波士頓物產 (BXP) 2015 Q4 法說會逐字稿

Good morning and welcome to the Boston Properties fourth-quarter earnings call. This call is being recorded. (Operator Instructions) At this time I would like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties.

Good morning and welcome to Boston Properties's fourth-quarter earnings conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the investor relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the investor relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Wednesday's press release and from time to time in the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statement.

Having said that, I'd like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions.

I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Arista; and good morning, everyone. Our focus today in addition to the quarter and market conditions will be a review of 2015 and our outlook for 2016.

On current results, we produced another solid quarter, with FFO per share $0.01 above consensus and $0.01 above our guidance after adjusting for the defeasance transaction. Based on recent leasing accomplishments as well as a significant lease termination we just completed for $45 million, we have also increased the midpoint of our full-year 2016 FFO per-share guidance by $0.26. We leased 1.4 million square feet in the fourth quarter and 5.2 million square feet for all of 2015, and our portfolio occupancy is now 91.4%.

So, moving to the operating environment: the US economy continues to grow, albeit at modest levels, with full-year 2016 GDP growth expected to be 2% to 2.5%. There was a modest slowdown in the fourth quarter of 2015, as GDP rose only 0.7%. The jobs picture remains healthy, with 292,000 jobs created in December; 2.7 million jobs created in all of 2015; 2.5% wage growth for last year; and 5% unemployment, albeit with lower workforce participation rates.

Economic growth continues to be uneven, with energy-related industrial sectors in recession. Our markets that are driven by technology and life sciences are continuing to exhibit tightening leasing conditions. Office markets nationally are also firming. The data indicates that absorption was 17 million square feet for the fourth quarter and 46 million square feet for all of 2015.

Vacancy ended the year at 13.8%, down 20 basis points for the fourth quarter and 50 basis points for the year. And asking rents rose 4.7%, with Boston and San Francisco experiencing the highest increases. Construction levels actually dropped in the fourth quarter to 2% of existing stock but are up 9% from a year ago.

Financial markets have become very volatile in 2016, driven largely by concerns that weaker economic growth outside the US and falling oil prices will have a negative impact on the US economy. Most economic data indicates a continued slowdown in the Chinese economy; the domestic equity market in China is down over 20% year to date, and fears of additional currency devaluation are pervasive.

China has funded an estimated $600 billion of currency reserves over the last six months, supporting the renminbi to its current trading levels. Local regulators appear to be taking additional steps to stem capital flows of China. Oil prices have also dropped nearly 50% from highs last year to approximately $33 a barrel. This has caused disruption in the industrial component of the US economy and widening credit spreads for high-yield names particularly related to the energy sector.

We are also monitoring with interest investment activity from oil-based sovereign wealth funds, as several Middle Eastern funds have reportedly been redeeming more liquid offshore investments in 2015. And lastly, despite the Federal Reserve raising short-term rates 25 basis points in December, the 10-year US Treasury has dropped below 1.9%, given all the global economic uncertainty mentioned.

So what does all this mean for real estate investment activity and valuation? Our instincts are that investment activity from some oil-based sovereign wealth funds should slow due to decreasing inflows and capital needs at home, and that flows from China will recede due to increasing capital controls. However, there continue to be numerous large-scale office deals completed in gateway markets at attractive pricing. Recent examples include AXA selling 787 Seventh Avenue to CalPERS and 1285 Sixth Avenue to RXR, and Blackstone selling four assets in Westwood to Douglas Emmett as well as 500 Boylston Street and 222 Berkeley in Boston to Oxford and JPMorgan.

All of these deals were large and completed with North American-led investors at cap rates in the mid-4% range or lower. Our read is capital values for high-quality assets are holding up -- notwithstanding, in some cases, fewer bidders and somewhat of a geographic rotation of investor appetite. Further, as a tailwind, long-term interest rates are low and dropping, while cap rate spreads to Treasuries are above long-term averages and rising. Investment yields and cash flow stability from high-quality real estate assets will continue to be an attractive investment alternative to fixed income.

Our capital strategy remains largely unchanged in that we are investing more in new developments versus acquisitions, which will be funded partially by additional dispositions. On acquisitions, we continue to actively review new investments but do not anticipate significant investments in stabilized buildings, given continued robust pricing. We are, however, seeing a pickup in value-add and development opportunity in our core markets.

Moving to dispositions, in the fourth quarter we completed the sale of Innovation Place in San Jose for $207 million, including a gain of $79 million; and a land parcel sale in Maryland for $13 million. Our total dispositions for 2015 were $584 million on an our-share basis, which led to a special dividend of $1.25 per share, which brings our total special dividends paid since 2005 to over $21 per share.

For 2016, we expect to continue to sell non-core assets and assets where we are able to achieve extraordinary pricing, though likely at levels below 2015. Our balance sheet is strong. We have already raised the cash to fund our significant capital needs, and we see upside in many of our core assets through rollups and redevelopment.

We recently sold 7 Kendall Center to MIT for $105 million, based on a pre-agreed option associated with MIT's tenancy in the building. We also placed under contract for sale our Reston Eastgate site to a corporate user who will retain us to build a corporate facility for their use, further enhancing the Reston area. Though difficult to estimate precisely at this time, we would expect $200 million to $250 million of total asset sales in 2016.

Moving to development, our activities remain robust. In the fourth quarter, we placed in service from our development pipeline 535 Mission Street and 690 Folsom Street in San Francisco, The Point in Waltham, and Annapolis Junction Eight in Annapolis, Maryland. In the aggregate, these projects costs $254 million; and with the exception of Annapolis Junction, which is currently not leased, we are delivered 98% occupied at an unleveraged cash yield of 7.8%, which is above our target.

Also in the fourth quarter, we added to our active development pipeline The Hub on Causeway at North Station, which is the podium phase of our North Station development in Boston, where we have signed anchor deals for 60% of the 200,000 square foot retail component and are negotiating 85,000 square feet of additional retail and office leases. North Station is very significant mixed-use development being built adjacent to one of Boston's busiest transit stations and the TD Garden. This project is a 50% partnership with Delaware North and will provide us with significant long-term profit opportunities.

At year-end our development pipeline consisted of 11 projects, representing 4.6 million square feet and $2.6 billion in project costs. Our budgeted NOI yield for these projects is in excess of 7%. The commercial component of the pipeline is 58% preleased. We have all the cash -- $1.5 billion -- required to complete the development of the portfolio, which should add materially to our Company's growth over the next four years.

Looking ahead in 2016 on developments, we have numerous entitled projects, and new starts will be highly dependent on pre-leasing activity. More specifically, we secured 940,000 square feet in additional entitlements from the City of Cambridge for Kendall Center and are in discussions with several tenants for pre-leasing a 360,000 square foot office building.

For Springfield Metro Center in Northern Virginia, we are pursuing a 600,000 square foot requirement from the TSA. Again, predicated on substantial pre-leasing, other potential projects for this year are 20 CityPoint in Waltham, Mass, and Block Five Office in Reston. All these projects aggregate 1.5 million square feet.

Lastly, we continue to devote time and resources to refurbishing our existing high-quality asset base. As Citibank vacates 399 Park Avenue in late 2017, we'll be completing upgrades to the facade, entrance, roof decks, and outdoor spaces.

A redevelopment of the office and retail space in the low rise at 601 Lexington Avenue is also planned. We are also updating lobbies and common space at 1330 Connecticut Avenue and Metropolitan Square in Washington DC to accommodate existing tenant renewals and attract new tenants.

So in summary, we are very enthusiastic about our prospects for success and ability to create shareholder value in 2016 and beyond. We have a very clear plan to improve and lease our existing assets as well as add new buildings through development of our portfolio -- all of which we expect to result in attractive FFO growth over the coming years.

We have selected non-core assets for sale to ensure continued portfolio refreshment. We have significant entitled and unentitled landholdings that we will continue to push through the design and permitting process and add selectively to our development pipeline in future years.

Our balance sheet is strong, with net debt to EBITDA below 6 times and with much of our upcoming debt maturities having now been either refinanced or hedged. This strong capital position will also allow us to pursue and act on investment opportunities that may present themselves in the coming quarters due to increasingly turbulent financial market conditions.

Now over to Doug for a further review of our markets.

Thanks, Owen. Good morning, everybody. So it seems like every day we seem to jump on this roller coaster of global volatility in the financial markets. But I do want to step back and just sort of take a little bit of a perspective here.

So about eight months ago, when we were in the NAREIT conference, I think almost every meeting we had was dominated by questions focused on signs of weakness in the tech markets, the lack of public IPOs, questionable valuations of unicorns, whether there was a looming shadow vacancy in our biotech markets due to potential slowing from venture capital sources -- and that all of this was sort of going to be precipitating a market correction.

I think, honestly, that these are the same questions that we were asked in November at NAREIT; and they are the same questions that are on everyone's mind today. They continue to be top of mind. So just take that perspective as I give my comments.

You are going to recall that the way we have been characterizing the Bay Area real estate market is really one of, as I would refer to it, as healthy, where the activity is really pretty similar to what it was in 2013, which was a really good year but clearly off the spike that we saw in 2014. And I think the pace of activity that we are getting today is pretty similar to the same activity that we have been seeing in the back half of 2015, and it is pretty constant.

And I just want to supply some facts to back that up. So in the Northern Peninsula and the Valley, in the last quarter or so Apple has expanded by another 1 million square feet. Google has leased over 500,000 square feet, and they have entered into additional building purchase agreements. Palo Alto Networks has expanded by 300,000 square feet. Facebook has taken on 200,000 square feet.

As Owen said, we were the beneficiary of Broadcom's desire to expand; and they purchased our 574,000 square feet at Innovation Center and have filed permits for the next phase of development, which is up to 537,000 square feet. And then on top of all that, there have been another 12 deals in the Valley for over 1.3 million square feet, with blocks of space over 50,000 square feet. And we, in January, signed 88,000 square feet of renewals and expansions in our single-story Mountain View asset -- that's R&D property -- over $48 triple net rent.

If you go to the city, leasing activity in the city finished off 2015 clearly off of the 2014-level high, when Salesforce and Twitter and Dropbox all combined for over 1.4 million square feet, just those three tenants. But, again, it was at the exact same level as we were in 2013.

Tech demand continues to average around 50% of the volume in the city, and there has been a pretty consistent volume of deals. Now, recently there has been continued attention to sublet space. Well -- the Dropbox sublet, which was planned, at China Basin -- it was all absorbed by Stripe and Lyft. There is some Twitter availability that was described in the midmarket area, and it is all under lease negotiation.

In fact, there is over 850,000 square feet of tech leasing that is expected to get done in the first quarter. And it is almost entirely expansion led by Airbnb, which is taking an additional 150,000 square feet from the former Dolby building.

The largest block of sublet space that was in our portfolio was a five-floor block in EC3 coming back from the Morgan Lewis/Bingham merger that occurred a few years ago. We have leased four of those five floors.

Now, there is some speculative construction in the city -- 181 Fremont and 350 Bush -- and the Exchange that are all under construction, and they're adding about 1.4 million square feet of space. And Park Tower at Transbay is supposedly going to be started with another 750,000 square feet. But, again, the overall vacancy rate in the city of San Francisco is under 6%; and people continue to talk about the Prop M and the issues there. But the point is that after the FAR deposit in October, the bank was at about 1.75 million square feet. But if the First and Mission project and 598 Brannan Street get approved, the bank will be empty -- no additional supply availability.

At Embarcadero Center, we completed another 220,000 square feet of office leasing during the quarter. Full floors totaled 162,000 square feet, and new tenants moving into Embarcadero made up 145,000 square feet of that.

During the third quarter, you may recall -- and I am going to refer to this a few times -- we described our quote/unquote revenue bridge to get to the end of 2017. And I think one of the sell-side analysts on our last call sort of asked, well, so, how much of that is in the bag? Well, at Embarcadero Center, the larger deals that we completed last quarter, about 95,000 square feet, are going to add about 2.4 million square feet to that 2017 revenue versus 2015.

The new floor deals that we did this quarter, 145,000 square feet, are going to add 4.4 million square feet. We have another four more floors close to being completed -- another 89,000 square feet. Those floors are going to add 5.1 million square feet for a total of $12 million of incremental growth from Embarcadero Center.

The mark-to-market on these transactions is between 40% and 70% on a gross basis. And none of those transactions are in our same-store statistics for the quarter. In fact, there is only about 28,000 square feet of CBD deals in the San Francisco region in that same-store data in our supplemental. Traditional FIRE demand continues to be very strong at Embarcadero Center and across the city.

At 535 Mission, we are now 99% leased. So this is the last time you're going to be hearing about that project for quite some time. We have completed 51,000 square feet of leases, average gross rents of about $80 a square foot. The building should be fully contributing by the third quarter of 2016, cash return 7.8%, 150 basis points greater than our pro forma.

I had hoped to announce that we had signed leases for an additional five floors at Salesforce Tower, 108,000 square feet, bringing us to 821,000 square feet of leasing of that 1.4 million square foot building, or 59%. Well, two of the leases are back -- or two of those floors -- but the remainder has yet to come in, and we expect to see it hopefully by this Friday. So we're going to have 108,000 square feet of leasing done.

We are adding venture capital and management consulting clients as industries being represented in the building. We still have active single- and multi-floor discussions going on with asset managers, and hedge funds, and more VCs, law firms, consulting firms, real estate brokerage firms, and other non-tech service firms that encompass another 300,000-plus square feet of space.

Activity continues to be really strong at Salesforce Tower. And most of these requirements are lease-expiration-driven occupancy -- tenants that are recognizing the value and excitement about the Salesforce Tower and wanting to be there. So, again, in summary, activity across the California portfolio, our Bay Area portfolio, continues to be very strong.

Let's jump over to Manhattan -- Midtown. Again, not much has changed on our activity and expectations for the Midtown market. Our tone has been pretty consistent for the last 24 months, somewhat subdued, when we made the strategic decision to get in front of our many pending lease expirations due to the large block future availability -- the supply in the market -- and our view that providing early release in the form of taking back some space in small increments would be the best interest of both us and our customers.

Well, during this quarter, we completed another 11 deals, 120,000 square feet. Eight of them had starting rents above $90 a square foot, and six were above $100 a square foot. Comparable to last quarter, where we did 12 deals, 90,000 were over -- square feet -- and 10 deals over $90 a square foot and seven deals over $100 a square foot.

Now it is clear that during periods of high stock and credit market volatility, many things do, in fact, distract the high-end users. And while some of the active tenants are probably elongating their decision-making process, they continue to look for space, and sublet space in Midtown is at an eight-year low.

In 2014, there were 570,000 square feet of leases done, with starting rents between $90 and $99 a square foot. In 2015, there was more than 1.2 million. For deals over $100 a square foot, there was over 1 million square feet and 2015. The reason I talk about this is because the bulk of our availability and rollover in our portfolio in the next few years occurs in spaces with -- that command rents in excess of $90 or $100 a square foot.

Now, transaction size continues to be small, with the preponderance of the activity under 20,000 square feet for nonrenewals; which is the reason we have -- again, strategically -- decided to cut up the remaining floors that we have at 250 West 55th Street. And we have leases out for all of our remaining pre-built suites. And we have signed half-floor deals on the two of the three available floors that we have. We have signed leases now for [242,000] square feet, with incremental gross revenues of $18 million that will be contributing in 2017 -- another component of our bridge.

We signed a termination agreement last night with a tenant that leased 85,000 square feet in a combination of one high-rise floor, the second floor, and a portion of the ground-level space at 250 West 55th Street. While working with the tenant on a transaction that would allow them to minimize their future obligations while recognizing both the cost and the time associated with finding replacement tenants, the parties agreed to a one-time payment and a transfer of the responsibility of retenanting the building to Boston Properties. That space was never built out, and we never provided TIs.

Switching over to 399, as Owen said, we have unveiled our plan for the upgrade, including the addition of outdoor terraces and our quote/unquote Oasis in the Sky, as we position the building to relet 640,000 square feet of 2017 expirations. Those are late 2017 expirations. We are in lease negotiations now on 200,000 square feet of that space, and we completed our first full-floor deal in the midrise, where we are pricing the space with starting rents around $115 a square foot.

There are a number of medium-sized financial institutions with 2018 and 2019 expirations that really value the more affordable low-rise large-block space -- we have those 100,000 square foot floors and 65,000 square foot floors -- but with connectivity to our slightly more expensive space in the midrise.

Going down to Washington DC, two-thirds of our activity this quarter in the Washington area was in Northern Virginia, where we completed 128,000 square feet of leases with the GSA, renewals at our VA 95 project, and also some GSA contract-dependent expansions at our Kingstowne project. Then we also did 10 small transactions in Reston Town Center.

In January, we completed a 60,000 square foot renewal at the Town Center, with starting rents of over $54 a square foot. And again, if you compare that to the Toll Road, where rents are on average $33 to $35 a square foot, the premium from Reston continues to show. Reston is 97% leased.

Our signature residential project is under construction, and we are in lease negotiations for 80% of the 25,000 square feet of retail that is associated with that project. And if our leasing team follows its typical pattern, given the lack of blocks of space and continued demand in Reston, we should have a lead tenant for the 275,000 square foot signature office development sometime in 2016.

In the CBD of DC, we completed our second office lease at 601 Mass Ave., and we have pretty good activity on the remaining 47,000 square feet. Our largest availability is going to be at Metropolitan Square, where we have a 120,000-square-foot tenant expiring at the end of the first quarter. We are in active discussions on more than 110,000 square feet of that upcoming availability.

Our view is that the overall market conditions in DC really have not changed much. On the margin, there is probably a little bit more GSA-related leasing that is anticipated for 2016, but it is probably going to have some economic limits that will push it a little bit further out of the CBD in the East End. The District continues to be very competitive.

The majority of our Boston activity during the quarter was in suburban Waltham and Lexington. The Waltham MetroWest market, a quote/unquote suburban market, continues to get stronger, driven by organic expansion. This quarter we did 16 leases in our suburban portfolio for 413,000 square feet. And we have another 200,000 under active negotiation. Rents have increased 25% over the last 18 months.

Delivery of the Waltham developments is on target: August for 10 CityPoint, October for 1265 Main. Both projects come into service 100% leased. In January, the City of Boston learned that General Electric had chosen to move its corporate headquarters to the city. It is expected to bring about 800 jobs, but that is really not what the issue is. What it really speaks to is the overall economic ecosystem of the area. This region continues to be a magnet for both the life science industry, established technology companies, as well as startup tech and maker organizations. This has led to continual improvement in business growth in the greater Boston area.

The East Cambridge office and lab market is probably the largest beneficiary of growth and has the best economics of any market that we are in. With 6.5 million square feet of office space and just under 8 million square feet of lab space, direct vacancy is under 4%. Office rents continue to achieve new peaks, with the most recent transactions being completed on the office space, at over $65 triple net with annual increases. Tenant improvement allowances have been reduced and are now below $60 a square foot.

As Owen mentioned, we finished out the year with an up-zoning of our Kendall Square development that is going to allow for the eventual development of 540,000 square feet of commercial office and 400,000 of residential, including 80,000 of for-sale. We're having substantive conversations right now with a number of existing tenants that are searching for growth and looking for that office space.

The other news for our Cambridge portfolio is the recent decision of Microsoft to relocate a group that it has at 255 Main Street to the suburbs over the next 24 months. This is likely going to mean that we will have an opportunity to lease 125,000 square feet of space that was not going to be expiring until 2021. With the Volpe site RFP expected to be issued in May and the zoning application still in process, we would expect more Cambridge tenants with near-term spacing needs to be likely exploring suburban Waltham and Lexington and the Boston CBD, because there's simply no place to go in the city of Cambridge right now.

The Boston CBD continues to be a good market, as supply has been absorbed over the last few years; though there is some speculative development in the seaport of some modest-sized buildings. Again, GE has not landed on where its new home is going to be, and it could take existing inventory or go to a new development.

At 120 St. James where we have 170,000 square feet of availability, there are now a number of tenants reviewing their options at the building. And they range from 32,000 square feet, a single floor, up to the entire 170,000 square foot block. At 200 Clarendon, we are in lease negotiations with tenants that would fill another floor in the high rise and leave us with 90,000 square feet on floors 45, 46, and 47. High-end demand in Boston has typically been for users under 30,000 square feet, and we expect to lease the space in smaller increments.

We have completed our multitenant transaction at 100 Federal Street, where Putnam has signed a lease for 250,000 square feet; Wellington has executed a long-term renewal and relocation on the 156,000 square feet it is currently using; and BofA has been able to realize some space and rent savings by reducing its footprint by 137,000 square feet. All of the available space at 100 Federal Street has now been spoken for.

Again, as you think about our bridge to 2017, these transactions at 100 Federal Street contribute approximately $6 million of incremental revenue. So last fall we outlined $80 million of incremental revenue from our existing portfolio that we hope to have in place by the end of 2017. Given all the transactions I have described, we now have commitments for approximately $36 million of that $80 million.

And with that, I will turn the call over to Mike.

Great, and thanks, Doug. Good morning. I am going to start out with a few comments on what we are seeing in the debt markets. As you know, we defeased our $640 million mortgage loan on 200 Clarendon Street in December. That resulted in a $0.13 per-share charge to our fourth-quarter earnings.

To replenish our cash we closed on $1 billion 10-year bond deal at an all-in yield of 3.77%. The excess funds will be used to repay our $211 million mortgage on Fountain Square that is open for prepayment at par in April as well as fund our future development costs. We have reduced the cash interest rate by 200 basis points with this bond deal versus the expiring loans, and the annual cash interest savings will be $11.5 million, even though we borrowed an additional $150 million of proceeds.

On a GAAP basis, the interest rate reduction is 75 basis points, as both of the refinanced loans were above market at acquisition. So they have a non-cash fair value interest component that is amortized into and reduces GAAP interest expense.

Clearly, the market volatility that Owen described is having an impact on the credit markets. It is driving credit spreads wider, particularly as you move out the risk spectrum. The bond market continues to operate efficiently, though, and high-quality issuers like ourselves have access, albeit at spreads that are 20 to 30 basis points wider than the 155 basis point spread that we issued in early January -- though there are frequently days when the global volatility does necessitate patience.

With the rally in the 10-year to below 2%, all-in borrowing costs really have not moved much for us. The mortgage markets have been a little more fickle, with CMBS spreads widening more significantly, especially in the conduit world and for single-asset deals that are in secondary markets or not fully stabilized.

For high-quality, stabilized properties in strong locations, the markets remain active, with both let companies and CMBS issuers actively putting out mortgage money, with 50% to 60% leverage loans pricing in the 4% area for 10 years. The banks are also increasingly active in financing 5- to 7-year term loans on a floating-rate basis at competitive spreads. So although we see some volatility, good-quality assets like ours continue to be able to secure attractively-priced long-term financing.

With the most active buyers for our asset class looking to employ lower leverage, the financing markets remain favorable. I also want to note that over the past three years, our asset sales strategy and the delivery of development properties at superior yields has translated into a reduction in our leverage position. As our new deliveries stabilize, we expect these ratios will continue to improve and create additional investment capacity on our balance sheet.

I just want to quickly touch on our earnings for the quarter. We reported funds from operation of $1.28 per share. After adjusting for the defeasance charge, we came in $0.01 ahead of the midpoint of our guidance range, which was related to better performance in the portfolio. Operating expenses came in better than budgeted, while our revenues were pretty tightly aligned with our expectation.

For 2016 we are increasing our NOI projections from our in-service portfolio. As Doug detailed, we continue to see good leasing activity, particularly in San Francisco and in Boston.

In Boston we closed the Putnam lease; and although it will not impact earnings until 2017, the transaction included a relocation and long-term extension with Wellington, with future rent bumps that will be straight-lined into 2016. We're also seeing increased activity on our vacancy both in the high-rise space at 200 Clarendon Street and at the Prudential Tower, where we could see additional income commence later this year.

At Embarcadero Center in San Francisco, we continue to be successful in completing a number of lease renewals with significant rental rate increases and have activity on our availability. As these renewals are signed, our GAAP income reflects the straight-line impact of the rental rate increases, though the cash impact will not occur until the future renewal date, which is in most cases later in 2016 or in 2017.

As Doug mentioned, we terminated an 85,000 square foot lease at 250 West 55th Street and received a significant termination payment of $45 million. Also at 601 Lexington Avenue, we are finalizing a termination with a tenant in the high-rise, which will enable Citibank to relocate out of the low-rise office building so it can be vacated for repositioning.

Overall, we expect our 2016 termination income to be approximately $47.5 million higher than our guidance last quarter. These lease terminations will result in lower future rental income until such time as we find replacement tenants. The lost income is projected to be approximately $11 million in 2016.

Given its lumpy nature, our practice is to exclude termination income from our same-property NOI guidance -- but it does have an impact. The leasing success that we are executing exceeded our expectations and would have improved our GAAP same-store NOI growth projection by about 50 basis points. However, the lost rental income related to our decision to enter into lease terminations has more than offset this growth. The net impact on our GAAP same-store property NOI projection is a decrease of approximately 25 basis points from our guidance last quarter.

The loss termination income from terminations also impacts our cash same-property NOI, though we still project growth of 1% to 3% over 2015.

As a reminder, our same-property growth is weighed down by rollover at 767 Fifth Avenue and at 601 Lexington Avenue. Both of these are consolidated joint venture properties. The growth in our share of same-property NOI is approximately 100 basis points higher for both GAAP and cash.

We project our non-cash straight-line rental income to be $35 million to $50 million in 2016, which is higher than our projection last quarter. The completion of our bond deal takes care of $1 billion of our near-term debt maturities. We now have $2.9 billion of consolidated debt expiring over the next two years, of which $2.3 billion represents our share. These loans carry a cash interest rate of 5.9% and a GAAP interest rate of 4.4%. We have hedged the 10-year swap rate on $1 billion of the expected refinancing.

The only material financing activity in our 2016 projections is the refinancing of our $350 million mortgage loan on Embarcadero Center 4 in the fourth quarter. This loan has a cash interest rate of 6.1% and a GAAP interest rate of 7%. So our interest expense run rate should be lower at the end of the year.

Overall, we project our 2016 full-year interest expense to be $400 million to $415 million, which is net of capitalized interest of $40 million to $50 million. The impact of these changes results in our increasing our guidance range for 2016 funds from operation to $5.78 to $5.93 per share. This is an increase of $0.26 per share at the midpoint, which consists of $0.21 per share from the net impact of tenant terminations and $0.05 per share from better projected performance in our same-property portfolio.

That completes our formal remarks. Operator, if you could turn the call over to questions, that will be great. Thanks.

(Operator Instructions) Jamie Feldman, Bank of America.

Doug, thanks for the color on where you stand getting to the $80 million of same-store NOI recovery. Can you just talk about the largest chunks left to go and your thoughts on timing of those leases?

This is called no good deed goes unpunished, right? (laughter)

Exactly.

So I think, look, there -- the three largest components that are likely to be talked about over the next few quarters are at the 200 Clarendon Street and 120 St. James, which is the building in Boston; the additional lease-up at the Prudential Center, which is about 90,000 square feet of space; and the changes that we're going to be going through at the 757/General Motors Building, which are both the retail space at the base and the two floors that we're getting back in July. That is where the bulk of that stat is coming from.

And I think the prognosis is positive, and we are working forward on transactions on all this stuff. But, I mean, it may be a quarter; it may be three quarters before we announced those transactions are completed.

Okay, thank you. And you commented on some of the higher-end tenants, particularly in New York City, maybe taking longer to make decisions given stock market volatility. Can you just provide more color on exactly what you are seeing and whether things are getting delayed?

So as I said, I think the overall tenor of the market -- and I'm going to let John Powers comment -- has been that things have just taken a little bit longer, but the activity remains the same. So as an example, when I look at our portfolio of tenants looking at the space of the General Motors Building on the 34th and 35th floors, we have got three or four tenants that are actively interested in pieces of those floors.

I think that there are days when there is more focus on looking at their screens than they are looking at office space. So I think it just elongates the decision-making process.

And, John, do you want to make any other additional comment?

I guess what I would add is that we finished last year with a very good leasing year, a very good leasing velocity year. I am talking about Manhattan overall. It was down 6% from 2014. But then again, it was 6% higher than the last five years.

During the year we had issues in August and September, as Owen and Doug said. And we had spread widening, as Mike talked about. And that never moved into the leasing market. It might have on a few deals, slowing things down a little. So right now we have the same kind of activity in the financial markets, and people are looking at it. But a lot of large tenants are planning for a significant period of time, and are not -- are continuing with what they do.

Some of the smaller tenants in the smaller deals, I think, look more closely at the screens than the large organizations do.

Okay, great. Thank you.

Emmanuel Korchman, Citi.

Maybe Mike or Doug: if we think about the $80 million of NOI uplift that we all keep talking about, how much of that is going to actually impact 2017 numbers? And how much of that is you thinking about that $80 million as sort of a run rate going into 2018?

I wish I could give you an honest answer, because the timing is what is really is going to drive that. I can tell you that much of it will start to bleed in in latter parts of 2016, and much of it will bleed in over 2017. So it there is no question that by the end of 2017 we'll have all of it, in our estimations right now.

I can't tell you if it is 50% in the first quarter of 2017 or 80% in the first quarter of 2017; a lot of it is just going to be dependent upon the physical characteristic of the space and when we can start recognizing revenue.

But it is fair to assume that some majority portion will be a 2017 impact, and then there will be a bleed-over -- or and then there will be a bleed-over that impacts 2018 specifically?

Yes, I think the fact is that a lot of it is going to be coming in in a very bulky manner in 2017 -- not all on January 1 of 2017, but over each quarter. But by the fourth quarter, it will all be there. But, again, a significant piece of it is going to be in before then.

Great. And then just thinking about San Francisco for a second, how much of the showings or the demand at Salesforce is overlapping with either current or prospective tenants at Embarcadero?

You know, that was a question -- I think a question that we had last quarter as well. And it is an interesting question. So existing incumbent tenants at Embarcadero Center -- we have one tenant that we are talking to at Embarcadero Center that is likely to leave and move to Salesforce. There are some tenants that are looking at both Embarcadero Center and Salesforce that are not tenants on our portfolio right now.

Great. Thank you very much.

Vincent Chao, Deutsche Bank.

I just want to go back to your comments earlier on the investment markets, feeling like there is going to be a little bit of a pullback from the oil-based economies in China, which makes some sense. But you also mentioned other geographies picking up. And I guess, on net, if you think those other geographies will be able to offset the lost inflows from those other two segments? And curious if that is more based on your expectations, or have you started to see that unfolding in the markets already?

I think that we have seen it unfolding in the markets over the last couple of quarters. I cited three $1 billion-plus -- four, actually, $1 billion-dollar plus deals in high-quality office space, high-quality office deals in gateway markets that went to North American-led investment groups, so either US pension funds, other US investors, or Canadian investors.

So I think that there is a bit of a geographic rotation, but thus far, certainly US investors; Canadian investors; we're increasingly seeing Japanese investors in the marketplace; investors from Asia outside of China. There are other groups that are in the marketplace and so far have led to a lack of reduction in pricing, at least to date.

Okay. And then just on the flip side of that, you also mentioned seeing more opportunities in the value-add side of things. And I was just curious if you could provide some more color on exactly what is driving that? Are there more projects coming to market? Are the traditional buyers pulling back? A combination of those? And have cap rates moved significantly in that space?

So on the value add, I think we have mentioned for many quarters prior to this and also in this quarter -- we are focusing on new investments where we can use our real estate talent. So that would be either new development or redevelopment of existing assets. And I do think right now we have a fairly robust pipeline of things that we are looking at in both of those categories and most of our core markets. These are areas where many of the sovereign wealth funds and offshore investors -- you know, it is not 100% the case, but they're less active. And, you know, that is helpful to us.

Okay, thank you.

Jed Reagan, Green Street Advisors.

There were some concerns put out there last week that New York City job and rent growth is likely to soften this year, and then non-core assets in the city might be repriced lower. Are you expecting those kind of changes yourselves? And do you think this could affect some other markets in your portfolio?

So before I let John respond more specifically about his views, that -- the Company's perspective has been that we have been seeing modest amounts of rental rate growth over the last few years, because as we have characterized the market, it is a healthy market, not an accelerating market.

And so I think our perspective has been very constant over the last three or four of these calls about the issues associated with the growth of rental rates and economics in the city is largely due to the amount of supply that is in the market from either relocations to the new buildings on the far Westside or Downtown and the retrenchment that occurred in 2013 and 2014 -- those deals actually starting to get completed. So as an example, Time-Life moved, finally, down to World Financial Center. And they are building on -- Sixth Avenue is now vacant and available to lease, and they are doing a repositioning on it. Everyone knew that the building was going to be there, but it is now in the market.

So there are a number of those types of macro supply issues that we have been watching and following -- and, again, why we made our decisions, and had tempered our views on what would be going on in Manhattan in calendar year 2016 and 2017.

And John, I do not know if you want to add anything to that?

Well, let me just at my previous comment. I said last August and September, the financial markets had a drop-off, and there were concerns. And we have that now. It did not move to the leasing market last time. We do not know whether it will move to the leasing market this time. It has not yet; but obviously, if the financial markets continue to have problems and the economy has problems, then that will affect everyone.

But on the New York side, we do not see any change over the last few months in the leasing. I would say the only change that is really noteworthy -- and Doug has mentioned the supply for a number of times -- is the deal with the news did not get done at 2. and so that is a 2.8 million square foot building that is not getting built downtown.

So on the supply side we understand that that is way out, but we do look way out, let's say, over the next three or four years. So certainly that is -- on the supply side, we don't need another 2 million square foot building on Sixth Avenue to come on the market in terms of the supply.

So we are just are moving along in New York. No big change yet, but obviously we are concerned, like everyone is, with the financial markets and what's happening globally -- and if that is going to have a real impact on the leasing market in the coming months.

Okay, thanks for those comments. And then just as far as the kind of non-core value-add type of assets, are you expecting a repricing downward on those types of buildings in the city or elsewhere?

I do not think we necessarily anticipate that. It certainly could happen. I do think the market is stronger for core assets in gateway cities than it is as you go out the risk spectrum in real estate investment. But we are not necessarily expecting a repricing of those assets.

We're certainly not getting any re-trading on deals that we are working on in New York.

Okay, thank you. You mentioned the $200 million, $250 million of planned asset sales for 2016. Just curious if the recent downdraft in share prices make you want to sell more aggressively than you're currently planning potentially, or just how you're thinking about that?

No, our asset sales are driven by selling non-core assets, which we do every year. You know, Innovation Place was probably the most recent example of that. And then from time to time we have opportunistically sold assets where we achieved what we thought was extraordinary pricing.

This year, I mentioned an early prediction of asset sales in the $200 million to $250 million range. As I mentioned also, we have already done 7 Kendall Center, which is a little over $100 million.

So we're not changing our disposition plan for this year based on current market conditions. We are basing it on our desire to continue to sell non-core assets.

Okay. Thanks for the color, guys.

Alexander Goldfarb, Sandler O'Neill.

Just following up that, Owen, on the disposition side: last cycle you guys sold some rather large CBD office buildings, and this time it sounds like that is not in the cards. So just curious -- is that simply because they CBD office towers that you own now have better growth profiles than the ones you sold last time? Or is it a fact that as submarkets have been built up, you see less opportunity to get back into the submarkets where you want to be?

Alex, we have sold a lot of -- a very significant portfolio of assets this cycle. 2014 was the largest year of asset selling at Boston Properties. The total sales for the cycle, I think, are in excess of $3 billion.

Remember, the joint venture we did with Norges on four assets over two years and other significant assets that we sold. It is also a large reason why we have made the very significant special dividends that I described, and also the reason that our current gearing is below 6. So we feel like we have done very significant asset selling this cycle.

Well, I guess, Owen, from the perspective that last time you sold outright stakes; this time it has been a bit more on the JV. So I didn't know if that had an impact in sort of how you see the reinvestment opportunity? That's where the question was going.

No, I think that we did sell 100% of several assets in the portfolio. I agree; they weren't as large as the joint venture transactions that we did. I think the JVs were a function of the fact that marketplace was very aggressive for the joint venture structure, which was attractive to us. And second, the assets that we have in joint venture, we do believe in; and we, in many cases, are improving and growing the cash flows. So it was a combination of both.

Okay. And then on California, Doug, appreciate the comments on the tech leasing environment out there. It sounds like things are pretty good, but just from the perspective of -- from our standpoint, as we read news headlines, whether it was -- well, you spoke about Twitter, but Yahoo having issues, or various tech tenants having issues.

On the demand side, on the user side, is it basically as though the market -- this is just normal tech volatility, and this is always part of the cycle? Or what would be the red flags that would indicate that some of these tech issues/headlines are more so than just normal, expected volatility in business models?

You are asking what is the canary in the coal mine, right? And I think that that's a -- it's a really difficult question to answer with a specific fact that we'll look at and say, okay, now the market has quote/unquote turned. I think that in the last four or five years, the city of San Francisco has reshaped itself so dramatically in terms of the tenant demand that the diversity of companies and the strength of those companies is so different that I think it will be much more difficult to sort of look at any one particular industry or any one particular company and say, okay, things have really changed.

I mean, clearly, a overall GDP reduction and a series of layoffs from major technology companies would be the thing that I think would be -- make it a clear-cut type of a demarcation. But again, we just don't see that. We see these large tech companies that have got pretty strong balance sheets and pretty global reaches now being able to weather the storm in a pretty significant manner, and with business strategies that have a very long-term focus associated with them.

So there is no question that there are going to be failures in certain tech industries. All of the mobile payment companies are not going to survive. There are, in all likelihood, a couple of unicorns that are not going to make it, just from a valuation and from a capital perspective.

But we have spent a tremendous amount of time looking at the demand from the sort of start-up community versus the quote/unquote traditional now and more fundamentally sound technology companies; and on a relative basis, the city of San Francisco is in a really good place.

So, Bob, I don't know if you have any other comments you want to make?

No, I think you covered it.

Okay. Thank you, Doug.

Ross Nussbaum, UBS.

Can you touch on, in each of your four major markets, do you think market rents actually go up this year? And can vacancies sort of hold where they are? Or do you see any risk of market rents flattening, going down, vacancy going up? Maybe put some context around that. It sounds like you're pretty bullish around your opening comments, but I am just curious how that translates into what you really see at the market rent/vacancy level?

Yes, I guess -- so I would characterize the way we feel as we are cautiously optimistic that rents will marginally improve across our markets, meaning that in markets like San Francisco, we believe we will continue to see modest increases in rents.

I don't think we're going to see spikes in the suburban Boston and the CBD of Boston. We're going to see good growth in rents, not spikes.

In Midtown Manhattan we think we're going to see pretty flat marginal growth in rents -- a couple of percent, depending upon the quality of the space and the location of the space. In a market like Reston, I think we can push rents 2% or 3%, maybe up to 5%, depending upon the space. In the city of Washington DC, it's going to be a pretty flat year. So we think it's a good market, not a spiking market.

Okay, helpful. And then specifically, if I look at 250 West 55th, and I look at the lease termination, can you help us understand -- if there was almost 20 years left on the lease, why didn't you say to the tenant -- and I think we all know who it is -- but why didn't you say to the tenant, look, you signed a contract. Pay us the rent and go sublease it. Why wasn't that an option?

I think -- well, I'm going to give you the quick and dirty answer, and John can choose to add some color if he would like. I think that is the approach that we took; and I think we got to a point where we felt that the economics of the payments that the tenant was making us more than justified the risk that we would be taking re-letting the space at a valuation that would provide us with a significant enhancement on a total NPV basis.

And our math is you got about five years', give or take, worth of rent? Is that about sort of the -- so if you lease it in the next five years, you come out ahead. Is that about right?

So I am not going to speak specifically to what the tenant is paying us, because I just don't think that is appropriate. But the way we looked at it was: we had not yet given the tenant any money to build out their space. So that's sort of house money. And we believe that we will be able to relet the space in short order at market transactions, and that we will come out significantly ahead versus what -- the payment that the tenant made us.

Appreciate it. Thanks, guys.

Steve Sakwa, Evercore ISI.

Doug, I guess on the 250, I just want to kind of circle back. So on before this termination, the building was kind of what percent leased or committed? And just what kind of discussions maybe have you had behind the scenes with existing tenants about possible expansion needs in the building?

I think prior to this, we were 92% leased; and we have leases outstanding for another floor, so another 3% or 4%. So we were basically 94%, 95%. I would expect that the space that we are getting back -- and remember, I said there is some space on the ground floor that is retail, and then there is space on the second floor, and then there is one high-rise tower floor.

That -- we will in all likelihood lease the high-rise tower floor to tenants outside the buildings, similar to the way we have been leasing up the 33rd, 34th, 35th floors. So they are going to be 5,000 square feet to 12,000 square feet to maybe a full floor. And I don't believe that anybody in the building will take the second floor, and the retail will come from retailers who are obviously looking to place their installations on Eighth Avenue.

Okay, thanks. I guess going to Salesforce Tower, I mean, it sounds like you are making a little bit of progress here and will have some leasing done. And it sounds like you have got other things the pipeline. Just help us kind of map out over the next couple of quarters kind of what goals you have, kind of where you want to be, maybe, by the middle of the year, end of the year as you kind of turn the corner into 2017? What does the leasing progression look like as we now get into the strike zone of delivery?

Yes. So, again, just in the context, the building is going to be available for tenants other than Salesforce in the latter half of 2017 and into early 2018. So I would expect that -- we now have done another five floors, knock on wood, that we'll get the last signature page -- I mean, these leases are literally out for signature -- in the next couple of days.

And so our expectation is there is another 200,000 to 300,000 square feet of leasing that we'd hope to get done during calendar year 2016, obviously, for rent commencement in late 2017 or early 2018. I think that would be our -- that is our sort of base-case goal.

And, Bob, you can comment. And you will probably tell me you are going to have the whole thing leased before the end of the year. But I'd moderate that perspective.

I would just add that just this past week, we had an inquiry for 200,000 to 500,000 feet from a very-well known tenant in the marketplace. And this week we also had 30 senior real estate heads from Wells Fargo, Google, Intel all come for a presentation on the building, which was better attended than we expected.

So, clearly, people are looking at this building. And I remain very optimistic that we are going to lease that quickly.

Okay. And I guess last question, maybe for Doug and/or Owen: as you just think about some of the development projects that you had talked about or future developments -- I realize you guys generally have a relatively high hurdle for pre-leasing, but what are the discussions like on some of those? And if you had to handicap how much you think you started this year, maybe without naming specific projects, what do you think that looks like?

Well, Steve, as you said, we do have a high bar for new development. We have -- we have talked about our target yields, and we also have a -- we also like to see significant pre-leasing.

You know, I went through some of the projects in my remarks. The most significant ones are the TSA requirement in Springfield, which I don't think we're prepared, necessarily, to handicap. We're certainly pursuing it.

Ray ought to comment on Reston and what the prospects look like for the Signature site that we are working on in Reston in right now. Bryan, I do not know if you want to spend a minute on CityPoint, and talk about what the prospects are for that?

So, Ray, can I turn it over to you?

Sure, Owen, thanks. As Reston sits there today, effectively 100% leased no new supply coming online, either from us or from the competition, we feel exceedingly strong about -- you know, this may come as a shocker, but we are pushing to go spec. We think that the floor sizes, the building's size, and the internal demand we have within the market could clearly justify it. But we are in discussions with about three or four major existing tenants of ours who -- expect interest in anywhere between 80,000 and 150,000 square feet.

Bryan, you want to spend a minute on CityPoint -- 20 CityPoint?

Yes. Probably the quietest story about the strength of the Boston market is the Waltham market in general. If you look at it, our competitive set is like 5% in terms of vacancy, and it is probably 2 to 3 points down from the previous year. So we have got a good supply-side look at the marketplace.

And then on the demand side -- Doug mentioned it earlier: we have got good life science activity, many companies looking from migration out of Cambridge into this immediate suburb. And then, also, in the, call it, cyber or cloud tech segment of the marketplace, good growth. And Doug mentioned the strength of the larger companies and the concern about it.

What we are seeing, again, is in a quiet way, these midsized companies -- 50,000 feet growing to 70,000, 100,000 square feet, with strong financial statements and strong products. So we're really encouraged about what is taking place.

And I would say to the last note, Owen, is just that there is a strong appeal for product that has the amenities that have been lacking in the marketplace -- those being the restaurants. And that is what has been so attractive to clients about CityPoint.

And then Bryan, lastly, the last one we should mention is the Kendall Center -- the new office project at Kendall Center.

Yes, and in a lot of ways, Owen, it's, call it, new to market, because we just got the approvals on it. So it is very recent in terms of its news and the opportunity. But again, just to reiterate what you and Doug had mentioned, the strength and the number of people we are talking to is significant. In this market Kendall remains very (technical difficulty).

So Steve, to summarize -- so the projects, I think, to keep an eye on are Kendall Center, Springfield Metro, 20 CityPoint, and The Signature site in Reston. We are all working hard on getting pre-let so we can start these projects.

Okay, thanks a lot.

Brad Burke, Goldman Sachs.

Just the follow-up to the last question, taking everything that you just said and summarizing it: should we think about the negative macro headlines that we have seen over the past few months of having had any impact on how you are thinking about the pace or the magnitude of total new development starts over the course of 2016?

I think we are generally conservative in our approach to new development. You know, I have described -- we have talked about our yield targets being 7%-plus for office. We have our pre-letting requirement, which we also think helps mitigate risk in development.

I would also point out that our development pipeline is not static. We just announced a delivery of several projects off our pipeline; that is going to continue. So even if we add a few projects this year, it is likely our development pipeline might actually go down during the year.

So, yes, we are paying attention. The macro headlines do matter. But at the same time, if we have a project that we think pencils to an attractive yield to shareholders, and we have risk mitigation through pre-leasing, we're going to launch it.

Okay. And then just an update on how you are thinking about the appropriate amount of liquidity and appropriate amount of leverage in the current environment, and whether that has shifted it all over the past few months.

Brad, I think that we have acted to bolster our liquidity additionally with the bond deal we just did. We have looked at our future debt maturities, and we did the defeasance. So we're kind of taking some of those maturities off the table now.

We have got all the capital raised to fund out our development pipeline. So we have very, very liquid balance sheet and are in strong position.

And from a leverage perspective on a net-debt-to-EBITDA basis, we are somewhere in the high 5s. So that is down pretty significantly over the last four or five years. We expect that to continue, as I mentioned in my comments, as our development pipeline will be coming online.

And we've already raised the money to do that. And those developments are expected to generate strong yields. So I think that our capacity to do additional things is just going to grow. So I think we're very, very well positioned, from both a liquidity perspective and a leverage perspective right now.

Okay, thank you.

Blaine Heck, Wells Fargo.

Thanks, so back on the topic of 250 and West 55th, I think some of the space on the second floor is pretty unique. So how are you guys thinking about re-leasing that? Will it need to go to a specific type of user, or do you think you'll have demand that will be pretty broad-based?

John, do you want to take that?

Sure. It is very unique space, with the -- it is almost a side core at that lowest second level, with the floor plate being close to 50,000 feet. And the ceiling heights and large windows make it very unique space.

We have the flexibility to use the second floor in creative ways. We could clearly use it for -- access it through the lobby and use it for office space. But we could also access it from Eighth Avenue, from some of the retail space, and use it for a different type of use -- studios or other. So we'll be looking at all of that.

Okay. And that is helpful.

The tower floor is -- we have got a lot of velocity up there. And we already have an offer on one floor.

Okay, great. And then in the past you have talked about some good prospects for a permanent solution on the old FAO space. Is there any update on that?

There are. So I will give you the macro view. The macro view is we are in conversations with a number of tenants, and we are optimistic that our perceived view of the value and the critical nature of that space for someone's brand will meld together. And we're optimistic we're going to have a deal done sometime in 2015 for someone to use the space in 2017.

Okay, great. Thanks.

John Guinee, Stifel.

A few questions here. First, Ray Ritchey, General Dynamics -- Washington Business Journal article a couple of weeks ago, moving into -- you are doing a build-to-suit for them on Sunset Hills Road, I think it is, in Reston. There was also an article that Northrop Grumman is spending $300 million to buy versus lease space in the Baltimore-Washington area. Do you have any sense as -- with the defense contractors out there, whether there is a tendency to lease versus own and control their own space? And then -- and you have got to do this without talking your book: what do you think are the better submarkets in DC as the defense contractors, cyber security driven get back into the market and lease space?

Well, that's rather a long question. I will give my best to make it as brief as possible. First of all, I can't comment on the specifics of the tenant coming -- or the purchaser coming to Reston.

And there is a little bit of movement towards owning the space. As you know, the accounting change taking place in 2018 will have an impact on many corporations on how they book their occupancy costs. But I still think that the defense contractors want to have -- given the uncertainty of the long-term government contracts, they still want to stay relatively short in lease terms, so they're not held out with either long-term lease obligations or the lack of liquidity by owning real estate. So I think those are isolated examples, John, but I don't see a general trend.

Relative to the market for Cyber Command: obviously, we're optimistic that Fort Meade will continue to pump out both contracts and then resulting jobs. The Dulles corridor still looks very strong, with the presence of major Intel activities out there -- NRO and CIA. So we like our positions in both those markets.

I will say that Rosslyn-Ballston Corridor is relatively soft, and I think that is more about the fact that now Tysons, with the Silver Line, has opened up another market that those defense contractors can go to, with better access and lower occupancy costs. So that still faces challenges. But we're putting our money in the Dulles corridor and the Fort Meade market.

Okay, great. Then, Doug, this is a question on lease economics and value creation vs. just simply no value creation and being on a hamster wheel. What we have seen happen over the last four or five years has been an interesting situation, where you've seen rental rates go up, but you've also seen CapEx and re-leasing costs remain high, essentially financing corporate America.

Clearly, if you get a mark-to-market of zero cash, 5 GAAP, and $50 NTI -- that being the math there is value destruction. What you need in terms of rollups in order to justify the CapEx you are putting into these buildings to say to your shareholders, we've got value creation here?

Well, you're just making one sort of subtle argument that there is no real value to the cash flow from a building once the lease has been signed that is different than the amortization of the transaction costs into that building. And I guess I would argue that in many cases, the expectations associated with what these buildings will do in the future is an important component to how they are being valued.

And so while on a short-term basis, it may be true that in a particular building where a lease is rolling at a quote/unquote flat to mark-to-market as you are putting transaction costs in on a net effective basis, it is obviously slightly dilutive. If there is a perception -- and in many of these markets there is a perception, which is based upon reality -- that rental rates will grow over time, that there is significant value that is likely embedded in that cash flow from that particular lease on a forward basis. So that's how you have to think about it.

Now, there are, in fact, cases where we don't have a view that there is going to be rental rate growth of any significance. And as Owen suggested, those are buildings where we are sort of saying, you know, leasing these things up and selling these buildings might be the best course of valor here. And so we have done a number of those sort of modest prunings over the years, where in fact we have agreed with you that there really isn't a lot of value to be attributed to doing additional leasing in these assets.

Great, okay, wonderful. And then Mike LaBelle, I realize taxable income doesn't line up with EPS exactly, but your dividend run rate is about $0.65 a share or $2.60 a year. In 2014, your earnings per share was $3.72; and when you take your $2.60 standard dividend and your $1.25 special dividend, it came out to $3.85, which is pretty close to your earnings per share for 2014.

2015 earnings per share guidance is about $2.75 at the midpoint. What does that tell us about -- I am sorry -- I misspoke; I meant 2015 and now 2016. Your 2016 earnings per share guidance is about $2.75 at the midpoint. What does that tell us about future dividend policies?

That is a good question. I think that as our development comes online, and if we slow down our asset sales, as Owen had mentioned, that is going to grow our taxable income. And as our taxable income grows, we will want to keep up with our traditional dividend policy of dividending out 100% of our taxable income. So you would expect that our dividends would grow. Whether that occurs in 2016 or not, I cannot tell you right now. What I can say is at this point, we have not made any change to our dividend policy for this year.

Obviously, in prior years we have sold a tremendous amount of assets; and we have delivered -- I think it was $8 a share in special dividends in the last few years. And so we have lost income from those assets that we've sold. We've replaced it with development. And we've elected to keep our dividend, our regular dividend, in line, because we've been able to based upon our taxable income.

But we've got a sizable development pipeline that is going to be adding to our income in the next few years. So depending what happens on asset sales, I would expect our taxable income is going to go up.

Great, thank you very much.

John Kim, BMO Capital Markets.

Thank you. I was wondering if you could share any surprises or other takeaways from your bond offering last month? And perhaps if there was a widening disparity of investor appetite between A minus and lower credit, or any investor concerns on the office fundamentals.

Look, I think that are bond offering went very well. I would say it went better than we expected, given the volatility that we had -- we were seeing in the market. We wanted to try to do something, either in December or January. So we had been looking at the market for a while, and it has been pretty volatile throughout.

And the demand for our deal was over 4 times what we expected to raise. So we were able to tighten in during the process and get to a level that we thought was really good level.

And there have been other companies that are highly rated companies, including a company yesterday, not in the REIT space, that has been very, very successful. I think as you go down the risk spectrum into lower investment-grade and noninvestment grade, the widening in credit spreads in the last 30 days has been more significant than the 20 to 30 basis points that I mentioned for companies like ourselves.

So I just want to comment. So Mike has done a terrific job managing down our balance sheet and putting us in what I consider to be an enviable position relative to both our liquidity and our access to capital, and has done a really good job of working with the bond investors to educate them on the principle foundations of how our business runs.

And so we did our deal, and I think we have traded 5 to 7 basis points wide in a period where the market has traded 30 basis points wide. So I think the reason that we are successful as we were is because the Company is in really good stead with the bondholders. And it is a -- I think it is very satisfying, and it gives us a lot of comfort that, going forward into 2016 and 2017, when -- as Mike spoke earlier -- we do have additional maturities, that we're going to be in a pretty good place to access either the unsecured or the secured markets at whatever the market pricing is, but at the tightest levels possible.

Do the fixed-income investors have a similar amount of concerns on the tech slowdown and your fundamentals? Or are they less concerned about the future?

I think they think about it in a significant way. But ultimately then they look at both the covenant structure of REIT bonds, and they look at the overall leverage ratio of our Company and how we have performed in the past decade as being an unsecured issuer, and they get very comfortable with the way we've managed our book of business.

And then, Doug, on your answer to Ross's question earlier on market rental growth, can you clarify if that was for asking rents or effective rents that you are seeing?

I am talking about gross [based] rents.

So with vacancy tightening in the markets, do you see TIs decreasing?

I think the TIs have come down in some places, and I think the TIs have basically stabilized in others. So as an example, I still think in San Francisco, if you are doing a 10- or a 15-year lease with a tenant that is going to be rebuilding space, they are likely looking for $70-plus a square foot.

By the way, the $70 a square foot is probably getting them 60% of the way to what their costs are; and it might have been getting them (technical difficulty) five years ago, because just the cost of construction as well as changes to the energy code and other codes that are requiring them to do things that they would not have had to do, which is just simply increase the overall cost of occupancy.

So I think from the tenants' perspective, interestingly, they actually see a diminution in the transaction costs in many of these deals. We are sort of looking at it as a flat.

Got it. Okay, thank you.

Rich Anderson, Mizuho Securities.

Yes, I'll just ask one question, try to keep it short. Doug, you mentioned very early on in the comments about taking back incremental -- small increments of space in New York and trying to get in front of some of the supply pressures. Do you have a visibility into that pipeline? In other words, what amount of the space in New York do you think tenants have signaled interest to either shrink or exit their space at some point in the future?

I am going to let John answer that question. And interestingly, I think we have had a presentation that we have done for a number of groups, where we have gone out and shown people what is ultimately anticipated to be coming onto the market over the next few years. And, you know, it's -- I think all of that is sort of built into it. And John, why don't you sort of describe the results?

Well, right now I can say we don't have any discussions with any of our tenants about shrinking. That is probably succinct as I can put it.

We have done over the last couple of years, as you know, a number of law firm deals. Some of those law firms have taken the same amount of space because they are growing, but they are more efficient in the space that they have. And other of those law firms have dropped significantly, sometimes by 15% or 20%. But right now we don't see any tenants that are in the portfolio that we are talking to or, for that matter, tenants that are looking from outside that are shrinking.

What's the motivation to be taking this proactive step?

Well, different tenants have different motivations. We are talking to someone at 399 for a very large block of space that is in three or four locations, and they want to consolidate. That is an important motivation. We are talking to some tenants in the building that have bought other companies that want to expand and want to consolidate everyone into 399. So it is always a specific business issue for the tenant that you're dealing with or the prospect that you're dealing with.

But Rich, let me just be a little bit more clear. So our decision to redo Weil Gotshal, Kirkland & Ellis, Reed Smith, Kirkpatrick & Lockhart was a decision where we said, okay, there are a number of new buildings that are being built across the city. And there are a number of buildings that are going to be vacated across the city when the tenants that are in them are moving to buildings that are currently vacant.

And our tenants are a likely candidate for all of those future availabilities. And we think we have the ability to help them get into more efficient space -- take some space back in calendar year 2015, or 2016, or 2017 in a very modest way that can be both accretive to them in terms of being able to reduce their footprint prior to their expiration in 2019 or 2020, and give us an opportunity to lease space at rents that are better than what those current tenants are paying.

And so it was a recognition that there was a number of competitive availabilities that our tenants were going to be looking at over the next few years, and taking advantage of our attributes in terms of timing and ability to do things with them earlier that led us to go in those directions. And that space is available today. And so we feel really good about all those decisions.

Okay, good enough. Thank you.

Tom Catherwood, Cowen and Company.

A quick question on DC. Obviously the 9% leasing spreads this quarter were the highest since 2011. But Doug, building off your comments saying you expect rents to be flattish in 2016, do you think the driver of those kind of moderating- to no-growth rents is more slower demand, or is it an impact of kind of increased supply in the market?

Ray, do you want to take that?

Yes, let me take a shot. One of the things we look at is not only the new construction -- that is, new development taking place; what we are seeing in DC is a repositioning of older assets, moving them from B-minus to A-minus. And that level of supply is probably at an all-time high.

That is why we're so aggressive and out talking to our tenants. We just renewed Steptoe with 2017 expiration. We are talking to Aiken with a 2020 expiration. We're trying to get our larger existing tenants locked up, because they're the targets of those new buildings coming online. And unlike the other three markets that we're in, DC is very much a lease-expiration-driven market. We don't have Salesforce coming in and taking 700,000 square feet, as Bob enjoys in San Francisco.

So our strategy is to get out with our existing tenants, lock them up, and then aggressively go after other people's tenants to backfill our new development. So to summarize, it's much more about the increasing supply moderating any future growth in demand.

Got it, got it. I appreciate that. And then one quick one -- in Cambridge, obviously, the upzoning of Kendall Square is a big deal. Do you have an estimate of the per-square-foot value of the additional FAR that you guys received?

I would not want to haphazardly give you an answer. I will just say, as follows, that we have the ability in some places to build structure on top of parking areas. And in other times there may be a requirement to remove a particular existing asset and add density to it.

So the mathematics associated with what the value is are really difficult to sort of describe with a number. I will tell you that we believe that we will be able to achieve rents in excess of that, you know, mid-to-high 60s on a triple net basis in current market conditions. And over time, we think those rents are going to go up, because there is such a lack of supply in that area. So we believe we will be able to profitably figure out how to use that density.

Okay. Fair enough, thank you.

Craig Mailman, KeyBanc.

I will try to keep a quick. On the Salesforce, net-net the 300,000 square feet you guys are working on with 2017 expirations -- do you think that that would indicate an expansion of space versus what those guys have in place or a contraction?

I think in most cases these are financial services companies that are looking for a modest amount of incremental expansion as they move forward. None of them are looking to reduce their footprint.

Okay. And then the 200 to 500 that you guys are -- just got the inquiry on: is that someone that is new to the market in expansion space, or more of a forward expiration that they are looking to consolidate into your building with?

It is an existing tenant in the marketplace that continues to expand.

Okay. And then just last one: Owen, you touched on it earlier that you guys are looking at more value-add and development opportunities, just more on the development side -- how far out are you guys looking in terms of opportunities for this cycle or next cycle? And which markets, perhaps outside the Volpe site, would you guys be interested in adding additional sites for?

Yes. It is opportunity-driven. We are actively looking at new investment opportunities in all of our markets. We have on balance sheet today, actually, a very significant pipeline of both entitled and unentitled land that we're going to continue to push through the entitlement and permitting process.

New projects -- at this stage, it depends. They could be for future cycle. I suppose if a prospect exists for this cycle -- although probably less likely.

All right, great. Thanks, guys.

I just want to add a couple of things to that last question. So we have, interestingly, a shadow, shadow pipeline that we have talked about before. So as an example, in Reston, Virginia, we -- but when light rail comes, we are going to get an upzoning in density. And I will let -- Peter, you can describe how much of the -- where were going to be getting there on land that we own in our existing footprint.

In Boston, we are in the midst of beginning our Back Bay train station upzoning entitlements for up to 1.75 million square feet of space. So there projects like that that are more long-range. They are not 2017 starts. They're probably 2018 or 2019 or 2020 starts that are physically in the Company's -- on balance sheet right now. And we just need to perfect them.

And then we have buildings like Fourth and Harrison where, again, we're in the permitting process for up to 900,000 square feet. And likely it will probably be a little bit less than that. But when central SOMA eventually gets permitted, and we're in position to start a building, it's another market where we are looking for things. We have talked about Dock72, where we are -- we'll hopefully be under construction in the next few weeks with the first building, where we have the potential to do another 1 million square feet. So again, there is a really good embedded inventory of places the Company that we can add inventory over time.

So I think that completes all the questions. Hopefully, we have been able to demonstrate to you all the progress we have made on our plans. Thank you very much for your attention this morning.

This concludes today's Boston Properties conference call. Thank you again for attending and have a great day.