波士頓物產 (BXP) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by.

Welcome to the Boston Properties second quarter earnings conference call. At this time all participants are in a listen only mode. Following the formal presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, press the star followed by the zero. As a reminder, this conference is being recorded today, Wednesday, July 24th, 2002.

I would now like to turn the conference over to Claire Conamen [phonetic]. Please go ahead, ma'am.

Thank you. Welcome, everyone, to Boston Properties conference call. We're assuming all of you got the release and supplemental pack yesterday evening. If not, it's posted on Boston Properties web site, as well as FRB's. Additionally, we wanted to let you know we're hosting a webcast of today's call which can be accessed at CCBN.com and BostonProperties.com. I'm going to read a brief safe harbor, introduce management, and we'll get this rolling.

At this time management would like me to inform you that certain statements made during this conference call which are not historical may be forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward looking statements are based on reasonable assumptions, we 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 filings with the SEC.

Joining us today I'd like to welcome Mort Zuckerman, chairman of the board, Ed Lindy [phonetic], president and chief executive officer, Doug Lindy, chief financial officer, and Ray Ritchie [phonetic], executive vice-president, national director of acquisitions and development.

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

Thanks, Claire. Good morning everyone. Welcome to the call.

Based on this quarter's activity there is no reasons not for this to be anything by a normal Boston Properties conference call. Recent turmoil has constantly been part by lack of investor confidence associated with questionable accounting practices and financial disclosure processed highlight practices, all of which are not only consistent with gap and believe also meet the intent of these principals which is to allow investors and the public at large to get a clear picture of how our core business strategy translates into actual operating results. While our business is simple, we have gone to great lengths to provide significant supplemental disclosure in requirements of the SEC in order to offer transparency and maintain investor confidence. Our supplemental package filed with the Form AK available to everyone contains among other information a detailed analysis of these expirations, active occupancy results [inaudible] straight line rental revenues, termination income, capitalized interest, capitalized development expenditures, recurring and nonrecurring capital expenditures, capitalized leasing expenditures, unconsolidated joint ventures, and financing arrangements and unconsolidated joint venture, asset by asset performance. Each quarter we attempted to approve supplemental disclosure providing by additional information. This quarter we've made several addition ands intended to provide great insight into our operations. First we supplemented our annual expiration schedules with a quarterly break^down for the remainder of 2002 and '03. We hope this quarterly occupancy inspiration. Second in providing a breakdown of capital costs associated with our development activity, our recurring capital expenditures and our transactional leasing [inaudible] we've done in the past. We've also provided a break^down of nonrecurring planned capital costs associated with acquisitions. Those are major projects like the rebuilding of the Prudential Center garage, approximately a $35 million project with a lobby replace many and construction of additional leasable space at 265 Franklin Street a $20 million project which were planned and discussed with the actuals were required. Some of all these capital improvement projects will he reconcile with the statement of cash flow provided part of our second quarter 10(q) filing.

This activity in our markets shows little indication of improvement. Third-party sources suggest that the rate of decline in office vacancies has slowed, but this is [Inaudible] operating results and business prosecretaries in short term. Yet in the face of current market conditions which we will discuss later, Boston Properties was able to make paying its occupancy during the second quarter make significant progress in reducing 2003 rollover as well as position our most significant developments, Time Square Tower for long term success. Last night we issued our second quarter press release and reported FFO on a fully diluted basis of a dollar 2 a share. One year [Inaudible] from operations was 18 pot 6 percent. Above guidance, first call estimates of 99 cents per share. Second quarter operation was net of $2.8 million or 2 cent per share writeoff unrecoverable leasing positions previously discussed Anderson lease at Time Square Tower. We concluded that the cost associated with the Danker son lease should not be capitalized as part of the project even though some am I might argue they could have been absorbed in contingency project budget. We viewed the costs as similar to abandoned deal cost and consistent with prior practices included president expense in our G and A for the second quarter. Income for the quarter was 59 cents per share diluted reflect 11.3 percent net income from the second quarter of 2001 of 53 cents per share. There has been considerable attention given to the accounting for stock options affect it would have on that income. Pro forma basis the expenses associated with our stock options for 2002 is 9.7 million or eight cents per share annually. We are reviewing how we should [inaudible] expense on a going forward basis but not surprisingly have found the answer is not simple. During our review of the gap option expense alternatives with our auditors we discovered that with were we to conform to generally accounted accounting practices only the 2002 grant would be expensed on a prospective basis two cents per share. Not the total expense associated with prior year grant. We would be under reporting the pro forma run rate expense of eight cents per share by 6 cents per share. Included in our second quarter results our termination fees [inaudible] $1.2 million. [inaudible]. These fees originated from 10 separate leasing transactions totaling 47,000 square feet. In the case of 7 of the spaces the fees were taken in connection with the new replacement lease at market rate. In many cases downward. Four of these transactions resulted in equal or greater future revenue in addition to the termination fee. Our policy which has not changed recognized termination fee payment when the tenant surrenders rights and moves out of existing space. We do not amortize payments over the remaining life of the original term. We received a payment of $1.3 million during the quarter which is included in interest and other which is a result of a tax appeal and settlement for years prior to the formation of the REIT. This should be viewed as a onetime nonrecurring receipt. In the second quarter it is as highlighted in the subsupplemental package $12.2 million. Straight line represent Guidance previously 13 million. We anticipate sequential declining straight line adjustments that were were approximately 11 and $10 million for the remainder of owe 2 and based on existing leases expect to be in the range of $26 million in total for '03. Our policy is to recognize the average of all future contractual lease payments due over the lease term in the straight line represent. The lease term includes three rent periods. If we eliminate the termination income and the one time tax receipt and the $2.8 million writeoff we surpass our own estimates by about 2 cents per share. Increase was due to higher than expected occupancy portfolio wide as well as our ability to operate at the high end of our expected property operating margin. Adjusting for termination fees in the hotel property, contributions to net operating income looking back over the past three years, our second quart quarter margin has been between 67.8 and 69.9 percent. This quarter we were at 69.9 percent. The improved margin correlates with the addition of 5 Time Square, a high margin asset to the portfolio. Our inservice portfolio occupancy showed a slight improvement at 95.3 percent in the second quarter. It was 95.1 at the end of the first quarter. This result is not totally unexpected given the relevant modest rollover we had during 2002 and we have been highlighting for the past few quarters. When compared to the national occupancy rate more directly the specific local market occupancy on a weighted basis, Boston Properties outperformance of the market continues to be exceptional. Based on a number of broker resource reports we believe that the national occupancy vacancy rate is about 15.7 percent and the combined [inaudible] 13.4 percent. Our out performance is about 870 basis points.

When you review the supplemental, note that as we mentioned last quarter [inaudible] is included in the occupancy analysis beginning of this quarter though it's not in the same store comparison. Our same store year to year NOI growth including hotels 4 percent gap basis 1 percent on cash basis. Quarter to quarter basis the hotels were down 24 percent on NOI basis. Excluding the hotels results same store NOI growth was 1.8 on a gap 2.5 on a cash basis. This is consistent with the guidance we provided during the last quarter of same store growth of between 1 and 2 percent. We expect similar results for the remainder of 2002. [inaudible] we have seen no indication of turnaround. Second quarter results goes from March 23rd to June 14th. The second quarter revenue from three hotels down 16 percent from the same period in owe 1 and that's compared to a negative 32 percent last quarter. On average the hotel occupancy was down 2.4 for the year and the rate was down 15 percent. We continue to maintain our estimates of about $24 million for hotel contribution for the portfolio this year.

As of July 1st, 2002, we will have terminated our third-party leases for the hotels and created a TRF, taxable REIT for area and will be consolidated into our financial results. Starting next quarter we will break out hotel revenue and expenses in the income statement. This will have the effect of reducing our total property operating margin since the results, current results include a net lease payment and real estate taxes. And we have done each quarter we will disclose our operating margins net of the hotel numbers. Reviewing property by property occupancy specifics, I believe it's paid to 70 to 20 of our supplemental I note the following recent changes. We have signed an additional 48 scare feet of Prudential retail bringing that occupancy to 97 percent. We have leased 53,000 square feet at power center in New Brunswick to bring that occupancy to 84 percent and regarding building 506 Carnegie Center until second quarter we did receive the contractual represent due under guarantee for rate economically that building is 100 percent leased. Our remaining office lease rollover for 02 is 1.7 percent down from the previous quarter and 5.09 percent for '03. This totals 469,000 square feet in '02 and a million four in '03. I would wall your attention to the regional information in the supplemental which shows that 530,000 square feet or 38 percent of the 2003 expiration occurs in the fourth quarter of '03. The '02-'03 rollover totals 6.79 percent of our office portfolio and just over 6.5 percent of our inservice revenues. Given current leasing conditions as Ray and Ed will talk about we are not going immune from the challenging market conditions but we are in exceptional condition to weather the time until the office markets recover and they will recover. We do anticipate modestly higher vacancy by the end of 2002 into 2003. The second quarter we release approximately 86 6,000 square feet of second generation space with an increase in net revs of 20 percent. Not surprisingly the lease to lease increases vary dramatically between regions. New York City it was 275 square feet and we had a 36 percent increase. In Boston it was 94,000 square feet and we had 22 percent decrease. San Francisco 114,000 square feet of 7 percent decrease, Washington, D.C., 177,000 square feet, a 15 percent increase. In Princeton 206,000 square feet, 15 percent increase. To repeat those again. 275,000 in New York City, a 36 percent increase, 94,000 in Boston, 22 percent decrease, 114,000 in San Francisco, a 7 percent decrease, 177,000 in D.C., 15 percent increase, and in Princeton 206,000 square feet, a 15 percent increase. You will also note we placed into service 897,000 square feet attributable to 111 Huntington avenue. To add a little bit of specific color to this leasing, in Boston we signed 17 leases. The largest was 22,000 square feet. If you exclude one lease in Lexington Massachusetts where where took termination income as I described before, and entered into direct arrangements with a number of subtenants, if that one lease was taken out of the equation, our we were down only 8 percent in the Boston region in the second quarter. Combining existing tenant expansions with renewals, the renewal percentage on second generation space was 37 percent. In New York City we did 12 leases in 97 percent of that was associated with retenanting of expired space at 875 Third and 599 Lexington. In D.C. we had ten leases renewable expansions made out to 58 percent and in San Francisco we signed 24 leases renewals and expansions made 61 percent. As we previewed last quarter, second generation costs were New York City, in New York City second engeneration tenant improvement made in check 30 to $35 square foot. Continue to execute long term leases, but between 10 and 15 years and correspondingly have higher brokerage costs. The total average transaction for second generation office space for the second quarter was $26.18 in New York City running about $40 a square foot. The remaining lease term for the portfolio as of June 30th is approximately 7 years. 50 percent expires before June - July of '09, 50 percent expires after July of '09. In addition the leases from our new developments which were committed at the rates in the 1999 and 2000 have an average remaining life of 13 years. As I said in the past, when we calculate our market to market end place leases, leases done at the peek of the rent spiking '99, 2000 impact dramatically reducing the current Mark to market calculation. In addition when you are try to gauge earnings impact with the market to market remember the rents we're providing are cash rents not gap rent. The potential impact of our earnings difference between straight line gap rent which is typically heroin lower than the cash expiring year and the straight line new rent typically higher than the initial rent after taking into account contractual steps inherent in the vast majority of our leases. Here is our viewpoint on where market rents are in the marketplaces. I'll refer to where we were last quarter to give you a sense of the directional activity. P V D Boston the mid 40s that's actually up from the last quarter because we added 111 Huntington avenue and the rest repeat considerably higher than the average market rate. Subboston were from the high 20s we lowered that range from the last quarter of the low 30s. C B D San Francisco market were in the high 30s to the low 40s. Last quarter we were generally in the low 40s. And suburban San Francisco, which is our Gateway project only we're in the mid 20s, lower from the low 30s last quarter. CBD Washington, we remain in the mid 40s. In Northern Virginia we are in the high 20s. Unchanged in Montgomery County we're in the low 30s unchanged. In mid town Manhattan we're in the mid 60s. We've lowered that from the high 60s, and Princeton we're in the low 30s unchanged. Given the dramatic reduction in rent the current embedded growth is approximately $31 million or 25 cents her per share. During the first quarter we mentioned the sale of two parcels of land. First remaining parcel Gateway project in south San Francisco. That was sold for $8 million or $67 per square foot on July 2nd. The gain will show up in the third quarter results. The second parcel in Herndon, Virginia 126,000 square foot business building residential developer closed for $5.2 million or $41 a square foot. The combined cash gain on those two sales was $4.5 million and the interim rate of return during the length of our hold was 23 percent. That includes cost of carry. We continue to maintain an escrow of the initial $22 million and proceeds from the sale of our five buildings last quarter 95 research and development park Springfield Virginia. We expect to complete the remaining transactions for gap purposes receive an additional $5.8 million of cash additional gain of 13.5 million in third quarter when we complete development of the 43,000 square foot addition to one of those buildings. In the meantime we have provided two short term loans totaling $18.9 million at 7 and a half percent for the purchasers. These buildings were sold at a blended cap rate of 8.62 percent or 150 bucks a square foot. Our cash gain was 17.5 million and our total rate of return during the length of the whole. The solution interest these sales assuming no reinvestment of these funds is about a sent in '02 and 4 cents in '03. You see during the last quail studying the unsecured debt market for some time and entered into conversations with the rating agencies. Those discussions are nearing conclusion and we believe we will soon be in a position to issue unsecured corporate bonds. Based upon market conditions we may very well take advantage of that opportunity in the relatively short term. If you review our debt material schedules on pages 12 to 13 of the supplemental [inaudible] totaling $251 million, 10 maturities in '03 totaling $840 million. With three exceptions, they all have extension options built into the existing financing agreements which provide us with the flexibility to monitor the various market conditions without any short term liquidity issues. In '03 the load term without existing extension rights are [inaudible], 223 N Street and 2 Independent Square. New York City and the other two CBD Washington, D.C. each of these properties is significantly under leveraged and the largest of cases, 875 Third, 2 Independence. The extended weak economy and expectations of lower inflation result in constant or reduced long term borrowing costs as we move through the remainder of '02. We may short term maturities beginning of '03. For our current earnings estimates we have assumed maintaining floating rate debt for the remainder of 02 and short term rates remain flat throughout the year. Follow our funded currently with the construction facilities remain floating rate debt would account for 16 percent of our total secured debt. There will be an increase in our short term interest expense for those funds that we move from floating to fixed rate date debt. For each $100 million refinanced increase of 100 base points translate to approximately a sent per share in our interest expense and corresponding reduction in our quarterly earnings. Our G and A expense was 13.5 million for the second quarter as stated earlier if includes $2.8 millionery write^off associated with time square tower. Our G and A expense for the year taking into consideration those unexpected costs is anticipated to be 45.1 million dollars. This suggests a run rate of 10 and a quarter for the final two quartes of 02. year to date we've capitalized two and a half million dollars of wages. Our accounting policy is the capitalize direct wages and ancillary costs associated with our development personnel in connection with ongoing development in our marketing legal and construction personnel in connection with all acceptable leasing transactions. As a point of reference in calendar year '01 capitalized wages $6.5 million. Capitalization is limited to periods during which activities necessary to get the property ready for intended use are in progress. We do not capitalize wages, interest, taxes or any other ongoing expenses on projects that are not under active development. In addition interest capitalization is limited to 12 months after base building project completion or project stabilization, whichever is sooner. In the case of an asset like 611 Gateway where construction was completed in June, but there is limited current activity, we review the interest capitalization on a quarterly basis. To the extent there is no current or expected immediate activity, we would eliminate additional capitalization until the activity occurs. For the purpose of our current earnings projection, we assume no near capitalization on 611 Gateway. FAD if you understand available for distribution calculation supplemental cash income versus our current dividend. Second quarter FAD is 78.15 percent provided in the supplemental and it contains total leasing costs associated with leases beginning the second quarter and recurring capital expenditures for all properties including the hotels. We are tightening our 2002 full year guidance to a range of 389 to 390. On a quarterly basis we look for the third quarter to be around 96 cents the fourth quarter to be between 99 and a dollar. All of these estimates include the effect of any FAZ 133 accounting. At the low end of our range this is a year to year increase of 9 percent. A result in these difficult times that we are pleased to be able to project. We expect that when viewed against the general owe economy and our office period this performance will be quite compelling. These estimates take into account the delutive nature of the sales of the 895 building elimination of further capitalization [inaudible]. No other dispositions or acquisitions are projected [inaudible] continue to float our development for the remainder of the year. [inaudible] estimated [inaudible] 235. As we consider 2003 given our internal view of business growth in the light of [inaudible] our rollover assumptions Inaudible] decrease in portfolio occupancy and taken a very conservative review. But limited rollover in 03 fourth quarter minimal effect on the same portfolio. You are not yet prepared to offer growth rate because of uncertainty with respect to the following factors: One, uncertain market conditions and their impact on rental rates and down time; two, the impact on our earnings and the timing of floating of fixed rate debt as quantity fight earlier; three, the potential for attractive price acquisition opportunities available in the current environment; four, our ability to execute on additional disposition; five the future contributions from the hotels; and six, any other unforeseen natural impacts on the business he is and obviously we've had a number of those in the last few quarters.

I'll end my comments there and turn the call over to Ed.

Thanks, Doug, and good morning, everybody. My comments will be brief. I'm going to ask Ray Ritchie this quarter to comment on our various markets since he is the gentlemen at Boston Properties who are responsible as executive vice-president for all of our marketing activities.

I won't say anything about the general market other than to say that obviously there is great uncertainty out there and so far we have not seen any and do not expect to see any pickup in office market activity. As we said before, office markets will grow when job growth begins again. And I don't think job growth will begin again for the foreseeable future. More may comment on this later on in the call when he comes up.

Let me turn to a couple of things, though, before I ask Ray to talk more specific specifically about our rage on. First of all, Region] the situation on time square tower, as Doug has stated and as we announced during the quarter, we have terminated our arrangements with Anderson. I think it was in everybody's interest, their interest, but more importantly our interest to do that and to get on with our lives so that we could continue the active marketing of the time square tower. And as we have stated previously, even before we entered into that termination agreement, we have been talking to a number of tenants about taking Boston space in Time Square tower which as you remember was our 1.2 million square foot building under construction at Time Square. Although we have nothing specific to report on this call, I can say that we are close to agreement on all major terms with a 200,000 square foot tenant, are in intense discussions with two other tenants, one of whom would require 300,000 square feet and another 200,000 square feet. Are in preliminary discussions with two other tenants in the 100 to 200,000 square foot range. And so it has really confirmed for us the interest that people have in this extremely well located building at a market that if you look forward to 2004 and beyond will be under served. And while we can't make all of these deals because some of them overlap, and these tenants are primarily talking about space in the low or mid rise elevator banks, we still are am a in a position where things break right for us we could cover all of the space that was freed up by the termination with Anderson. And what I think you may have heard me say before over the years, we don't count deals until the leases are signed and given recent experience, I suppose, we shouldn't even count deals after that happens, although in this case I think the tenants with whom we are dealing do not oppose any risk in term of actually moving into the building. [do not pose] so we are very optimistic about that. The numbers that are involved are not dissimilar to, and in fact would approximate the economics of the Anderson transaction with one potential exception being that there may be somewhat higher transaction costs associated with these deals, although certainly well within the budget that we have provided for transaction costs and in our numbers. So I think the news is good on Anderson.

Two other comments. I've spoken before about terrorism insurance. Since our last call, the Senate has voted out a bill to provide protection or back stopping for the insurance industry so that insurance can be provided for potential acts of terrorism. That's the good news. Unfortunately, the house bill and the Senate bill are different, requiring a conference committee action, and today the conference committee has not been to date] formed. We are hopeful that the Senate and house will come to agreement on the members of the conference committee and that they will move to action. It is complicated, of course, by the fact that there will be several wee sessions this year and it is an election year. So we remain optimistic. We are uncertain as to the timing of when Congress will actually act on terrorism.

One other thing that you may have read about, those of you probably in Boston have certainly read about it, and that has to do with the lord and tailor store at the Prudential center. Lord and tailor occupies about 120,000 square feet in Boston, and had a lease that had [Inaudible] Interruption in the call]

Excuse me, is somebody talking? Somebody on this call that shouldn't be?

All right. The lord and Taylor situation is as followed follows. They had a lease that had a termination in March of 2003, and in our opinion did not exercise their right to extend that lease which they had. We are now seeking a declaratory judgment to determine whether in fact our interpretation is correct. In fact, I believe that we may expect to hear something about that tomorrow. We are also in discussions with other tenants about taking over the lord and tailor space, depending upon how things break with the court action and with those discussions, we think that there is significant up side potential to us in the future. It would not be recognized because of the time that lord and Taylor's current occupancy and moving another tenant in, but there is significant up side for us in the future, 2004 and beyond, from relief of the lord and Taylor space to either lord and Taylor or another tenant and we've had considerable interest in the store. That may work, it may not work, depending upon how things end up in the court.

I think with that I am going to turn things over to Ray Ritchie so that he can do his regional review and give you more color and specifics on where we are in the various regions in which we operate. Ray?

Thanks, Ed. It's been several quarters since we last looked at regions in more specific detail. So I'll give a quick big picture overview of five core markets. Some of this may be redundant with what Doug just mentioned. First in San Francisco. It is not news to any of us that the deterioration of the office market is nothing short of remarkable. Second quarter vacancy rate for class A office space in the financial district is 16.9 percent. Four new projects totaling over 1 million square feet of available space, coupled with Robbie Stephens [phonetic] space coming back to market, the vacancy rate could easily exceed 20 percent by '03. Rental rates to range from the high 20s to mid 40s. This backdrop look at the embark dare owe sender. [inaudible]. Lease term, strong professional ten an base, average tenant size, world market world place rental rates, [inaudible] some specific facts. We currently have not [inaudible] in the last two quarters we did 17 deals averaging $45 square foot. Major tenant whose lease expired till '04 and over $50 rentable square foot. [inaudible] mid 30s to low 40s. While we still face major challenges in most competitive lease environment we feel we are holding our own in this market. With regards to south San Francisco and our Gateway project it continues to be a very challenging situation. Market vacancy rates are approaching 40 percent with no users in site. And sight. While I'd like to give you an update on our new Gateway building there is nothing new to report. No new prospects, no new proposals. It was a remarkable achievement given the state of the south bay market the last we [inaudible] another developer who specializes in biotech for $8 million, over $60 a foot, a 3.$5 million gain as Doug said really amazing feet. Moving to Boston, the story is very similar, not as dramatic as San Francisco. Both 15 percent. Rates falling to range of low 30s to mid 40s. Several new projects are coming on line totaling well over million square foot of space that will continue to impress the market. Again [Inaudible] Boston property's position to the general marketplace. Our 3 million square foot Prudential Center project is 90 percent completed 111 Huntington Avenue. Our 265 Franklin, 50 percent vacant on acquisition is now 68 percent leased with significant activity. Recent lease he in Boston include a full deal 265 and $45 a foot, due deals at 111, one in the mid 50s other lower floors mid 40s, $40 renewal at Pru Tower. Significant deal early renewal 152,000 square feet at 101 Huntington for ten years at $45 a foot. Given the dynamics of the Boston market putting the large pocket space to bed was very important. In the Cambridge market given we have no space available and none rolling, there are no current BP comps to site. It is our sense and confirmed by others that the Cambridge has stabilized the 15 percent vacancy based on the strength of the biotech market. In the Boston suburbs like Cambridge we are getting a sense things are plateauing. Things appear to have stabilized in the low 20 level. Certainly a far cry from 3 to 5 percent level just two years ago. Rental rates have obviously fallen to mid 20s low 30s premiere space. Suburban assets, is he secured letter man tent for a full. We are [inaudible] committed space to 40 percent. Our 33 Hayden building, we were able to secure 35,000 square foot deal in the low 30s with no down time, a very solid deal for this current market. On to New York.

It is shared with you positive news about time squares tower mid town market how to release the BP portfolio. We will also see in down ton Washington this is a bifurcated market. Demand for smaller office space softened dramatically. While there is a 10 percent vacancy am mid town only a handful of options in excess of 200,000 square feet currently available. As a result, while there isample supply and little demand in the below user base, the users are facing shortage of options in next years. Quarterly seeing strong interest from several large major tenants as Ed discussed in our Time Square project. Five existing New York buildings we currently have 98 percent occupancy level and thanks to our aggressive releasing renewal program initiated last year have less than 2 percent of our existing asset base that remains to be leased in 2003. We are also holding our own regarding rental rates being achieved with high 60s low 80s group 280 Group Center, 280 Park, 599. In Princeton more of the same. a general Princeton market has weakened the last several quarters. Access space for financial services and a slow down in the pharmaceutical industry. [Inaudible] 17 percent including both direct and sublease space from the 6 percent levels just 18 months ago. Rates are now down to high 20s, 10 percent reduction just last quarter. All of our regions, however, Carnegie Center outperforming the market, maintaining 95 percent occupancy level. As Doug mentioned interesting to note 60,000 Ratheon guarantee resulted in effective vacancy rate of 1.3 percent. The question with Carnegie is where we can maintain occupancy level and rate in face of ever increasing availabilities and ever more aggressive pricing from competing landlords. Finally the Boston region. As we mentioned in New York, D.C. is also two-tier market. With our extremely high beer evident entry limited. Although the D.C. market enjoys a sub 7 percent vacancy rate, as is the case with New York, options for small users are plentiful. Going from high 30s to mid 40s as a 10 percent reduction from last year's class A rents. Boston Properties 3.2 million square foot D.C. portfolio, we currently enjoy less than 1 percent vacancy rate with virtually no rollover exposure for 2003. Now my comments in the lack of options for the larger users. We will soon be breaking ground on 901 New York project totaling 500,000 square feet. Ground break being 5 percent of this lessed. All these deals closed approximately 80 percent preleased with rental rates above $50 a foot '05 delivery. Northern Virginia is an interesting market. The District and close Virginia suburbs have been the beneficiary of increased from demands Defense, Intelligence and the State Department. Several large leases consuming major blocks of space. The Dulles corridor, representing the sub markets of Merrifield Tysons, Reston and Herndon is another story. This market is experienced very little 911 space demand. Exception is our new building new dominion 250,000 square build to suit major intelligence agency. To the contrary, the collapse of the technology tell come industries dramatically impacted this market leaving vacancy rate in excess of 20 percent. Again, however, it is important to distinguish the Boston Properties assets from the general market. Here are the facts. We have 2.7 million square feet of office space in Reston vacancy of 1.2 percent. We have no office space expired in Reston for 2003. Over 40 percent of the space is leased to the Federal government on long-term basis and nonG S space in Reston is centered around Reston town center. Premiere mixed use suburban community in the United States. Recently completed discovery square project anchored by Microsoft, we just executed a lease with 70,000 square feet bring total project to 90 percent leased. Interesting to note that S I has literally scores of building housing this requirement elect today pay premium to come to our project due to the quality asset and adjacency to the town center. Unfortunately 250,000 square foot portfolio experienced softness associated with commodity office space market. Little new activity sugar land or broad broad way technology park. We did sell our 599 development site for $5.2 million [inaudible] netting 50 percent profit over basis in property.

Saving the best for last, Montgomery County market in suburban Maryland is the healthiest urban property in the market. Exposure to technology and strong demand base from HHS, NIH and the Life Sciences, I-270 corridor [inaudible] evidence of future erosion from new construction or significant subleasing. Our existing asset base has the biggest 3 percent with limited rollover exposure for the next 12 months. Recently completed 26 tower oaks project 99 percent committed asset in this market 670,000 square feet is 97 percent leased. Perhaps the best indication of the strength of this mar debt is that we're currently pursuing four major build to suits ranging from 150 to 260,000 square feet, something unheard of in all other suburban markets. In summary our markets are reacting to the negative influence in the current economic client in varying degrees. However, there is one constant in all of our regions. Boston Properties materially out performed the general market in every one of our regions. Why is this the case? There are certainly important rise ons we are seeing quality. Tenant are willing to pay a premium to be in the best space to be in the best markets when rents are at these parking level. Tradition long term leases to high quality tenants maintain occupancy level more challenging time. Our track record of maintaining positive relationships with our existing tenant base through sponsored property management is a key to our extremely high tenant re: tension and lastly and most importantly superior performance of each of our regions is the ultimate validation of the Boston Properties philosophy that the best office assets and the best markets in the country are the last to be affected and the first to recover when the markets rebound.

This leaves us being tested today and [inaudible]. Thanks, Ed.

Thanks, Ray. Mort, I don't know if you have any comments you'd like to add before we turn it over to Q and A.

Yeah, I'm just limit myself to just a few comments. I can't help but be reminded of the cartoon that showed a client in an investment banking office on Wall Street looking out the window and on every ledge of every high rise building that he could see out through the window and there were many of them, there was somebody on the ledge about ready to jump and the investment banker says, you know, every now and then we have to pay attention to the technical indicators in the marketplace.

Well, we are, as you know, in a very difficult economic environment, and -

Mort?

Yes. I do think, if I may find a way to reiterate what Ray Ritchie, in fact, allful my colleagues just said and what we have said for years, since we have been public. We have a strategy in the real estate business that we have followed not just for the five years we've been public, but really at this point for the 32 years that we've been a company in this business. And that strategy, which as Ray said, focuses on the best assets and the best locations in what we think are the best markets, and those which have constraints on excessive new supply have produced what has been our experience, not again, not to just lift downturn, but to the various down turns that we've been through in the 70s, 80s and 90s prior to this. We've done better in the good markets and much better in the bad markets, and I think that the occupancy levels and the rental rates that we have received when you look at it in comparison to the general market or even our it seems competitors are testimony to that strategy. And we are looking forward, frankly, to demonstrating that as we go through the next year in particular. But I do want to say that the question that we have to ask, and I'm sure all of you and everybody is wondering, is whether whether or not the turmoil in the financial market will leach into the general economy and the real economy. This is an interesting question because the underlying economic trends, while not as strong as they appeared in the first quarter and even in the second quarter of this year, nevertheless are still positive.

The consumer expenditures have remained positive in part because we have had - we've had no real employment, but we've had quite a limited, in fact, the most limited unemployment of any recession. It's still a 5.9 percent unemployment rate, but look at heads of households, it's around 4 percent. So we think that there are reasonable conclusions to be made that the consumer will continue to grow his or her spending, although modestly. And the issue is whether or not media attention given to the turmoil in the financial markets will affect the general consumer confidence. I would point out to you that since 90 percent of the stocks held by household are held in the top 10 percent of the income spectrum, the general public is not nearly as much affected by the actual decline in the market as they are by the impact it will have on consumer confidence.

Where I am concerned, and where we are particularly involved is the business confidence. I have always said over the last year that the people who write about the economy are a lot more optimistic about it than the people who write check. But again, as Ray Ritchie has to ably pointed out, it is very important in this industry as in others to discriminate between one kind of product and another, between the class A products and the best locations and other kinds of real estate. It is a huge difference, and they are not comparable, and that is demonstrated over and over again through good markets and through bad markets. It is why we are able to do as well as we are able to do in mid town New York, in Washington, D.C., in Montgomery County, and Virginia, in Boston and in San Francisco and indeed in Princeton. We have consistently focused in on the highest quality locations and the best markets. If I could put it in terms that maybe are slightly more. Understood, I will guarantee you that allful you would appreciate that residential real estate on fifth avenue and Park Avenue in New York will do better than any other real estate in this market. And it is because there is a limited supply, there is always demand for the highest quality space. That is where we have focused our commercial real estate. That is why we have done better, as I said, in good markets and in bad markets.

Having said all of that, frankly, we don't know or we know less and. Less predict ability about where the economy is going because of the turmoil in the financial market there is clearly some unraveling of confidence in the numbers to paraphrase the federal court in San Francisco which recently ruled on whether or not we could say we are a nation under God, every now and then [inaudible] you have a nation under indictment. And I think this is something that has an impact on the overall business economy and it [inaudible] predictability. Interest rates have been low, inflation remains low. Unemployment remains relatively high. The consumer is still much more concerned about the value of his home, and that has continued to go up and it's much more important to him than the value of his stock portfolio. [inaudible]. And remember that the value of homes, in part, is a reflection of the cost of carrying homes and mortgage rates remain at the lowest end than we have seen in a long, long time. And I think therefore this will stimulate this part of the consumer economy, both in auto sales and home sales and that this will continue through the rest of this year.

So, you know, we have been very cautious and very conservative over the last several years. We believe that this is still the right posture. We think we have positioned ourselves through the length of our leases and the quality of our tenants and their credit, to sustain whatever may happen and we think we will continue to do well, very well in good markets and much better in difficult markets than the general marketplace because of our real estate. I think with that I will stop.

Operator, we'll take questions 00:50:53

Operator we'll take questions now.

Thank you, sir.

At this time, ladies and gentlemen, we will begin the question and answer session. If you have a question please, press the star followed by the 1 on your push button phone. If you would like to decline from the polling process, press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection and your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

One moment, please, for the first question.

[Pause.]

Our first question comes from John [inaudible]. Please state your company affiliation followed by your question.

John Lent [phonetic]. Good morning. First I want to complement you guys thorough albeit long call [inaudible].

I'd like to start with a question about the leases that you terminated in order to low down the market rent. Can you give us a little bit more color how many are affect, how many more you think might happen, impact the rent going forward?

We don't want to roll down market rent. So if I made that comment or that was interpreted [inaudible]. Generally all the terminations we have had, John, have been in situations where the existing tenant has effectively come to us with their hat in hand and said, we're probably going bankrupt. If you don't do something with us and accommodate us, we're just going to stop paying the revenue and have your secured deposit and we have taken the position, well, we have that, what can we do that will better the situation. In most of those cases as I said, there are subtenants already in place. So we've basically taken the position we'd rather take the bird in hand and cash while on a net present value basis we actually are in most cases have been indifferent to these situations. On a gap reporting basis they hurt us because we effectively are required by gap to book the termination income up front and take the pain of the reduced rent going forward. So for example on that one lease I talked about of the $1.2 million about 500,000 of it was from one particular lease of about 17,000 square feet. If I took that amount of money and amortized it in over the lease going forward with the subtenants request that tenant had in place, I would in fact have gotten 100 percent whole on the existing lease. But because the first tenant went away, I was required by gap to recognize that termination income and the other tenant were paying less money because they were subtenants and quite frankly the market had gone down.

I think I did misunderstand your comment before.

On the second time square tower, how are you currently anticipating when you would start expensing that building capitalizing it, sometimes capitalize the first year to stabilize?

The practice as I described, when you need a building and the purpose of the shell completion, the current literature gives you a maximum of 12 months to capitalize [inaudible] interest and other cost, AKA insurance and operating expenses. As long as you are actively moving forward, you can continue to capitalize that until such time as you become quote-unquote stabilized. Stabilize is an ambiguous definition, if you can our auditors they will probably tell you their definition of stabilization is somewhere between 50 and 75 percent. If you've actually signed leases and you're moving toward building out space and you're still within that 12-month period, I think the capitalization would arguably be able to be continued to the extent that you basically were in a position where you didn't have additional activity and you got to whatever that stabilization number is, you would be required to stop the the capitalization at that point.

Can I add something to that answer? I don't want there to be any miss impression here. When Doug was talking about what gap requires, etc., we think in this case that gap is also requiring what's appropriate to really capture the facts. Because during the development of a project, during its reseptember when we're moving tenants in it is in fact appropriate to treat it that way. And if in the example of 611 Gateway where now things have - we are not active, there aren't tenants intending to move into the space, we're not [inaudible] it no longer is appropriate to capitalize it. So gap is making sense here and that's what we're doing.

So in all likelihood in '04, this building will not be in the number?

Well, it will be in the numbers to the extent we start getting income in '04, and once we start getting income, we expect the expenses that go with that income are expensed. and we fully expect for some tenants to be in occupancy and paying rent and for part of the building to be completed in '04.

You bring the revenue and the expense on a proportionate basis. Given that Anderson went out you're working on leases you're not going to take this earnings hit in '04 and start expensing the interest. That would be an '05 event should the building be vacant in '05.

All of a sudden the market was dried up and nothing was happening, then there would be similar to the 611 situation.

One of your reasons why you're not giving your '03 guidance at this point related to acquisitions, I was wondering if you could give us a little bit more color on the acquisitions environment and what you're seeing out there.

I think the acquisitions environment hasn't changed much since the last time we spoke, which is that we still remain, I suppose in one sense disappointed and in one sense excited by the fact that there is clearly a very high value being placed on existing high quality well located [Inaudible.] Still remains very low. In some instances lower than they were prior to the time when the general market turned down. And I say we're delighted because that implies that the value of our portfolio, our existing assets is very high. On the other hand, we thought that there would start to be opportunities to acquire assets [inaudible] and we still think that that will happen, but so far it is still very difficult to acquire the kinds of assets that we'd like to acquire at attractive rates of return.

Thank you.

This is Mort. Just to under^line this, what I think is also implicit in what Doug is saying is that we intend to continue to be in the marketplace for appropriate acquisitions.

Okay. Thank you.

Our next question comes from Raul Benasharsee [phonetic]. Please state your company affiliation followed by your question.

Hi. This is Raul from Merrill Lynch. Doug, could you walk us through your quarterly distribution of earnings for the rest of this year? How do you go from the buck or 2 to 96 and then back up to a buck?

When you say how do I get there, I mean, we have our own internal model which is based upon our existing leases in place and the income associated with the hotels and the expenses that we have. And that's the way it comes out. Unfortunately I can't give you a simple reason.

Well, one reason, Doug, surely is that the fourth quarter in the hotels is different from the third quarter in the hotels and the other may be we have vacancy factors that we built into our models that may end in a particular quarter.

Like I said, Raul, there were expenses are moderated between quarters as well. Third quarter expenses may be slightly higher from a projection basis than second quarter expenses were.

So our margin might be down a little bit and those sorts of things.

Okay. And then I know you've die site decided not to comment in '03, but the consents us is about 410. So if I look at your development schedule, I'm just trying to figure out how the needle for '03 could move to anywhere above the 390 level you've got for '02.

Unfortunately I don't feel comfortable talking about '04 number '03 numbers commenting on somebody else's model. One piece of the information I can respond to is we don't have any additional development coming on line in '03.

All right. Thank you.

Your next question comes from Stuart Axelrod [phonetic]. Please state your company affiliation following your question.

It's Stuart Axelrod from Lehman Brothers.

Doug, first you mentioned higher vacancy assumptions going into oath. Could you give additional color on that in terms of - Inaudible?

Inaudible] I know that because I know we have an expiration coming up the end of 2002 that we haven't covered. So I think about 300,000 square feet of vacancy [inaudible].

Okay. And the per share impact of eliminating the capitalization from Gateway?

The basis is about 4 cents. [611 Gateway]

And the space in the portfolio that's currently available for sublease [inaudible] percentage of tenants on credit watch?

On credit watch, interestingly enough, we have an allowance for all of our receivables which is included in our big picture numbers. I think it's about 2 if the $2 million. We are, for example, have no A R with Worldcom or M C. I or any affiliates right now. We do not have any other tenants aside from Worldcom that have an impending bankruptcy issue that we are aware of. So we feel pretty good about the state of our collections on a going forward basis, and I will let Ray comment on the sublet market.

Again, across the board from a sublet standpoint there is no major blocks. We've got portal sciences still to be leased in Northern Virginia. San Francisco there's some bits and pieces in Embarcadaro Center. But looking across the portfolio, we're actually extremely good shape from the sublet standpoint.

That answer why you question, sir?

Yes. One follow-up question. Attitude towards the share repurchase?

We're watching that carefully, but we are not kind of letting share relooking at share repurchase at the moment.

Okay. Thank you.

Our next question comes from Greg white. Please state your company affiliation followed by your question.

Hi, good moring guys. From Morgan Stanley. Just one small thing. On the development and management service fees trending lower in the second quarter, can you give a little color on that?

It's just timing. In fact, I would not - would anticipate those numbers going up. Actually relatively significantly. If what Ray has been describing in Washington, D.C. occurs, not only do we have some build to suit opportunities in Montgomery County; all of which are on their own basis, Ray, as he always does, is able to manage to find opportunities to put our development folks to work in the greater Washington, D.C. area on a fee basis as well. In addition, we are going to continue to be doing work for the post office at 90 Church Street in New York City for probably an extended period of time. That building was affected by the 9-11 issues.

Okay. And then you mentioned obviously the dealings that you were having with the rate agencies right now. Can you give some timing parameters to that?

As I've stated, we are nearing the very end of that process and we are continuing to monitor all the markets and, you know, something might happen in the short term, something might not happen for a period of time.

And, I mean to the extent that you feel comfortable commenting, how have the dealings with them been going?

I feel very uncomfortable commenting [inaudible] they provide their own comments.

Okay. And just turning a little bit obviously you're projecting some slight duration in vacancies. Can you [inaudible] through same store guidance?

I think our same store is going to remain in the 1 to 2 percent range on a floor basis this year.

Okay. Ed, you guys gave some good color on the potential tenants at time square building and I just wondered given the shake out that we've seen in the market the last couple of weeks, when you think about who those prospects are, do you still feel the same level of confidence or -

Yes, I do, Greg.

Okay. And then just to follow-up on one earlier question on the buy back, can you give a little color as to why you wouldn't be a little more aggressive at current levels?

Well, I think we also as Mort says, we continue to be looking very carefully at the [Inaudible] . It is correct if you're implying that our stock should be considered a very attractive - at a very attractive price. I believe it is ape very attractive price, but this is a very difficult time, and so I think it's also appropriate to be cautious.

Okay. Thanks a lot, guys.

The next question comes from Kim Olson. Please state your company affiliation followed by your question.

Yes. Capital. Just one question. Can you specify your occupancy rate for the center in mid town Manhattan?

I believe it's 100 percent.

Thank you. Thank you.

Our next question comes from lieu Taylor. Please state your company affiliation following your question.

Hi, Deutsche Banc. Just to follow-up on Greg's buy back question, Ed, where do you guys stand on dispositions and have you considered maybe selling more assets into this strong market and redeploying those assets into stock?

As we've indicated we have done some dispositions, albeit limited, and we are continuing to explore some other dispositions. I don't think that we are - we also, as we said, have great faith in the values of our existing asset, and therefore were we to dispose of them, I think we would be looking to re place them. And given what we said about the acquisition market, I think it would be very difficult to do. So it's sort of walking a fine line.

Okay. The second question is just with regard to the rent at time square tower with the being activity. Where are the rents you're currently negotiating vis-a-vis Anderson and your pro forma?

You know, I don't think we've ever stated and I don't think it's appropriate for us to state in the midst of negotiations what the specific rents are, but as I think I said, the rents that we are expecting to achieve will be not terribly different meaningfully different than the Anderson rent. If there are differences, they will occur perhaps in some timing and in some concessions, but well within the range of what we've allowed for in our budget.

I do think I can say that the tenant think the rent is too high and we think they're too low.

And I agree with Mort.

Okay. And the last question for Doug, I want to make sure I understand the guidance correctly. Your guidance of 389, 390 assumes your current level of floating rate debt and current interest rates, if there are some financings floating rate debt your numbers would be down by that sensitivity you mentioned earlier?

Yes.

Okay. Thank you.

Our next question comes from Lee. Please state your company affiliation followed by your question.

Thank Bank of America Securities. [inaudible] other analysts in asking questions were implying that the buy back is something that should be considered, and I would echo that. I'll just ask a specific question about the options. At the beginning, Doug, you talked about this eight cents pro forma and the two cents following gap. Are you decided two expense options or you're just sharing numbers that would be impacting the numbers should you choose to do that?

At this point we are providing you with the information and we are [inaudible] still reviewing what policy we should adopt going forward.

Okay. Thanks.

Our next question comes from Mike more an. Please state your company affiliation followed by your question.

Financial securities. I just want to confirm the reserve balances. Doug, I think you mentioned it was 2.2 million. Is that for reserves against tenant receivables and accrued rental income.

No, [inaudible]

Could you tell us what total reserves are?

Inaudible.]

I'm sorry, how much?

3.3.

3.3? And that's against both receivables?

3.3 [inaudible]. That portfolio revenues of about a billion dollars.

Okay. There are no reserves against, separate reserves against the accrued -

There are, 3.3 million dollars.

Okay. For tenant assignment [Inaudible]. Okay. All right. What quarter do you expect to start expensing interest for 611 Gateway?

[Inaudible.]

Okay.

The third quarter results.

[inaudible] do you have any tentative outlook for same store growth in '03?

I wouldn't even want to wager a guess at this point.

Okay. That's it for me. Thanks.

Our next question comes from Larry Raymond. Please state your company affiliation followed by your question.

Yes. Great quarter. My questions have been entered. Thanks.

Our next question comes from Alexis Hughes. Please followed by your question.

Bank of America Securities. Ed, with respect to your anticipation that the acquisition markets will return to more attractive levels, are you currently looking to increase your exposure to current markets, to your current markets, or are you considering expansion into any new markets?

At this point we are trying to stay in the markets in which we are already operating.

Okay. And any repositioning of your exposure there?

When you say repositioning -

Looking to increase your exposure to a market that you are under weighted in, increase your exposure - that your currently overweight?

No specific policy. I think [inaudible] depending upon what's available. Obviously our markets as we've indicated have relative strength, so it may be in terms of what they are performing today. So it may be easier to underwrite something in one market than in another. But frankly we have space in all of the places that we are operating on long term, and if we see the right asset available at the right price, we're going to be actively trying to acquire it.

Thank you.

Our next question comes from Anthony Paloni [phonetic]. Please state your company affiliation followed by your question.

CIBC. Thanks. Can you talk about the status of the retail space at 5 Time Square and whether that's fully hitting it or not?

[Inaudible.] At least two out of four spaces, one of them I think we've announced, which Champs which is a subsidiary of Foot Locker. The second we have a letter of inat the point that's signed. The tenant has gotten the approval. We are finalizing the lease negotiations. And I believe those two in total are about 20,000 square feet and there is another 14,000 square feet [inaudible].

And can you talk about rent and operating margins on that space?

Well, the operating margins are 100 percent of triple net leases. The rent I believe on the ground floor space are in the 3 to $400 a square foot range. The space on the second tier levels is I believe in the 60 to $80 square foot range.

Okay. And should we assume that you've got that space hitting accordingly in your guidance that you've given?

Yes. I believe it doesn't really hit. It won't be hitting until the end, the very end of 2002 and beginning of 2003.

Okay. Thank you.

Ladies and gentlemen, once again, if there are any additional questions, please press the star followed by the 1 at this time. As a reminder if you are using speaker equipment you will need to lift the handset before pressing the numbers.

Pause.]

No other other questions Operator?

It peers there are no other questions.

We apologize for the length of the call. I think we feel it both appropriate and almost compelling to be as detailed as we possibly can to provide you with back up for the numbers and color for the numbers. We recognize it make the call long and for those of you who [inaudible] we really do apologize. Those of you who are still with us, thank you very much and we look forward to meeting with you again next quarter.

Ladies and gentlemen, this concludes the Boston Properties second quarter conference call. If you would like to listen to a replay of today's conference, please dial 800, 405-2326 or 303-590-3000. Once again if you'd like to listen to a replay of today's conference call please dial 800-405-2326 or 303-590-3000. Thank you all for 01:15:27 participating. You may now disconnect.