波士頓物產 (BXP) 2016 Q1 法說會逐字稿

Good morning and welcome to the Boston Properties first-quarter earnings call. This call is being recorded. (Operator Instructions)

At this time I'd like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager of Boston Properties. Please go ahead.

Good morning and welcome to Boston Properties' first-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 statements 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 Tuesday'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 statements.

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. Good morning, everyone. This morning I'll cover our quarterly results, the macro market conditions that we see, as well as our current capital strategy and investment activity.

On current results, we produced another strong quarter, with FFO per share $0.05 above consensus, primarily due to improved operating performance. We've also increase the midpoint of our full-year 2016 FFO per share guidance by $0.05.

We leased 1.5 million square feet in the first quarter, above historical averages. And our portfolio occupancy is now 91%, down 40 basis points from year-end due primarily to the Genentech vacancy of 186,000 square feet at 611 Gateway in South San Francisco.

We had solid rent roll-ups in our leasing activity, with rental rates on leases that commenced in the first quarter up to 16% on a gross basis and 26% on a net basis compared to the prior lease. The leasing results in San Francisco, New York, and Boston all exhibited strong growth over the quarter.

Now moving to market conditions, US economic growth continues to be positive, though we certainly see a hint of slowdown. Fourth-quarter GDP growth is now reported at 1.5%, which is down 2% from the third quarter last year, and estimates for this quarter are below 1%. However, most forecasters for this year are still predicting growth in excess of 2.5%, albeit after downward revisions.

The jobs picture remains fairly healthy, with 215,000 jobs created in March, and the unemployment rate is steady at 5%. Labor participation statistics are unchanged.

We also see office markets nationally continuing to improve. Net absorption was 5.9 million square feet in the first quarter. Vacancy rate remained essentially unchanged at 13.9%.

Asking rents rose 4.7% over the last year. Construction levels also rose 6% over the last year but remain at 2% of total stock, slightly above long-term averages for the US office market. We continue to see the strongest space demand in locations driven by technology, life sciences, and other innovative industries notwithstanding all the financial disruptions of the last nine months.

Moving to financial markets, they've improved materially from their lows in mid-February. The S&P 500 is up over 14%; credit spreads have narrowed; oil prices are up over 50%. Near-term interest rate increases also look less likely, with the US Federal Reserve highlighting concerns about sluggish growth, and other central banks around the world, most recently the European Central Bank, signaling an accommodative posture.

10-year US Treasury is hovering around 1.9%. It's traded below 2% since January. Credit spreads have narrowed, though less so for riskier credit.

Now moving to real estate, on private market real estate valuation, prices remain strong for prime assets in gateway markets. We've seen plenty of evidence of this over the first quarter and seen a number of transactions in our core markets that were offered and priced in 2016.

Examples of this include: in Boston, 101 Seaport. That's a new 440,000 square foot office building located in the Seaport district, 100% leased to PwC on a long-term basis. Sold for $1,029 a square foot and a 4% initial cap rate to a German fund.

In Washington DC, 733 10th Street: fully leased 170,000 square foot office building sold for about a 4.7% initial cap rate, $1,065 square foot. I believe only the third building to trade above $1,000 per square foot in the district. The buyer was a Middle Eastern fund manager.

In New York, there are two significant sales reported to be pending to non-US investors: a significant partial interest in 10 Hudson Yards, a new 1.8 million square foot office tower selling for a low 4%s initial cap rate and nearly $1,200 a square foot. And 550 Madison Avenue, an 850,000 square foot office building that was being vacated for residential conversion, is trading for approximately $1,800 a square foot.

Lastly, in San Francisco, 140 New Montgomery, a 300,000 square foot older but fully renovated Class A office building in the SOMA district, leased at current market rents, sold to a US investor for approximately a 4.8% cap rate and over $960 a foot, a record price per square foot for San Francisco.

As with the fixed income market, our perception is pricing for riskier assets, whether in noncore locations and/or requiring lease-up or renovation, has softened to a degree in 2016. Long-term interest rates are low and cap rate spreads to Treasuries are above long-term averages, both of which provide strong support to real estate valuations. As I've mentioned before, the relatively high investment yield and cash flow stability provided by high-quality real estate assets will continue to be an attractive investment alternative to fixed income.

Now moving to our capital strategy, it remains unchanged in that we're investing more in new developments and redevelopments than in stabilized acquisitions. And these investments will be funded partially by select asset dispositions and the balance with debt financing.

On acquisitions, we continue to actively review and are seeing an increase -- for the reasons I mentioned earlier -- in value-add and development opportunities in our core markets. This past quarter, we purchased a 218,000 square foot office building on Peterson Way in Santa Clara, California, for $78 million. The asset is in an infill location with increasing density; it's 100% leased to a single tenant through 2021.

During the remaining lease term we plan to entitle the property for approximately a 630,000 square foot office campus. So the way to think about pricing is we're paying $123 a square foot for unentitled land while receiving a 4.6% cash yield as we entitle and prelease a new upsized office complex. We're also working on several additional acquisitions of sites and value-add office buildings.

On dispositions, in the first quarter, as previously discussed, we completed the sale of Seven Kendall Center to MIT for $105 million. We continue to pursue select sales of noncore assets and maintain our estimate of 2016 asset sales of $200 million to $250 million.

Moving to development, we remain very active, primarily in the execution of our predevelopment pipeline. In terms of forecasting potential starts for the balance of 2016, it will remain highly dependent on securing preleasing for entitled sites.

The potential starts for 2016 include Springfield Metro Center, where we're pursuing a requirement with the TSA; Reston Block 5, located in the Reston Town Center; and 20 CityPoint, the mirror building to 10 CityPoint being developed in Waltham. These three projects aggregate 1.1 million square feet.

We've been very active this past quarter advancing our predevelopment pipeline for projects that would start beyond 2016. Several important updates are as follows.

As mentioned last quarter, in Cambridge at year-end 2015, 940,000 square feet of additional entitlements were made available for our Kendall Center development. We are in advanced discussions with multiple office users to fully prelease the 540,000 square foot office component of the entitlements. The balance of the project will be high-rise residential.

The project is complex, involving replacing two smaller existing buildings on the site, and will likely commence in 2017. Given we are not acquiring additional land, this project is another great example of the embedded development value in many of our existing assets.

You've probably read about our initial submission to the City of Boston for the development of additional sites at the Back Bay Station. We are already managing the concourse level of the Back Bay Station as part of our agreement with the Massachusetts Department of Transportation.

The project is in an early phase and could ultimately represent 1.3 million square feet of office, retail, and residential space located adjacent to a major Boston transit hub. The project is obviously subject to local approvals and public review and would not commence prior to late 2017.

You have also probably read that we have been designated by the MTA as developer for their site located at 343 Madison Avenue between 44th and 45th Streets in New York. The site is the western half of a full city block between Madison and Vanderbilt Avenues and offers direct access to Grand Central Station and the new Long Island Railroad Station at Grand Central Terminal.

We will acquire a 99-year ground lease and build up to a 900,000 square foot office tower, subject to a number of local approvals and a ULURP. The development of this property is likely several years out, but we've commenced our predevelopment work.

As discussed, we are also conducting a significant upgrade of portions of our portfolio. These redevelopment projects that we're executing include: 399 Park; the low-rise building of 601 Lex in New York; 1330 Connecticut Avenue; Metropolitan Square; and the Prudential Center retail.

At the end of the first quarter, our development pipeline consisted of 11 new projects and one redevelopment, representing 4.6 million square feet and $2.6 billion in projected costs. Our budgeted NOI for these projects remains in excess of 7%, and the commercial component of the pipeline is 61% preleased. We have all the cash -- $1.4 billion -- required to complete the development of the portfolio, which should add materially to our Company's growth over the next four years.

Moving for a moment to a comment on governance, we recently announced in our proxy that Mort Zuckerman will retire as Chairman of the Board and become Chairman Emeritus of Boston Properties. Ivan Seidenberg will also retire from our Board, and Joel Klein will become our lead independent Director. We were also very pleased to be able to recruit Karen Dykstra and Bruce Duncan as independent Directors of our Board.

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

We have selected noncore assets for sale, to ensure continued portfolio refreshment. We have significant entitled and unentitled land holdings 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 a net debt-to-EBITDA ratio below 6 times and with a substantial portion 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 coming quarters.

Now let me turn it over to Doug for a further review of our markets.

Thanks, Owen. Good morning, everybody. The tone of the market color that I'm going to give this morning is pretty consistent with our last few calls, albeit there are a few subtle changes; but I want to just level-set it to what I've said previously, and I'll do that real quickly.

What we've said before is that San Francisco has slowed from the pace it was going at in 2014 and 2015, but the Silicon Valley continues to be very active and actually has been expanding. New York is a good market, but it's been impacted by growing supply, and there's been some impact of the financial service market volatility on small tenant demand.

The Washington, DC, is a challenged market and there's not much evidence of improvement; though the Reston area continues to be pretty active and there's a little bit of growth there. Boston suburban and Cambridge are seeing increasing demand while the CBD is a healthy market, but it's really been more driven by lease expirations and intermittent technology migration.

So that level-sets what I said previously. Let me start now with the Silicon Valley and, given that Peterson Way was just purchased, give you some sense of the thesis around this site and our views of the Valley.

Having sold Innovation Place last quarter, our portfolio unfortunately is pretty small down there. It's really comprised of our 570,000 square feet of Mountain View single-story product, where we actually completed another 89,000 square feet of leases this quarter with average starting rents of $50 triple-net, which is more than double the expiring rents on that space.

Then we have our standalone office building down in Mountain View, which is only 141,000 square feet, and we have our land/redevelopment parcel on North First in San Jose. That's the totality of our portfolio down there.

The difficulty we've been having over the last four or five years is finding high-quality buildings or sites with an acceptable basis/return ratio. The Peterson Way site offers an opportunity for us to deliver product in 2023 at a cost basis of under $700 a square foot -- and that assumes cost escalation on the cost side of the equation in terms of our building materials, labor, etc. -- and an initial return in excess of 7% at rents that are less than 10% above market rents today.

So we have a market where there was 29 million square feet of gross leasing and user activity in 2015. The market size is about 240 million square feet, so it's a market we definitely want to be a part of; and there was 11 million square feet of absorption in 2015.

In the first quarter, there were another eight leases over 100,000 square feet each, including 275,000 square feet from Google and another 200,000 square feet from Apple. Those are clearly the two dominant users of space, and they've had a dramatic influence on the market.

But there are lots of other companies down there, like Facebook and NVIDIA and Broadcom and VMware and Palo Alto Networks, that are really leaders in their respective fields. These are growing companies, and what they're looking for is new, modern, efficient product to house their growth. So this is what we're going to hopefully build, and this is the demand that we're going to satisfy.

Jumping over to the city, as we discussed in our call in January, leasing velocity in the San Francisco CBD has moderated from the levels we saw in 2014 and early 2015. It's really been a continuation into the beginning of 2016.

I think the big difference between the market then -- i.e., in 2014 and 2015 -- and today is really the lack of large growth requirements. By that I mean big tenants over 300,000 square feet.

At the moment there is no 300,000 square foot or greater requirement that we are tracking in the market. In 2013, 2014, and 2015, you had unprecedented large growth from Google, and Dropbox and Salesforce.com and Uber and Stripe and Slack and LinkedIn; and they're just not there today.

However, there continues to be lots of active tech demand. In the first quarter, Airbnb and Twilio and Quantcast and Stripe all took down blocks over 100,000 square feet each. And just in April, Lyft and Fitbit and Uber combined leased over 500,000 square feet; and much of that actually was from the sublet market.

So technology is still a vibrant part of the market. It's still expanding. It's just not quite in the same manner that it was in 2014 and 2015. Interestingly, technology users now make up 31% of all of the space leased in the City of San Francisco.

The second change in the CBD market in San Francisco has been the velocity from startups. If you look at the venture investing statistics, the seed and early-stage investing is down about 22% quarter-to-quarter from prior year; and first-time investing is down 31%.

If you look at the City's sublet statistics, the overall level is very low, at about 1.4 million square feet. But there are significant amounts of full-floor availabilities between 12,000 and 15,000 square feet across the South Financial and the SOMA areas. This is the product that is most attractive to the startup community.

Keep in mind that most sublet space has limited term, so it's not competing with the lease expiration-driven requirements from traditional tenants, which is where we are working at Embarcadero Center.

At EC, we completed another 128,000 square feet of leasing during the quarter. Full-floor tenants totaled 90,000 square feet of that 128,000; and new tenants coming into Embarcadero Center totaled 85,000 square feet of that 128,000. The mark-to-market on these larger transactions is between about 40% and 70% on a gross basis, very consistent with what we've been seeing for the last couple quarters and is obviously a dramatic markup in our same-store statistics this quarter.

The pipeline of leases that we have going in negotiation today at EC continues to be robust: 150,000 square feet of additional leases in negotiation. 66,000 square feet of that was either new tenants or expansions.

We also have active discussions with new tenants for an additional four vacant floors totaling 100,000 square feet. So it's very, very busy at Embarcadero Center. I would say, however, that relative to the end of 2015 -- when activity was described as, as strong as it has ever been history of our ownership -- the pace of new tours has moderated a little bit.

We've signed additional leases for floors at Salesforce Tower, 108,000 square feet, which is in our statistics today. So our occupancy is 59%. The next wave of lease proposals are progressing and include some single-floor users as well as large tenants of between two and four floors. All of the discussions involve pending late 2017 and 2018 lease expirations.

The steel and the core are rising into the San Francisco skyline, and we hope to have our first tenants in occupancy in late 2017 or early 2018.

Now based on conversations we've had with shareholders and analysts recently, I think it's fair to say that there's been a prevalence of concern about the next market I'm going to talk about, which is midtown Manhattan. Now, our perspective has been pretty consistent since 2014 when we recognized there was going to be a supply issue from both new construction and the impending relocations that would impact lease economics.

There continues to be good -- not great -- leasing activity across the City, and there are still tenant expansions across diverse industry groups including examples of financial services companies within our portfolio that are expanding today. Some of the more recent transactions in the marketplace from an expansion perspective have included Facebook and CBS Broadcasting, Vox Media, Google, PricewaterhouseCoopers, Shroders, and Chubb.

In January, we talked about the fact that the public capital market volatility was impacting the decision-making from small financial firms, and the first quarter was certainly a roller coaster for the debt and the equity markets. These conditions impact velocity at the high end, which is predominantly a small financial services firm demand pool.

Across the market in the first quarter, there were five relocation transactions written at starting rents over $100 a square foot. That includes the Citadel lease at 425 Park. So if you remove the Citadel transaction, the average lease was 10,000 square feet.

So four leases, 10,000 square feet on average. There was clearly a change in the market in the first quarter.

During the quarter, we completed 14 deals for about 173,000 square feet. Over 100,000 square feet of our demand had starting rents over $100 a square foot. They were all renewals and/or expansions.

While we continue to see a constant and steady volume of leasing at between $80 and $120 a square foot, the velocity above $125 a square foot has slowed. We have been successful leasing small units across the portfolio for a number of years, and we're going to take a very similar approach to the two General Motors floors we get back on July 1, subdividing them for smaller customers as required.

Our discussions regarding the entire FAO block continue to be very, very active. Given the magnitude of the commitment by the prospective tenants, this will take some time; but we hope to have a firm, signed lease later this year.

Last quarter, we announced our lease termination transaction at 250 West 55th Street. While we have not signed a lease on any of that space in the last 90 days, we have significant conversations underway for the entire second floor; and a number of food operators have presented proposals for the ground-floor space. So the activity on that takeback is stronger than we anticipated.

At 399 Park, we're in lease negotiations with two existing tenants that would expand and commit to about 175,000 square feet of the Citi space rolling over in 2017. 125,000 square feet of that demand represents expansion by these tenants.

Now we've had some questions about the roll-up and roll-down of the office space that Citi is going to be leaving in 2017. Our expectation is that it's going to be pretty moderate with a very slight roll-up.

As an example, we completed a full-floor extension on one of the floors that is in question. The roll-up was about 3.75% on a gross basis; i.e., pretty flat.

This quarter, our New York City CBD portfolio had a roll-up of over 35% on a gross basis. So clearly 399 is one of the more moderate pieces of that.

Now Mike made some significant enhancements to our supplemental package this quarter, and he's going to discuss those. But the one I want to point out is the delineation of our share of the portfolio NOI by market.

In the case of our Washington, DC, region it illustrates what we've been saying for some time, which is that our Washington, DC, CBD portfolio is 9.5% of the Company's NOI. We've seen a number of comments suggesting that the DC office market has turned the corner. Our view is that there has been no demonstrable change in the leasing environment.

Most of the DC law firms have completed their new installations. Between 2016 and 2019, we're tracking only one law firm expiration over 100,000 square feet.

The good news is that there is likely to be little impact on any downsizing on the market. The bad news is that there is little activity being generated from this sector.

The GSA continues to be taking a very measured approach to their renewal and is now hunkering in to what we as refer to as election inertia, which contributes to pushing out decisions.

In spite of the challenging environment, we did a complete 117,000 square foot lease at WeWork at Met Square this quarter, as well as yet another 17,000 square feet of the uncommitted space at 601 Mass Avenue leased.

This quarter we also completed a 60,000 square foot renewal in Reston Town Center, starting rents in the mid $50s, and five smaller transactions totaling 17,000 square feet. Reston continues to be 97% leased.

One green shoots in the Washington, DC/Northern Virginia marketplace comes from a group of mid-size technology tenants that are slowly expanding. We have a few of these tenants in our Reston portfolio -- some direct and actually some subtenants -- and they are prime candidates for that next building and town center that Owen mentioned.

The Boston region continues to be a magnet for the life science industry and established tech companies as well as for startup technology and maker organizations. This has led to a continual improvement in leasing momentum in the Greater Boston market this quarter.

Leasing velocity in the Waltham/Lexington submarket in particular has accelerated during the last few months as a result of this type of demand, and much of it is organic expansion. When we purchased Bay Colony in 2011, there was about 50,000 square feet of technology tenants and no life science companies in the park. Today, we have over 500,000 square feet of these users, and almost every one of them is an expansion mode.

This quarter we completed another 179,000 square feet in our suburban portfolio, and we have responded to more than 500,000 square feet of additional proposals over the last month.

Virtually every pharma company has put down a base in the Cambridge market. And coupled with the growth of the biotech industry and the tech titans that are there, we have a market where the availability rate is under 5%.

We are in active lease discussions, as Owen described, on 100% of our recently permitted commercial density, which will likely involve terminating some leases and potentially taking down some existing buildings in order to accommodate the new growth. We expect to make our site-specific applications this year with a potential construction commencement in early 2017. Again, as Owen said, as part of this new development we will also build additional residential high-rise products.

The Boston CBD continues to be a very steady market, as supply has been absorbed over the last few years, though there is some speculative development going on in the Seaport area. While we do have a few technology tenants expanding into the overall market, much of the demand is still lease-expiration driven.

General Electric is going to be moving into a combination of new construction and rehabbed buildings currently owned by P&G and not utilizing existing inventory.

This quarter, we completed over 520,000 square feet of leasing, and that includes the work that we did at 100 Federal Street, which is about 400,000 square feet of that. We also did 28,000 square feet at the top of 200 Clarendon and 50,000 square feet at the Prudential Center.

Activity at 120 St. James, where we have 170,000 square feet of availability, has picked up dramatically. Although we haven't signed any leases, we have a number of tenants reviewing their options at the building. They range from between 32,000 square feet, which would be partial floor, to the entire 170,000 square foot block. All of those tenants would have occupancy in late 2017 or early 2018.

Last quarter we provided a scorecard for our revenue bridge. We continue to make progress. With additional transactions this quarter, leasing at Embarcadero Center, the Prudential Tower, 200 Clarendon, and 250 West 55th, we've accomplished about $48 million of that $80 million bridge.

And with that I'll turn the floor over to Mike.

Thanks, Doug. Good morning, everybody. As Doug mentioned, we made some changes to our supplemental financial report this quarter that I'd like to go over. The purpose was really to more clearly reflect the characteristics and performance of our share of the portfolio, given the sizable impact of the consolidated joint ventures that we have put in place in the last couple of years.

In addition to delineating the geographic and tenant diversification in this manner, we've included supplemental information in our same-property NOI performance pages to include both the consolidated portfolio performance that we've historically provided as well as the performance of our share of portfolio. You will also notice that we folded our R&D segment into our office segment this quarter due to the immaterial size of the R&D portfolio, especially after the sale of 415 Main Street in Cambridge during the first quarter.

Lastly, as Owen mentioned, we're embarking on several significant repositioning projects within the portfolio, which we consider nonrecurring in nature. In our capital expenditure disclosure in the supplemental, we are now segregating the capital spend for these projects, which have a total budget of approximately $165 million to be spent over the next few years.

Now turning to our results for the quarter, as you can see from our press release, we reported first-quarter funds from operations of $1.63 per share, which is $0.03 per share or about $5 million higher than the midpoint of our guidance range.

The performance of our portfolio drove approximately $4 million of this outperformance, with about half of it coming from faster than projected leasing activity. We continued to successfully execute early renewals at Embarcadero Center and in our Mountain View properties at a significant rent roll-up that are straight-lined into our revenue upon lease signing.

We also incurred earlier than projected occupancy from new leasing and smaller pieces across the portfolio.

Approximately $2 million of the improvement resulted from lower than projected operating expenses. That stemmed from warmer than normal weather conditions in the Northeast which reduced our utilities expense a little bit, as well as the deferral of repair and maintenance expenses that we project will be incurred later this year.

On development and management services fee income, we were approximately $1 million ahead of our projections. The majority relates to higher than anticipated service income generated in the portfolio.

We also signed an agreement to act as development manager for the tenant that acquired our former Innovation Place project in North San Jose. We will earn a multiyear development fee for work that commenced this quarter.

Our first-quarter same-property performance was solid, with the combined portfolio cash NOI up 5.6% and GAAP NOI up 1.5% from the first quarter last year. As I mentioned, the Company's share of NOI growth differs from the combined results; and if you pull out the noncontrolling interest share, our share of the portfolio performance is even better. This quarter, our share of cash NOI growth was 7% and GAAP NOI growth was 2.8% in 2015, which is the new level of detail we provided on page 41 of the supplemental under the heading Adjusted Combined.

As we look out to the remainder of 2016, we project our same-property growth to moderate through the year. Our same-property cash NOI growth will be impacted by free rent that was in place in the first quarter of 2015 but burned off during the year.

Both GAAP and cash NOI will be negatively impacted by the pending vacancy of 70,000 square feet in the mid-rise at 767 Fifth Avenue and 150,000 square feet at 601 Lexington Avenue, where we've completed a series of lease terminations and relocations that will allow us to redevelop the low-rise building starting later this year. We expect this portion of the building to be out of service for about two years. The redevelopment will result in a longer period of downtime, but in late 2018, when we reintroduce both the new retail and low-rise buildings to the market, we expect it will enhance the long-term value and future cash flow from the building.

Our leasing activity in the portfolio is steady and generally in line with our prior projections. Overall, we've modestly increased our combined same-property NOI growth projections for GAAP NOI, but we still project roughly breakeven growth from 2015.

We continue to expect our combined same-property cash NOI growth to be 1% to 3% from 2015. Again, when you remove the noncontrolling interest share from the consolidated portfolio, our share of growth for both GAAP and cash is projected to be 100 basis points higher.

The increase in our GAAP NOI projection is reflected in our guidance for noncash straight-line rents, which is now $40 million to $55 million for the full year.

We acquired Peterson Way this quarter, with a plan to complete entitlements and develop the site in the future. In the meantime, the building is 100% leased for the next five years, and it's projected to generate approximately a 4.6% cash return and a 5.8% GAAP return.

As a result, we've increased our 2016 guidance for the incremental NOI contribution from our non-same-property portfolio -- that includes our new developments and our acquisitions -- to $38 million to $44 million. The projected 2016 incremental contribution from these developments and acquisitions for 2016 represents 3% year-over-year growth on our share of the total portfolio NOI.

We also increased our guidance for development and management services income by $2 million at the midpoint and now project services income of $22 million to $26 million for the year.

The impact of these changes results in our increasing our guidance range for 2016 funds from operations to $5.85 to $5.95 per share. This is an increase of $0.05 per share at the midpoint, consisting of $0.02 per share from better projected portfolio performance, $0.02 from acquisitions, and $0.01 from higher projected development and management services income.

That completes our formal remarks. I'd appreciate it if the operator would open up the lines for any questions.

(Operator Instructions)

Emmanuel Korchman, Citi.

Maybe if can we just stick to New York City for a second and we think about the Madison Avenue corridor, that sounds like it's going to have a bunch of new supply coming on if all these projects go forward over the next few years. Do you think that that submarket can handle the new supply coming from One Vanderbilt, if we classify it as Madison, MTA site, and now Sony coming back to office?

You just mentioned three projects. One of them is an existing building; the other two are new developments. I can't comment on the timing of the One Vanderbilt, but I think that the MTA site is a site that will take some time to go through entitlement. And hopefully over time the City of New York well have a demand generator that allows us to start that building with a significant preleasing commitment associated with it.

I think that the challenge with New York City -- and I'll let John Powers comment on this -- is that, while there are plenty of tenants who are paying above $100 a square foot, there are not a lot of big tenants that would be anchor tenants that would be paying over $100 a square foot [inside].

So I think the market has to be naturally positioned to accommodate the demand that is there, as opposed to a hope that simply rising rents will be achieved by the traditional large-scale tenant demand that the City currently sees. John, you want to comment any more?

No, I think you have it, Doug. On the Madison comment, as you said, there's a big timing difference. 550 is vacant now; and the MTA site has to go through the whole ULURP process, so their objective is to have that done when East-side access comes, which is 2021, which is a long way from now.

Great. If we switch coasts for a second, given your positive commentary on Silicon Valley and Santa Clara specifically, can you express your interest or your views on the Yahoo site that seems to be coming to market?

Bob, do you want to take that one?

Yes. It's a big site. They're looking for approximately $300 million. It's not a bad site.

We think the site that we purchased is, A, smaller and more manageable and closer to the center of activity. The Yahoo site has been on the market for quite some time, so that will tell you how many buyers are out there for a $300 million site.

I take it to mean that you're not a likely buyer there?

No, I don't see us as a likely buyer at this time.

Thanks, guys.

John Kim, BMO Capital Markets.

Thank you. Your cash re-leasing spreads at 26% was more than double what you achieved last year. Would you characterize this as unusually high this quarter, or a reflection of what you're seeing for the remaining of the year?

The challenge with our pre-leasing spreads is that they're so dependent upon the particular portion of the portfolio that's rolling over at any one time. So we may have a quarter where we have much more significant growth, and then we may have a quarter where we have a much more muted perspective because of the specifics associated with, again, the granularity of that.

In general, the more dominant a quarter is relative to its San Francisco rollover, the higher the numbers will be. Because on average there is probably somewhere around a 50% or 55% mark-to-market on virtually everything that we are doing in Embarcadero Center; so as that gets a larger portion of each particular quarter, that's what's driving it.

Then I think the second area would be our New York portfolio at the General Motors Building, where we have significant embedded upside. So when those things roll over into the market, you're going to see a much higher number.

And then our Cambridge portfolio, where there is a significant embedded upside, those are the three portions of the market where, when they hit the statistics in any one quarter, they will push it in the right direction.

So outside of those buildings, it would be more of a 10% to 15% number?

I wish I could give you a specific number. I just can't, because it's really dependent upon the granularity.

Okay.

Washington as an example, doesn't -- there's not much in the way of roll-up on our CBD portfolio. So if 100% of that was occurring in any one particular quarter, it would be more muted.

Okay. Then can I ask you about 767 Fifth Avenue? More on the refinancing side with a fair amount of debt due next year. I know you've locked in the swap rate or part of it earlier this year; but can you talk about the overall financing strategy next year and if you're planning to utilize a similar amount of debt both in mortgage and mezzanine debt?

I think that the amount of debt we will be able to get will be at least equal to what is there, and it will all be senior. We won't need to use mezzanine debt to get to that level.

The cash flow of that property has grown pretty dramatically over the last 10 years that we've owned it, as we've rolled up rents pretty consistently over that time frame. There is still -- it's still under-rented from a lease rate perspective; so from a debt underwriting perspective, lenders will be comfortable with the cash flow characteristics and the future cash flow characteristics.

It's obviously a large loan, so that's the biggest challenge with it, is that the current financing is $1.6 billion. It's naturally going to be good for the CMBS market. The CMBS market can easily handle a loan of that size typically.

But that market has been a little bit more volatile over the last six to nine months, although I would say that most of the volatility is when you start to get into the higher leverage points. So when you're talking about a loan that is 40% to 50% leveraged, that market is more -- is a better place to be today than if you're talking about a loan that is 60% to 65% leveraged. So we could finance this loan today in the CMBS market based upon the leverage point that we have.

The existing loan is a syndicate of a bunch of banks and insurance companies. So it's also possible to execute in that type of environment, where you would have somebody help you put together a large syndicate.

So I think there's a couple of different ways for us to tackle this. It doesn't expire until the end of 2017, so obviously there is time.

But we've put in some hedges for about a third of the exposure at this point. So that's where I see that standing.

Can you remind us what the all-in cost of that is, versus where you think you could refinance it?

That debt on a cash basis is 6% debt. On a GAAP basis, because of the -- when we consolidated this thing, the GAAP debt is about 3%. I would say the CMBS market today for 50% financing is somewhere in the high 3%s to 4.25%; and as you go up the leverage scale towards 60%, it gets into that 4.5% level.

So it's a significant reduction I would see from a cash interest basis, based upon current interest rates.

Thank you.

Jamie Feldman, Bank of America Merrill Lynch.

Good morning. I guess to start, can you talk about leasing prospects for 888 Boylston, which is coming online in the third quarter?

Sure. So 888 Boylston Street is a 17-story building; and floors 3 through 11 and floors 15, 16, and 17 are already committed and leased. So we have four floors left.

I think we have strong interest in the building from anyone who comes to the building and looks at it, because the design and develop group here have created a building that is paramount to the most sustainable, exciting, innovative building that the City of Boston has ever seen. The issue is that we're looking for a premium rent, and so the number of tenants that are prepared to pay a premium rent is a smaller number than the average of the marketplace. We have to be patient with regards to the progress that we're going to make at leasing that space because of what our expectations are.

Okay. In terms of the impact on 2016 guidance, I guess there is none. Pretty (multiple speakers) be 2017?

Yes, the large tenants in the building are coming into the building from a rent commencement perspective in 2017. I think there's about 75,000 square feet that could hit the fourth quarter with the top three floors.

Okay.

And there's some recent (multiple speakers) --

That's already in our guidance. And I think it's 25 that's in 2016; and then a couple of those other floors are in the beginning of 2017. Then the anchor tenant is towards the end of 2017.

Okay. Then I appreciate the color on San Francisco and the Bay Area. Can you guys talk a little bit more about supply, like how you guys are thinking about the competitive supply both in San Francisco and in the Valley?

Bob, you want to take that one?

Yes. In San Francisco, right now in addition to Salesforce Tower there is the 181 Fremont project in Block 5 which is under construction. I don't see anything else coming out of the ground that's entitled in the Central SOMA district or the SOMA district or the downtown anytime soon. So that's the main competition that we have.

Mission Bay does have the Kilroy project that's under construction. But we really don't think that anyone that's going to be looking at that product is going to be looking at our project at Salesforce Tower.

Then down in the Valley, there's numerous projects that are under construction and planned, several million square feet. We think that will offer opportunities for tenants to expand in and temper the vacancy rate somewhat from a standpoint of possibly increasing.

But in San Francisco overall, there's very little competition that's going to come into play. And Prop M obviously is going to have an impact on future development, because there is nothing that's been resolved on Prop M one way or another, and I don't see anything getting resolved on it in the near future.

Okay. But I guess going back to the comments about not that many large tenants looking for space right now, how do you think about some of the buildings that are under construction in the CBD, that space going -- that space getting leased? Do you think they will sit for a while, or we'll see that stuff get leased up pretty quickly once it's done?

We've heard there's a couple of Silicon Valley users that have looked at Block 5. They have no commitments. 181 is a much smaller floorplate building, so whether that appeals to tech remains to be seen.

I can only talk from the standpoint of the activity that we're seeing at Salesforce Tower. We continue to do tours weekly and presentations weekly, and we continue to exchange paper and proposals with tenants. We hope in the next -- by the next quarterly call, that we'll have done hopefully another 100,000 square feet in leases.

Okay. Then finally for Mike LaBelle, can you just talk about what the new guidance means for AFFO and dividend coverage for the year?

Yes, I'm happy to. Our AFFO is going to be better than it was last year, where we had a lot of free rent. Free rent last year was well over $100 million. This year's free rent guidance is $45 million to $55 million, so that's going to be a benefit to it.

I would say on a per-share basis the way we calculate FAD in our supplemental, we expect it to be somewhere in the $4.15 to $4.40 range. You're talking -- in order to meet our occupancy guidance that we're going to have leasing costs of somewhere in the $150 million range, and CapEx of -- on a recurring CapEx basis of somewhere $75 million to $90 million, which is pretty similar to last year, maybe a little bit higher.

Okay, great. Thank you.

Jed Reagan, Green Street Advisors.

Morning, guys. You mentioned seeing a slowdown in high-end tenant demand in New York City this past quarter. Just with some of the market volatility settling down in the past couple months, are you seeing signs of those types of tenants getting more active again?

I'll start and I'll let John comment. I actually -- I talked to a handful of brokers in the third week in January, and then I talked to them again last week, and I think to describe their personality is it's somewhat manic, on the good and the bad. The number of tours that is occurring right now in the greater Midtown small-tenant market is significantly accelerated versus where it was when the Dow and the credit markets were a little bit more in turmoil.

John, you have any other perspective?

No. I mentioned on the last call, that we had this in August and the beginning of September, when the equity markets had a lot of jitters and spread widened in the bond market. And we had the same thing happen in January.

But it didn't stick with the leasing market in the fall and I don't think it's going to stick with the leasing market now. Certainly on the high-end financial, hedge funds, etc., they are very, very close to that market. And when there's issues there, they have concerns.

Okay. That's helpful. Just switching to DC, can you talk about your outlook for DC beyond 2016 as far as leasing activity and rent growth is concerned? Do you think that's a market that turns the corner in a noticeable way in 2017 and 2018, let's say, following the election?

Peter or Ray, do you want to comment?

Yes, I'll take a crack at it, and then Peter can add to it. What we lack in DC that you hear in the other markets are unexpected demand drivers. Right now we're still predominantly a lease-expiration-driven market. So we can look in advance and see where the demand is coming from, from our existing tenants.

And the matchup relative to supply is pretty equal. In other words, we're not going to see a tremendous increase in vacancy, nor are we going to see a tightness. It's a pretty balanced picture right now.

But what we really need is for the election to take place, clear the slate, and look at some technology and some other demand drivers coming to the marketplace. Until that additional demand comes we're going to be a pretty status-quo market. Peter, do you have anything to add?

I would certainly say that's true as it relates to the election. I do think looking at the job growth numbers and looking at where the GSA has been, they've been shedding net jobs. That has stabilized in the last 12 months and they are starting to actually add jobs again, which I think will be a positive.

But as is always the case, the money won't start to flow till after the election for those things.

Okay, thank you.

Blaine Heck, Wells Fargo.

I guess Owen or Doug, just more generally, you guys talked about the development pipeline; but can you just talk more about where you think we are in the cycle and how that pertains to the shadow development pipeline? Has your level of comfort going ahead with any of those projects changed as we've come through the cycle?

And how do you think about the importance of pre-leasing at this point?

I don't think it's, quote, changed, but I do think it is shifting gradually. In terms of your question about the cycle, obviously it's difficult for us to predict exactly when the cycle will end and when we'll have the next recession. There are a number of people predicting it in the nearer term; I don't think we're quite as concerned about a near-term recession.

But as I mentioned in my remarks, growth is clearly slow, and I think we anticipate that continuing here for some period of time. But we're not blind to the prospects of a recession certainly in the medium term.

Then what I mean by saying a shift, I do think our thinking about launching new developments is shifting. I think our pre-let requirement is higher.

It's difficult for us to say precisely that we need X% of a building pre-let to launch it, because it depends a lot on other factors. Like: where is the tenant coming from; what's the size of the building; what's the nature of the market at the time? So we don't set those kinds of fixed hurdles.

But I do think as we look at our portfolio and we look at projects that we want to launch, a pre-let requirement is clearly required. I mentioned in my remarks three projects that we're looking at now for 2016, and we're not going to launch any of them without some kind of significant preletting.

Okay; that's helpful. Then it sounds like you guys are progressing well with the tenant for the FAO space. Can you give any estimate as to the potential NOI upside versus the temporary tenant that you have there? And maybe even versus what FAO was paying?

We've been reticent to talk about the specific economics of the deal. We've talked in big-picture perspective about the income that's being generated by the overall retail space in the past at the General Motors Building.

I think we've said in the past, and you could figure it out from our disclosure, that the rent that FAO was paying was about $20 million a year. And we think the number is significantly higher than that.

Okay, great; fair enough. Thanks, guys.

Steve Sakwa, Evercore ISI.

Thanks. Doug or Owen, when we look at your occupancy by market, there is a real bifurcation in a couple places between the CBDs and the suburbans. I'm just wondering if you could comment.

On Princeton, it's 75% occupied today versus your New York, which is 95%. You've obviously got a few things you talked about down in South San Francisco that may get cleared up. But then when you look at the Washington portfolio, you're doing well in DC, specifically in Reston; but then suburban Maryland.

How do you think about those markets in particular? And maybe Ray can comment on the Annapolis Junction, which just doesn't seem to be getting much traction on the leasing front.

Sure, let me take a quick stab at that, Steve, because it's a fair question. The good news is that the occupancy number that you're describing and the contribution from the properties that are in that occupancy number is significantly underweighted. In other words, if it were leased the relative rent that it would achieve is de minimus relative to the rents that we're achieving in our CBD property.

As an example, the Washington, DC, vacancies in our VA 95 product -- and it's interesting; it's actually the first time in the 20-some-odd years that we've been a public company we've had significant availability in that particular park. But the net trends that we're achieving are $13 a square foot.

The big pieces of availability in our portfolio are at Tower Center in New Brunswick, which is in excess of 300,000 square feet of that availability, and then the property in South San Francisco at Gateway. So if you pull those three out -- the VA 95, the Gateway, and the Tower Center -- you have a very different picture.

But it is true that the majority of our challenged space is in the suburban marketplaces.

Yes. I guess, Doug, it just seems like it takes a lot of management effort for maybe not a lot of reward. I guess, is it worth longer-term keeping it versus focusing your efforts on other things in the portfolio?

So, Steve, it's a great point. It's a debate we constantly have as a management team. I described a lot of investors' enthusiasm for real estate, but it's primarily for leased buildings in our core markets. There is less investor enthusiasm for unleased buildings in suburban markets.

So our trade-off is we don't want to sell assets just to sell them at deeply discounted prices. We want to perform the real estate skill, lease the buildings, and get a proper price for them.

But -- and I would say if you go back and look at the asset sales that we've done, clearly we've done some of the large joint ventures on the urban assets. But mixed in with that, if you go back over the last couple years, we have sold noncore assets in some of our suburban locations in Boston and in Washington DC.

Also, as Doug said, one other thing I just want to clarify, when you talked about the Princeton vacancy, the Carnegie vacancy is -- the Carnegie occupancy is 86%, all resident in Tower Center, as Doug described.

I guess, any comment from Ray on just the Annapolis Junction? That just doesn't seem to be getting a lot of traction at this point.

Yes, well, I'll be glad to take a crack at that, Steve. First of all, again, we own 50% of those buildings with our partners, the Goulds, and we're seeing the NSA demand be focused more back on the base as opposed to reaching out to satellite office locations.

The MegaCenter, which was the main driver for the Annapolis Junction project, they're changing their use of that. That was like a WeWork for spies. It was a scenario where people would come in and have temporary occupancy. Those requirements are also getting moved back on the base.

So we are seeing a slowdown in the demand. But again our presence there is relatively small on a relative basis to the overall Boston Properties enterprise.

Okay. I guess just one last question for Bob Pester. I know this is hard. You say there's not a lot of large requirements in the marketplace today; but what we've heard from brokers in the past is a lot of these large requirements are stealthfully done, maybe either away from the brokerage firm or directly with some landlords.

Any perspective you can just offer on that today? I realize if they're not on a brokerage list and maybe they're not in the market or you would know about them; but how should we think about that?

Yes, I think that's a bunch of baloney, Steve. We haven't seen that through the years we've been in this marketplace, where some megadeal happens that nobody knew about.

Okay. Thank you, guys.

Erin Aslakson, Stifel.

Good morning. Yes, my question was along the same lines, just regarding the Annapolis Junction asset. I realize it's 50% owned, but it had a huge loan-to-value in place, $339 a square foot. That we assume is being relocated on base. Is that what you were referring to, Ray?

Yes. Basically, Erin, that they seem to be more concerned about security now more than ever. So the outreach to, again, third-party space providers is not as great as it was before.

We still have a strong presence there. We're pretty well occupied in the other buildings other than the MegaCenter.

If Mike wants to talk about the debt, you could go ahead and ask questions to him.

Okay; yes, that's fine. Then that was on AJ One, where the big debt was in place. On AJ Seven, there was a one-year extension done on the loan there, which is much more reasonable, $170 a square foot.

But is there a lack of demand? I mean, that's a 100% leased asset. But is there some expectation that that tenancy goes away as well?

Well, it's a short-term lease; and, no, there is no anticipated vacancy there. We just decided to stay short and evaluate the overall position as we go forward.

That lease is actually, as Ray has correctly stated, a one-year lease. However, the government invested about $40 million in technology in that building. And for better or worse, the nature of that park, those one-year leases, are just the way they get allocated funding.

What they do is basically give you a one-year deal, and then nine one-year extensions. So we have every expectation that they are going to stay in that space.

Yes, okay. Then how much did the government invest in the One Annapolis Junction asset?

Actually, we put the bulk of that investment in. As Ray described it, it really was a plug-and-play [skiff] with raised flooring all the way down to the desktop computers and a 24-hour operating entity in there, which was first SAIC and is now Leidos, one of their successor entities, with a staffed helpdesk 24/7.

As Ray indicated, what's happened -- and having met with the director of logistics and facilities early in this part of the year -- earlier this year, rather, they've had a couple of security issues up there. There was a fatality outside the base. There was obviously the Edward Snowden incident; and it has, I think, scared them into moving certain requirements on base when they've been able to do that.

We're in the process now with Leidos of throttling back, based on our conversations with the logistics folks from NSA, the level of services that we've been providing, to a number that we can adjust the rent downward and take that part out of the operating expense, if you will. So where we've been leasing space there in the $120 to $130 range, we just did a deal at $95 which, quite frankly, if we can continue to do deals at that rate, I think we can put the building back on a pretty sound footing.

Okay. Is there any indication in the size of the amount of square footage going back on base in total?

They didn't really share that. They didn't really share that information with us.

Okay. Well, thank you guys very much.

Vincent Chao, Deutsche Bank.

Good morning, everyone. Just going back to San Francisco here for a second, I know we've talked about it quite a bit, but just curious. It does look like you got some leasing done at Salesforce Tower. Can you just comment on -- and I think you said that you are hoping for another 100,000 square foot or so in the next couple quarters.

Just curious who is taking space there today. Obviously the larger guys are not out there. But where is the demand coming from today?

We've talked about this in the past and it hasn't changed, but I want to just reiterate that. All of the demand that we are seeing at Salesforce Tower is really lease-expiration-driven demand. There may be a couple of tenants that aren't in the market for a floor that have asked for a presentation; but it is a truly representative FIRREA-oriented group of tenants that are looking for high-quality, brand-new, visible, state-of-the-art office space.

So it's brokerage firms, consulting firms, accounting firms, lawyers, investment professionals, asset managers, venture capitalists. That's sort of the laundry list of the type of users who are the most likely tenants to be in that building.

Remember, the first available floor is now 32. So you're in a high rise of a high-rise office building in the (technical difficulty) location in San Francisco.

Okay; thanks for that. Then just maybe going back to the East Coast, just any comment you can provide on the Penn Station redevelopment, your interest, and maybe the process from here?

John?

We're not bidding on the Penn Station redevelopment. We've looked at it carefully. There's two opportunities: one is Penn Station and the other is the Farley building. It's very complex.

Both of them are very complex. Penn is primarily -- exclusively a retail play. And Farley is a combination of retail, probably some hotel and office.

But it's a very complex. And as I said, we analyzed it carefully and decided not to participate.

Okay, thanks.

Alex Goldfarb, Sandler O'Neill.

Good morning and thank you; just two questions here. First, you guys obviously spoke a lot about Midtown, what's going on, and then also the growth out West. But looking at your portfolio mix, New York is still a pretty big component of BXP relative to the West Coast.

If we look at where a lot of the economic growth is, there seems to be a lot more coming out of the Bay Area versus New York. So should we expect more and more of the investment to be out West? Or should we expect it to be as it's been right now, where there is a West Coast investment announcement and at the same time you have a New York investment announcement as well?

So, Alex, we certainly think about our portfolio mix and our balance across the various regions as we think about making new investments in buildings or in development. For that reason, if you pro-forma-ed what we're going to look like over the next few years, the San Francisco component of our overall results is going to grow materially, primarily driven by the delivery of the Salesforce Tower, but also by some of the other projects that we delivered last year, like 680, 690, 535 Mission, and so forth.

So it has been a conscious effort and I think it's going to continue to be a conscious effort that we're going to grow our Company in areas where there's the greatest tenant demand, which today is technology and life sciences. So the answer to your question is yes; but I would also say that the investments that we make are also opportunity driven. Our teams in each of the regions worked feverishly on identifying new investments, on pushing our development pipeline forward.

So though we think about a top-down, the actual allocations are also driven by where the opportunities present themselves.

I mean, Alex, just if you take Salesforce Tower, right, it's 1.4 million square feet. If average gross rent in there is in the mid-80s, we're talking about $115 million to $120 million of additional revenue, which is a significant jump in the overall percentage that San Francisco will have when the building is fully in service in 2018, early 2019.

I also think that -- and I think we've been pretty consistent in our description of this, which is we're a demand-oriented Company. We're looking to serve those users who are growing and where the demand is being generated. And to the extent that there is more demand and users that are technology oriented and they happen to be in the West Coast, we're going to do everything we possibly can to service those companies.

On the other hand, New York City and the Boston and the Cambridge marketplaces, and to some degree Northern Virginia, also have a pretty interesting future demand pool that we are going to try and serve as best we can as well. So I think that we are going to be aggressive about making investments in all of those places where we think there is an opportunity to find tenants who are growing and who are looking for high-quality office space.

Okay. Then the second question is, I think in your opening comments you said the activity down in Silicon Valley area is much more active than in San Francisco. Did I hear correctly?

Yes. I mean if you look at the activity in the Silicon Valley in 2015, it dwarfed what went on in San Francisco.

Okay. Then my question is, how much of that is just where businesses are growing because of what's happening internally in the business? Versus there may be easier access to, quote-unquote, cheaper, more affordable housing that's causing people to maybe -- down South maybe there's San Jose or South of there there's more affordable housing for people versus the explosive residential rent growth that's been in San Francisco. So how much of it has been employee driven versus business driven?

I'll make a few comments and then I'll let Bob and Owen chime in. The first is that Google and Apple are by far the most dominant users of office space in the Silicon Valley, and their headquarters is in the Silicon Valley, and I think there's absolutely no expectation that that's going to change.

I also think that the number of people who are living in the City of San Francisco and that are using commuter-oriented transit -- mostly in the form of private buses -- to get to those campuses down in the Silicon Valley is very, very significant. So I think that the, quote-unquote, value of the affordable housing is less critical to the growth of the Silicon Valley than the natural establishment of those campuses and those businesses in terms of historically where they've been, and their ability to still be able to attract labor from the urban market if they are looking for younger, more transit-oriented types of opportunities.

Bob, any other thoughts?

Yes, I would just say I don't think the housing prices in the Silicon Valley have anything to do with the growth. I think all the growth is organic growth where they're growing and getting bigger.

If they were looking about residential values, they would move into the East Bay, because that is the cheapest housing in the Bay Area.

That's one heck of a commute. Listen, thank you.

Tom Lesnick, Capital One Securities.

Good morning; thanks for taking my questions. Just a couple of quick ones. First, I understand it's a relatively small segment of your overall business, but it looks like the multifamily and hotel segment has been dragging on same-store NOI the last little bit here. What's your prognosis for that segment going forward?

I think on the same-store side, our hotel was down a little bit. That drove it this quarter. The challenge is it's such a small portfolio that any kind of little change has an impact.

Also, if you look at the residential page of our supplemental, The Avenue is in one year and not in the other, so you really have to look at the same-store page, which is not as bad because that excludes The Avenue, which was sold during the year. The Avant and the Atlantic Wharf property, [retro] wharf, have both stayed very, very well occupied year-to-year and continue to improve.

I would also just add, we are interested in continuing to grow our residential portfolio, primarily through development. If you look at our active development pipeline and our predevelopment pipeline, we have a number of projects that we are either under construction now or we anticipate building. We talked a little bit about Reston, certainly in Cambridge, North Station; there are several examples of this around the Company.

Got it; thanks. Then maybe one for Ray. It looks like you guys are introducing paid parking at Reston Town Center. Just wondering; is it possible for you to quantify the incremental revenue opportunity there?

And are there any other opportunities across the entire portfolio where you could also realize upside potential?

I'll let Peter adjust that. He's way more political than I on those type investments. So go ahead, Peter.

Well, I don't think we want to get into necessarily quantifying it. I would say that there's approximately 8,000 parking spaces there. We undertook this for a couple of reasons. Obviously, revenue is one; but we've got a circumstance where we have to control that to honor our obligations with both the retailers and the office tenants there, and people in adjacent residential parking -- in our spaces, so to speak -- as well as commuters doing the same thing.

Part of implementing it now is we've got enough of a runway that with the introduction of Metro proximate to Town Center probably in about three, three and a half years, we want to be in a position where the system is up and running. It's going to be a license plate recognition system; you'll be using an app to park there; and we think it's going to be a pretty significant enhancement for our customer base coming to the Town Center.

One point I would like to make is we talked to some other major retailers about the experience of implementing paid parking. And after the fact, they actually noted an increase in sales of up to 10% at the retailers, because the people who do come to the malls now find it way more convenient and, as a result, spend more time there and spend more dollars.

So we view it as a great thing for our retailers and our office tenants. The income we get will certainly be helpful, but by no means the main driver.

Interesting; appreciate the insight. That's all I've got.

We have time for one final question. Craig Mailman, KeyBanc Capital Markets.

Thanks, guys. Just curious, going back to San Francisco, your commentary on it being a little bit slower. Just curious if that's filtered in, impact at all, rent level discussions as you're trying to fill up the rest of Salesforce?

It actually hasn't. The overall availability in San Francisco, I think, is under 6% right now. I think what we have done is we have tried to price all of our product appropriately for the market. We are not striving to set records for the sake of setting records.

Where we think we are hitting the market bid, and we're doing it pretty consistently, is because we're asking a true, honest market price that both the tenant and the landlord feel good about. So we have not seen any diminution in our pricing component of our concession package and rental rate economics over the past three to four months.

That's helpful. Then just lastly, down at Peterson Way, I know it's a longer fuse on this one, but would this be spec or build-to-suit?

I would hope that it will be build-to-suit. But in 2023, we'll be in a different environment, so we'll see where we are when we get there.

Great. Thank you.

That concludes the questions and our formal remarks. Thank you for your time this morning and your interest in Boston Properties.

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