波士頓物產 (BXP) 2016 Q3 法說會逐字稿

Good morning. My name is Brandi and welcome to the Boston Properties third-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. Please go ahead.

Good morning and welcome to Boston Properties' third-quarter earnings conference call. The press release and the supplemental operating and financial data were distributed last night, as well as furnished to the SEC on Form 8-K. You can find reconciliations of non-GAAP financial measures discussed during today's call in the supplemental package. 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 statement.

Having said that, I would 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. As usual, I will cover our quarterly results, market conditions, as well as our current capital strategy and investment activity. On current results, we produced another solid quarter with FFO per share a penny above our prior guidance, primarily due to portfolio performance. We also increased our full-year 2016 FFO per-share projection by $0.03. For the quarter, we leased just under 900,000 square feet, which is below our historical averages. However, we have a very robust pipeline of in-service and development leasing activity, which we think will be signed before calendar year-end and which will bring our annual leasing for 2016 in line with or possibly above averages.

Our in-service portfolio occupancy is now 89.6%, which is down 120 basis points from the end of the second quarter, and this is due primarily to the addition of Colorado Center to the portfolio. We had another quarter of positive rent rollups in our leasing activity with rental rates on leases that commenced in the third quarter, up 6% on a gross basis and 8% on a net basis compared to prior lease.

Now moving to the economy, US economic growth continues to be positive, but as we all know, it's been sluggish. Second-quarter GDP growth has been revised up to 1.4%. It was 0.8% in the first quarter and estimates for all of 2016 are 2% or less. The employment picture continues to improve gradually with 156,000 jobs created in September and the unemployment rate has remained flat at 5%. Wages have perked up a bit, up 2.6%, though inflation remains low at 1.1% for the third quarter.

Moving to capital markets, the 10-year U.S. Treasury has risen approximately 40 basis points to 1.75% from lows in July, which have sparked a seemingly harsh REIT market correction of 5.5% plus over the past month. Though the Fed is signaling one rate hike before year-end, further increases in the short to medium term we think will be tempered by low interest rates in the developed world, dollar strength, sluggish growth in the US and low inflation.

Given the growth in the US economy, office markets nationally continue to improve, albeit more slowly. Net absorption was 8.7 million feet for the third quarter and the vacancy rate was flat to last quarter, but improved 30 basis points from a year ago. Asking rents rose nearly 6% year-over-year and construction levels are up 6% year-over-year and are 2.3% of total stock, which is above the long-term average of 1.9% for the US office market.

Moving to private real estate capital markets, we believe interest from primarily non-US investors remains healthy for prime assets in gateway markets. However, transaction volumes are below 2015 levels and domestic institutional investors have been less of a factor in this segment of the market. Commodity assets are more difficult to sell and there are fewer bidders for Class A trophies.

There are, however, several examples of Class A assets continuing to sell for favorable prices in the third quarter. In Cambridge, 245 First Street, which is a 300,000 square foot office and lab building, sold to a domestic pension fund advisor for $1,020 per square foot and a mid-4%s cap rate. In San Francisco, a sovereign wealth fund purchased a minority position in 101 First Street and 303 Second Street for approximately $950 a square foot, which is a low 4%s cap rate. And finally, in West LA, 233 Wilshire was acquired by a US REIT in partnership with a sovereign wealth fund for $1,080 per square foot and a low to mid-4%s cap rate, and there is a pipeline of additional deals in the West LA market we think with similar pricing metrics.

We believe the relative stability of the US market, given Brexit and other global turbulence, as well as the fact that US cap rate spreads to treasuries remain above long-term averages will provide a cushion for US real estate valuations, particularly in our core markets.

So, in summary, operating performance improvement in office remains positive, but is later in the cycle and slowing slightly. Interest rates are up modestly, but will likely remain low, and private capital flows into our space remain healthy, but somewhat diminished from previous quarters. Given this economic picture, we will continue to take advantage of reasonably healthy tenant demand and lease up our existing vacancy and new developments. We will focus our new investment activity on new development and asset refurbishments in innovation centers where we see the strongest prospects for growth. We will also protect the downside by requiring pre-leasing for new office developments, avoiding the purchase of stabilized assets at low cap rates, selectively selling assets and keeping our overall corporate leverage at conservative levels.

Moving to the execution of our capital strategy. As you know, we completed the acquisition of Colorado Center in West LA last quarter. We've had very strong leasing activity at the project and are completing our redevelopment plan. We are also actively seeking to grow West LA into another major reason for Boston Properties over the long term and are reviewing a number of on and off-market opportunities. However, we will remain disciplined and patient and focus only on investments that create attractive returns for shareholders.

Moving to dispositions, we recently completed with Blackstone the recapitalization of Metropolitan Square, which is a 620,000 square foot office building, 75% leased, located in close proximity to the White House in Washington DC. We've reduced our interest from 51% to 20% and will retain the leasing and management of the property. Pricing on a 100% basis was $360 million, or $581 a square foot and the building will likely require an additional $160 per square foot of capital to complete its repositioning. We realized $56 million of proceeds for the sale of our interest net of existing financing and we experienced a 14.2% leveraged IRR in the portion we sold over our 18-year period of ownership. We are also delighted to be developing a larger relationship with Blackstone through this transaction.

We also closed in the third quarter the sale of a parcel in our Broad Run Business Park in Loudoun County for $18 million. And finally, we've withdrawn from the market our VA95 business park in Springfield, Virginia. During the marketing process, the major tenant in the park, U.S. Customs, issued an RFP for a consolidation in Northern Virginia. The resultant uncertainty around retaining this tenant diminished investor interest in the asset, though ultimately we could end up benefiting from the consolidation opportunity. We do not anticipate any additional sales in 2016, though we intend to continue to sell non-core assets in 2017 subject to market conditions.

Including these transactions, in 2016, we will complete the monetization of three assets for total gross proceeds on an our share basis of $235 million, which is in line with projections provided at the beginning of the year.

Moving to development, we remain active delivering assets into service, advancing our pre-development pipeline and evaluating new investments. In terms of starts for the quarter, we commenced the full redevelopment of the 220,000 square foot low-rise building at 601 Lexington Avenue; the 195,000 square feet office component of the building is being renamed 159 East 53rd Street and will have a new dedicated street entrance and lobby providing branding opportunities for a major tenant.

The building is being re-clad creating 30% more vision glass; a new high-efficiency HVAC system will be installed and access to the building's extensive and redesigned outdoor terraces will be improved. The 25,000 square foot retail atrium is also being completely redeveloped with a prominent at grade entrance on 53rd Street and will house multiple dining amenities and a fitness center. Our share of the total budgeted cost of this project is $106 million and we forecast the yield on the office component to be in line with our target NOI yield of 7% for development. Returns on the retail and outdoor plaza components will be partially driven by the enhancements we realize in lease rate and velocity due to this new amenity for our three major office assets at 53rd Street and Lexington Avenue.

We also anticipate starting the development of an amenity building in the existing outdoor plaza at 100 Federal Street in Boston in the fourth quarter. We remain active advancing our predevelopment pipeline for projects that would start after 2016. Several updates from this quarter include, at Kendall Center in Cambridge, we are in the final stages of executing a lease with a major technology company to build their 476,000 square foot headquarters at 145 Broadway, which will require demolition of an existing 80,000 square foot low-rise building on the site. Total budgeted development costs are $517 million, or $1,086 per square foot with land at market value, and the first-year development NOI yield is projected to be approximately 7%. The project will not commence until 2017 and efforts continue on developing commitments and projects for the remaining 600,000 square feet of potential entitlements at Kendall Center.

Further, we are pursuing multiple new preleased development opportunities in the Washington DC region, all of which are potential 2017 starts.

On deliveries, this month, we delivered into service 1265 Main Street in Waltham, Mass. The building, which we own in partnership with a local developer, is 115,000 square feet and 100% leased to C&J Clark. We are generating a 7.7% yield on our $26 million investment in this redevelopment.

At the end of the third quarter, our development pipeline now consists of eight new projects and two redevelopments totaling 4 million square feet and $2.2 billion in projected costs. Our projected NOI yield for these developments is in excess of 7% and the commercial component of the pipeline is 50% pre-let. We expect the addition of these projects to our in-service portfolio to add materially to our Company's growth over the next three years.

So, to conclude, we continue to remain very enthusiastic about our prospects for creating shareholder value in the quarters ahead. We have a clear and achievable plan to materially grow FFO through the development and delivery of new buildings, as well as the lease-up of existing assets for which we currently have a particularly strong backlog of potential leases. We selected non-core assets for sale to raise capital and ensure continued portfolio improvement. 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 remains strong with conservative leverage, which will allow us to pursue and act on investment opportunities that present themselves in coming quarters.

So let me turn the call over to Doug for a further review of our markets.

Thanks, Owen. Good morning, everybody. So this is the third quarter and we introduced our 2017 earnings guidance last night and I'm going to devote my time this morning to providing the operating background that's behind our estimates and to describe the key drivers of our occupancy and revenue growth over the short term, as well as those situations where we have, in fact, completed transactions, signed leases, but are not going to be recognizing any revenue until 2018. And there is a significant amount of that. In a number of instances, our estimates reflect investment and repositioning decisions that were made during the past 12 months, which have a direct impact on our 2017 GAAP revenues. And I want to take the time to provide the incremental impact of those decisions.

So let me know give you some specifics on our regions and I will start with San Francisco. So during the first quarter, we completed 128,000 square feet of office leasing at Embarcadero Center. During the second quarter 158,000 square feet of leases. And during the third quarter, we completed an additional 219,000 square feet of leasing. All of these leases average a positive mark-to-market of more than 40% on a gross basis and 70% on a net basis, very consistent with the leasing spread we've been reporting in our quarterly supplemental. The incremental revenue from the deals we've now signed in San Francisco since the third quarter of last year is over $16.5 million and will be at a full-run rate starting in the third quarter of 2017.

The overall market conditions we've been describing in the last few quarters in the San Francisco CBD really remain the same and while it may make a headline to write that the rate of activity in 2016 is not going to be quite at the level as it was in 2015, which, by the way, was just off the peak market of 2014, we actually think the real news is the stability of the market in San Francisco CBD.

Each quarter, there continues to be a new crop of significant technology company lease expansions in addition to the traditional lease expiration-driven market demand. This quarter, Twitch signed a lease at 350 Bush for 185,000 square feet; Fitbit took over 300,000 square feet off the sublet market; Lyft has taken over 280,000 square feet at 185 Berry; Adobe is in the market and expanding by 200,000 square feet; Slack, which started at our building 680 Folsom in an 11,000 square foot prebuilt suite in 2014 is now looking for more than 200,000 square feet, and NerdWallet continues to be in the market for over 100,000 square feet.

Continuing the trend we saw in the second quarter, high quality, well-built sublet space is hitting the market and getting quickly absorbed and has really served as the dominant large block availability. The largest block of sublet space in the market statistics last quarter was a 400,000 square foot block at 211 Main. Well, Schwab renewed so there is no more sublet availability. And the largest block of space on the market this quarter was Twitter's buildings up on Upper Market and it appears now that space has been put under lease negotiation with a growing startup technology company. Sublet availability has remained flat with growing technology expansions compensating for additional availability.

Salesforce Tower is the tallest building in the city and we are now able to take prospective tenants up to the available floors and allow them to visually and physically experience the breadth of vision glass, the column-free floors, the volume of the slab-to-slab heights and the views. We have five floors under lease negotiation, which is what our expectation was for the year and hope to have all these leases signed by year-end. Only one full floor future prospect is actually located at Embarcadero Center, so it's all incremental new demand. The structure of the building is up about 56 floors and we expect to have our first tenants in occupancy in late 2017.

I said this last quarter, but I want to repeat it again. We anticipate delivering the first block of space to Salesforce.com in the second quarter of 2017 and then we have four future delivery dates that extend into the fourth quarter of 2018. We do not recognize revenue until the tenants have completed their buildout on a floor-by-floor basis even though we are going to be receiving cash rent. Our 2017 earning estimates continue to assume we are not going to record GAAP revenue from Salesforce.com's lease in 2017. Rent commencement on the other four tenant floors is likely to start in the fourth quarter with accompanying cessation of capitalized interest, but it is offset by the startup of operating expenses and taxes for the whole building. When the building is fully leased with tenants in occupancy, which we expect to occur in 2019, we anticipate an initial stabilized net operating income of between $80 million and $85 million.

Our Mountainview activity continues to be very strong still. We are renewing our single story product at over $55 triple net, but occupancy gains are slower at 611 Gateway. We will start the year there with 186,000 square feet of availability and we are unlikely to see much incremental revenue from that space in 2017.

Going down the coast to our new market in West LA. Activity there is robust and we anticipate signing leases for more than 200,000 square feet of our 385,000 square feet of availability in the coming days and extending another 190,000 square feet. The West LA market has had a string of strong quarters of rental rate growth as it benefits from both the creativity and entrepreneurship of local content creators and providers, the explosion of new content from new economy entertainment companies and the growing labor market for a number of San Francisco-based technology companies that are trying to broaden their workforce reach. Since July, the submarket has seen more than 400,000 square feet of signed leases and there's another 790,000 square feet of activity in the market, including our transactions in process. Rents have moved more than 10% for these large blocks of space since our purchase in July.

I want to start my discussion in the New York region with our retail tenancy. At 250 West 55th, we have signed a lease for 55,000 square feet, including the second floor, with the operator of an experiential, thematic visitor destination that expects to be open by the end of 2017. Since the space needs to be improved, we have not included any revenue in our 2017 estimates, but the space is leased. You will recall that our 2016 results included termination income equivalent to 4.5 years of rent. We expect to replace this income from this space after 23 months.

At 767 5th, we have more clarity on the timing of the retail revenue from the various spaces. We expect to deliver the space to Under Armour in the second half of 2018. So going back, in 2014, prior to the termination of the FAO Schwarz lease when all of the retail was leased, we had about $64 million of revenue from the retail spaces at the General Motors building. All this space is now committed, but, in 2017, as we work through the transition, we will have about $51 million of revenues. In the second half of 2018 when the transition is complete, we anticipate an annual run rate of over $85 million of revenues with a pretty conservative projection for percentage rent from the tenants. We own 60% of this joint venture.

We are not anticipating any office rent growth and probably slightly higher concessions around our Midtown office portfolio in 2017. The conditions we have been describing for the last few years remain in control. New supply continues to come into the market. The large financial players continue to shrink their cost structures and in certain instances, they've chosen to move to new owned facilities on the far West Side creating additional inventory. Landlords that are putting capital into older assets are attracting tenants. Major League Baseball at 1271 6th Avenue just took 400,000 square feet and Hogan Lovells at 390 Madison Avenue just took 250,000 square feet being the most recent examples. The market is active for larger tenants in the mid-$80s across Midtown, while the market for space over $100 a square foot obviously has less velocity.

I think the most significant change in our Manhattan leasing is that we have seen a significant pickup in demand for our two floors -- the available floors at 767 5th Avenue, which total about 80,000 square feet. We have a lease for 24,000 square feet out for execution -- we actually expect to get it signed today; and we have three other tenants looking at between 40,000 and 20,000 square feet. Again, we won't recognize revenue in 2017, but the expected contribution is over $7.5 million from this 80,000 square feet.

If you look at it statistically, there has actually been a significant amount of space leased at over $100 a square foot and that even excludes the Citadel lease at $425, more than, in fact, in 2015, but the typical relocation deal is still under 10,000 square feet, so you have to do a lot of deals to lease space. Our total New York regional activity in the third quarter was about 113,000 square feet. We are negotiating leases for 60,000 of our 87,000 square feet of 2017 rollover at 599. It's all priced in the $80s and we expect to receive income from some of those spaces in 2017. We completed the relocation of all of the tenants from the low rise at 159 East 53rd Street. This was our one opportunity to dramatically rebuild the space in conjunction with our plan to reintroduce the public spaces.

In order to complete the work, we took back 70,000 square feet in 2016, which resulted in termination payments and a rent rolldown, which is why you see negative statistics in our supplemental in the New York region this quarter. When we made this decision to proceed with this investment in late 2015, we recognized that we were going to be reducing the pro rata share of the revenue from the office space by about $5.5 million. That's what we are experiencing in 2017. We are now marketing a 195,000 square foot block of space that we hope to deliver to tenants in 2018 with revenue commencing in 2019.

At 399 Park Avenue, we've commenced an extensive renovation and have leased about 204,000 square feet of the coming up rollover and we have another 0.5 million square feet that is uncommitted, including about 100,000 square feet of concourse space that is currently rented at about $45 a square foot. The existing lease expirations from Citi and the law firm expire in August and September of 2017, and while we expect to lease significant portions of the space during the year, we anticipate having to remove the existing improvements and may not have tenants in place with the revenue recognition until 2018.

Our other New York City assets have very modest near-term expirations or vacancies. We've signed leases or negations ongoing that will create significant amounts of incremental income, but the opportunities to drive 2017 revenue are limited.

Going down to DC. The DC CBD office market fundamentals have not experienced much in the way of new demand generators and we haven't really seen any demonstrable positive change in the leasing market. Landlords are competing on any available space and concessions in DC on leases of 10 years or more typically include a year of free rent and more than $110 of tenant improvement allowances. DC is truly a forward-leasing market for any sizable space, but there continues to be speculative buildings under construction, believe it or not, aging beauties that are being repositioned and 11 operational buildings with between 100,000 and 400,000 square feet of available space. That's the market we are dealing with.

The GSA continues to have a very measured approach to its renewals and we are not aware of any requirements that are net generators of demand. We are negotiating short-term renewals with the GSA for 196,000 square feet of our 2017 lease expirations. In spite of the challenging environment, we are chipping away at all of our ability with about half of the 47,000 square feet of available space under negotiation at 601 Mass. That's the building that opened late last September. And we have another half a dozen leases under 15,000 square feet either signed or in active negotiations on our other DC assets -- CBD assets.

In Reston, we completed another six leases totaling 69,000 square feet where the average starting rent still is in the mid-$50s and we have made two proposals to large users for our proposed new 270,000 square foot Signature development. Our Reston portfolio continues to be 97% leased leaving us with a very small smattering of availability. There's actually been a pickup of activity at our VA95 product, the product that Owen was describing, and we are actually in negotiations with two tenants for between 53,000 and 69,000 square feet of our availability there, and we also picked up another 31,000 square feet tenant at our AJ6 building in Maryland.

As Owen reported, we are close to executing a lease for an approximately 476,000 square foot office building on the site of our existing 97,000 square foot office building, 145 Broadway. We are moving through the formal review process with the City of Cambridge. We anticipate vacating 145 Broadway during the second quarter of 2017 and commencing construction soon after. We are eliminating, taking off the board, $2.3 million of income on an annualized basis until the building comes into service in December of 2019. This is captured in our 2017 projections. I think you are starting to get the theme.

The demand growth in our Boston suburban portfolio continues to outpace the other submarkets. This quarter, we completed 173,000 square feet of leases and we have more than 475,000 square feet of renewals and relocations with growing tenants in progress. High-quality space is at a premium and we anticipate additional rent growth in 2017. One of our negotiations is for our building at 170 Tracer Lane, which we took out of service in 2016 in order to complete a major refurbishment. We spent an incremental $16 million and expect to increase the income by more than $1.2 million when the tenant takes initial occupancy during the third quarter of 2017. This is yet another example of us purposely forgoing current income in order to create higher long-term value.

The Boston CBD market continues to be a lease expiration-driven market with a steady flow of new technology companies. One of the more interesting phenomenon is that all the large users that have been entering the, quote/unquote, Innovation District, or the Seaport area, are for the most part traditional FIREA tenants seeking new large blocks of space and most of the smaller and growing technology companies have located in the financial district, uptown, which is what we call the north station area, or the Backbay.

During the quarter, we leased about 50,000 square feet in our CBD portfolio, but, this month, we expect to complete 64,000 square feet of leasing at 888 Boylston Street. Again, I think the leases will get done in the next day or so, bringing us to 89% leased. We've signed 108,000 square feet at the Prudential Center, including 76,000 square feet of new tenants bringing the occupancy in the Prudential Center to 98%. And we've signed 54,000 square feet at 120 St. James, the low-rise portion of 200 Clarendon.

As we discussed on our last call, 888 is not going to hit its stabilized run rate until November of 2017 when Natixis occupies floors 4 through 10, or 154,000 square feet. And while we've leased more than 1.2 million square feet at 200 Clarendon since we took possession in 2011 -- and it's a 1.6 million square foot building -- we still have 120,000 square feet of low-rise space and 125,000 square feet of high-rise. While the low-rise space is very attractive to nonfinancial tenants, the high-rise floors continue to be driven by traditional lease expiration-driven users and the activity in this area has been less robust. We expect to lease a large portion of the space over the next 12 months, but we are not projecting revenue in 2017.

In summary, we've executed on a significant portion of our plan and we have a significant amount of contractual revenues in both our operating properties and our development assets that will increase our earnings over the coming years. We've now executed on about $72 million of our $80 million bridge, but we still have a few significant lease expirations that were part of that bridge that we will still need to cover. And with that, I will turn the call to Mike.

Great. Thanks, Doug. Good morning. I'm just going to start with a couple quick comments on our balance sheet and then I will jump to our earnings results and our guidance. We completed a significant transaction in the debt markets this past quarter. We raised a $1 billion 10-year bond issuance at 2.75% coupon. If you include the settlement of a portion of our hedges, the all-in GAAP interest rate on that financing is 3.5%. We used the proceeds to repay two mortgages that had a weighted average GAAP interest rate of about 5.9%. So you will see the impact of the 240 basis point reduction show up as lower interest expense in our run rate going forward.

Our cash balances have dropped to just over $400 million after the acquisition of Colorado Center, funding of our developments and the repayment of debt. We project our development spend to approach $1 billion through the end of 2017 and we anticipate either using our currently untapped line of credit, or raising additional debt capital as a partial funding source.

Our guidance currently assumes the use of our line. Though it is certainly possible that we may complete a new debt issuance and hold the cash short term, which would be dilutive to our earnings guidance. With the run-up in Treasury rates over the past couple of months, our borrowing cost for 10 years in the bond market is currently about 3.2%. If you assume a $500 million debt issuance at the beginning of 2017, it would reduce our 2017 earnings guidance by about $0.05 a share.

The other major debt transaction that we have our eye on is the pending refinancing of our $1.6 billion mortgage on 767 5th Avenue that expires next October. This is a consolidated joint venture with our share being 60%, and we expect to refinance it in the mortgage market. We currently account for this loan under fair value accounting, so the GAAP interest rate is only about 3%. With the mortgage market currently pricing comparable large loans in the mid-3% range, the refinancing will likely increase our GAAP interest expense. We've also entered into hedges for $450 million of this at a 10-year Treasury rate of 2.62% that will impact the transaction. The current cash interest rate on the loan is 6%, so on a cash basis, we anticipate a significant reduction in the interest rate that should enter into our cash flow.

Our earnings for the quarter were reported at $1.42 per share, which was a penny above the midpoint of our guidance range. Our portfolio performed ahead of our expectations, generating NOI of approximately $3 million above our projections due to a combination of rental revenue outperformance and operating expense savings. The majority of the revenue beat came from San Francisco where we completed a number of leases earlier than we projected, including some renewals with strong rollups that we started to straight line upon signing. As you can see in our mark-to-market stats, we continue to experience dramatic rent rollups on our activity in San Francisco.

The outperformance in the portfolio was offset by a $1.8 million impairment we booked this quarter on a land parcel in suburban Maryland. This is the last parcel we own in a land assemblage we have considered exiting over the past several years, having sold two other parcels and booking gains totaling $5.5 million.

Our FFO guidance for the rest of 2016 of $5.97 to $5.99 represents an increase of $0.03 per share at the midpoint from last quarter's guidance. All of the increase emanates from the performance of the portfolio due primarily to leasing success in the Boston and San Francisco markets. Our guidance now assumes our share of 2016 combined same property cash NOI growth of between 3.5% and 4% over 2015, which is at the high end of our prior range.

As you look at 2017, the most important factor to remember is the impact of the amount of termination income that we recorded in 2016. We project 2016 termination income of approximately $58 million. The lion's share of this came from one large termination at 250 West 55th Street and several at 601 Lexington Avenue where we needed to relocate tenants from the low-rise to the high-rise in order to allow our redevelopment to move ahead. Our 2017 guidance assumes only modest termination income. So this represents a loss of $0.31 per share of projected FFO from 2016 to 2017.

In the portfolio, Doug described our activity in New York City and Boston where we are successfully signing leases and letters of intent, but much of the impact will be in 2018. Although some of our leasing efforts will not result in immediate revenue recognition, we do assume solid growth in same property portfolio in 2017. In Boston, we've signed leases on virtually all of the vacant space at the Prudential Tower and we expect Eataly and the rest of the Prudential shops' releasing effort to be open and revenue-generating by the first quarter.

We also start to deliver floors to Putnam at 100 Federal Street and we expect moderate additional leaseup at 200 Clarendon Street. In aggregate, our guidance assumes this activity adds $17 million to $25 million of incremental NOI to 2017.

In San Francisco, we've had a tremendous success both leasing up our vacancy and rolling up rents on renewals at Embarcadero Center this year. This was reflected in 2016, but will be even stronger in 2017 where we project an incremental $18 million to $25 million of NOI, equating to growth of more than 10% for the region. On a cash basis, the growth is even greater as the cash mark-to-market takes hold on our early renewal activity.

The impact of the growth we are experiencing in Boston and San Francisco from both increased occupancy and a rollup to higher rental rates is projected to be partially offset by a decline in the contribution from the New York portfolio. The contribution from the Washington portfolio is projected to be relatively flat.

As Doug described, in New York City, we will not see any real impact from the significant leasing we are doing at 767 5th Avenue and at 250 West 55th Street until 2018. We expect a temporary loss of income from 500,000 square feet of rollover at 399 Park Avenue in the second half of the year. Overall, our guidance assumes NOI from the New York City portfolio to be down $5 million to $10 million in 2017 from 2016.

So, in aggregate, our guidance assumes our share of combined same-property NOI to grow between 2% and 3.5% in 2017 over 2016 and on a cash basis, we assume between 2% and 4% growth of our share of combined same-property NOI over the same period.

Our non-same property portfolio includes our development deliveries, acquisitions, dispositions and the impact of taking building out of service for redevelopment. Our redevelopment projects include 159 East 53rd Street in New York; 145 Broadway in Cambridge; and one of our suburban Boston assets, 191 Spring Street. We expect these redevelopments to generate an accretive development return on investment, but in 2017 will result in the loss of approximately $8 million of NOI compared to 2016. This includes both lost rental income, as well as the expensing of demolition costs that we project at $4 million in 2016 and $7 million in 2017.

On the positive side, we expect to generate NOI growth from a full year of the acquisition of Colorado Center and from our development deliveries. Though, as Doug described, our development deliveries will be much more impactful to 2018 based upon the anticipated occupancy dates for our major pre-leases. In aggregate, our guidance assumes our non-same property portfolio will add an incremental $18 million to $30 million of NOI in 2017.

The other area where we expect significant change in our earnings in 2017 is through lower interest expense from the combination of debt refinancing completed in 2016, as well as higher capitalized interest associated with our development pipeline. Our guidance for 2017 assumes net interest expense of between $378 million and $391 million, which is a reduction of $21 million at the midpoint from 2016. We assume capitalized interest to be between $50 million and $60 million in 2017.

So in summary, based on these assumptions, we project our 2017 funds from operation to be between $6.05 and $6.23. This is an increase of $0.16 per share from the midpoint of our 2016 projected FFO. At the midpoint, the increase in FFO over 2016 is the result of $0.23 per share of growth from our share of our combined same property portfolio; $0.14 per share of incremental NOI from development deliveries and acquisitions; $0.12 per share from lower interest expense; a penny per share from higher development and management services income that we project to be offset by a reduction of $0.03 per share from higher G&A expense and $0.31 per share of lower projected termination income.

Again, the biggest item to consider when looking at our 2017 FFO growth is the impact of all the termination income that we recorded in 2016 that is not projected at anywhere near the same level in 2017. If you exclude the impact of termination income, our FFO per share at the midpoint of our guidance range is projected to be up 8.5% over 2016.

I also want to make a quick comment on our dividend. Our estimate for 2016 taxable income before gains on sale is roughly in line with our current dividend rate of $2.60 per share. As we forecast the income generated from our development pipeline delivering over the next few years, combined with the anticipated organic growth in the portfolio and assuming moderating asset sales, our taxable income is projected to grow meaningfully. We've been working with our Board on evaluating our dividend strategy and anticipate that our annual dividend will likely increase in both the short term and the longer term to continue to match our taxable income to our dividend.

That completes our formal remarks. Operator, can you open the line up for questions?

Certainly. (Operator Instructions). Alexander Goldfarb, Sandler O'Neill.

Good morning. Owen, just first question is, with the JV with Blackstone down at Metropolitan Square in DC, can you just give a little bit more perspective on how we should think about the relationship with Blackstone? Is this going to be where, as they have buildings that they are putting on the market, we may see you guys partner and buy into those buildings, or is it more selling parts of your portfolio, or is it the two companies both going out and pursuing new acquisitions together?

Look, I think that we've done actually two important transactions with Blackstone this year. We purchased the half interest in Colorado Center from them and we are doing this recapitalization at Metropolitan Square. I don't think I would read anything more into it than just that. Clearly, we have a good relationship and a tremendous amount of respect for Blackstone and we are very open and welcome to doing new business together, but I think it will be very situation (technical difficulty).

Okay. And then the second question is, on LA for future investment, your comments sounded a little bit as though we should be patient, but maybe you could just frame some perspective, when you look at the companies out there, whether it's [Dougie] or Hudson, they are buying individual deals, or maybe a portfolio like Westwood, but a number of the properties that meet the Boston criteria don't seem as widespread, at least to those of us. So maybe if you could just provide a little bit more perspective on what you guys see as the opportunity set both in aggregate and then maybe as far as timing if it's something that's within -- we should wait another six months, or it may be another 12 plus before we see more investment.

Yes. So the strategy, as you know and as we've been articulating, is the investment in Colorado Center isn't one-off. We clearly feel that we are going to make a profitable investment in Colorado Center, which is great and was certainly one of the objectives, and the other objective was to get us into the LA market, which we think will be an attractive and important market for the Company over the long term. But we don't intend to go out and make new investments just to grow in LA. Each investment, as Colorado Center did, has to stand on its own and, in our opinion, create attractive returns for shareholders. And if you also look at the overall Company, we entered the San Francisco market in the late 1990s and it still is the smallest region of the four primary markets of the Company; here we are nearly 20 years later.

So our intent is to grow. We view the investment in LA as strategic, but we are going to wait for opportunities that, again, we think make sense and [pencil] from a return perspective. And so where we are in the market today, I don't think you should expect us to go out and purchase stabilized assets in a 4%s cap rate environment. Those are not the kinds of things that we are going to be doing. We are going to be looking at new developments. We are going to be looking at assets that need some repositioning or lease-up. Our focus will be on a handful of markets in West LA and I don't think you should put a confined timeframe on it like 6 months or 12 months. We are going to be careful and patient and wait for the right opportunity.

Okay. That's helpful, Owen. Thank you.

Manny Korchman, Citi.

Mike, a question for you. How much taking the properties out to put them into the redevelopment pool instead of same-store pool impact same-store growth? Said differently, if you hadn't re-classed them and you said these are properties we own; we are doing work, but they are coming out of the pool, what would same-store growth be then?

I don't think it's that significant 2016 to 2017. I mean we've talked about $8 million of reduction. I think that if we didn't pull them out in the 2015 to 2016 at this point -- it will probably come out in the fourth quarter, so we will have one quarter of 601 being out for the low-rise, which will have a little bit of an impact, but I would say it's 25 basis points maybe to 50 basis points, something like that.

Okay. And on Colorado Center, you said you have deals that are close. How much capital is it going to take to get those deals in place, or is it going to be just more normal TI type spend?

So the deals that we have in place are not legally conditioned on us doing any work to the exterior areas of the buildings. There's a tenant improvement contribution for each of the deals and I think the general market is in the $70 to $80 a square foot for a 10-year deal and it's closer to $100 a square foot for a 15-year deal. But we intend to do a major repositioning of the properties and we have a plan that we've come up with that we've discussed with TIA who are the other party in the transaction and we don't have a firm budget on that yet, but it's somewhere -- more than $10 million and probably less than $25 million and we will have to come to an agreement internally and with them on what the right amount of spend is and how long it will take, but that will be more of a global repositioning as opposed to what's required for these deals. These deals don't have any requirement from a legal perspective to spend money.

Manny, the number is about 50 basis points. It's about $8 million on about $1.350 billion of our share same-store.

Thanks, Mike. Last one for me. Is there any agreement with salesforce in place, or any option in place where if they want more space at Salesforce Tower, they get it, or is it a new negotiation for new space?

So our lease with salesforce.com includes just the space that they have on, quote/unquote, their existing lease, so we have the unfettered right to lease other space to other tenants. You would think that the major 800,000 square foot tenant would be an important customer and so to the extent we are doing things on other parts of the building, we are letting them know what's going on. So to the extent that they have an interest in that space, they can give us their view on how we might work with them on it.

Great. Thanks, everyone.

Tom Lesnick, Capital One Securities.

Good morning. Thanks for taking my questions. I guess, first, going back to the discussion about financing for 2017 and specifically mortgage debt, can you comment at all on what the appetite for balance sheet debt by life cos looks like relative to the CMBS market right now?

I think both have strong appetites. I think the CMBS market has come back very strong in the summertime after a weak, volatile first quarter and beginning of the second quarter and life companies were actually holding back a little bit because they wanted to have a more even outflow. So they held back in the first half and now CMBS is more competitive than they are. You've got swap rates that are below Treasury rates and you've got -- for leverage rates that are 50% to 60%, the spreads are very, very tight on CMBS, so they are competitive. So I think now the life companies are trying to become more competitive and put out capital. They have more to put out by the end of the year, so I think it's pretty competitive.

I think that when we look at 767 5th Avenue, that's a big loan. That is going to be more aligned with the CMBS market, I would imagine because you would have to put together many other life companies to put that together given its size and the fact that most life companies are maxing out at a couple hundred million to maybe $400 million at most, or we could do a large bank loan transaction, which is actually what we have today when we originally did the deal.

Got it. Appreciate that. That's helpful. And then my other question -- on the redevelopment of the low-rise at 601 Lex, how are you guys thinking about positioning rents for that space relative to a wide range of rents in Midtown?

John, do you want to take that one?

That's a very unique product and we are very, very excited about it. It's got light and air, but no views. It's got a very good location. So that will be positioned to be in the high $80s. (multiple speakers) and as 10% of the entire space is outdoor space, (inaudible).

Great. Thank you very much.

Blaine Heck, Wells Fargo.

Thanks. Owen or Doug, it sounds like you guys have a lot of situations where the lag between signed leases and occupancy or innovation are delaying the recognition of income, but, on the flipside, can you talk about anywhere that you think maybe there's currently vacant space that could be leased quick enough to become income-producing before the end of the year and maybe provide some upside to guidance?

So I am hesitant to answer that question too aggressively because the circumstances under which we deliver the space are so critical to when we recognize -- have the ability to recognize revenue. So we can sign leases and be in a position where the space is committed, and if we deliver the space in one condition, we are recognizing revenue day one and if we are delivering it after having removed the existing improvements, it could be 10 months, or 12 months, or 6 months delayed. So Mike's numbers have some of that baked into them in terms of his projections for our same-store growth for the year, but it's pretty muted because of the issues associated with the delivery conditions. So I think we will do more leasing. I don't know whether or not we will be able to get impact from it in our 2017 numbers.

Okay. Fair enough. And then it looked as though CapEx was higher than normal again this quarter and I know it can be a little bit of a lagging indicator since it's on leases commenced during the quarter, but can you guys just talk a little bit more -- you touched on it in New York -- but what are you seeing in each of your markets with respect to concessions and are you getting any pushback in any of the markets to increase free rent or TIs?

So I would tell you that overall in our markets, if you had to pick a direction, concessions are moderately up as opposed to moderately down. I think in New York City, many landlords have taken the recipe that we've been working with for a number of years and pre-building space, and if you pre-build the suite, you are giving a lot more money in the space than you are when you are giving an allowance, but in theory you are reducing the free rent concession significantly and/or improving your velocity.

I described the transaction environment in Washington DC. It's pretty close to where it was last year, maybe it's slightly higher. I think the greater San Francisco market, it's actually -- concessions have come down a little bit in the sense that many tenants are deciding that renewing in place on average is a more economical experience for them because of the cost associated with having to relocate. So if you have a tenant in place, you can get away with a smaller concession than with a new tenant coming into that space.

And then in the Boston market, the CBD probably had slight increase in its tenant improvement numbers, not significant. Pre-rent really hasn't become a factor in this market at all. And our suburban market actually I think has seen a decrease overall in concessions because -- honestly, because of the stronger market and the availability of high-quality space is becoming limited.

Great. That's helpful. Thanks, guys.

Nick Yulico, UBS.

Thanks. Mike, you mentioned that you are going to do a little over 8% FFO growth next year if you exclude the termination income and so I'm wondering whether FFO or AFFO growth could get even better than that in 2018 and beyond since you still have a fair amount of releasing of vacancy and development NOI to hit, which I think is a greater amount of benefit after 2017.

I think that -- we don't want to talk too much about 2018, but I think if you look at what we have, we've got a significant amount of space at 200 Clarendon and 120 St. James that is today roughly 350,000 square feet of availability that is zero today, which is meaningful space. So I think that -- and we've got some other rollups in Boston, suburban Boston and Cambridge, so I think the Boston market will do very well. I think San Francisco will continue to do well. We have dealt with a lot of our rollover, but we've still got a little bit more to go that has rollups and we still have a few floors of vacant space.

And then in New York City, Doug talked about 767 and 250 West 55th Street. Now we do have to release the 399 Park space, so depending on how quickly that comes in, that could be a negative for that year. And then, obviously, our development pipeline, we will have a full run rate of 888 Boylston Street and then salesforce will start to have a real impact to us. I think there's some very positive things for 2018.

Okay. That's helpful. I guess just one other one on Salesforce Tower. Can you go back and explain a little bit more about -- someone was talking about the operating expense I guess hitting for the full building at some point I think at the end of 2017 along with the removal of capitalized interest and is that an issue that effects 2017 much, or is that more of a 2018 issue?

The way that we capitalize taxes are that we continue to capitalize them on the percentage of the space that is not leased up to 12 months basically after we deliver the building. But most of the other operating expenses, you do have to start to ramp up for utilities and other things and you can't capitalize those types of things. So in the very beginning of your occupancy, you have a tough time getting positive NOI, but obviously as you lease up, you start to get that leverage.

Okay. And just quickly, could we also just get the capitalized interest assumption for 2017? Thanks.

I think we said $50 million to $60 million of capitalized interest for 2017.

Jamie Feldman, BofA.

Great. Thank you. I guess just to start, Doug, did I hear you say that you are $72 million done of the $80 million leasing target for the repositioning NOI?

So we've been keeping this running total and so we've done $72 million of $80 million on the revenue side, but remember number there's a net reduction from some leases that were expiring that go against that. So I'm giving you a gross number, not a net number. So there's another $15 million to $17 million that's part of that $80 million that we still have to get done. But on an apples-to-apples basis from what we've been reporting from the beginning of the year, we started with zero and we've gotten $72 million of $80 million and then we have some negatives that have come on that we have to still cover.

Okay. And then, Mike, you talked about a potential $0.05 drag from a debt deal early in the year. Is that in your guidance, or you are saying if you do it, it would be another drag?

If we do it, it would be a drag. So we've assumed in our guidance that we are using our line of credit as we need it. So we've got some interest expense in our guidance associated with our line of credit, which we draw on as we need the money. So it gets drawn throughout the year. But it is certainly possible, again, that we could do something much sooner than that and then we would sit on the cash and the cash doesn't earn much. So I gave an example of $500 million because that's the approximate amount of capital we would need to fund out most of our pipeline.

Okay. And then do you have a view on AFFO for 2017 based on your guidance?

What I can give you is some of the pieces to help you. If you look at our projections for what we need to lease to meet our plan, we need to lease something like 3.5 million square feet of space. So depending on how much cost you throw at that, that's probably somewhere in the $200 million plus or minus range for costs that would get hit there. Non-cash rents, we gave guidance for that of $50 million to $70 million and I think that we would say maintenance CapEx is probably somewhere in the $60 million to $80 million range.

If you look at other non-cash expenses that we have, that would offset that probably between $35 million and $45 million. So you are talking about total adjustments to our FFO of $280 million to $320 million, something like that. That would bring you down probably to, I don't know, $4.25 to $4.50 or something like that on a per-share basis, just dropping that off the guidance (inaudible).

And then I guess going back to the same-store question for 2018, just back of the envelope, do you guys have a sense as you were going through the numbers of where you are shaping up for 2018 same-store and what kind of pop you get over 2017 based on what's in motion?

We've got projections, obviously, but there's a lot that can change and a lot can happen. We don't really want to get into 2018 guidance at this point.

Okay. That's fair. And then my last fundamental question on New York City. You gave some interesting color on market leasing and some demand you're getting in your buildings. I think you also said the $80-ish rent market is pretty good. How are you guys thinking several years out on New York City? As everyone thinks about the moving pieces in the market, how do you guys think about what you are expecting?

John, do you want to try that one first?

Well, I'm very consistent. I'm very bullish on New York City. I think the New York population is going up. All the indicators here are positive. There's not as much job growth as last year, but there is job growth this year. I think the hotels are doing well and it's a very good market. So we think it will continue to draw people into the market, the tech sector. The [TAMI] sector is growing. So the long term is bullish. We do have some supply, as we've talked about, coming on with the Trade Center primarily and the rail yards and that will be absorbed over the next couple of years.

And I guess in terms of prospects to push rents, (multiple speakers) flatten out, do you think that continues?

I'm not bullish on rents moving up. I think there will be some areas in the city, in some particular buildings where rents will move and there will be some places that will be a little softer, but I'm pretty flat overall for the next couple years on rents.

Okay. Anyone else want to chime in?

Jamie, I think we've been saying for I think several years now that, as John articulated, New York is a healthy market. It's a desirable city. There is job creation. I think the mix of industries is getting more diverse in a very positive way. So all that is very positive, but there is a fair amount of supply. It is significant on a square foot basis. It's less significant on a percent of total stock basis, but it matters. And so when we've run our numbers, we see availability in New York. It's hard to push it below 10% and when you are in an environment like that, it's hard to push rents certainly above inflation and we've been saying that and we've been in many cases leasing our portfolio with that type of philosophy.

Yes, that's all true, but also on the other side of that, we don't see the availability going to 12%. It takes a lot of movement to move it from 11% to 12%, so it's pushing somewhere around 11% aggregate in the city and we have some pipeline coming on over the next couple of years, small, as Owen said, a small percentage relative to the 400 million square foot market here, but nonetheless space that will impact the market. So we are going to be somewhere around 11%. That's what the availability rate overall Manhattan is going to be at the end of the year. Fourth-quarter leasing velocity will probably move up. It should hit close to the 25 million that's the average over the last 12 years.

Steve Sakwa, Evercore ISI.

It's Rob Simone standing in for Steve. Just stepping back and at a high level, you guys are going to do call it $1.3 billion of NOI roughly this year and I guess our question is, once all the developments are placed in service, the biggest portion obviously being salesforce, and once you guys are through the majority or all of your planned leasing, what's the run rate cash NOI, or GAAP NOI that we should be thinking about looking three years out when all of this activity, which will quarter-to-quarter introduce a lot of noise to the results, is finished, what's that bogey you guys are targeting?

I'm going to answer that question in a terribly unhelpful way, which is I don't think we are in a position where we feel comfortable giving you a projection three years out. We've given you a lot of pieces and we've described the average return on cost of our development pipeline and the delivery of those dollars. So if you are assuming -- 7% is a number that we are using as a surrogate. The number is going to actually be higher than that on a GAAP basis because we are describing cash yields and obviously cash yields don't include the increases in rents that you straight line and they don't include, as Owen, for example said, what our market land value is. That's a non-cash item, or non-GAAP item, so the numbers are going to be higher. And if you take that -- and then Mike gives a pretty good same-store revenue number -- I wish I could tell you that we can give you more than that, but I think that's what you are going to have to work with to come up with our three-year projection, if you want to call it that.

Yes, no, no, that's helpful. I know obviously it's a long way out. I guess it's just a lot of activity that's happening concurrent to each other and it's also not going to be a straight line up, obviously. So that's helpful. I get it. Thanks, guys.

Vikram Malhotra, Morgan Stanley.

Thank you. Just two granular questions on New York. 250 West, can you outline the prospects for the remaining space, particularly on the retail left on the ground floor that I think (technical difficulty) is helping you with?

Sure. So we have one retail space left and we have a letter of intent on that space with a restauranteur.

And then any other space on the office side?

Yes. So we have the 36th floor, which is available and half of the 35th floor and we have discussions going on with smaller tenants on the 35th floor and we, at the moment, don't have any active conversations on the 36th floor.

And then just on retail going to the Plaza District, just want to get your thoughts on retail on 5th Avenue around 50, 57th Street versus off-5th, and I'm just trying to understand this commentary on some weakness in certain parts of Plaza, but just want to get your thoughts on how the prospects are for on-5th versus off.

So I will give you a macro answer and then, John Powers, you can provide some micro if you want. So Boston Properties has leased all of their 5th Avenue space for the next 17 or 18 years. So we are not in the market on 5th Avenue any longer. We will have a small space on Madison Avenue coming up in the middle of 2017 and another space towards the end of the year and they are both 1,000 to 3,000 square feet and our view is that the market on Madison Avenue has gotten marginally better than where it was three or four years ago. So if three or four years ago we thought the market was $850 to $900 a square foot, today, I think we think the market is from $1,000 to $1,200 a square foot. John, do you have any other comments?

No, I think that covers it.

Great. Thank you very much.

Jed Reagan, Green Street Advisors.

Just following on the New York questions. I guess what trends are you seeing in terms of net effective rents in Manhattan year-to-date and is there any difference at the high end of the market versus the more moderate price points?

I think that it depends on how you define that. So I think that the way the market is working is that when you have -- and most of the Midtown activity is lease expiration-driven; there's not a tremendous amount of growth -- that when you have a lease expiration tenancy and they have a particular day on which their space is leasing, the market has become more flexible on meeting that date.

So where it used to be that, in a bit of a stronger market, if you had a lease expiration on January 1 of 2018 and the traditional 10-year deal was 12 months of free rent and $65 or $75 of TIs, that would be what the transaction package would be. Today, if you have a lease expiration on January 30, or February 1, or March 30, or April 1, you might get the same concession package, but your rent commencement date would be a little bit drawn out. So effectively your NER, if you want to call it that, has gone down slightly, but it's, in reality, just a way to meet the demand of the marketplace as opposed to actually increase concessions and I think that's the flexibility that's being required.

In addition, as I said before, Jed, there is more landlord-oriented work that is going on in Manhattan in the form of pre-built or other landlord-required obligations to tenant spaces. So there has been a push-up in concessions in that way.

But you haven't necessarily seen the face rent growth to offset some of those higher concessions?

John, I don't believe we have? You can comment.

No, I don't think we have. And, as Doug said, yes, in a market that's got some vacancy at 11% availability and some balancing between tenants and landlord, tenants still have sometimes limited opportunities. They might have two or three things even though it [with] all the space in the market in terms of where they want to go, their size, what's available, their timing, etc. But because of the market we are in with this balance, landlords are pushing out and looking at future lease expirations and matching that so the tenant doesn't have double rent, as Doug said. And that pulls the NER down, but that's forward leasing and that's consistent with most lease expiration-driven markets.

Got you. Thanks. Can you talk a little bit about your expected disposition plans for 2017 in terms of the potential dollar value and the profile of assets you might look to sell?

Jed, for 2017, we haven't finalized our disposition plan yet, but our expectation is that we will continue to do what we've been doing for the last couple of years and that is selling non-core assets. So I would expect the volume of dispositions to be more in line with what we were doing in 2016 as opposed to a couple years ago.

I see. Okay. And then as we look out to 2017 external growth plans, how should we think about the potential number of, or scale, aggregate scale, of new development starts and I know you mentioned a few DC possibilities specifically -- if there's any sense of how much that could aggregate?

So I will give you a range. If we are able to do nothing other than this potential lease at 145, the number is call it -- what Owen said, $530 million. If we are successful in generating the business that Ray is chasing in DC, there's another $0.5 billion of potential starts in calendar year 2017.

Okay. Great. Thank you.

Craig Mailman, KeyBanc.

Maybe to ask the out-year NOI question a different way, as you guys look at the portfolio and look at what your expirations are going to be two years out, are there any instances similar to what we are seeing today with 601 Lex and other places where big blocks of space may be taken offline to redevelop -- anything that could be a step back in terms of an offset to some of the NOI coming on?

So it's a very fair question, Craig. I think that if we go around our portfolio and look at the amount of repositioning we have already done, the vast majority has been completed. There are a few 300,000 plus square foot buildings in Washington DC. One of them is undergoing a renovation right now and the other one will likely start in 2019 or 2020. That's the building over on New Hampshire Avenue, right?

Yes.

And then there's a suburban office building in Boston that we actually are about to undergo a renovation on, but we actually have a signed lease for that building and that tenant would like to be -- sorry, not a signed lease, a signed letter of intent -- and that tenant would like to be in that space in the third quarter of 2017, so that one is going to happen really fast.

Our CBD portfolio by and large in New York City, and in Boston and in Washington DC, aside from that one building I just described, have really gone through a pretty significant restoration and refurbishment. And then we are going to be doing some work at Embarcadero Center probably over the next two or three years to really upgrade and improve the experiences there, but not in anticipation of any lease expirations, just in the form of making sure we are maintaining our competitiveness with the marketplace.

Okay. That's helpful. And then just to go back, Owen, to your comments about the opportunities you are seeing in DC on the development side. Could you go into -- is that more in the District, more in the Metro more broadly and how comfortable would you be doing any development other than the build-to-suit in that market?

We are looking at opportunities in the District, in Northern Virginia and in suburban Maryland and certainly as we have described, pre-leasing is critical for us to launch projects and even more critical if we are going to do it in the suburbs. If we have a development that is fully or materially pre-leased at an attractive yield, it's something we are certainly going to launch.

So something like north of 50% kind of a good bogey?

Oh, yes.

Craig, just to give you perspective. Three of the things we are looking at in DC are 100% leased and one of them there will likely be a lease of at least 60% or 70%.

Okay, that's helpful. One last quick one. You guys are seeing the demand come back for the space you have at the GM building. Could you just give some color on maybe is it a similar tenancy to what you guys had on the hook earlier? Did you guys have to change pricing there at all to reignite activity?

We have not changed our pricing from the deals that we were doing a year ago, so we have not raised our pricing, but we haven't lowered our pricing and the tenants are very similar. They are in what I guess Owen refers to as small financial firms, private equity firms, alternative asset management firms, consultants to the asset management business, some, quote/unquote, I guess hedge funds (multiple speakers).

We call them very attractive tenants.

Doug, I think the only difference might be that we thought we might have to have pre-built some of the space and try to attract 5,000 to 10,000 square foot users and as Doug described, what we are really talking to is 20,000 to 40,000 square foot users. So that's a half a floor to a full floor, so that's not really doing the pre-built activity.

But we will end up doing some pre-building on those floors to fill out the space.

Great. Thank you.

John Kim, BMO Capital Markets.

Thank you. Just on that subject of retail in New York. I was interested in Doug's comments on the conservative percentage rents that you see there. Can you just give us a range of what conservative means and also was that commentary for Under Armour or did that include Apple as well?

So you are never going to hear us describing what the rent is or what the sales are for any of our tenants on a particular basis because I just don't think that's appropriate. So the number I gave you was a revenue base for all of the retail at the building, which includes a multitude of tenants, even some banks, but they don't give us percentage rent. (multiple speakers).

And I guess my point is is that we are well off what the peak sales were in terms of our expectations for the percentage rent and we haven't assumed any growth. So we said let's look at what the least exciting sales might be and use that as our baseline and everything that we get on top of that will be gravy.

But as far as conservative, are you saying below 20%?

I'm not going to give you a number because you've got to understand the sales for these properties are different than they are for anything else that you would probably see in a retail portfolio.

Okay. In San Francisco, there's been a lot of media reports on the structural integrity of Millennium Tower, which neighbors Salesforce Tower. How concerned are you about this and has this impacted leasing at all?

Bob, would you like to describe that one?

It's had zero impact on leasing and we are not worried about the building falling over. That's the short answer.

In a worst-case scenario, what do you think happens?

I think they pressure grout and stop the building from sinking. I think it's going to continue to sink until they come up with a solution.

Got it. Okay. Thank you.

John Guinee, Stifel.

Big picture question for you guys. Over the last 10 years, you have been highly, highly successful selling high 4% cap rates, plus or minus, developing to a 7% yield. Your cost of capital on an NOI basis has been a $4.5 to 5% yield. You've paid a special dividend when necessary. And what this has done is this has really helped you on an NAV value creation, but has hurt in terms of FFO growth.

If you look at what's happening in the investment sale market, as I think, Owen, you pointed out at the beginning, some stunningly high prices, but very few bidders. Why aren't you taking advantage of this and really ramping up your investment sale program given what can be happening in the market in the next couple years in the investment sale arena?

John, well, we have taken advantage of the sale market this cycle. We did several billion dollars worth of asset sales and joint ventures over the last several years and made significant special dividends to shareholders. We also -- a lot of those decisions also were driven by the need we had for capital to fund our development pipeline, in which we've been employing. We will certainly consider selling additional assets in the future if we need the capital for a new investment that we make or for additional development. But what we are not doing is just selling assets when we don't have a need for capital. As you know, our debt is lower than where it has traditionally been and we have still substantial capital to invest in our current development pipeline.

Great. Thank you.

Okay. That concludes all the questions and our remarks. Thank you for your attention. That concludes the call.

This concludes today's conference call. You may now disconnect.