波士頓物產 (BXP) 2001 Q1 法說會逐字稿

Good day, Ladies and Gentlemen and welcome to the Boston Properties conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during this teleconference, please press *0 on your touchtone telephone, any conference coordinator will assist you. As a remainder, Ladies and Gentlemen, this conference call is being recorded. It is now my pleasure to introduce your host to today's conference, Claire Koeneman of the FRB. Ms. Koeneman, please proceed.

Thanks. Good morning everyone. Welcome to Boston Properties First Quarter Conference Call. We wanted to let everyone know that we are hosting a live web cast of today's call, which you can access through www.streetevents.com or www.bostonproperties.com. At this time, I would like to inform you that certain statements made during this conference call, which are not historical, maybe deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although, Boston Properties believe that expectations reflected in any forwards-looking statements are based on reasonable assumptions, it can give no assurance that the expectations will be attained. Factors and risks that could cause actual results to differ materially are detailed in yesterday's press release and from time-to-time in the company's filings with the SEC. I am pleased that the management could join us today, we have Mortimer B. Zuckerman Chairman of the Board, Edward H. Linde President and CEO, Douglas T. Linde Chief Financial Officer, and additionally all the regional managers from Boston Properties are online and will be available during the Q&A session. So, without any further delay, I would like to turn the call over to Douglas T. Linde.

Thank you Claire. Good morning everyone, and welcome to Boston Properties First Quarter 2001 Earnings Call. Last night, we reported funds from operation before a non-cash adjustment related to the application of FAS 133, a new accounting pronouncement in the Government Derivative Investments and Hedging Activity on a fully deluded basis of $0.85 per share. This represents a 9% year-to-year increase in diluted FFO per share. We expect a close on our purchases to the court standard this afternoon. All our forward-looking comments regarding the company's earnings include the acquisition of Citigroup Center. We will address the specific capital structure, listing profile, and general returns later in the call. I have a few comments to make on the information outline in our first quarter supplemental package. Our same store of lease-to-lease results continues to demonstrate that in better group of the portfolio remain. In the first quarter, we are really 597,000 square feet with an increasing net rent of just over 47.7%. This was spread portfolio wide, the largest lease with 62,000 square feet, and the average lease was 8000 square feet. In addition, we did recognize $1.1 million of termination fee income from a number of tenants, no major increase reserve. Our straight-line rent adjustments in the first quarter were approximately $6 million. This jumped significantly from Q1 2000 because of two San Francisco renewals where rent increases take place in the later part of 2001. We have provided a lease expiration schedule by market and property type. Our office lease rollover for the remainder of 2001 is 991,000 square feet, and for 2002 is 1.5 million square feet. This total is just over 10.6% of our inservice portfolio. I will leave a discussion of the current market conditions to Edward H. Linde and the regional managers. However, if you calculate a mark to market on our entire portfolio, the current imbedded growth is more than $275 million or $2.20 per share. In calculating this result, we use current office market rent averaging as follows: $69 for New York City, $66 for San Francisco, $55 for Boston CBD, $41 for the District of Colombia, $41 for Suburban Boston, and $34 for Suburban Washington DC. Our operating margins showed a slight improvement from the first quarter of 2000, rising modestly from 68.8% from 67.7%. We continue to see dramatic increases in the price of utilities in California and we are monitored showing utility charges in Boston and New York City. Union increases in cleaning and the electrical crisis in San Francisco in particular, caused our expenses to increase relatively significantly from last quarter. We do not expect any immediate correction of the spike in energy cost, and this will affect our margins for the remainder of 2001 and possibly into 2002. As I have explained during our last call, the Long Wharf Marriott has been undergoing a total rooms redo during the first and second quarters of 2001. As expected, we have seen a reduction in the revenue part based on the lower occupancy as we have had 60-100 rooms out of service at various times during the quarter. Given the current economic climate, we anticipate flat results compared to calendar year 2000 for the remainder of 2001 in all of our hotels at Long Wharf, Cambridge Marriott, and Residency. We have one additional comment on the hotels. There will be increased quarter-to-quarter variances in the hotel net income numbers due to a different reporting period in 2001 versus 2000. We expect the hotels to generate approximately 14% of their income in 2001 first quarter, 26% in the second, 27% in the third, and 33% in the fourth. A few comments on FAS 133; FAS 133 governs the accounting for derivative investments and hedging activities. Our accounting staff and our outside orders spend a great deal of time calculating our FAS 133 adjustments in the first quarter. This is a non-cash accounting charge, caused by the fact that our hedges were created as options in periods of cash inflow and not swapped and was not deemed effective from the FAS 133 perspective. If these hedges had been done as swaps the mark-to-market would have flown through to our other comprehensive income account on the balance sheet and not affected earnings. These hedges relate to a portion of our floating rate construction loans. We protected us ourselves against raising interest rates last year by entering into a series of ____ 00:06:18. These were tax-less transactions for the company. We paid for them by selling a floor that limited our opportunity to pay lower rate as interest rates fell. The true economic impact of these hedges was to reduce the budget and interest cost on our development projects from between 8.75-9.5%, to approximately 8%, which will ultimately translate into a higher return on investment as these allowances comes online. If short-term rates continue to be lower, we may see this soft FAS 133 charges. But, please remember that these charges will all reverse themselves as the term of the hedges comes to an end we will be recording as phantom income the sum of all the charges as well as the $11 million balance, which accrued from the end of 2000. We will continue to break out FAS 133 in all of our earnings releases. I would like to mention one other potential feature accounting charge that we may take in the second quarter of 2001. SAF 115, which governs the accounting for marketable equity securities, requires that we take a charge against earnings for the loss of any marketable security if the market value of that security goes below cost for a period that is other than temporary. We invested $6.5 million in Cyprus and allied raiser. If the market price of those stocks did not improve, we will write down those investments next quarter, because the accounting literature will be in this reduction in value of the other than temporary. At the end of the first quarter, the write down would have been approximately $5 million. The only other non-property investment Boston Properties consensus need is a $1.5 million private investment category, the elevator news, and advertising media. In our results for the first quarter, we have a write-up of approximately $600,000 relating to the World Trade Center. At this time, we believe our 2001 G&A will be between $39 million and $40 million. We showed a 3.6% increase from Q4 2000 to Q1 2002, if you normalize the termination expenses reported last quarter, the write-up of the World Trade Centre and some increases in MIS for QH for the first quarter of 2001. I would like to spend a minute, highlighting a few changes that are of fair significance to our construction in profit data schedule, which has financial modeling implications. This commentary is made to provide some color on the changes from the fourth quarter. I will leave a discussion of the actual leasing progress of these assets to Edward H. Linde and the other regional mangers. First, 302 Carnegie Center and the New Dominion have been brought into the service, but we still are finishing up the leasing on 302 Carnegie. We terminated a lease with a company called Pledget for 125,000 square feet at a Broad Run Business Park Building E. Pledget had intended to convert our entire multi tenant office building into a ___ 00:09:09. The tenant notified us they were going to default on their obligations under the lease, and we stopped the project prior to any specialized improvements being put in place. We have received a termination payment of $1.4 million, which will be recognized as income in the second quarter of 2001. The building is still under construction and will be available for occupancy in the fourth quarter of 2001. Edward H. Linde and Ray will discuss the leasing prospects of that in a few moments. 111 Huntington Avenue is currently 80% leased and 94% committed, while the first tenant is projected to occupy during the last few days of the third quarter of 2001, only 33% of the space will be occupied at the end of the calendar year. The building should be 95% occupied by the third quarter of 2002. 5 Times Square is our building leased to Einstein Young. Einstein Young's rent is scheduled to commence in the second quarter of 2002. It is anticipated they will commence occupancy towards the end of the first quarter of 2002. I have a few comments to make regarding capital requirements. At the end of the first quarter, Boston Properties had approximately $280 million of cash that include a deposit for Citigroup Center, which is included on the balance sheet under prepaid expenses. We have financing commitments for the majority of our new developments including Time Square Tower, where we are in the process of closing a $500 million syndicated bank construction loan. We have two loans, which mature in the fall and we are in the process of renewing or replacing both of those facilities. There has been tremendous day-to-day volatility in the financing markets, with treasuries, Swats, and credit-spreads have moved up and down. In general, we do believe all involving rate continue to be following a downward trend and we will aggressively look at the long-term fixed-rate debt on all of our new developments as the assets approach stabilization. Finally, I would like to offer some assistance products 2001 and 2002 funds from operation estimates. All of these estimates exclude the effect of any FAS 133 accounting charges or gains. As I mentioned before, the seasonality of our hotels is well up in a manner, which we recognize percentage run on our refill base has created a situation, in which there is additional variability in our sequential quarterly result. In 2000, we reported 24, 25,26, and 25% quarter-to-quarter. For 2001, with the addition of Citigroup as well as the new developments coming on line during the fourth quarter of this year, we would expect our results to be back-ended leading the fourth quarter between 8-11% higher than the second and third quarter of 2001. We have just completed a bottom up property level business plan release forecast, and renewed tentative tenant rollover assumptions from our existing portfolio, as well as an assessment of when we might begin or expect to begin any further new development in any of our markets. As you might expect, our regional management team have anticipated an increased projected downtime between leases, which may reduce occupancy from our current level of 98.4% by up to a 300 bases point in various times over the next 24 months. Based on our current view of market conditions, our review of our projections based on appropriate market leasing assumptions going-forward including increased downtime as well as the addition of the Citigroup building, which will be described in a moment, we are comfortable with 2000 estimates of $3.58 to $3.60 and look to achieve $4.15 to $4.20 for 2002. Picking the midrange of these expectations we will show year-to-year growth and earnings of just under 9% for 2001 and 15% for 2002. With that, I would like to turn things over to Mortimer who will give some more detailing clarity on our Citigroup acquisition.

Good morning. This is Mortimer Zuckerman speaking. Today, we will mark the day on which the actual site of the Citigroup Center entered in New York. We transferred that has a main 614,000 square feet and an absolutely prime building, one of the signature buildings in New York, which has a vacancy of about 1600 feet under the main 614,000. We will retain the total consideration including various fees, mortgage recording tax, etc. certain amount of money that is retained for capital improvement of $755 million. We have senior debt on this property to $525 million at a 7.185% rate and ten-year term. We also have a partner in this transaction. Boston Properties will own 65.5% of it and the partner will own 34.5% of it. The allied partner is putting up $35 million in ten-year money. That will remain in the asset thereafter, but before the ten years will receive no returns and no interest on that money. The remaining funds, which will be invested by Boston Properties, will receive a prior return of 10% compounded throughout the entire 10-year period. Based on this set of facts, and taking a very conservative estimate of the numbers we estimate that the NOI in the year 2001 will be each, which is a partial year, obviously, will be 9.14 and the FFO would have been a 11.37 and this is a reflecting the $525 million in senior debt and the $35 million of non-return bearing investments. This yield will grow up, we believe, quite considerably over the decade; it will average in the 5-10% range, the NOI will average in the 20% range in the second five years, and the FFO, which will be possibly 12% on average in the first five years will average somewhere on the order of 18-19% in the second five years. Now, we have here a building, which in our judgment has a current lease structure which fits perfectly with the current market conditions. We have actually no space turning over the first three years. The average rents from the building in our judgment are approximately $24 to $25. But, under the current market fact, there has been a turnover of one piece of space in the building since we signed the agreement at $92 a foot. We had in our estimates a number, which was $11 a foot, under that just to give you an idea of how we have too reasonably conservative assumptions on the projections going forward. So we are very pleased with that particular acquisition, which we think we will do very well on as the lease has turned over particularly in the fourth year and there afterwards. This has been an interesting market, where we were in fact, we made this on Carnegie Center, but the acquired rent of that is substantially more than we did, and the same thing was true of our involvement in the World Trade Center, but we feel that this asset is the best of the three from our point of view in terms of let, we have been able to add in terms of our portfolio. And now, I would like to introduce Edward H. Linde who will cover additional material for you.

Good morning everybody. Thank you for being with us. I intend to swing through our markets and give you some general comments and some more specifics on what we see going on in the market, I know everybody is both concerned and curious as to what in fact we see happening on the ground sort of speed. So, let me do that, but as I always do, we are very myopic. So, what you will hear from me today really reflects what we are seeing in the market in which we operate, because our eye is on that particular ball. The most difficult conditions with which we are dealing is really the deferral of decisions and commitments by tenants. And that's almost universal. Tenants are uncertain about their own growth requirements. They are concerned about the outside world's reaction to commitments that they might make. They are extremely worried about making commitments and then finding out that three months later they check themselves, because they think that maybe the rents will go down in that three months period. And so, the result is a very significant drop-off in activity. What of course, people refer to is velocity lineup, and I am not sure what that really means. We are duly showing viewer request proposals and they are for viewer deals and most importantly a much less evidence in terms of getting new information, much less evidence on which we can really make conclusions about rent levels. They just do not earn any comparable out there. In fact, what we are seeing is that where tenants have real requirements and therefore can't differ making decisions. At that level of either steady or probably dropped but only at moderate levels and so there hasn't been a precipitous fall in rents by any means when a tenant needs to make a decision. On the other hand they are just aren't very many deals in which we can point to. But I think there are several very good reasons why rents have not dropped precipitously, and why we don't expect in the kinds of properties on which we operate, that rents will drop precipitously. And those reasons are as follows: First of all, real estate is in relatively strong hands and I contrast that to say that in the late 80's or early 90's where real estate was in weak hands and where people were really desperate to move their product. And most importantly, the overhang of available space, the overhang of soon-to-be-available space is still very small, if you are talking about well-located properties in key markets. Now the wild card, of course is sublease space. And, clearly there is sublease space that come back on the market, which will compete with primary space owned by building owners for available tenants and that really will serve as a check on the kinds of continued increase in rent levels that we have seen in the past. I will point out to you that when you look at sublease space, it is important to make a differentiation. There is a very big difference between a dot.com tenant putting sublease space on the market, South of Market Street in San Francisco in a converted warehouse, which is a sort of Arts and Crafts infield where the prime tenant may not be very strong financially. So, there is some question about how good the lease is, and where that space may have been improved in ways, which the typical user of classic inventional space is not going to find very attractive. And so, you have to make those kinds of judgment. If you look in the CBD's, traditional financial districts or business districts of cities, you do not find as much of that kind of sublease space, which is really comparable to the kind of space that we generally lease to tenants. So, with that patch up, let me make some comments on our specific targets. Let me start with New York. Space remained very tight in Midtown and in fact, subleasing has not yet become a real problem in Midtown at all. Now, while velocity of fields is small, we have made several deals since the start of 2001 at rent in the 60's and into the 70's per square foot. In this market, by the way, we have virtually no uncovered rollover in 2001 and only about 350,000 square feet of rollover coming up in 2002, in which we are already under negotiations. The biggest uncertainty, obviously in New York is the fallout from financial services firm. If in fact Morgan Stanley for example, and this is just - I do not know anything about Morgan Stanley's plan, but if in fact, when Morgan Stanley finishes their new building over the west side of Rockville Center and decides that they are going to take seven or eight of those suites and not occupy them and put them on the market. Clearly that is going to be space coming into the market that nobody has anticipated. But in fact, if you look at the Midtown Manhattan, there are still almost no large blocks of space available for tenants. And my partner here has raised his hands; I think he wants to add something.

One of the major brokerage expense in New York pointed out to us is that there are 15 blocks of states and a 100,000 square feet or more that we will become available between now and the end of next year. There are also over 50 tenants looking for 100,000 square feet or more in Midtown in the same period. Yet, very few of these blocks of space are under negotiation at this point. And my point in making these facts now to you is, this just reveals that there are companies who need the space, but were basically standing on the sidelines, sustaining on the guidelines for a while, and I think that supports what Edward was saying. There is virtually no excess supply in almost any of our markets, which will get converted into New York. While there is virtually no excessive supply, there is a huge amount of demand relative to the supply that will be coming up over the next 18 months, so we do not expect that there will be really any price weaknesses. In fact they are very well fixed- there are no changes of settlement within the next 9 or 10 months. I think you will begin to see some resumption of price increases.

The only place in New York where that has, well there are two places where that has impact on our portfolio, looking forward. One is the 875 Third Avenue, where we have the rollover that I spoke of. Most of which is in 2002-2003, most of that comes from 875 Third Avenue, some from 599. We are already in negotiations and discussions with several tenants to cover a very significant portion of that rollover; active rents that I must tell you are above where we would have expected them to be as recently as a year ago. Now, they may not be aware of extrapolation of what happened in 2000 would have taken them that is continued unabated, but certainly they are at very healthy levels. Let me move to Washington. Here too, in our existing portfolio, we have virtually no immediate term rollover or vacancies. Doug already referred to the ___ 00:25:33, which is out in the Dallas, I believe it is the name of the municipality. That is a 125,000 square foot building. We have proposals out currently to two tenants, one of which will be to 60,000 square feet, one of which will be for 80,000 square feet, both with rent levels that would facilitate the return requirements that we have for that project when we begin it. Our other development fields are also out in Northern Virginia, but they are both in Western Town Center. And it is important once again to differentiate between what I would commodity buildings and buildings like Two Freedom or Discovery Square in the Western area or in the Town Center area, because there are lots of buildings that are not bad buildings but fairly undifferentiated products where you will start to see significant sublease things going on or even buildings that may not have been leased up although for the most wide products that was being built in that area was significantly pre leased. But in Two Freedom, for example, which is right in Western Town Center and which is really differentiated, we since the beginning of the year leased another 50,000 square feet in that project bringing it up to more than 55% committed. And we are talking about a building that will not be delivered until the third quarter of 2002. And we are talking about rents in the low 40's, which is where our projections were. In Discovery Square, we now have one building that is also 55% leased and another building where, if we are successful as we believe we will be in converting what is our firm letter of acceptance to a lease, we will be up to 62%. Here too we have achieved the rents that we projected for ourselves and here too, we are also talking about space that could not be delivered until the second quarter of 2002. At 2600 Tower Oaks Boulevard, which is over in Maryland, we are now in negotiations to finalize to bring that building to a 100% lease. It is currently at 71% lease and we expect that to be a 100% lease once again fully in line with our projections about when we expect rents to commence in those buildings. Now let me turn to San Francisco, which of course I get this feeling sort of the poster child of the expressions of alarm about markets, a likely spell when you are talking about markets where as much as three and a half million square feet might be available for sublease in the so called South East market or multimedia gulch area, but as I said before you have to differentiate the different kinds of space and the what kind of tenant-set for example, is not going to be the tenant-set; it is going to move down to a converted warehouse in multimedia gulch. Once again, since the first of the year 70,000 square feet of leases at an average rent, which I hesitate to tell you because I do not want you to imply that there would be ____ 00:28:48 about this, but the average rent from this 70,000 square feet in multiple fields was $95 plus per square foot. As Doug pointed out, we are not taking our projections on that continuing, but that is the experience so far. At Gateway, which is our South San Francisco project, we have done four deals, all small deals since the start of the year at the mid 60's level. And a year ago, we considered $50 to be a very high rent out at Gateway. So, what I am saying is that conditions still remain, in the kinds of properties that we have, still remain relatively strong. Our rollover is small. We had 300,000 square feet rolling over in 2001 in Embarcadero Center. We have covered all but 90,000 square feet of that with firm leases. We have another only a 153,000 square feet rolling over in 2002. That is not to minimize some major questions that we have. We as you know, started with 250,000 square foot project out at South San Francisco at our Gateway development there, which so far we have not made any leases on and do not have any commitments on. While we still remain very optimistic about that project for several reason, one being that we unrecorded our debt levels, which we feel are going to be extremely competitive and secondly, because it has been a market that also appeals to the biotech industry, which gives it a greater breath that if we were simply looking for a computer-related firm; nevertheless it is on our strict detention watch list. And the same thing applies in Boston where there are other major projects that is uncovered is under construction. We are doing a 300,000 square feet development, which we call the Waltham Western Corporate Center, and it is a great location in the suburbs of Boston, but as of today, we do not have any leases signed, although we do have a signed letter of intent for 50,000 of that 300,000 square feet in the mid 40's, and we equally expect to turn that into a lease in that area because of the lack of other alternatives. If tenants are in the market, those tenants that cannot afford to sit on their hands simply because they need space. We are one of the few games in town and it gives us comfort about that. It is also, once again, a project that could not be delivered until more than a year from now. The market in our physical buildings in Boston remains strong, though Max, said, I think that in his remarks that we are up to over 93% committed at the 1011 Huntington. Most recent deals there are still at the same red levels that we were making deals previous to the start of the year. By that I mean we have just entered to deal with $70 and $80 per square foot. In the suburbs, the deals that we have made since the beginning of the year are also in the mid 40's and as high as $50 per square foot. Let me just finalize by saying something about our approach to our development pipeline. As I think we have said before, but I want to stress to you, with the exception of the projects that I have just mentioned and as you can see the details are shown in our supplemental, we are substantially leased at all of our development underway. Sometimes the 100% lease, as for example, at 5 Times Square, where after this earnings call we are going to top-off that building, since it has now reached its final height. But we do have a large inventory of development land which by the way, the cost of carrying that land has been included in all our calculation of our numbers, and we are not under any pressure to begin the construction of any those projects, if it is not prudent to begin the construction. We have a low land basis. We have them entitled and ready to go. We think they are terrific sites and when it is appropriate to begin them, we are going to be the first people able to be out of the block to meet demand as it comes along. But, you will not see us starting projects if we do not feel that there is strong market supportive evidence from tenant commitments. So with that, let me open it up to the Q&A. We will try and finish up by 10:30 AM although the queue remains strong. By the questions, we might be able to extend that a little bit and as I say, we do have to go to a topping last ceremony. I appreciate you all being with us today and we will open up for questions. Our regional managers are available if you have any specific questions, so feel free.

Thank you. Ladies and Gentlemen, if you have a question at this time, please the *1 key on your touchtone telephone. If your question has been answered or if you wish to remove yourself from the queue, you may do so by pressing the pound key. Our first question comes from Sam Dominique of TD New Christ.

Good morning. Good quarter. You could maybe just repeat the yield numbers on the Citigroup Center? I think I missed the yield. Was it 9.1?

9.14.

Okay. And on the occupancy .......

In fact, that's a partial year. For the first full year, which is 2002 it is 9.58 with an FFO of 11.67.

And again, just a follow on there, the yield average over the next five years was going to be 20%. Is that what you said?

Over the second five-year.

Second five years, is it at NOI.

That's an NOI. Yes.

So, some pretty strong growth being anticipated there for sure?

Yeah, and the reason for that is that, as I indicated to you before, the current rents are significantly under the market. On an average, we believe that somewhere around $24 or $25 per square foot are fairly conservative numbers and the reason why I say it is fairly conservative numbers because of the experience we have with the one or two transactions that are underway, our estimates where the current market is proved to be $6 to $7 under where the markets have proven out to be. So, we are very pleased with this acquisition.

At the same time there is not a lot of role in the next three years. There must be some suitable role in the fourth, fifth, or sixth.

That's correct. The real role began in the fourth year. There is very little role, just a small amount, the yield will go up for example in the year 2001, reaches the NOI the 10.23 is based on our estimates and a 11.98 on the FFO, and then the fourth year it goes to 10.91 and 12.27, and then it begins to jump by a couple of 100 basic points to reflect the turnover that we have and again those are all fairly, we believe fairly conservative numbers. Otherwise we would not be giving them to you.

Those NOI yields are not straight-line numbers?

No, the NOI yields are not straight-line numbers. The FFO yields are straight-line numbers.

And also just to clarify the capital structure of the transactions. Is it approximately $200 million being put in over and above the 525 million and the 35 million? Is that all being contributed by Boston Properties?

Yeah. That's about a $195 million and that's all an investment by Boston Properties and we get a prior cumulative compounded return of 10% on that entire investment.

And the $35 million, what happens at the end of 10 years and only gets no interest along the way, but is there a protective ......

At the end of 10 years, they will begin to get a 10% return on their money. We get our money back first, with the 10% return, in terms of the third part of it that we leave in. Our equity and their equity each get 10%; then it gets divided above that, 55.5% to us and 34.5% for them.

Great, thanks.

And we have complete control of the management of the project.

Because, I can see you are seeing some slippage to 300 basic points that at downtown I think is what you said. What market do you see that occurring in mostly?

We project it across the border.

Sort of evenly across the board?

Well, what we had done is we rebuilt our numbers on a property-by-property basis, so each regional managers and the marketing people in each region make a judgment on a property-by-property basis, but it does not fall disproportionately in any one of our regions. It is really spread across based on what the individual marketing people believe is the correct assumption. Although, the fact is that we are primarily a CBD or Working Center Company with 75% of our assets, and that is in those market strength features, very minimal vacancy. Take Washington, there is virtually no vacancy in Washington not only for us, but for virtually everybody in the district itself, and we have for example a site for development and we have six different tenants competing for that site. If you need a large amount of space in Washington, it is simply not available. That is sort of the condition that is difficult to many of the real estate market, but particularly in the market that we are in. So, that's where we think we will have a continued strength particularly since we really have in terms of the available space or the space turning over. It is a very small percentage to buy sort of things.

Thank you very much.

Thank you.

Our next question comes from Jay Leupp Of Robertson and Stephens.

Good morning. It is Jay with Robertson and Stephens. Just a couple of questions Mort and Doug, on the Citigroup Center acquisition, you believe that the rents are $24 to $25 under mortgage? Doug, the rent assumption you were giving for New York was $69. We fairly assume that you purchased this building and that it has a weight average pushback for rent in the mid 40's at this point?

No. The differentiation determine where the rents are, but if we were to lease up the space, we believe that the average rent of Citigroup, which is a very unique building in the city of New York, and as I said we are just on one deal at $92.

What is the ________ 00:39:39.

32, 37 quarters, it is 59 Storey building. The average rent there is slightly under $55. It is just in that range and we believe that the market rate today for that building, if we have the market of today would be $79 to $80 I talk through the building.

Okay, and then just a followup on the capital rate assumption. I agree with you, it is a very high quality asset. The fact that you are purchasing the building at above 9% capital rate, do we make any more global assumptions about your existing asset base and the capital rates we deployed in NAV analysis, given the fact that you are purchasing this at such an attractive rate today?

No, let me just finally clarify that. The yield that we are talking about is leverage yield, so the capital rate in fact is considerably lower than 9%. So, I just want to make that point clear. I would not say that you could buy class A real estate of this caliber ready to rise 9%, but if you know of any building like that in your account, please contact us immediately. None of those buildings are available anywhere near those kinds of numbers. They are still at a pretty strong demand for these kinds of buildings that you probably have seen from either the domestic or foreign growth. I might tell you that we are now, in our numbers assuming very low levels of growth going forward. When I give you numbers that range in terms of an annual increase over to cover a 10-year period, run from a low of 1% to a top of 3%. This is a very low estimate of where the rests are going forward and we are starting from the base. As I indicated you that this agency cost and we laid off the rent floor-by-floor and the experiences we have had, we have actually had two situations. Actual rents are considerably above our estimates.

Just one last question with respect, Doug, to the comments you made on Allied Rise and Cyprus, and we appreciate your frankness on that. From a business standpoint, are these two companies you are actually still doing business with and are they still providing services in your buildings.

Yes, in certain markets they continue to provide services. They are advertising and attempting to gain penetration in the buildings. I would tell you that from our experience and our portfolio, they have not been very successful. In the case of Allied Rise, they are in all of our markets. I am looking forward about staying here with me, but Cyprus has pulled out of several retail services in New York, Washington, and San Francisco. They continue to sell retail services in Boston and the other markets where they have resolved infrastructure, they are selling wholesale to other telephone companies to use their infrastructure in gaining access to tenants.

This is Mort speaking. I will reiterate what I have stated many times before. We believe that the core competency of this company lies in real estate. We are able to create values in real estate, whether it is through acquisitions or developments and we think it is unique in terms of companies in the United States and that is where we are going to concentrate the bulk of our average, and I will say to you that the experience that we have reiterates and underlying that particular strategy.

Thank you.

I could translate that for you in different terms but I think you ....

Thanks.

Row _____ 00:43:31 of Merrill Lynch and Co.

A couple of questions. Firstly, on the guidance you gave, Doug, does that include the perspective charges for Allied Rise or on Cyprus?

Yes.

Secondly, The Citigroup Center. Who are the major tenants besides from Citigroup itself?

____ 00:43:51 Omalderle and Myers are the two major law firms in the building. Peacock Capital Management, the head financier is the tenant of the property building and then it is really a lift of class A building and a dozen of Citigroup office from Slumbers A, Native America, Merrill Lynch, E-classified Capital, and ATNT _____00:44:14.

It is absolutely blue chip types of tenants. You have to look through any other major buildings in New York City. I don't think you would find any building that have better tenant lease than this one.

And in terms of looking at this perspective acquisition, aside from looking at its yield in terms of 'per square foot prices' I guess now to $450. How did you look at allocating capital towards the acquisition versus developing staff right up the ground? Is it somewhat the same per square foot price?

Very good question. I actually did jolt my mind because I should have mentioned it before. You are right. It is approximately $460 a square foot. But I would point out to you that both our buildings in Times Square are coming in about this by significant numbers into one case. They are both about $500 a square foot. The ones you have is a building that is a superb building that we have been able to acquire at a little below the replacement cost. In fact in the newest building in Times Square, it is close to a $100 a foot. Not quite a $100 but below our replacement cost. That has put up tenant improvement so it is good. I mean it has joined our tenant improvement center. Anybody who has been in the Citigroup building knows what kind of tenant improvements are expected in that building. So, on a replacement cost basis, we believe that we brought that in an extremely attractive number.

Okay thank you.

That I might say does take into account what land cost would be for a site like that in New York today. It is just very impossible and you can't replace that.

Once again Ladies and Gentlemen, if you have a question at this time, please press the *1 key on your touchtone telephone. Next question from Stuart Axelrod of Lehman Brothers

Hi guys. This question, I am getting an unleveled capital rate on the Citygroup Center clubbing about 75%. Does that make sense?

No, it is slightly higher than that. It is about 76%.

Okay, and what are you doing with the portion that is non-interest bearing?

That is excluded. It is non-interest bearing for ten years.

In terms of leasing velocity, are you seeing any changes from April versus the previous month.

From where? April versus the previous month?

Yeah.

I don't think so. I don't think we have enough data to really be status precise about that. Right now, I don't think so.

Okay and in terms of your earnings guidance, what do you assume in terms of market refinancing?

You want the rate?

Or in terms of some of the maturities, one or two maturities are you doing those early?

No, we assume all those maturities come as it does as a loan and the rates generally are in our internal model is 6.75% and we are going to do significantly better than that.

Okay thank you.

Our next question comes from Gregory Whyte of Morgan Stanley Dean Witter & Co.

Good morning guys. Just a couple of questions Doug, did I hear you correctly say that lease terminations are 1.1 million.

Yes.

And so, what was the net 4.4 million of other income. What was the balance of that from?

That is interest income on the $280 plus million cash.

Okay. Can you give a little color on the average rent rate? Your sense on that was pretty impressive occupancy-capacity pack. Can you give a little more granularity to what gross that?

I think obviously we still continue to have very low current existing rents in our portfolio and it is just an area in the numbers that I gave you before. We assumed that those $675 million buildup, $69 averages for the New York City, $66 for San Francisco, $55 for Boston, $41 for the district, $41 for suburb in Boston, and $34 for suburb Washington DC.; that is both in North Virginia and Maryland.

Is there any exception in the recent quarter, what happened?

Give me one second. I have that. Let me just take a second to go back to the answer that I had before. I am not sure I have a script of the enterprise. When I talked to you about the on-leverage capital rate at Citigroup and I said it was 7.6%, if you take a $35 million, it is 8.07%.

Greg, in the last quarter as I said, the leasing was really pretty much across the border. The increase in Boston with a 116%, Washington 20%, New York City 43%, and San Francisco 176%.

Okay and just another quick thing here. I see TI rough a little bit in the most recent quarter and given the conditions in the market, how are your standards? Are we seeing a trend? Are you having to giving a little more TI to get people in?

We are not in fact. It is funny. We keep reiterating that the TI's are actually going down or holding stable and that continues to be the case as rents go up. However, particularly in New York City, you do have brokers commission that are based on the rent level and so the brokers commission have within propositionally with the rent as the rent has goes up and that has really been the bulk of the increase.

Okay that is good. All right, thanks a lot.

Our next question is from Louis Taylor from Deutsche Banc Alex Brown.

Doug, can you just go over your G&A commentary? Then you had mentioned that it was up 600,000 because of the scheduled cost and what else was in there that tried to increase this quarter?

Well, we looked at it really Louis, from quarter to quarter and from the fourth quarter of 2000 and the first quarter of 2001 I believe it was up 6.3%. If you back out the 600,000 there and then we had some termination expenses in the fourth quarter of 2000 and then we have been spending more money on Management Information Systems largely because we have become a larger company and we will become much more a debt-at, bringing information to the debt senior management and that it had a significant debt. Last quarter on our conference call, we did say that we expected to have a run rate between $38 and $40 million for 2001 and that continues to remain constant.

Okay. The next question is with regards to the Amazon project in San Jose. What are your current thoughts there?

Well, we are continuing and are now close to being in a position to get final entitlements and when we get final entitlements, we will see where the market is?

Okay.

We are not counting on anything there for a while, because that is a market that you know is exploding as we stated in the beginning and somebody has told me that there is a million feet of space coming on every week - sublease space. But sublease space is still sublease space. Not all of that states tenant requirement and we are just going to be in the marketplace and we are not assuming that we are going to be doing anything on that for the next few years.

Let me say Louis, once again, I think important to point out, we have a basis in that property that around $30 billable foot and I will get stated even in given current conditions that all our concerns that is probably a third at least. And I mentioned that _____ 00:52:35 was saying maybe a fifth or a sixth of what you could buy in a title price for in that location.

Just you understand from my own modelling perspective, we are not capitalizing that investment into 2001 or 2002. We don't assume that it's "under developed" for the purpose for reducing our interest expense. So, the burden of that is included in the numbers that we have provided.

Okay and then finally, what do you expect for sales per NY growth this full calendar year?

That is a number I don't have at the top of my head. We probably figured it out if we push our calculators quick enough, we will give it to you as soon as we get it.

That's it. Thank you.

Okay, we will jump in when we have the number if we get it.

Thank you.

David Top of Robertson Stevens

Hi good morning guys. Can you just give a little bit more color on the leasing activity or the locked era that gave way? You had mentioned that you did sign a couple of leases that you are existing out of the town there and assuming that the rental rate you are asking are kind of inline between those two assets. Can you just give me a little bit of color on what is happening there?

Let me just give you by way of fact; when we bought that Amway building, we underwrote that at about slightly under $135 a foot. We are now able to get and have been getting well over $60 a foot in the gateway project that is completed building itself. We also underwrote the development norms; that is in the mid-thirties as well. Right now, I just gave you that highway of background.

Well I am just going to ask Bob Eastley to time in. He is right on top of that market.

On the existing buildings and we are in the high 90's as far as occupancy and we just signed several renewals recently in the last two or three weeks at $63 a square foot gross. On the development buildings, it is important to keep in mind that we are carrying not only the 250,000 square feet in development but also the entire garage for the first and second phase and we underwrote that such when we got board approvals and markets rents were approximately 25% less than where we are currently doing deals at. That still showed better than 12.5% return. So, rents could drop down drastically and we would still see a very good double digit return. Buildings not to be delivered until late March of next year and a lot can change in the next year. We have had interest from several of the biotech users that are prominent in that marketplace including to Selora and Avon 00:55:24. At this point in time, we do not have any leasing commitments, which again is not unusual for a building that states that is the saying that is out the same as the physical area of the market. This field is just going up. We haven't even come close to topping out the building.

And so, does your issue appear to be price or people are just reluctant to commit to taking out large box of space at this point?

I have to tell you because you made this a very good question and it is a question I constantly ask our marketing people which is, "are we loosing deals because of price" and the answer is consistently, No. We are not loosing deals because of price. It is that people are unwilling at this time to make commitments unless they have a need that have to be satisfied the day after tomorrow. That is certainly not unexpected given the fact that is an economy that has changed so quickly.

So if you had to take a stab at it, then what do you think the market rate is down for larger blocks of space, assuming you do not want to lease us up in the price of $5 to $10 in fee?

I would rather not speculate it at this point on that.

Okay.

Unless you are a tenant.

I will add, David about a proposal that we just received this week from the biotech users for the entire second phase that would require some modifications in building for more of a biotech use and lab space but that was a proposal that was for the entire building at rough rates that would exceed our current proforma on the phase of the other new constructions.

Okay great. Thanks guys.

Chris Hailey of First Union.

Congratulations on a nice quarter. Just a clarification, in this 358-360 in 2001, you were assuming the write-downs of $5 million in those numbers some time this year?

Yeah eventually next quarter.

Are you assuming in your 2001-2002 expectations that occupancies will drop 300 basis points or you just highlighted that as a risk?

In deriving our own internal numbers, we have assumed because our regional management marketing guys and women have told us that their view is that they think it is of the one concern they have is downtime as we roll over. So they have five definitions elongated their receipt period as leases roll over and so that is built this way through the portfolio and over the next 24 months depending upon the particular monthly rollover situation we could see as much as 300 basis points of decreased in occupancy in any one time.

And is that just pattering in some of the projects that are coming online over the next 18-24 months?

No that is just our existing portfolio, rollover any existing portfolio.

Okay great. And my last question is, we can back into a FAD number or CAD number, whatever you want to call it. What would be your expectations on relative FAD growth over the next 2 or 3 years versus the reported FFO growth?

You know Chris; it is not really something that I have got the information for in front of me here. Obviously, the real issue is straight-line rents. Have straight-line rents affect our numbers given the rather large investments that are coming online in the end of 2001 and the beginning of 2002. So, I just don't have all that stuff in front of me broken out but it is obviously I think that if you were to take a collar, $13 or $14 per square feet on the rollover spur for deduction for capital expenditures and then strip out all our straight lining and that how we would derive it is just like everyone else derives it and I don't have the information in front of me.

And the capital improvements for the hotel site Doug, what are the terms of expectations over the next 12-18 months for total cap ex on the hotel site?

On the hotel site?

Yeah.

Most of the money on the hotel site will be spent in the first and second quarter of 2001. You haven't seen it show up because we haven't built that yet. You need a clue for capital expenses. The room is reduced, the long worked area I believe is approximately %7-8 million in total. Let me just jump in. Louis Taylor asked the question before that about NY growth, and I believe that hopefully our myth is right; it is somewhere in the 3% plus range.

Thank you.

Lee Schalop of Banc of America Securities.

Two questions. The first is, at the beginning Doug went through some information about rents in specific markets that were used to compute the spread between in-place rents and market rents. Can you either share the number that you used last quarter or just talk conceptionally about whether these numbers have come up or come down over the past three months?

I don't have the numbers that we use the last time we did this analysis. But I can tell you they have definitely come down for the purpose of the calculating our own internal market. I just looked at the time. By the way, I will take five more minutes of questions it there are any and then we will wind up 20:11.

Thank you.

Stuart Seeley of UBS Warburg.

Good morning. You commented on TI's and leasing commissions and capital expenditure on the leases. Could you comment on whether free ramp has made it into any leases substantially.

The only market in which we have a definition in sort of a prevent in New York City and that is because tenants are required to do their own build out and so they as the space comes due, you owe them the time they build their own space up. But in no other market that I am aware of, have we seen any "free rent" come into the equation concession.

So, it is not free rent that drove the bump in the straight line running this quarter?

No, we drove the bumps there, but we do we have existing leases? And when you have an existing lease and you sign a lease amendment, you have to restate the gap straight line of that lease. So, if we have a lease that currently expires in November but you sign a lease in March at a rent that is significantly higher, you have a straight-line impact for that period of time and obviously it goes the other direction as soon as the lease commences.

Okay, and it looks like the decline in occupancy in Embarcadero was really due to one building. Can Bob comment on what is going on to release that space in particular.

Sure. It is actually two transactions; we had the floor that we recaptured early in the year. That was at a significantly lower rental rate that we could reset it at a higher rental rate. That is vacant right now that we have activity on. And then we had one floor that was vacated just this past month that is in the _____ floor, so we will go through about a four-month process of expenses of payment. That is the reasons for the dip in the Embarcadero expenditure.

Great thank you very much.

Our final question comes Mark McAllister of Salomon Brothers Assets.

Hi, just a clarification on the ____ 01:03:06 NOI. You did about 8.3% in Q1 and my understanding of the response was that you are going to do 3% for the year. Does that imply that we are going to have at least one quarter where we are going to see negative scenes to NOI. Just on a simple average, 0 with the end of the year, 8 at the beginning, and the average comes to about 4. And if you may give some more clarity on what your assumptions are on.

Just for the next three quarters. Not for the whole year and we did for the first quarter and 3+ was for the remainder of the year.

Okay. And what are the assumptions on rate versus occupancy.

It is very much dependent up on the actual lease-by-lease rollover on the buildings for example, and except for that we have that we have a lease rolling over in New Jersey, we in the opposite, do not have the same amount of rental rate growth in those that we did in Embarcadero, Denver, or in New York City and it is the function of the actual places those leases are coming to, but again we in general elongated our downtime and reduced our rental rate assumptions as we put these projections out. I will also point out that these assumptions are still below where we are concurrently seeing the market place, so, we are trying to be reasonably conservative in real estate in terms of where we think the market is going on, or just in general perspective wise personally do not see that the economy is going to recover very much particularly, as the appointment levels and profits through the entire year. So, that is why we are making these kinds of assumptions going forward. The strategy that we are fielding the top quality of real estate assets in the individual markets really concentrates in the markets where the great constraints on supply. Still my judgment is going to demonstrate a superior relative performance in place to any other kind of offsets we will see in the year. So, I think that is for the context that which we put together on numbers.

Thanks. Thank you all for being with us today and we do have to end the call now and we appreciate your continued interest and support.