overall portfolio, you'll see again, focus on the office portfolio, you'll see that in 2005, we were up 2. 8% on a cash basis and 5.8% on a straight-line basis and for the quarter, it was 1.9% and 4.5% on a, on the straight-line basis.

So, again, good growth and we're going to continue to try to focus on the difference between our pro rata share and our overall performance throughout this presentation as well as in our supplemental package. You'll notice that we have broken out those different metrics so you can track not only the performance of our portfolio, but also our portfolio management and which components of our portfolio are performing at different rates.

Sticking with occupancy statistics, again, same property occupancy statistics. Our office property was up 40 basis points sequentially to 94.6%. The overall portfolio was 93.7% for that period, which is 60 basis points higher than September 30th. On a pro rata basis, it was 93.8% to 93.4% and portfolio was 92.5 to 92%. On the right-hand side, you could see the entire portfolio, which is, as you can see, is down sequentially and that really reflects the acquisition of the Eastridge portfolio and the Reckson Plaza portfolio which occurred in the fourth quarter of 2005.

Continuing with our summary of highlights on slide 4, as you see, we had an extremely active leasing period. We signed, in the fourth quarter, 61 leases for 916,000 square feet. We had a 78.5% renewal rate during this quarter, which was exceptionally high for us based on our 2005 activity. The same space rent performance again increased, up 15.4% on a straight-line basis, up 4% on a cash basis. There was a large renewal signed with Verizon in one of our buildings in Westchester. When we purchased this building, this lease was significantly above market. Because of rent growth, it actually still had a positive mark-to-market but not as much as the balance of our portfolio, so it did depress the numbers. If you pulled that out of the equation, the straight line same-space numbers would have been up 18.4% and the cash numbers would have been 6.3%. You also see again the chart which ended the year 94% leased. We had 51% of our new deals, of our lease assigned this period, related to renewals and then a large chunk of the other deals were city and then miscellaneous new leases throughout our portfolio which we'll talk about later.

Switching to slide five, I want to spend some time talking about our market trends and where we see our market and how that impacts our strategy into 2006. We believe our markets are continue to gain strength as demand for high-quality office space is outpacing supply. Tenants are well capitalized and focusing on expansion and they are seeking some of the better quality assets throughout the the Tri-State area to meet these needs. We took this into account as we developed our business plans for 2006, and the objective really was to find a way to capitalize on this strong leasing environment.

So we went building by building, space by space, and determined which of our spaces we would characterize as premium spaces and which of our spaces we would characterize as competitive spaces. For the spaces that we characterize as premium spaces, our objective was to lead the market in driving high rents. And if it meant having to sit with those spaces vacant for an extended period of time or not renewing tenants that wouldn't reach for the rents that we thought those spaces would demand, that's what we'd be willing to do and be willing to accept a longer period of downtime to achieve this higher rent.

On the competitive space, our objective was to meet the market and get that space leased. So as you go through each of our markets, I'll give you some examples of how this strategy plays out.

New York City and Long Island continue to display some of the strongest leasing velocity and rent growth in all of our markets. We're seeing in New York City, and I'm sure you've heard on all the other calls, again midtown Manhattan, very, very strong. We're leasing premiere space at 1350 Avenue of the Americas in the low $70 per square foot. In the mid-level spaces, we're leasing the spaces in the mid to high 50s per foot. As an example of how the strategy plays out, we have a large tenant rolling over this year, about 125,000 square feet in this building. We could have renewed that tenant. We chose to pass on renewing that tenant because we believe we can get north of $20 more per square foot from a new tenant that's willing to pay that rent for that space.

Another opportunity that we have in midtown Manhattan in terms of this premium spaces is 1185 Avenue of the Americas. We have about 130,000 square feet coming back to us this year. For that building, it's a great block of space in a great location. We actually have a floor that breaks up the continguous nature of that block of space that's already expired early in this year. We're keeping that floor vacant so that we can actually build a large continguous space during the year and have a large premium block of space that we can lease and again we believe we'll be able to get rents in the mid-60s on that space.

We also in Manhattan have some very strong premium space on the top floors of 810 Seventh Avenue available to us at the end of this year, the beginning of next year. So those are spaces we're going to play for again very high rents on.

In Long Island, Reckson Plaza, I'm pleased to report in our first three leases that we signed in that project were averaging rents north of $35 a square foot as compared to the prior tenants before we purchased the building being in the low 30s per foot, and those who had toured the building and had been briefed on that project knew that was an objective of ours. We have some large spaces coming back to us through '06 and '07 and we think we'll be able to achieve those type of rents as we put all work into that building. One of the key things for us there is we have some extensive lobby and renovation work that we're doing and we're trying to get that work in place and completed prior to trying to lease that other space so we can get some of the higher rents associated with that.

Finally in Long Island, 68 South Service Road, we've had some very good success there as we'll talk about later. We leased a significant portion of the building to Citibank. We had the balance of the space, had very good activity on the balance of the space, but again consistent with the our strategy, we actually had a tenant just recently that was interested in the balance of that space, but wouldn't reach the rent that we had marketed it at and we let pass and we're going to now go out and lease the space to other tenants that we believe will pay the rent that we we think we should be able to achieve there.

In New Jersey, we're showing a strong demand for premium product in the Route 24 corridor and we had good activity on our new development in Princeton. Just as an example, in the Short Hills Office Center, we're working on transactions now where we're getting $45 and up per square foot on some of the rents that we're doing in that building. We have some good space coming back to us at Giralda Farms as part of some of the redevelopments and repositionings that we have there and we believe we'll be able to get rents well in excess of what we originally anticipated based on the market conditions there.

The other markets in New Jersey still remain competitive. There's a lot of space that the tenants have to choose from that are willing to go to those different submarkets, into those types of buildings, so they are a little bit more challenge and again we would characterize those at competitive and then do what we can to get that space leased as quickly as possible.

In Stamford and Westchester, both those markets are starting to show signs of significant improvement. Westchester, in particular, as it relates to activity is much better than it has been. We've actually, this past quarter, did two times the amount of leasing activity in Westchester than we've averaged over the last eight quarters in that marketplace. We had good activity although we're not at a point where we're seeing the ability to really push rents significantly in Westchester.

Stamford, on the other hand, I think activity's gotten to a point, we're actually able to start pushing rents. Our Landmark 6 project is 75% leased, again ahead of schedule in terms of being able to get commitments for that space, and we anticipate getting good rent on the balance of that space. Stamford Towers, we've gotten back some space in that building or are scheduled to get back some space, additional space in that building. We're actually seeing an ability to do rents in the mid to high $40 per square foot, which is a number significantly higher than any leases we've ever done in that building, probably north of $10 higher than any leases we've done in that building historically. So again it demonstrates some of the pricing power that we're seeing in that market.

And then finally back to Westchester, we are seeing some good activity on the new Eastridge portfolio which I'll talk about later in my discussion. So, I think as you look at this strategy, and hear some of these examples, you'll see we really worked hard to build an inventory of high-quality space and we actually were able to achieve having that high quality space just at the right time in the marketplace. So we're going to be very focused on being disciplined of trying to maximize rents for the long term for those spaces, not be short sighted and take a long-term approach. When you run all this through our models for 2006, it adds about two months of additional downtime on average across our 2006 forecast which is about $6 million of GAAP revenue reduction in '06 that gets picked up back in '07 with the higher rents and growth associated with those higher rents for years to come. So there's a short term impact to this but the long-term is we're going to get much more significant growth as we go forward.

If you turn to slide 6, I think you can see the ability that we have to create value through our leasing activities and here on slide 6 talks about the activities that we did and the economics around some of those leases. During the year, we spent about $26 million on tenanting costs for same space non-incremental transactions which is about $18.76 a square foot. On those leases that we sign, we actually got about $3.68 higher incremental rents than what the tenant was paying upon their expiration. So that's about a 19.6% return on invested capital to retenant that space. So if you look on the fourth quarter, we got a 26% return on invested capital as the tenants relet that space with the higher rent that they were paying. So while it's costing us money, this money is more than justified by the returns we're getting.

When you look at our overall portfolio, we had about 61% of the tenanting capital was what we characterize as value-enhancing transactions which are transactions that return on invested capital greater than 8%.

If you look on the bottom right-hand side of slide 6, you'll also see we included a graph showing our tenanting cost per square foot per year of lease term. The blue line in the middle indicates the overall portfolio which is $2.93 per square foot, which is below the $3 guide that we have set for ourselves we want to stay below. But when you look actually in the breakdown, we also broke it down for CBD in New York City as well as the suburbs. New York City is $4.84 per square foot for the year and the suburban portfolio was $2.43 for the year. Clearly, the $4.84, based on the economics we're driving in our New York City portfolio, is justified.

I will tell you tenants are still demanding significant buildouts, particularly for the premium type spaces. They are taking the spaces, they want them to be functional and they expect to be there for a long time. What's interesting is not only the demanding buildouts from contributions from landlords, but what we are seeing is they're typically investing two or three times our investment, our contribution, of their tenant costs into this space. So they are making big capital investments into this space which is also extending the buildout times that are required to get them into this space.

Slide 7 just again looking prospectively, you'll see, during 2006, we have approximately 8% of our portfolio to roll, which is about 1.5 million square feet. In 2007, it's about 8% as well. 2007 is actually up from last quarter because we have about 250,000 square feet of Eastridge and Reckson Plaza space that's rolling ing that period of time, and then you see it normalizes down in 2008. We look at 2006 and 2007 as a great opportunity for our Company to again mark our portfolio to market.

If you look at slide 8, you'll see that we have been successful doing that. On the left-hand side, it shows you the numbers for 2005, on an average basis, were up 12.7% on new leases versus the expiring leases. Average rent on a cash basis, we were slightly down and that again reflects for those who aren't familiar with our portfolio, that was suburban portfolio has built in annual rent increases so it's much more viable to look at the average rent versus the average cash rent to understand the economics of those lease terms on a suburban basis.

When you look to the right side, that gives you our 2006, mark-to-market forecasted right out of our model. You'll see that on a cash basis, we actually are at a 7.2% positive on a cash basis and 11.5% on an average basis. So the opportunity has manifested itself and it's something we expect to continue to manifest itself as we go and lease our 2006 expirations.

Moving away from the operations and just jumping into the investment overview and strategy. From an overview perspective, the investment markets in our mind remain competitive for high quality stable office property. They may be a little bit less competitive at this point for some of the more value-added or transitioning assets as we saw with the Eastridge portfolio but yet stable high-quality assets there's no lack of competitive bidders.

In addition, if you look at the pipeline of office properties today that are being offered for sale, it would indicate that it should be less sales activity in 2006 than there was in 2005, and we think this is really two reasons for that. First, the debt markets remain very aggressive for financing and stable properties so makes an attractive alternative for potential sellers. We worked on a couple of transactions over the last few months where the seller was able to achieve financing for the same amount of proceeds that we and other bidders were offered to buying the buildings for. Now, they were stable so that's a little bit of a caveat to it. But if you have markets like that, it could take potential sellers out of the market.

Also, what we've seen is institutional owners are concerned about being able to redeploy any proceeds that they get from selling assets which makes them less likely to be a seller because they don't want to take the money and hold it as cash. So our strategies as we go forward in 2006 from an investment standpoint, are as follows. We're going to continue to allocate our capital to the value creation and strategic properties that we think will offer higher risk, adjusted returns, as well as well located core-plus properties that we think we can purchase at significant discounts through replacement costs like we did with Eastridge, like we did with Reckson Plaza.

We also are going to continue to execute the match funding strategy that we used last year. We think it enhances the quality of our wholly-owned assets and then we sell off our non-core properties at prices that reflect today's premium pricing. So we're enhancing the quality and selling off non-core at what we believe on a risk adjusted basis is extremely strong pricing.

We plan on continuing to use the JVs to pursue core-plus properties like our Australian, property trust and use institutional JVs to pursue more competitive, to become more competitive in acquiring large strategic properties in the city and other markets.

We want to leverage our existing portfolio to access new investment opportunities. This is a strategy that we've been working on for some time which is really to use our assets as a currency to try to tie them, the sale of these assets into buying other assets, and that's something that we continually are working on.

We're going to continue to make opportunistic structured finance investments in our markets. And we've been for a number of years now, and particularly in the last number of quarters, we've been working on a series of what we call cultivation projects, long-term projects or properties that could be coming to market and working these relationships. It ir our belief that some of these projects will mature into transactions in 2006.

And then finally, we plan on continuing to replenish our value-creation pipeline with new growth opportunities in 2006.

Just to recap on 2005, during the year, we completed $1.3 billion of investments. Of that, $870 million were what we characterize as stable property acquisitions, that we matched with $910 million of stable property dispositions. So if you think about the properties that we sold, we actually sold for 6.8% forecasted, GAAP NOI yield, the properties that we bought, we forecast getting a GAAP NOI yield of 7.1% so we're getting a higher initial return, but I think more importantly, when we look at the growth characteristics of the properties we're buying versus the properties we're selling, as better and the quality of cash flow as better.

In addition, one of the things we were able to do successfully is not hurt our overall presence in our markets through these dispositions. We actually are going to continue to manage 90% of the square footage of the assets that were part of these sales through the use of joint ventures.

On slide 11 outlines the Eastridge portfolio, which is an acquisition, a value-added acquisition that closed right at the end of the year. This is one of the best-located office portfolios in Westchester. It's a portfolio that we've had interest in for many, many years, ever since we first went into Westchester. It's been institutionally owned for over a decade and we always felt it would have great upside potential. It came to the market last summer and it appeared we were going to be priced out by other bidders who were being more aggressive than we were, but in early December, those deals began to fall away and the seller came back to us and said they would accept our offer, our initial offer, if we closed by year-end. We felt comfortable with the due diligence that we had done, our understanding of the marketplace, and we had the flexibility of our balance sheet that we were able to get it done and we actually were able to bring this property to closure on December 29th and take ownership of it. It's a 1.6 million square foot portfolio, 70% occupied.

There's one property that we have chosen to sell and we've signed the contract to sell for $35.3 million or $219 a square foot. It's a property that is in a park with two other buildings and the owner of the two other buildings is purchasing this building and also shares the systems for the two other buildings are in this building so there's really a natural strategic rationale for the owner to have this building. We also leased about 38,000 square feet prior to selling the owner this building. When you take that into account, it brings our cost basis down to $220 million or $156 a square foot which is a great discount to replacement cost. When we stabilize these assets, we think we will generate a yield in excess of 9%. This is truly a classic Reckson value creation opportunity. We believe we'll be able to double the NOI over the next two to three years. The fact that it was institutionally owned for so many years in our opinion will result in some undermanagement that when we lost the manage the portfolio more efficiently and bring it up a few notches and that as the properties mature into highly attractive core plus assets, we think there will be good investment opportunities for the Australian LPT which is consistent with what we want to do with our core plus properties.

As I mentioned earlier, we've already experienced good leasing activity in the portfolio since closing at the end of the year. We actually have eight leases outstanding for about 76,000 square feet. We received interest for over 380,000 square feet of which 330,000 square feet were for new leases. So off to a good start although there's a lot of wood to chop to get this portfolio into form that we want to have it in.

As I mentioned earlier also, we completed our 68 South Service Road development during the quarter and signed a 15-year lease. At its completion with Citibank for 200,000 square feet bringing the building to about two-thirds occupied which is the good news and that was ahead of forecast in terms of having it occupied. However, Citi is doing extensive buildout that is going to take quite some time so it's going to result in us not really recognizing much income from this lease until the end of 2006. Once this building is stabilized, we would anticipate generating a stabilized NOI yield in excess of 10%.

Just continuing with the theme of value creation, you'll see that in 2005, we worked real hard to position ourself with a large pipeline of value creation opportunities. Our activities has resulted in us having about 2.2 million square feet of incremental revenue opportunities in '06 and '07. We broke it out here so you can get a better feel for what we're talking about. Maybe start on the left-hand side. You see mark-to-market opportunities about 575,000 square feet of market opportunities primarily made up of 1185, 1350 and Stamford Towers. We have about 750,000 square feet of repositioning opportunities which is Eastridge and Reckson Plaza primarily. Redevelopment opportunities of 190,000 square feet of redevelopment opportunities which includes One Giralda Farms, Six Landmark Square and one of the Eastridge buildings. And then we have about 650,000 square feet of development opportunities that are going to, the square footage will be coming to fruition there. We have 68 South Service Road, Seven Landmark Square and University Square. When you take all these opportunities, they're forecasted to generate approximately $40 million of anticipated incremental GAAP NOI upon their stabilization. This is a big opportunity for us and it's really what we're working on hard, particularly because the markets are strong and when you're doing these type of development projects, when the window is open, you need to move very quickly to capitalize on the strength of those markets.

Just a few other quick updates on the investment disposition side. We actually this quarter signed a contract to sell One Orlando, the building that we own in Florida we got as part of the Tower acquisition. We wanted to sell this building for quite some time, but it was cross-collateralized on a mortgage with one of our New York City properties which we were able to finally pay off last year. We got $70 million as the purchase price, about $200 a square foot. A 5.3% cap rate is the estimate for that. We anticipate closing this month and we're obviously pleased with the pricing and pleased to have this non-core asset off of our books. We expect to recognize about a $9 million gain from that sale. 3 Gannett Drive is the Eastridge portfolio, property I spoke about. We have just, on the other initiatives, we have been working on –the Nassau Veteran’s Memorial Coliseum redevelopment, which is the redevelopment surrounding the 77-acre coliseum site. We have good news to report which is as part of the RFP process, the county executive narrowed it down to two final RFPs, us being one of those RFPs, and so we're going to continue to work hard on positioning us to be the developer to redevelop this site.

And then finally, we're continuing to harvest our non-income producing assets. In this past quarter, we actually had some adjustments to our investment in the Catskills, where we restructured our deal cancelling the merger agreement that we had with Empire Resorts in exchange for a termination or breakup fee that was in the form of a series of stock options and it freed us to go do with our land what we thought was appropriate to do with our land so we're going to continue to work that. As well as we have a series of non-core land and other non-income-producing assets that we're working on hard and believe that we'll be able to realize profits from during 2006.

With that, let me turn it over to Mike to walk you through the financial data and the balance sheet.

Thank you, Scott. Good morning, everybody. I'm starting on slide 15 with the operating data looking at the revenue line, the sequential decrease in revenue is attributable to the sale of the LPT assets in the third quarter, at the end of the third quarter. And also the sale of the 70% interest in One Court Square in the fourth quarter. As far as operating margins for the fourth quarter, came in at 58%. This compares to 59.3% for the same quarter last year. This quarter's margin reflects increases in certain operating expenses, primarily energy costs which everybody, I believe, is feeling. These costs to a certain extent are mitigated by our ability to pass through increases to tenants. The decrease in operating margin sequentially from the third quarter also reflects the higher energy costs in the fourth quarter in terms of the commodity costs for energy and is also negatively impacted again by the sale of One Court Square in November which was a net lease property and obviously had a much higher margin to it. While we do recover significant portion of the increased energy costs, there will be a negative impact continuing on our margins in 2006. We are looking at about 15% increase in our expected energy costs for the year.

Termination fees for the fourth quarter was $1.7 million as compared to about 250,000 for the quarter, same quarter last year. These fees, termination fees, are by nature vary from quarter to quarter. We don't expect these fees to trend upwards as our markets continue to recover. We're budgeting about $2 million of termination fees for 2006.

Going to the G&A, before the charge which I'll get into in a minute, it was about $8.1 million for the fourth quarter, which was somewhat below the estimated run rate and this is primarily to an adjustment that we made in the fourth quarter to finalize the allocation of year-end bonuses between cash awards, which are charged in the current year, and equity-based awards, which have future performance criteria and amortize over a multiyear period. For 2006, based on an estimate for the full year and anticipating a ramp-up in our payroll and our staffing, we believe will average about $9 million a quarter in G&A.

If you recall last quarter, we discussed on our call the long-term compensation incentive plan which was put in place in January of 2003. It is a four-year plan that has two components -- a core component which is earned annually by meeting an annual absolute or relative performance hurdle, and then a second component, which is a special outperformance piece that is earned at the end of the four-year period based on meeting both an absolute and relative performance criteria over a cumulative four-year basis. The measurement date for that part of the plan is December 31st, 2006. The plan has a cap as to the ultimate value based on the terms of the plan that could range from zero, where the performance criteria is not met, to a max of approximately $35 million in the aggregate for eight senior officers of the Company. The maximum amount is based on a stock price of approximately $39 per share. Last year, excuse me, last quarter, we concluded, based on the status of the Company's performance relative to the criteria metrics, that no accrual was warranted. However, based on updated measurements of the same criteria metrics, and now the shorter time period to the ultimate measurement date, we have concluded that there is a reasonable probability that the performance criteria will be met. We've therefore have included a charge against this period's earnings in the amount of $23.4 million for the incentive plan. This amount represents an estimate of the planned payout based on the closing price as of December 31st, 2005 for the completed service through December 31st, 2005. Application of the accounting rules for employee compensation prohibits us from recognizing the full estimate of the plan until the service period is entirely completed. The remaining portion of the payout will be charged to earnings over the next five quarters through 2006, based on similar analysis in using the stock price at the end of each quarter.

Looking at other income, totalled $9.9, about $10 million, this quarter. That includes $4.5 million of interest income on the mezzanine and other notes receivable, $2.1 million of other income attributable to real estate tax refunds, utility refunds, interest income on balances and miscellaneous items, and $1.0 million of equity in JV earnings. That's a GAAP number. Converting those earnings to FFO is about $2.0 million. This number reflects a full quarter of the tranche I transaction of the LPT JV and partial quarter for One Court Square which again we sold in November. The fees earned through JVs amounted to $2 million for the quarter. About $900,000 was attributable to the LPT JV.

Turning to slide 16 and looking at the financial ratios as of for the fourth quarter, continue to be very strong. Our debt to total market cap was about 40% at the end of the fourth quarter compared to 41% at the end of the third quarter. You'll also see on the debt slide that the debt to total market cap was about 36.8% prior to the $255 million Eastridge portfolio purchase which occurred on December 29th, 2005, and we had some pressure from the seller to close that by the end of the year. Our fixed coverage ratio was 3.1 times for the fourth quarter as compared to 2.9 times for the third quarter, which shows some improvement. Secure debt to total market cap was 16.9% last quarter which, on the initial slide was not included but I believe it got posted later, as compared to 12.6% this quarter, a good reduction. That's a result of the sale of the One Court Square which was a mortgage property. These numbers will be possibly impacted as we complete the schedule capital recycling and recapitalization activities that Scott had mentioned including sale of the tranche II assets of the LPT and the sale of the One Orlando office building we'll be getting significant proceeds back.

As for capital plans for 2006, aside from the sale in joint venture activities, we will refinance a number of mortgage assets that are significantly underleveraged today including 1350 Avenue of the Americas that has a $72 million mortgage and that's over 550,000 square-foot asset, and Landmark Square in Stamford, which is an 800,000 square foot property with only a $42 million mortgage. As these mortgages mature, we'll plan to refinance them with unsecured borrowing, or sales proceeds, and add them to the unencumbered pool to create additional capacity or seek joint ventures opportunities to unlock the value that's been created over time.

We'll continue to sell our non-core operating assets and complete the amortization including RSVP which Scott mentioned which we expect to recover a significant portion of the $55 million of outstanding investment during 2006. As a result, all that we believe we're well positioned to finance our growth initiatives within the capacity of our balance sheet and the alternative capital sources that we set up in the past year.

Turning to page 17, which is our debt schedule, our weighted average interest rate on our outstanding fixed rate debt at December 31 is about 6.29% and 6.12% based on our pro rata ownership of the underlying assets. The weighted average maturity is 4.5 years. We have a limited exposure to maturities over the next three years with no unsecured long-term debt coming due until mid-2007. Our line of credit had an outstanding balance as of the end of the quarter of $419 million. That's our only floating rate debt which represents about 21% of our total debt. This amount includes $255 million which was used to repurchase, or excuse me, to purchase the Eastridge portfolio at the end of the year. So we'll refinance the line with the sales of One Orlando, the sale of the Eastridge asset Scott mentioned, and with other unsecured borrowings. That's my summary on the financial side and I'll turn it back over to Scott to finish up.

Thanks, Mike. Just to return to slide 18, we provide the conclusion and guidance for 2006. Just to recap, 2005 was an exceptional year for our Company, not only for what we accomplished, but also for how well we positioned Reckson for future growth. On the accomplishment side, obviously, GAAP NOI growth at 6.9%, significant leasing at 2.2 million square feet, record level of investments at $1.3 billion, and really executing on our value creation initiatives with the completion of 68 South Service Road and all the other activities that we had going forward from there. We're really well positioned for sustainable outperformance based on this. The match funding investment strategy enhances our long-term growth rate of our portfolio. We think we're very well positioned to be effective capital recyclers now with our Australian LPT and other ventures that we've set up. Our development and creation pipeline, as I showed you, is in full force and really robust at this time. And we positioned ourselves with very attractive vacancy right at the right time in the marketplace. So we're really pleased with where we are in '05. As you look at '06, you'll see a lot of strategies that we laid out impact our guidance and it's a lot of opportunities for to us create long-term value for '06 and '07 and beyond.

From a guidance standpoint specifically, we're setting guidance at $2.45 to $2.53 per share. The three biggest impacts to that guidance is a leasing strategy, which I had mentioned earlier, with the two months of additional downtime reduces about $6 million of revenue from our normal downtime. Our value creation strategy and some of the dilution associated with those projects like Eastridge, for example, which is slightly diluted in the beginning and kicks in later. And then our match funding strategy, which this year different than last year, has really started off the year with the dispositions and the dilutions associated with the dispositions, and is expected to end the year with the acquisitions. If you recall last year, we started the year by contracting to buy a lot and then selling towards the end of the year. This year, it's actually inverted and so that creates additional dilution.

Let me walk through some specifics from a NOI basis on a cash basis, same store NOI. We're forecasting between 2% and 4% same-store NOI growth. On a GAAP basis, we're forecasting between 0 and 2%, which again that's really where you see the impact of the leasing strategy in the average two months of downtime. On the weighted average acquisition, net of dispositions, we're forecasting between $0 and $100 million, and again that's a number that's predicated on the fact that we're starting the year with the heavy amount of dispositions and need to make up for those through the acquisition markets as we go forward into the year. So that is a factor that has a big impact here. Termination fees and other income, we're forecasting between $10 and $20 million, which is in line with our three-year average. Service business fees, we're forecasting $7 to $10 million, which is taking into account the fees that we're generating from our joint ventures and Australian trust. Then as it relates to our development, and redevelopment projects that are coming to service, we're forecasting minimal accretion from those projects in 2006 and the accretion that we will have will be back-ended in 2006.

So when you look at all this, and one of the things that I think plays out, is that we believe earnings growth will be backloaded and carry into 2007 at a much higher rate than the beginning. As we look at just the first quarter, provide some guidance specifically to that, we would expect our GAAP NOI in the first quarter to be flat to what was existed in the fourth quarter and that's really a function of the leasing strategy and the heavy level of expirations that we had in the first quarter. This would be slightly offset by some of the positive leasing that we've seen in the fourth quarter, but much of that, as I mentioned, isn't going to be delivered into the second quarter, second half of '06.

We're also expecting on a quarter over quarter basis, dilution from One Court Square, the LPT tranche I, the sale of 100 Wall, as I mentioned, the Eastridge portfolio, you take all that into account, that's about $0.05 to $0.06 of quarter over quarter dilution just from the disposition program. If you look at the $0.60 reported in the fourth quarter and took out the other income, it's about $0.58, let's call it $0.05 or $0.06 of the dilution, would bring you down to $0.53 to $0.52. We think we'll make up some of that from, as I mentioned, the leasing in the fourth quarter and some positive built-in rent growth that we have in our portfolio, as well as other income initiatives that we have, should get us to a point of $0.58 to $0.60 for the first quarter of 2006. And then our hope again is that we start ramping up through the year, although it may not necessarily be the second quarter, it would probably be more weighted towards the second half of the year depending on our investment activities and how fast, if we're being a little too conservative on our downtime assessments related to our leasing strategy. So again, $0.58 to $0.60 for the first quarter. $2.45, $2.53 for the year, which would get us in excess of 5% growth at the low end of that range. So the good news is, I think we're executing a strategy which we believe to be the right strategy that will enhance the long-term growth prospects for our Company, that will be felt in the second half of this year and more materially into 2007, while still being in a position to produce over that 5% FFO growth in 2006 that we've targeted and put our Company in a very good position going forward. So with that, Operator, I'll be glad to open up for questions for myself, Mike, or the rest of the team.

Okay. [OPERATOR INSTRUCTIONS] Your first question comes from the line of David Toti from Lehman Brothers. Please go ahead.

Hey, David. How are you?

Good, thanks. A couple of questions around capex on Eastridge. Could you sort of outline what your expectations are for average kind of concessions on a corporate basis for the space you have to lease in addition to talking about general capex related to stripping down some of the buildings and redevelopment?

Let me start with the latter point. Actually before David, before you go, the way I wanted to make clear and I neglected to say and it just dawned on me is in that guidance I gave, I didn't provide any adjustment for the additional, any additional charges so that's in advance of that -- charges would be an adjustment to that guidance. So I'm sorry about that. But to go to your question specifically, on the Eastridge portfolio, we're forecasting, I believe, $30, to $31 million of total capital being invested as part of this repositioning not including rollover time. Is that correct? I'm sorry, $26 million post selling 3 Gannett so $26 million. I don't think we're forecasting the cost of the TI beyond our repositioning dollars to be any different than the balance of our Westchester portfolio. And so I would say it should be relatively consistent, maybe lower in some cases because you don't have necessarily the heavy buildup some of our bigger buildings might require.

Okay. Just one quick question on the development pipeline. Could you talk about the potential timing on some of the four projects that you have in the planning stages?

I think the next project on the development pipeline would be that's in place, it's not in our presentation for those -- David's focusing on what's in the supplemental schedule, and I think the first one would be, the next one would be Rye Brook And that one really, the Rye Brook space, which is a building that we're working on right now, it would be determined on tenant demand and we actually have some decent activity right now for that building as well as what might what happen with MCI that rolls over in that park during 2006 which we have some good discussions going on with them. If either one of those factors turned out to be showing the right level of positive momentum, that would be the next project we'd start and we'd start it relatively quickly because it's extremely well located project on the border of Greenwich and Westchester and it would be something, a level of product that Westchester does not have in terms of quality and infrastructure. And actually if you look at the list, Giralda Farms, the next one we're working already on RFPs and other things there, so they're longer but they're right in the pipeline as we outlined them in our valuation pipeline order that we would anticipate these projects coming together barring some demand from someplace else.

Great. Thank you so much.

Thanks, David.

Your next question comes from the line of Jordan Sadler from Citigroup. Please go ahead.

Hey, Jordan.

Hey, good morning, Scott. I'm here with Jon.

Hey, Jon.

Just going back to the [inaudible], you said the the guidance excludes any remaining charges. I guess it looks like there could be a potential additional $0.13 or so to get you to the full $35 million. Did you say the price was $39 to hit the cap?

That's correct. The way it would work is, because you can't take a full charge until you complete the service, you would look at each quarter and what the price of the stock is at the end of each quarter and then calculate any incremental amount as a result of that, including the passage of time. So if the stock price, for example, stayed to where around where it is today, we'd be accruing up to the max through the end of the first quarter, 2007. Because while the performance metric is at the end of 2006, there's an incremental vesting period that goes through March of 2007.

Of the remaining -- it looks like you have about a third left.

I think we did about 70% based on the completed service period.

And how much would fall into '07? Of the 100%?

You know, one-fifth of the remaining, 20% of the remaining so --

The 5% or something.

Yes.

Okay. I just wanted to go back to one of the strategic questions about using sort of joint ventures to do additional transactions, core-plus transactions. Is there anything in the pipeline beyond the LPT, or were you referencing anything beyond the LPT for core plus?

Not for core plus. No, for core plus, we're focused on using the LPT for ongoing investments.

Okay.

I was referring to for more core assets, whether it's New York City-type opportunities where there's a cost to capital advantage that Reckson not the LPT has.

Okay. And then, on the other transaction that you referenced leveraging your portfolio, what exactly did you mean by that? Is that a core property?

No. In other words, what I meant, what you do on these strategic, on the investment strategy?

Yes. You said something about leveraging?

In today, one of the more valuable currency than currency is hard currency is buildings, right? Everyone wants product. So when we look at our portfolio and say we're willing to shed an asset or bring in a joint venture partner, we're going to try to strategically leverage that willingness to sell by going out and only selling to someone or trying to sell to someone that has something that we're interested in buying.

Okay

And so we have a couple of things like that that we've been working on.

So you can take an additional ownership interest in some additional core type buildings?

Correct.

But you'd sell some of your own properties into venture or something like that?

Core or non-core as an example. We keep a list and as we do our NAVs and look at each of our properties through business plans as to which would be properties that we'd be willing to sell or bring in a joint venture. We always have an inventory of properties that we would consider for that type of circumstance. Our view is to try to take something that we've already identified in that bucket and then target institutional or other owners that we think have product that either we would like to own and offer to sell as part of buying, which really helps mitigate the issue that many institutions and individuals don't want to sell because they have no place to put the money.

Okay. Where's the line of credit today? It was at $418 the end of the quarter but you had the JV deal? Or the LPT deal, rather?

Yes, we had LPT, which is about $72 million that we got back.

So you're down to about $350, is that a good guess? On the line?

Probably a little higher.

Okay.

Development, funding some of the development.

Okay. And then on RSVP, what changed during the quarter? I notice the value of the member's equity increased substantially.

We sold the ALI portfolio which realized cash. We also, there was a transaction to sell an interest in Dobie Center where we realized some profit there that went into RSVP.

Any prospects on repatriating any of that cash?

It's a clear 2006 objective. So I think we're in the process of working on monetizing Tollway and taking initiatives to do so with Catskills so I think that as soon as we have a little bit more clarity, probably Tollway being the one that is the one that gets resolved first. Then we would work on repatriating the cash back.

I assume there's nothing in your guidance as it relates to RSVP?

No.

Okay. That's all I have, thanks.

Thank you.

And your next question comes from the line of Ian Weissman from Merrill Lynch.

Good morning. You guys have talked of in the past about the potential of Long Island City. Maybe you could talk a little bit about the plan redevelopment of Silver Cup Studios which I believe is down the block from you, that $1 billion that plans to get invested in that project.

Right. It's an interesting project. The guys who owns Silver Cup Studios have been working on it for quite some time and this is the centerpiece of their development plan, has been to attract television production back to New York City and centered around Silver Cup Studios, where "Sopranos" is actually filmed . Their plan is to do a heavy residential component, retail and then perhaps some office. I think it's early in the stage in terms of getting the approvals, but I think it would be great for Long Island City. Each of the Queens West residential towers that have gone up have been a great success which I think continues to encourage more development. Citibank is building the phase two of their building and I think identified all the people that are going to be in there already from the different locations which is great and I think is going to again enhance that. The U.N. Credit Corp has got a site next door that's going up right now so a lot of activity in Long Island City that should speak to the ongoing development of that marketplace as we hoped into one of the prime market, sub-markets of New York City. We're working on a few things in early stages and continually cultivating different opportunities and we hope to participate in something that's more near-term than far away that has some level of mixed use component with a partner because I think they're all going to have initially start with some level of mixed-use component to be successful.

Aside from the residential, though, and retail, do you think it triggers more office development in the market?

I think at some point, I think if there was a well-located, into the closer to sort of where our building is in Long Island City, and the Queens West area, sites right now that could be built and of a reasonable scale, you'd have tenants from Manhattan going to Long Island City based on the pricing of Long Island City versus midtown Manhattan. So I think the problem right now is the ones that have the ability to go forward are a little bit out of the beaten path as to where things have already started to come to a level of development that makes sense or of a scale and size that make it hard to swallow a development. But if you were talking 500,000 to 800,000 square-foot development right now in that marketplace, I think it would go very well.

Moving on to just coliseum for a second. Have you and Charles Wang disclosed what your new development plans are now that the 60-floor tower is not getting built? When do you think a decision will be made by the local township?

To answer your first question, I think there's, we haven't disclosed fully exactly what's going to be there, but while the building itself hasn't been disclosed, the plan really has never changed. It's still going to be 5.5 million square feet and still going to have the same components relative to residential, retail, office and hotel. Exactly what's on the specific site where the 60-story tower was going to go has not yet been disclosed. But my guess is that will come in the very near term when we have some plans that we're working on that will make it a little bit more distinctive. But I think it's a little bit more of a media no-namer that they just, somebody's going to actually go there. It's still the same thing. From a timing standpoint, we're hopeful that by sometime this summer, we're through the process with the county, and if we're selected, will be able to kick off the process with the town of Hempstead.

Finally, were you guys involved in the bidding process for Gale and what do you think the market implications are in this transaction?

We were not involved in the bidding transaction, the bidding. We actually had looked at Gale historically and chose to not bid this time. And I think -- there's too many market implications to it. I think that Gale has been an operator in the market for a long time. These assets have been in the market for a long time. And so I don't really think there are too many market implications that we're focused on.

Okay. Thanks so much.

And your next question comes from the line of Lou Taylor from Deutsche Bank.

Thanks, good morning, guys. Just one question. Scott, as you look at your '06 lease expirations and I would think you're working on some '07 transactions as well, do you get a sense that your retention rate is going to change very much just as the markets get a little tighter?

Yes, I think they will. It's a good question. I think it's going to be interesting. The retention rates on what I would characterize as competitive space, we're going to try to keep at the highest level possible. Because I don't think you have the pricing power in some of those competitive spaces to push rents. I think the retention rates on what we're characterizing as the premium space, is going to be something that's going to decline because we're not going to be willing to, the rent differential today versus what some of those tenants are paying is so large versus what we can get in the marketplace that it justifies us letting them leave, taking some downtime, and putting a new tenant in.

Okay. Great. Thank you.

Thank you.

And your next question comes from the line of John Guinee from Stifel Nicolaus.

Hey, John. How you doing?

Good morning. Hey, going to your Eastridge deal, you're essentially $156 a square foot at about 70% occupied. By the time you add in your base building dollars, repositioning dollars, TI, leasing commissions, what do you think your stabilized cost per square is on that?

Somewhere between $175 and $180.

Okay. And then, when you're talking about your replacement costs for that sort of product in Westchester county, are you assuming structured parking, not structured parking? And what's your essentially the main components of your replacement cost?

No structured parking. The thing about this location, these locations are as some of the prime, most prime locations you have in Westchester county, right on the highway, by heavy, more affluent residential neighborhoods and behind it. So I think the land cost would be probably a big factor. But my guess is you're talking somewhere in the $250 type, $260-type range per square foot when you think about with the land in that mix.

You're saying $250 to $260 with surface parking?

With surface parking, correct. Some of the space today, I don't think under the existing zoning you could build the same amount of space with surface parking. But take that out of the equation.

Okay. Thank you very much.

Thank you.

And next we'll go to the line of Tony Paolone from JP Morgan. Please go ahead.

Okay. Thank you. Scott, can you go through the $6 million of dilution in 2006 that you talked about a couple times in the presentation? I just didn't quite catch how that all tied in.

It's again, all that is when we looked through and sort of starts building by building and space by space, so this is sort of an output, not necessarily an input, and that when you went through and said, okay, we're now characterizing some of these spaces as premium, and rather than having as many spaces renew as we would have if we were willing to take lower rents and assuming that we're going to need more downtime to drive some of the rents, the output is about two months on average additional downtime for the amount of square footage that we have in our lease-up forecast for 2006. When you take that too much of additional downtime, that's worth about $6 million.

Okay. And so then that $6 million then is dialed into the same-store GAAP NOI expectation?

Exactly. If you look at the, that's really part of the differential on the same-store GAAP versus the cash. If you look at the cash NOI of 2% to 4%, the 2% takes into account our normal rent increases and same-space rent increases that we had from '05 leases that you're going to feel into '06 offset somewhat by expense increases, right? Utilities that may not have been there at the beginning of '06 that we felt in the second, of '05 that we felt in the second half of '05. The 4%, and that equates to 0% GAAP. The 4% says we do a little better on some of the downtime that we're talking about and that gets you more cash and more GAAP and that's 0 to 2, 2 to 4.

Okay. I see. Other question. You talked a little bit about the capex budget for Eastridge, I believe it was, earlier. What about the rest of the portfolio for 2006, TIs and leasing commissions?

Again as I said, I think they're going to continue to be consistent with where we've seen them over this past year. I don't see them moderating in any manner. The good news is we're getting rents that are giving us a good returns on those investments. And so I would still forecast that we're going to be in the $2.50 to just under $3 per square foot per year of lease term as we go into 2006.

Okay.

The other point again which I think is fascinating is we're looking at this, but the tenants are still putting in multiples on top of the contribution that landlords are making in the premium buildings.

Okay. So then even though with the higher retention rates, it seems like maybe materials costs and other items are still going to keep that number fairly constant?

Well, remember, the higher retention rate only applies to, I think on average, I'm not sure we're going to have higher retention rates. Because on average, we're willing to let tenants go in what we're characterizing as premium space. Lou's comment was on more competitive space, we're going to do everything we can to retain the tenants. But when we think we can get higher rents, we're going to go out and try to get a new tenant versus renew the old tenant for a lower rent and the differential between the new rent in the marketplace versus what the old tenant's expiring is that a scale in many cases where the old tenant can't justify it. And so they'll maybe scale down to a lower-quality building or a lower, or a less quality space.

Okay. And then just last thing on deal pipeline. What is sort of the transaction sort of under review right now look like? Is it fairly large, small at the moment?

I'd probably characterize it as below where we were last year, but there still is activity. And again, I think the more challenging thing about some of the activity is that you know, not, we're not, they're not yet in the process where you're seeing a, last year you saw a lot of ongoing marketing process that you knew were going to end up with a deal manifesting itself. The projects that we're working on right now are ones that have been off market type, store type transactions, so that you don't necessarily follow the same pattern that you might have where you know this is coming to market and then two months later, you know if you want to own it and you feel comfortable, you can be the high bidder, you're going to own it. This is more of an ongoing process.

Okay. Okay. Thanks.

Thank you.

There are no further questions at this time.

All right. Operator, thank you. And thank you all for joining our call and I look forward to catching up with you in third quarter and speaking to you next quarter. Thank you.

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