波士頓物產 (BXP) 2001 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Boston Properties, Incorporated conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer sessions and instructions will follow at that time. If anyone should require assistance during the call, please press star, then zero, on your touch-tone telephone. If anyone should disconnect and need to rejoin, please dial 1-888-413-4411.

And as a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's conference, Miss Claire Koeneman, of FRB/Weber Shandwick. Miss Koeneman, you may begin.

Thanks, . Good morning, everyone. Welcome to Boston Properties' Fourth Quarter Year End Conference Call.

I wanted to let everyone know that we are hosting a Webcast of this call, which can be accessed at Bostonproperties.com and Streetevents.com. And if anyone should need a copy of the release, it should be posted on BXP's Web site.

At this time, management would like me to inform you that certain statements made during this conference call today, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of '95. Although Boston Properties believes that expectations reflected in these 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 expectations are detailed in yesterday evening's press release and from time to time in the company's filing with the SEC.

Having said that, I'd like to welcome with us today Ed Linde, President and CEO, Doug Linde, Chief Financial Officer and Mort Zuckerman, Chairman of the Board.

At this time, I'd like to turn the call over to Doug for his opening remarks.

Douglas linde: Thank you, Claire. Good morning, everyone, and welcome to Boston Properties' fourth quarter 2001 earnings call.

2001 was clearly a challenging year for the world, for the United States and for Boston Properties. As the economists finally told us this fall, we have been in the midst of a recession since at least last March. And while there is great debate as to whether there will be a recovery in calendar year 2002, either way, it's unlikely 2002 is going to show a return for the robust real estate market.

While the weakening fundamentals of the past 12 months have been painful to absorb, Boston Properties' consistent strategy of developing and acquiring the highest quality assets and signing long-term leases has and will dampen the effects of the current economic climate on our business model.

Last night, we issued our fourth quarter press release and reported funds from operation on a fully diluted basis of 95 cents per share before our adjustment of two cents a share. This represents a year-to-year increase of 11.8 percent on funds from operation. This is in line with our guidance of 94 to 95 cents and First Call estimates of 94 cents per share.

These fourth quarter funds from operations exclude a $2.8 million gain on sale of land, as reported in the press release in our supplemental information. This brings our year-end funds from operations to $3.57 compared to 2000 FFO of 3.31, a 7.9-percent increase.

Net income for the quarter before the charge related to FASB 133 and excluding the gain on the sale of land was 60 cents per share diluted, a year-to-year increase of 15 percent. For the year, excluding the effects of FAS 133, our net income before gains and losses on the sale of real estate were $2.40 compared to 2.02 for 2000, a 19-percent increase.

Our same-store NOI growth, including our hotel income, was 2.8 percent on a GAAP basis and 1.2 percent on a cash basis in the fourth quarter. Excluding the hotel results, same-store NOI growth was four percent on a GAAP basis and 2.3 percent on a cash basis. The sequential quarter-to-quarter reduction in same-store growth during 2001 is largely due to a decrease in occupancy. Our in-service portfolio occupancy has gone from 98.4 percent in the first quarter to 95.3 percent in the fourth quarter of 2001.

When you review our supplemental disclosure package, which has been posted on our Web site, please note that 111 Huntington Avenue and 5 Times Square are not yet in our in-service occupancy analysis. And hence, the in-service vacancy rate does not include the 1.9 million square feet, which is 97.8 percent leased.

Reviewing the property-by-property occupancy statistics, I would note the following recent developments in our in-service portfolio, which are not reflected in the year-end numbers.

Since the end of the fourth quarter, we've leased 61,000 square feet 265 Franklin Street for an occupancy in the second quarter of 2002. This brings the occupancy to 64 percent. We have leased 17,000 square feet at Tower Oaks and are finalizing the lease for 27,000 square feet, which will bring the occupancy to 95 percent. We have leased 6,000 square feet at 302 Carnegie, which will bring the occupancy to 86 percent.

Note that the declining vacancy at building 506 at Carnegie Center is a direct result of our Washington Group exposure. While we have a guarantee to cover the loss rent and/or re-tenanting costs, we are not including this income in any of our projections until it is actually received. Recently, we have signed a commitment, not a lease, for about one-third of the vacant space.

Our most significant leasing challenges, as you will see from our occupancy results, remain the suburban Boston and suburban Boston and suburban South San Francisco market.

I'd like to call your attention to the lease in progress for our development pipeline, which is highlighted on page 40 of our supplemental package. 111 Huntington Avenue is approaching 100-perdent commitment as we complete the leasing of the remaining expansion space to the larger tenants. Currently, we are at 95-percent signed leases, edging up from 93 percent last quarter.

We have completed a small transaction in Weston , bringing the occupancy up to 19 percent. And since the start of the year, we have seen a pickup in activity in the suburban Boston market.

We've signed a lease for 56 percent of our 126,000 square foot building at the Broad Run Business Park and at Discovery Square Reston, we're up to 65-percent leased, with a pending lease that will bring our commitment to above 75 percent. Unfortunately, we continue to see little tenant demand at our new Gateway building in South San Francisco.

Our straight-line for the fourth quarter was $9.2 million. The majority of this increase was due to the traditional free rent associated with the tenant construction at 875 Third Avenue in New York City and rental associated with the rent from our development . This brings our 2001 total straight-line adjustment to $28 million.

We've met all of our requirements with respect to delivery of space to Ernst & Young at 5 Times Square, our 1.1 million square foot development. We expect to bring the building into service sometime between February 1st and March 1st of 2002, with the rent commencement scheduled for May 1st of 2002. The long-term nature of this lease, along with a significant contractual , will translate into an additional straight-line increase in 2002.

In the fourth quarter, we released approximately 691,000 square feet of second generation space, with an increase in net rents of 51.2 percent. This was spread portfolio-wide.

In New York City, 112,000 square feet was leased, a 38-percent increase in same store; Boston, 190,000 square feet, a 17-percent increase; San Francisco, 140,000 square feet and 111-percent increase; Washington DC, 221,000 square feet, a 34-percent increase; and Princeton, 27,000 square feet, a 32-percent increase.

The San Francisco results, including the 88,000 square foot renewal that was done in square foot, signed in early 2001, with rent commencement in November. After excluding this lease from the , the results of the portfolio still shows an increase of 26 percent. You will also note that we placed into service 130,000 square feet, attributable to our development projects.

To add some additional color to the leasing activity, in Boston, we signed 30 leases. The largest lease was 50,000 square feet. And if you include existing tenant expansions along with renewals, the renewal percentage was 66 percent.

In New York City, expansions made up 94 percent of the lease space. In Washington DC, renewal and expansions made up 73 percent of the space leased and includes 17 leases. And in San Francisco, it was 87-percent expansion or renewal.

Consistent with renewing or expanding existing tenancies, our second generation leasing costs decreased from cents in the third quarter to $6.88 cents in the fourth quarter. You'll recall that the majority of our third quarter renewals were in New York City, with correspondingly higher brokerage commissions.

For the full year, we released 2.7 million square feet with an average leasing cost of $15.65. Unfortunately, we continue to see changes in achievable rental rates in our market, mainly Boston and San Francisco due to the increased available of sublet space and the reduction in tenant demand as a consequence of the current economic conditions.

Our commitment to the strategy of signing long-term leases has and will continue to serve us well. The average remaining lease terms of the portfolio at the end of 2001 was approximately 7.3 years. Fifty percent of the portfolio expires before September 2009 and 50 percent expires after 2009.

In addition, the leases from our new development, which were committed at the strong rents of 1999 and 2000, have an average remaining life well in excess of 15 years.

Our office lease rollover for 2002 is 4.09 percent, down slightly from the third quarter report. And it's 6.74 percent in 2003. It's important to note that 20 percent of the 2002 expirations and 18 percent of the 2003 expirations occur on December 31st of the respective years.

The 2002-2003 rollover totaled 10.8 percent of our in-service office portfolio and just over nine percent of our in-service revenues. So while we intend to aggressively make deals consistent with the economic conditions of the current market, only a modest portion of our portfolio is exposed to current market conditions.

Based on our expectations for tepid real estate fundamentals for the next 12 to 24 months, we are forecasting extended vacancy for any space we are unable to renew. And until there is a recovery in rental rates, the of rental rates we have seen in 2001, coupled with the modest mark-to-market, based on no budget and rental growth internally for 2002 or 2003, we'll have to hold down our same-store sales growth.

Based on these assumptions, our 2002 same-store growth will be between one-and-a-half and two percent and 2003 will be between two and two-and-a-half percent.

When we calculate our mark-to-market, we compare current market rents to actual signed reasons. The rents put in place at the peak of 1999 and 2000 have the impact of dramatically reducing the current mark-to-market calculation.

Our current rate assumptions are based on our portfolio of assets and the current proposals we're making literally on a day-to-day basis. Our average market rents are as follows. And I'll try to note changes from our last quarter.

CBD Boston mid 40s versus low 50s from last quarter. Suburban Boston low 30s to high 20s versus low 30s for the last quarter. CBD San Francisco mid 40s versus low 50s last quarter. Suburban San Francisco, which is made up entirely of Gateway Center, low 30s versus mid 30s last quarter. CBD Washington DC, consistent at the mid 40s, Northern Virginia and Montgomery County, low 30s versus mid 30s last quarter and midtown Manhattan remaining in the high 60s, Princeton, New Jersey, the low 30s.

Our mark-to-market calculation is only on leased space. Taking into the leasing activity in the fourth quarter and the increase in vacancy, the current existing portfolio embedded growth is approximately $90 million or 71 cents a share. If we assume an average portfolio rental rate of $30 per square foot on the vacant space in our portfolio today, then each one-percent increase in occupancy or 290,000 square feet adds on average $8.7 million or seven cents per share to that embedded portfolio growth.

Termination fee income for the fourth quarter was a minimal $400,000. During our third quarter call, we discussed the terms of the early surrender of space and the associated payments at 875 Third Avenue. At the time of that call, we were in the process of reviewing the treatment of this income with our auditors. It was concluded that the GAAP net income treatment for these payments require recognizing the entire amount of $12 million as earned during the third quarter of 2001.

We amended the third quarter net income provided in our supplemental package with our press release issued November 13th. The tenant is contractually obligated to pay $1.3 million per month through mid-July, 2002. As has been our practice, we will recognize this income for FFO purposes as it is earned over the remaining terms of the lease and break it out as part of our supplemental financial data as early surrender lease income.

The hospitality and travel industry has continued to see great economic impact from the events of September 11th, as well as the economic slowdown. Marriott International (Company: Marriott International Inc.; Ticker: MAR; URL: http://www.marriott.com/) manages our hotels. And they have not yet seen any significant pickup in the small group business meeting business at our property for early 2002.

Our fourth quarter results include data from September 10th, 2001 to December 28, 2001. The fourth quarter NOI for the three hotels was $6.2 million, down 20 percent from the same period in 2000. On average, our hotel occupancy was down nine percent year to year and ADR was down 11 percent year to year. Marriott and the other hotel operators continue to hope for recovery and demand in the later parts of 2002. Actual 2000 NOI from the hotels was $34 million. Actual 2001 NOI from the hotels was $26.9 million.

Remember that the sharp drop in hotel demand began in March of 2001. We are budgeting a reduced contribution from the hotels for 2002. Based on the revised projections we have received from Marriott, we are expecting a 2002 total contribution from the hotels of $24 million, a seven-percent decrease.

Adjusting for the early surrender income, termination fees and hotel property contributions and net operating income, our operating margins increased slightly, from 67.5 percent in the third quarter to 67.9 percent in the fourth quarter of '01.

We now have completed our 2002 operating budget and have anticipated dramatic increases in security for our Boston and San Francisco CBD assets. Surprisingly, our New York City assets are experiencing limited increases since they do not have the underground garages and lobby-level access was already limited.

On average, the security expense at the Prudential Center and Embarcadero Center is up about 50 cents per square foot off a base of about a dollar. Due to the nature of the office building leases, the increase only affects our margins on vacant space, as well as new leases for 2002 base .

The other area of operating cost experiencing dramatic increases is clearly insurance. We've renewed our liability policy for calendar year 2002 and saw an increase of 34 percent. This works out to approximately an additional penny per square foot. We extended our property insurance coverage to March 1st, 2002, earlier in 2001 in order to avoid the of policies that expire on December 31st.

We are now in the process of purchasing our insurance program for fiscal year starting March 1st, 2002. This policy includes our California earthquake coverage, as well as our all-risk property. We expect to see increases in property insurance of between 40 and 50 percent. And we will be adjusting our coverage limits due to the availability of coverage and to control costs.

It's clear that the one peril that will be excluded from our property policy is terrorism. To date, Congress has not reached agreement on how or if the federal government will aid the insurance industry for losses due to future terrorist events. With no actuarial data or previous loss history, extremely low coverage limits and out-of-sight premiums have created a situation where the insurance is not available at commercially reasonable rates today.

For example, our insurance advisors believe that the most we could buy today in terrorism insurance is 150 to $200 million for our entire portfolio. And it would cost between two and $20 million. Our total property policy coverage for 2001, including the terrorist risk, as well as earthquakes, was $6.4 million.

The real effects of this situation are twofold. First, we are effectively in a position where we are self insuring against this catastrophic risk. But the more critical issue revolves around the financing market. We are not aware of any high-profile asset that has achieved a new financing commitment without the expectation that the owner will provide terrorism insurance if a commercially reasonable policy is available.

If there is no affordable insurance available when the borrowers and lenders are ready to close these loans, the industry may find itself with outsources of single-asset debt financing.

Our expectation is that, over time, the government and/or the market will create a viable framework for affordable policy coverage. But today, this does not exist.

Our G&A expense was $8.7 million in the fourth quarter. This brought the total 2001 G&A to $37.3 million. The 2001 expense includes approximately $1.5 million in costs associated with due diligence for uncompleted acquisitions or predevelopment expense for projects no longer being pursued and is net of capitalized wages of approximately $6.6 million.

Last week, our compensation committee and approved our 2001 bonus and salary program. We have frozen all officer-level salaries. That's about 16 employees. And the 2001 bonus pool was reduced by 27 percent from what had been budgeted at the beginning of the year. The Chairman and CEO will receive no bonus for 2001. The senior officers will see bonus reductions averaging 34 percent. And other officers and associates will see dramatically reduced 2001 bonus payment percentages.

In our 2002 G&A estimate, we are carrying a reserve for continued development projects, a reserve for discontinued development projects or uncompleted acquisitions, as well as a reduction in capitalized wages as our development pipeline projects are deferred. We estimate our 2002 quarterly run rate at $10.25 million. note that we did add two additional parcels of land in the fourth quarter. We are reviewing our land inventory and where appropriate, we are pursuing the sale of land parcels where development is not likely in the foreseeable future and where sales for a non-office use could provide a significant capital gain.

Concurrent with the decline in the economy has been a dramatic reduction in short-term interest rates. While we did not see the benefit of these reductions in 2001 since the vast majority of our floating rate debt is associated with our development projects, which to date had been capitalized, in 2002, this reduction in our cost of capital will benefit our bottom line. All of our 2002 debt expirations are floating rate construction development loans with built in extensions. 111 Huntington Avenue, for example, the largest 2002 maturity, has two one-year extension options commencing in late September of 2002.

Based on the current steepness of the yield curve and the near-term uncertainty in a long-term market due to the insurance issues discussed above, we intend to remain - maintain floating debt rate for the foreseeable future. We explicitly negotiated our development financing with multiple short-term options in anticipation of a situation like we find ourselves in today. If all of our construction loans were fully drawn down, floating rate debt would account for only 29 percent of our total secured debt.

We continue to believe that it is the right business decision to put long-term fixed rate debt on our new developments once they achieve stabilization. But we do expect the - we do expect the extended weak economy and expectations of lower inflation to result in for our reduced long-term borrowing cost as we move through 2002. We will be on the constant lookout for the right opportunity to fix our long-term debt.

During the fourth quarter, we retired $500 of derivative instruments, at a combined cost of $21.7 million. When we embarked on our $1.5 billion development program, we felt it appropriate to cover a portion of our construction loan interest rate risk with several hedging instruments.

Now that we are nearing completion of the two large office buildings at 111 Huntington Avenue and 5 Times Square, we decided to retire three of these hedges. These cash costs are included in the development budgets and the cost of line of our development projects listed on page 40 of the supplemental earnings packet, value creation pipeline.

We continue to have - we will continue to have a FASB 133 adjustment on the remaining $150 million hedge, which expires in 2005. This contract is intended to partially hedge our interest rate exposure on Times Square .

Following the events of September 11th, we instituted $100 million stock purchase plan approved by our board of directors. During the fourth quarter, we repurchased minimal shares, approximately 79,000 for $2.7 million at an average stock price of 34.46. The plan remains in effect and we will examine future stock purchases with the same diligence as other capital transactions.

In light of the events of September 11th, including the turmoil in the insurance market, the potential for a near-term shortage of debt capital and the potential opportunity for additional acquisitions, we are being very cautious regarding our liquidity and our capital structure.

We've provided calculation in our supplemental, which compares cash income versus our current dividend. Our fourth quarter ratio provided in our supplemental information contains the actual fourth quarter capital costs and recurring capital expenditures.

Comparing our funds from operation net of straight-line rent and preferred dividends, deducting our annualized leasing cost, not just the period run rate, for our anticipated rollover space and further adjusting for non-recurring capital expenditures at our current run rate of about 40 cents per square foot, the current dividend coverage ratio would have been 59.9 percent for 2001. And if we were to add the pro forma cash contribution of 111 Huntington Avenue and 5 Times Square, which have no capital or leasing costs, our 2002 pro forma ratio would decrease to 66.9 percent.

We hope we've provided a realistic appraisal of the effect of the economy in the real estate markets on Boston Properties 2002 earnings prospects. Our internal expectations assume no rental rate growth, a slight deterioration of occupancy, some modest increase in operating expenses and a continuation of a slumping hotel business.

But we have only four-percent portfolio rollover. And when combined with the addition of 111 Huntington avenue and 5 Times Square, approximately $825 million of investment, which comes on line at yields in excess of 11 percent on the GAAP basis, financed currently with floating rate debt, Boston Properties will have significant growth and earnings, making 2002, relatively speaking, a very strong year.

Our more technical guidance for 2002 is as follows. All of these estimates exclude the effect of any FAS 133 accounting charges and include the cash from the early surrender of 875 Third Avenue through July.

We estimate 2002 funds from operations in the $3.87 to $3.94 cent range, an increase of almost percent at the low end of the range from 2001. Due to the seasonality of our hotel properties, we typically experience a decrease from the fourth quarter to the first quarter the following year. With that said, we estimate the quarterly breakdown of 2002 FFO at 23.5 for the first quarter, 25 percent for the second, 24.5 for the third and 27 percent for the fourth. These numbers assume no acquisitions and no disposition.

We are currently in negotiations to sell a portion of our park. The net proceeds would be in excess of $56 million and the cap rate is approximately nine percent. If this transaction occurs, it will close in March and will be dilutive until the capital is reinvested.

Our industry continues to make its own news with its focus on reporting measures. We will continue the practice of providing GAAP net income or operating EPS guidance, breaking out any gains or losses on real estate disposition.

Included in our supplemental earnings packets and in our guidance are all the details necessary to arrive at operating EPS or GAAP EPS. Our Web site includes a detailed schedule of historical operating EPS for those interested.

We will provide net income guidance, excluding FAS 133, since we have no way of determining the vagaries of derivative valuation. Understand, however, that the calculation of GAAP depreciation is very challenging and is, in our judgment, much less predictable than projecting real estate net operating income or cash flow. We estimate 2002, operating net income per share of 2.35 to 2.45.

Given the volatility we've experienced this last year and our inability to forecast the rental market conditions in 2002, we're not yet prepared to offer guidance for 2003.

With that, I'll turn the call over to Ed.

Edward Linde: Good morning, everyone, and thanks for being with us.

Doug has covered a lot of territory. So I will try and limit my remarks in order to allow plenty of time for Q&A. First, I will briefly review our markets by region. Then, anticipating some questions, we'll comment about Arthur Andersen's pending tenancy at our Times Square Tower building and finally, just touch on our development pipeline and plans with respect to dispositions and acquisitions. First, the markets.

I'll lead off with San Francisco, which is clearly the weakest region in which we are currently operating. Overall vacancy has climbed to over 15 percent in the central business district north of Market Street; 18 percent in the CBD south of Market, which, by the way, is an interesting distinction, Embarcadero Center being north of Market; 20 percent in South San Francisco; and even greater than 20 percent as one goes further down the peninsula.

And by the way, any occupancy numbers I give you include the impact of subleasing, which you know probably accounts for as much of 50 percent of available space in many regions.

If, turning back to San Francisco, current trends continue, as we expect they will, occupancy could slip even further. As far as the direct impact on Embarcadero Center, as Doug has discussed, our rents have fallen to as low as $40 per square foot ranging upward to close to $60 per square foot, depending upon location within the complex.

It's only the attractiveness of Embarcadero Center that has enabled us to sustain even those rents. Fortunately, some tenants realize that this is the time to lock in very attractive rents in high quality buildings since the spreads over less desirable space have narrowed.

It's interesting, by the way, to look at our progress or lack of progress, I guess I would have to put it, during 2001. During the first quarter, we reported average achieved rents at Embarcadero of $99 per square foot. By the end of 2000, our most recent quarter - 2001 in our most recent quarter, the same number was $49 per square foot, a rather dramatic change. However, tenants do prefer to stay in like Embarcadero Center. And if we respond by being realistic about the rent premium we can achieve, we will keep those tenants.

As Doug mentioned, the situation in South San Francisco is more difficult. There, current - with current market rent in the low 30s and very little activity, we expect significant increased downtime and vacancy.

The situation in Boston is somewhat better. CBD vacancy is just a little above 10 percent. Vacancy in Cambridge is almost 20 percent. And in the suburbs, the vacancy rate is more like 15 percent. The trend line is negative, with quarter-to-quarter increases in vacancy of one to two percent and decreases in rent of two to $5 per foot. Nevertheless, we did almost a million square feet of leasing in 2001 in this region and are now concentrating on covering our 2002 and 2003 exposures of 450,000 and 800,000 rollovers respectively.

Our marketing strategy is pretty simple. Retain tenants whenever possible. No one involved in marketing at Boston Properties will sleep easy if they can't present an overwhelmingly compelling story to explain why any existing tenant leaves one of our buildings.

The climate in Washington is mixed. The district itself, I think it's fair to say, is the tightest market in the country. There was actually 500,000 square feet of net absorption in the fourth quarter, 2.2 million square feet overall. And vacancy was only up 1.3 percent during 2001. Unfortunately, the picture's not quite as rosy in northern Virginia, where vacancy rose to 14.3 percent, a three-percent increase from the previous quarter and where negative absorption for the year approaches four million square feet.

There is, however, as we've said before, real differentiation between commodity buildings and buildings which can distinguish themselves, such as the product that we control at Reston Town Center. And as the numbers Doug gave you before and our development projects can attest, projects like Discovery Square, Two Freedom Square and the other premier buildings that we own and control continue to do much better than the look-alike projects further out from Reston Town Center.

In Montgomery County, Maryland, vacancy is still below 10 percent and we have - and while we have limited availability or rollover in that market, it has enabled our 2600 Tower Oaks project, which was first occupied during 2001, to be close to 100-percent committed. Low rollover, by the way, characterizes our entire Washington portfolio.

New York has been our strongest market during 2001. Consider 599 Lexington Avenue, where we started the year with expected 2002-rollover exposure of 322,000 square feet. As of today, all but 138,000 square feet of this has been covered. And we are in final lease draft negotiation on another 81,000 square feet, which would reduce our rollover exposure in 2002 in that building to a roughly 50,000 square feet. And by the way, this leasing has been achieved at rents in excess of $70 per square foot.

The same story applies at 875 Third Avenue, where we started 2001 with 335,000 square feet of exposure for 2002 and 2003 and have leased more than half of it already, with negotiations underway on another 75,000 square feet.

As Doug mentioned, our exposure in Princeton is primarily due to the bankruptcy of the Washington Group and as he said, we've made progress in meeting some of that. The biggest exposure in New Jersey for us is in East Brunswick, where activity has been slow on the 115,000 square feet we have available in our Tower Center project.

So on balance, the great markets of '99 and 2000 are now a memory. But it is still important to point out that what we consider today's depressed rental levels are still above existing rents in our portfolio and in many cases, exceed where we expected rents to be and projections made just a few years ago.

Unfortunately, I can't answer the question of when the markets will turn positive. Existing empty space, both direct and sublease, will have to be absorbed before there is any real upward pressure. Rents will not move up until tenants believe that their options are limited and others are competing for the same space. If there are two tenants in the market each seeking 10,000 square feet with only one block of 10,000 square feet available, the landlord wins. If there are two blocks of 10,000 square feet available and only one tenant looking for 10,000 square feet, the tenant wins. And the change, by the way, from one condition to the other, can be quick and dramatic.

Now let me answer some questions that you might have regarding the prospective tenancy of Arthur Andersen at our Times Square Tower now under construction in New York. Let me start with some objective facts.

In September 2000, Andersen signed a lease which commits them to about 620,000 square feet. Recently, they have asked for an additional floor in the building. And the lease amendment memorializing that expansion is currently being drafted. The lease requires that we begin delivering space to Andersen in late spring of 2003, after which they have six months to build out that space before rent commencement. Construction is on schedule to meet those dates.

In direct conversation with Andersen's senior New York representatives, we have been told that plans for their New York operation have not changed. They continue to need and want the space to which they are committed, including the additional floor I just mentioned. The Andersen New York practice currently operates at two principal locations, both of which have been committed to other tenants for occupancy after Andersen leaves that - their existing space in 2003 and 2004.

Our lease with - is with Andersen North America, a limited liability partnership, which we understand, accounts for a little less than half of Andersen's worldwide revenues. We further understand that Andersen's internal partnership agreement obligates all of its entities to support the financial requirements of one another.

Andersen has liability insurance coverage in excess of several hundred million dollars, which we believe will be used to cover, up to its limit, any liability growing out of the Enron (Company: Enron Corporation; Ticker: ENE; URL: http://.www.enron.com/) situation, assuming of course, that liability ultimately is actually levied against Andersen.

Since we have no reason to believe that Andersen will not its obligations under the lease Boston Properties fully intends to meet its own construction and other commitments to Andersen. Their representatives have pledged to keep us fully informed as to any developments which would affect the lease. And should something occur, we would, of course, react accordingly.

Clearly we, along with a lot of other companies and individuals, are not happy about being caught up in the Enron situation. We have followed the speculation about Andersen's future as carefully as anyone. I won't comment on all the possible scenarios. Although, I do know that their New York practice is thriving, highly regarded and led by people with whom we have enjoyed a very productive, open and mutually beneficial relationship.

In addition, we still have the greatest confidence in the real estate which underlies this transaction. Times Square Tower will be one of New York's best buildings in a market which is still the most dynamic in the world and where it is incredibly difficult to create new quality office space. We don't expect this to happen. But should Andersen not require the space we are building, other tenants will. Three fully leased towers in Times Square attest to the desirability of this location. And we are happy to control two of its four corners.

Doug has already reviewed the leasing progress on our development pipeline. I only want to add that although we have deferred some developments and will even be selling some sites where we believe that harvesting current land value is a better choice than waiting for an improved development climate, we are committed to finding and controlling sites on which we can create significant value in 2004, 2005 and the years beyond.

We actually acquired two sites during the fourth quarter, one of which had been under agreement for more than a year but is still considered the best remaining site in Boston's 128 sub-market and we're happy to own it. And the other is in Reston, where we are convinced that controlling key parcels is the right long-term strategy.

As to acquisition, a big gap still exists between the bid and the ask on quality buildings with upside potential. We remain focused on adding the right properties to our portfolio. But they have to be added at prices which will produce superior returns and not just for the sake of size.

On the flip side, we are exploring, as I've mentioned, several dispositions of smaller properties that are solid assets but with only moderate growth potential.

And with that, let me turn things over to Mort. And then, we can turn to the Q&A. Mort?

Good morning, everybody.

I think I'll just limit my own comments to just a general view of the economy and in particular, a view of the nature of business spending and business confidence. There has been the most remarkable decline in business spending in the year 2001 I believe that we've had since the end of World War II. We went from an increase of 15 percent in capital spending to a decline of around 20 percent. We had, though, the largest drop in profits in the year 2000 also, I believe, since the end of World War II.

And frankly, it's hard really to see where the bottom is. We don't see the bottom yet. We still see a deterioration in capital spending and capital business commitments, which is one of the reasons why there has been the turnaround in the real estate markets that have already been described by my colleagues.

Now, the blue chip economists, 50 of them, have estimated, I believe, that in the second half of the year, that GDP will grow somewhere the range of 3.4 or 3.5, 3.6 percent. I will point out to you that in the - they also predicted almost a similar increase in the second half of the year 2001. Needless to say, those results were not in place at the - by the end of the year 2001 unless we had a terrific New Year's weekend.

So it's hard really for us to rely on that kind of a - pardon me - estimate. We basically just do it based on our own analysis and on our own views into the marketplace.

And our own analysis going forward sees the following. A continued decline in capital spending that may reach 150 to $200 billion or one-and-a-half to two percent of GDP, a continued decline in exports, which maybe represent another half of one percent decline in GDP, a flattening of consumer expenditures and possibly even a decline in consumer expenditures since they have been increasing but at declining rates since the fourth quarter of the year 2000 probably had a modest negative in the fourth quarter of the last year.

And, you know, that may turn into negative territory in the first or second quarter or both quarters of the year 2002. And finally, there is a decline in spending on the part of state and local governments, which represent roughly twice that of the federal government. But at least $50 billion will be taken off of federal and local expenditures.

Those represent, sort of, the negatives. The positives, of course, are lower oil prices, lower interest rates and a huge inventory of in the year 2001 that might lead to an investment that's not in capital and equipment into inventories in the first parts of the year 2002 and then, an improvement in consumer confidence and maybe hopefully in business confidence. Although that, frankly, is not visible. It seems to me that the people who write about business are a lot more confident than the people who are in business.

The real estate markets are, to some extent, a reflection of this. But I have to reiterate what has been our long-term philosophy and what has bee implicit in the descriptions of the markets we are in and the assets that we have. And that is that we still find that the highest quality assets do best in the poorer markets and best in the good markets. And that's really where virtually all of our assets are concentrated. We're still in the markets where we think we have Class A, Class assets. And we still see this in terms of the performance in those markets where there is demand going forward.

I too, would like to just add comment in terms of our dealings in Times Square with Arthur Andersen. As you all probably know, they have an annual volume that comes close to $10 billion a year and their profitability is quite substantial.

And I must say to you that in the New York office, the dealings that we have had with them reflect people of integrity, intelligence, talent. And we were able to put together our lease agreement with them, to which they are committed and to which we are committed within a matter of a few weeks, primarily because we found we could rely completely on their word and vice-versa. And that is the kind of relationship that we believe we will have with them going forward.

Nobody, of course, can predict everything. But I must say to you I think the reports of the exposure that they have are, at this point, at least, it seems to , exaggerated and limited to their particular troubles in one office and with one client. I'm not suggesting they haven't been damaged and nobody knows what the particular exposure is there. But frankly, we feel that they will be the occupant in the building going forward.

In general then, though, we're going to have to wait and see to be able to be a little bit more accurate in predicting a turnaround in the real estate markets, never mind the turnaround in the overall economy. The two of them are going to be related. And we are, as yet unable to make a prediction that there will be a turnaround in the economy in the year 2002.

I hope that the economy gets to be a little bit clearer. Certainly, interest rates are going to stay low, we believe virtually the entire year. There's no inflation in the system. The real exposure in the economy, it seems to me, is on the downside and that the Fed will react that way.

Whether or not there will be an additional stimulus program coming out of the federal government is anybody's guess. At this point, it's certainly going to be delayed at the very least. So we're just going to have to work through some of the excesses that built up during the last part of the 1990s and into the first three quarters or even into the first year of the year 2000. We hope that will be by the end of this year. But I certainly do believe that it'll be by sometime next year in any event, if not this year.

That's, sort of, where we all see the overall picture. We are in very, very good financial shape. We have enough money to make an additional acquisition of a substantial scale were such an asset to become available. So far, the bid and the ask is still quite wide.

We do find that we've been quite cautious in our estimates of value as we go forward in terms of an acquisition. We're very, very pleased with the acquisition we did make, which is Citigroup Center, which remains virtually - I mean, 99-plus percent leased. And anytime any space becomes available there, it gets grabbed up usually by one of the existing tenants. And depending on where you are in the building, the rents have gotten into the 90s and are remaining in that area.

So that, to us, still justifies the conclusion of the value of quality space and Class A space in the markets we are in. and that's going to continue to be our philosophy.

With that, I think we should open the call to questions. And I thank you all for your patience and time.

Thank you, gentlemen. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question at this time, please press the one key on your touch-tone telephone.

Our first question comes from David Shulman of Lehman Brothers (Company: Lehman Brothers Holdings Inc.; Ticker: LEH ; URL: http://www.lehman.com/). Your question, please.

Good morning, everybody. I have two questions. First, on your Arthur Andersen lease, do you have the ability to actively solicit backup offers?

Well, I don't think it's a provision in the lease. We can certainly solicit anything that we want .

You're not prohibited from doing that ?

No, of course not. And we have been approached, in fact, in one case. But we really do not expect that there's going to be any change in the leasing status of that space and that building vis-à-vis Arthur Andersen. You know, I can't give you an absolute assurance of that, obviously, given the fact that we don't know all the facts.

But we have had, as I indicated, absolutely a candid, honorable, straightforward agreements and dialogues with the Arthur Andersen people in New York. They have acted with the utmost of integrity. And we have, I believe, good reason to rely on what they tell us and frankly, on what they know. And I don't think they know everything either. So - but we fully expect that they will be in full occupancy of the space that they have signed for and which they have additionally committed.

Next question. If there is a - if the federal government doesn't come in and help out with terrorism insurance and it makes it very difficult to finance on a non-recourse basis, large real estate assets, would that force you to shift your financing philosophy to use recourse debt at the corporate level rather than at the property level?

Well, if it proves to be impossible - and, Doug, please join in - to on one route, we obviously can go down the other route. We are very happy with the approach that we have taken. We think it makes sense to do property-specific financing and keep the overall credit of the corporation and the parent entity unencumbered by it. But that's certainly a viable alternative.

As you know, several of our colleagues in the field have taken that approach almost exclusively. And it's certainly been a viable alternative. We just have chosen a different route. If that route obviously becomes impossible or so difficult or costly as to make it an unwise alternative, we're definitely going to explore going in the other direction and we're going to do whatever it takes to qualify for that. And then, we'll just have to see how the market evolves.

I do not believe it is possible for the country to have God knows how many billions and trillions of dollars in real estate that will be unfinanceable because of the lack of terrorism insurance. Other countries have taken various approaches to this issue, Canada, England, for example. And I think that sooner or later, the government will.

When the government says they don't know of any pain, I mean, I think they will become a lot more cognizant of it. It doesn't mean buildings are going to fall down because you don't have insurance. But it does mean that no buildings are going to be built and it's going to be very difficult to finance or refinance existing assets over time. It's going to present a tremendous problem to the country and greatly inhibit investment in commercial properties over time, which of course, will enhance the value of existing properties.

But having said that, this is a problem that has to be solved and, therefore, it will be solved. How, I can't tell you.

Thank you.

Thank you, Mr. Shulman.

Our next question comes from Stewart Seeley, from UBS Warburg. Your question, please.

Good morning. Ed, you'd said that the vacancy rate in CBD San Francisco, I think was 15 percent.

EDWARD LINDE: north of market.

North of market. Sometime last year, you had a presentation in San Francisco where one of - I think it was a fellow from had identified about a dozen premium buildings, of which Embarcadero was one. Do you have a sense for what the vacancy rate is in that collection of premium buildings?

EDWARD LINDE: I'm going to - I'm going to - I would say it's under 10 percent. But I don't know if I can be specific. But I - Bob Pester, I think, is - has the ability to chime in. And I don't know - if he can offer a more accurate number, I'd welcome it.

It's in the five to seven-percent range, dependent on the building and dependent on the amount of sublease space available in the building right now.

And is your sense, Bob, that that premium collection of buildings ever bumps into double-digit vacancy?

No, I don't see that at all.

OK. And the second question, on the land that you took down in Weston, you had a $9 million deposit. Was that a situation where your option was burning off and you had to choose between either walking or pulling down the property?

Yes. But it was never - I mean, we never considered walking from it. It's a great piece of property and it's one that we want to control.

Will you be capitalizing the project as a development starting from...

We will not. As Doug has point, we are - we are expensing all of the carry on land which is not actively under development.

OK.

And that's built into our numbers.

OK. And, Doug, what was the total capitalized G&A cost in '01? And what is the capitalized run rate on top of the 10-and-a-quarter that you expect for '02?

DOUGLAS LINDE: The first question, it was about $6.6 million.

OK. So that was the annual number.

DOUGLAS LINDE: Right. And for next year, I can't really give you an answer, Stewart. You know, it's going to depend on who's doing what and where. And I'm just not comfortable, sort of, giving you a number other than saying that we have - we've implicitly taken a, sort of, conservative viewpoint on that and for our own internal purposes, assume that the number is reasonably, you know, lower than the $6.6 million.

Very well. Thank you.

Thank you, Mr. Seeley.

Our next question comes from David Lobb, from Freidman Billings Ramsey. Your question, please.

First, Doug, thanks for recognizing that we're all so short of time and going through those numbers really fast.

DOUGLAS LINDE: I could - I could have spoken for 45 minutes. But that wouldn't leave anybody time for questions.

I agree. That's what replays are for. Can you just give us an idea about the tenant move-in schedule for 111 Huntington Avenue and when you expect to start receiving rent and how much on that building?

DOUGLAS LINDE: I'd say right now, we are about 25 percent fully - as of the end of the quarter, we were about 25 percent moved in. But we had - 50 percent moved in but we had rent on about 40 percent of that space because didn't start paying rent until January 1st of 2002. I believe by the middle of this summer, we will be in the 85 to 90-percent range. And I think the last tenant that we have from a signed lease perspective would occur in, you know, October or November of this year.

So you about 40 percent in the first quarter?

DOUGLAS LINDE: Yes. We'll be 50 percent in the first quarter. We were 40 percent in the fourth quarter.

Renting.

DOUGLAS LINDE: Renting. In terms of - you know, people are moving in ahead of schedule because we're building out the space for them. But their rents don't commence necessarily until a specific date, certain time frame.

Thanks very much.

Thank you, Mr. Lobb.

Once again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone.

Our next question comes from Dennis Maloney, from Deutsche Bank. Your question, please.

Hi. Thank you. Just one small question. What accounts for the decline in general and administrative expenses from the third quarter to the fourth quarter?

We basically, in the end of the first - third quarter, decided that the bonuses that we were accruing for the year were going to be overstated and at that point, decided to stop accruing for bonus. And as I said, we are - our bonus pay out was 27 percent less than what we expected.

Thank you very much.

Thank you, Mr. Maloney.

Our next question comes from Alexis Hughes from Bank of America Securities. Your question, please.

Lee . Alexis is also here. Two questions. The first is about the trend in office rental rates. I know it's difficult to predict when we're going to see the turn. But could you talk about your experience in past cycles, what we need to see in the broad economy before the office market reacts? Are we going to be well into the turn? Could we see something as soon as GDP starts to pick up?

I think clearly, GDP pickup will precede an upturn in rental rates. There is space that has to be absorbed. As employment starts to grow, that employment - the first part of that growth will be absorbed by existing space. And it's not - in this - in this cycle, which is so different than previous ones, a very large percentage of that space relatively is actually controlled by tenants that leased it well in excess - in advance of the actual needs of the space. So I think that there will be a lag clearly in real estate markets. Now, you know, is that six months, nine months? I just have a hard time getting a handle on that.

Let me just say that frankly, it varies. The worst of the four that I've been through was in the 1990s because there was a huge excess of supply that came onto the market that joined for a while with a decline in demand. There wasn't a huge excess supply this time around. But there was obviously, a decline in demand. And this was a recession, after all, that began with an investment bust that followed an investment boom. So in this sense, it started earlier. And we just can't predict when it will end.

But the - I don't believe it'll be anything like what it was in the early 1990s when that extended probably for a total of three years. I do think this will be shorter than that. But again, as Ed said, it's very difficult to say exactly when. A lot depends too on the nature of the upturn. If it is an upturn that is a very, very mild upturn, the space absorption may change.

But I do think one important piece here is just the overall level of business confidence. I think a lot of people in business still do not see the bottom. Once you get that turned, I think businesses are all going to be looking at their space requirements. There are a lot of people who a lot of space who are just on the sidelines at the moment because, frankly, they don't see where the bottom is.

And the second question, at the risk of harping on this Andersen thing, could you talk about where you see market rents relative to the Andersen rents, so if you had to replace them, whether you think you'd do better or worse?

Well, let me comment on that. You know, you have a major tenant with - what was the equivalent - probably of a AA rated credit with Arthur Andersen. There are tremendous advantages to the space in Times Square. And it's one of the reasons why we bought both sites really without having any prior commitments from lead tenants.

Let me just mention one of them. And that is that they have protected real estate taxes for 20 years. Now, New York City is in a tremendous budget deficit. And one of the things that is undoubtedly going to be a part of what happens is there's going to be some increase in real estate taxes. This will further enhance the competitiveness of this site.

There are - I mean, since we haven't had direct conversations but we've been approached in a particular case by a tenant who's looking for this kind of a space, my own belief is that we'll do at least as well as the current rents with Arthur Andersen simply because there is literally much less - much less competition in terms of supply for large blocks of brand new space. It just doesn't exist in Midtown New York.

And I think the other thing to point out is that the Andersen lease was not, in any way, an above - you know, an above-market lease. And it is not inconsistent with market conditions.

We never sign above-market leases. It's against ...

Only when we can achieve it.

Right.

OK. Thanks.

Thank you, sir.

Our next question comes from John Litt, from Salomon Smith Barney. Your question, please.

Good morning. And, Doug, thanks for that thorough review of information. I also missed quite a bit of it. I don't know if in the future, you can gets some of that in the supplemental. That'd be great. And I'll follow up with my more detailed questions after the call. My one question - I'm not sure if I got this right. You talked about some reserves that sounded like for dead deal costs. I was wondering if you could just go through that again.

DOUGLAS LINDE: We - in our G&A?

Yes.

DOUGLAS LINDE: We have - last year, we wrote off about $1.5 million. We - in our - in the G&A run rate I gave you for 2002, which was $10-and-a-quarter million, we have assumed an additional kitty for either development transactions that we're currently working on that aren't going to go anywhere. Not - this is not land that we actually own but sites that we're investigating, as well as acquisitions.

You know, in an acquisition like the World Trade Center or the CBS building, which is one we looked at, you know, at some point, you start hiring lawyers and accountants to do due diligence for you and engineers to do inspections. And you may or may not be successful. And you ultimately, if you don't buy those buildings, have to write that - those dollars off.

And how big is this kitty that you created?

DOUGLAS LINDE: It's significant.

Is there in there - or what's happening with all the development people if your development pipeline begins to shrink, your future development pipeline?

I think that's the point, John, that Doug made with capitalized and - capitalized wages. We have - we have assumed that the amount of wages capitalized will be - will be reduced. And to the extent that we don't have work for people to do, there'll be reductions in staff, as well.

, is that in his number?

Yes. That's in that number, as well.

OK. Thank you.

Thank you, Mr. Litt.

Our next - I'm sorry. Our next question comes from Mike Marron, from Prudential Financial. Your question, sir.

Thanks. I understand that the space at 875 Third was released during the fourth quarter. I'm wondering if the revenues reported in the fourth quarter included a comparable amount of revenue in comparison to the old...

All the rents at 875 Third Avenue were higher than the existing leases, if that's what you're asking.

OK. So the fourth quarter revenue related to that space was actually higher than the lease payments due under the prior lease.

Yes.

OK.

But just so you understand and I hope I was clear on this, there's an additional revenue on 875 Third Avenue, which is the payments that were being made in addition to the revenue we're getting from the tenants - from - the former tenant is obligated to pay us $1.3 million per month through July of 2002. So that's in that number, as well.

OK.

That's an ongoing obligation of that tenant.

How much is the difference then, Doug?

DOUGLAS LINDE: I don't have it off the top of my head. But I think that the rents were in the - in the, sort of, 53 to $54 range. And the leases that we - that we signed in the building were in the mid 60s, on average.

OK. Could you talk about - a little bit about the rate of decline in occupancy that you expect in the first couple of quarters next year? I guess we've been at 60 to 70 or now 80 basis points per quarter.

Yes. Well, I mean, the good news is, and I'm not saying this tongue and cheek, is that we don't have much in the way of rollover. So relatively speaking, I think the occupancy decline is going to - is going to slow down in 2002 versus 2001. The majority of our rollover is, in fact, towards the end of the year.

And so, I think that, you know, assuming that we don't have - knock on wood - additional tenant failures, you'll see a slight decline, meaning, you know, probably half of what you've seen in earlier quarters. But not - you know, unfortunately, it's not going to go the other direction unless we have some, you know, dramatic success which we're not counting on, quite frankly, in the releasing of vacant space.

OK. And my final question. For One and Two Discovery Square, how much of that property was included in the fourth quarter?

Zero.

Zero. OK.

That's not occupied yet.

OK. Thank you.

Thank you, Mr. Marron. Gentlemen, at this point, we have no further questions. Would you like to proceed with any closing comments?

EDWARD LINDE: I have no closing comments, other than to thank everybody for their continued interest and for being with us. And it's not going to be an easy economy in which to - in which to make dramatic results. On the other hand, we are very happy with where we are relative to any time in any other down cycle that I've ever experienced in the real estate business. Anybody else - Mort or Doug? With that, then, thank you all. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.