波士頓物產 (BXP) 2002 Q3 法說會逐字稿

Good morning. My name is Michelle, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Boston Property Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Ms. [Connaman], you may begin your conference.

Hi, good morning, everyone. I just wanted to alert everyone that we're furnishing a webcast of today's call, which you can access at ccbn.com or bostonproperties.com, and if anyone did not receive the supplemental pack or the press release, please contact [Kathleen DeKura]'s office.

At this time, management would me to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from 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 include Mort Zuckerman, Chairman of the Board, Ed Linde, Chief Executive Officer and President; and Doug Linde, Chief Financial Officer, and then several of the regional managers will be available during the Q&A session.

So without further ado, I'd like to turn the call over to Doug for his opening remarks.

Thanks, [Claire]. Before I begin, I just wanted to note that we have put together a presentation [at NARI], where we are hosting market experts from the Silicon Valley, the CBD of San Francisco, the Peninsula, and the East Bay on Thursday, November 7 at 7:00 AM. And if people are interested in attending those presentations, they should contact [Angel Guzman] at 415-772-0702.

Thanks for joining us today for our third-quarter earnings call. Although we don't plan to spend an excessive time discussing the weak market conditions, which are the subject of many of the third-party reports that we've seen in the last few days and weeks, my remarks reflect that fundamental office space demand remains anemic since job growth in our market shows little indication of near-term improvement. Later in the call, Ed will comment on this briefly, and Mort will discuss the macroeconomic viewpoint, onto which we overlay our business projections, in his remarks.

As we've said before, Boston Properties' consistent strategy of signing long-term leases with credit tenants has served us well in a time of decreased demand. Our most recent acquisition of 399 Park Avenue, which closed on September 25, with its profile of the long-term leases to credit tenants further enhances the stability of our future results.

As we review the third quarter, it's important to emphasize that our results remain consistent with our internal expectations and with the guidance we have previously provided. During the call, we will be providing guidance for 2003. Our 2003 results are highly dependent on our prospective capital structure. We will review the critical assumptions affecting the capital structure, and, equally important, the timing associated with the number of significant capital transactions that are intended to meet our previously announced objective of putting the Company in a leveraged neutral position, vis-à-vis, our recent acquisition of 399 Park Avenue in New York City.

Boston Properties has gone to great lengths to provide significant supplemental financial disclosure in addition to the requirements of the SEC in order to offer transparency and maintain investor confidence. Our supplemental package, filed with Form 8-K, contains, among other information, a detailed analysis of our lease expirations, including a quarterly breakout for the remainder of '02 and '03, asset-by-asset occupancy results, straight-line rental revenue information, termination income information, capitalized interest, capitalized development expenditures, recurring and non-recurring capital expenditures, capitalized lease expenditures, unconsolidated joint venture financing arrangements, and unconsolidated joint venture asset-by-asset performance.

Before last quarter's call, we added a more detailed breakdown of our capital costs. In addition to breaking out the costs associated with our development activities and our recurring capital expenditures and our transactional leasing costs, we also provided a breakdown of our nonrecurring planned capital costs associated with acquisitions. The sum of all these capital improvement categories reconciled with the Statement of Cash Flows, provided as part of our second quarter 10-Q filing.

This quarter, we've also added a CBD suburban breakdown to our property profiles. Last night, we issued a second-quarter press release – a third-quarter press release and reported funds from operation on a fully diluted basis of $1.00 per share. Our year-to-year-funds-from-operation increase is 9.9 percent. This is above our guidance and $0.03 above First Call estimates.

Net income for the quarter was $0.74 per share diluted, reflecting an increase of 32 percent over net income from the third quarter of '01 of $0.56 per share. These results include the effect of the gains on sale from the asset sales we reported in the press release. Without the gains from the sale, net income from the quarter would've been $0.59 per share diluted, an increase of 5.35 percent.

There is an unanticipated consequence of asset sales to which we want to make you aware. As an SEC registrant, in order to keep our 10-Ks technically updated, we are now required to revise prior-year results, showing the effect of discontinued operations, which, for our purposes, means property sales. You will see a consistent stream of press releases announcing 8-Ks amending prior-year 10-Ks, which we are required to make in any quarter in which we sell an asset, as long as we want to maintain updated registration status. This amendment simply reclassifies property revenue and expenses from the sold assets as discontinued operations on the income statement and has no effect on net income or funds from operations. We expect to file an 8-K amending our 10-K shortly after we file our third quarter 10-Q. We believe the compliance with this rule may confuse the investing public, but we have no choice. [NARI] and others have been unsuccessful in convincing the SEC of this conclusion.

There's been considerable attention given to accounting for stock options and the effect it would have on that income. As we discussed last quarter, on a pro forma basis, the expense associated with our stock options for '02 is $9.7 million, $0.08 per share, or $0.02 per quarter. On prospective basis, the cost would've been $0.02 per share for the year and a half a cent per quarter. We will continue to break out the expense of any non-cash compensation each quarter. We have not adopted FASB 123 since we are awaiting a definitive accounting standard. We think it would be a mistake to formally adopt one of several different possible standards, but it provided the data necessary for you to draw your own conclusion.

Our G&A expense was $10 million for the third quarter, and our expense for the full year is anticipated to be about $45.5 million. When reviewing year-to-year data, remember that the second quarter included the $2.8 million write-off associated with the terminated Arthur Andersen lease at Times Square Tower, as previously announced. We expect fourth-quarter G&A expense of approximately $11 million. Year-to-date, we have capitalized wages of $4 million. Our accounting policy is to capitalize the 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 successful leasing activities, but to end capitalization when development activities cease. As a point of reference, in calendar year 2002, our full-year capitalized wages was $6.5 million.

Included in our third-quarter results are termination fees totaling approximately $1.85 million, .6 percent of total quarterly revenue. Over the last four quarters, our termination income has averaged about $1 million per quarter, and over the last two years, termination fees have averaged $1.8 million per quarter. We do anticipate termination fees of between one and two million dollars per quarter for the foreseeable future.

This quarter, these fees originated from only four leasing transactions totaling only 80,000 square feet. In each case, the fees were taken in connection with a new replacement lease at market rates. Seventy percent of the fee resulted from a single transaction in San Francisco, where the net present value of the sum of the termination payment and the future rent payments from the new tenant will be in excess of what we would have received from the terminated lease. However, we are required to recognize termination fee payments when the original tenant surrenders its rights and moves out of its existing space. So, unfortunately, on a going-forward basis, the recognition of the lump-sum up-front payment will translate into a corresponding reduced contribution from this space in the future.

The collection of unanticipated holdover rent added about a half a cent to this quarter; unbudgeted percentage rents, about a half a cent; the elimination of leakage from our former hotel operating leases, about a third a cent; early rent commencements, about a cent; and reduced interest expense, about a cent. They all contributed to our better-than-expected third-quarter results. In addition, the net contribution from 399 Park Avenue was about three-quarters of a cent to a cent per share for the period of ownership from September 25 to September 30.

During the third quarter, we also had one unanticipated negative adjustment involving the true-up of unbilled electrical charges. While these charges are, for the most part, reimbursable from our tenants, the period does go back until 2000, and we have assumed a net reserve of $1.1 million. If we're able to collect these charges, we will bleed off the reserve as the cash is received.

In the third quarter, as highlighted in the supplemental, the straight-line rate adjustment was $12.2 million. We anticipate a straight-line rent adjustment of approximately 14.3 for the fourth quarter of '02, and based on existing leases, including the addition of 399 Park Avenue, we now expect to be in the range of about $35 million of straight-line rents for calendar year 2003. Our increase from our prior guidance is due in its entirety to the addition of 399 Park Avenue. Again, our policy is to recognize the average of all future contractual lease payments due over this term lease. The lease term includes – if it includes free rent periods, those free rent periods are burned in. However, as we have – we will discuss, the disposition of existing assets may affect our straight-line rent adjustments on a going-forward basis.

Our in-service portfolio occupancy showed a slight drop to 95.1 from 95.3 at the end of the second quarter. Included in our in-service portfolio at the end of the third quarter at 611 Gateway, which remains vacant, and 399 Park Avenue, which is 100-percent leased. We expect to see some modest declines in occupancy in the fourth quarter, as well as in 2003. The bulk of this additional vacancy will be in Boston and San Francisco. Specifically, we expect to lose about 100,000 square feet of occupancy in suburban Boston in the fourth quarter due to one major uncovered lease expiration, an additional 81,000 square feet of occupancy at the Prudential Center in the first quarter of '03 stemming from a long-term renewal that we completed, which involved the reduction in square footage at the end of the year.

Additionally, we have a major tenant in South San Francisco going through a reorganization with a near-term lease expiration, and we will likely see a significant loss of occupancy, possibly in excess of 100,000 square feet, towards the middle of '03. Assuming we are unable to cover any of these and other expected expirations, we would lose 100 to 150 basis points of occupancy between now and the end of 2003.

Our same stores' year-to-year NOI growth was positive 1.1 percent on a GAAP basis, excluding – including our hotel income, and flat on a cash basis in the third quarter. If our -- on a quarter-to-quarter basis our hotels were down 13.4 percent on a cash NOI basis. Excluding the hotel results, same-store NOI growth was 1.7 on a GAAP basis and .5 percent on a cash basis. This is consistent with the guidance we provided during our last call of same-store growth of between 1 and 2 percent on a year-to-year basis in '02. We expect similar results for the remainder of '02, and during 2003, we expect flat same-store results on both a cash and a GAAP basis for the full year.

Our hotels continue to show strong occupancy but significant room-rates impression. The third-quarter revenue from the three hotels was down 8 percent from the same period in '01, and that compared to a negative 16 percent last quarter, obviously a significant improvement. And our average hotel occupancy was down 1.4 percent year to year versus 12. – and the rate was down 12.8 percent year to year. We continue to maintain our original 2002 estimates for contribution from the hotels of $24 million, and we expect that that will stay flat in 2003.

As we described last quarter, as of July 1, 2002, we terminated our third-party leases for the hotels and created a taxable lease subsidiary, which has been consolidated into the financial results. Starting this quarter, we broke out hotel revenue and expenses separately in the income statement. This has the effect of reducing our total property operating margins, and so prior results include a net lease payment and real estate taxes, not total revenues and total expenses.

Adjusting for the hotel properties' contribution to net operating income, looking back over the past three years, our third-quarter margin has been between 66.2 and 68.9 percent. This quarter, we were at 67 percent. When compared to 2001, when we were at 68.9, the reduction in the margins is a result of lower occupancy and lower termination income, not significantly greater unreimbursed expenses. For calendar year 2001, our total year-end margin was 68.5 percent. We expect for calendar year 2002 the margin to be between 68 and 68.5 percent.

I have two quick comments on the property-by-property occupancy statistics, which are on pages 17 to 20 of the supplemental. We signed an additional 35,000 square feet of leases at the Prudential Retail, which brings that occupancy from 90.1 to 97 percent, and regarding Building 506 at Carnegie Center, as we've continued to describe, we have a guarantee from [Raytheon], so economically, that building is 100-percent leased.

Our remaining office rollover for 2002 sits at about 1.3 percent, down from the previous quarter of 1.7, and it's 4.4 percent for '03, down from 5.1. This totals 379,000 square feet in '02 and 1.29 million in '03. I would call attention to the quarterly expiration information, which shows this 508,000 square feet of the 40 expires in the fourth quarter of '03. The 2002/2003 rollover totals 5.7 percent of our in-service office portfolio and just over 5.8 percent of our in-service revenue.

In the third quarter, we released approximately 684,000 square feet of second-generation space with a decrease in rent of 9 percent. As I said at the outset, these results were not unexpected. Fifty-seven percent of the leasing took place in Boston and San Francisco, and the regional results were as follows. In Boston, we did 146,000 square feet, and there was a 15-percent decrease. In San Francisco, 242,000 square feet, and there was an 18-percent decrease. In Washington, D.C., 239,000 square feet, and there was an 8-percent increase. And in Princeton, 57,000 square feet, and there was a 1-percent increase. We had no leasing activity in New York City during the quarter.

To add some additional color to the leasing activity, in Boston, we signed approximately 25 leases. The largest lease was 64,000 square feet of R&D space. Sixty percent of the square footage involved renewals. In Washington, D.C., we signed 17 leases. Renewals made up 67 percent. The largest lease was 52,000 square feet of R&D. And in San Francisco, we signed approximately 43 leases, and renewals made up 58 percent. The largest lease was 55,000 square feet at [Embarcadero] Center. This tenant reduced their occupancy by 37 – 39,000 square feet, but we have released about one-third of that vacant space.

Just as our second-generation leasing costs were impacted by the heavy re-leasing activity in New York City in the second quarter, this quarter we had a preponderance of small transactions in Boston and San Francisco that were completed with very little transaction costs. If we eliminated the costs associated with one [53,000] [indiscernible] tower center in New Jersey, our second-generation capital costs were $9.12. While we have seen dramatic declines in space rent, we have tried to minimize up-front capital costs wherever possible. We are not buying higher rent at the cost of providing extensive improvement allowances. The remaining lease term for the portfolio as of September 30 rose from 7 to 7.2 years. Approximately 50 percent of the portfolio expires before November of '09, and 50 percent expires after November of '09. The leases from 399 Park Avenue have an average remaining length of 14.3 years.

Our average market rents are as follows: CBD Boston, the low-40s. This is down from the mid-40s last quarter. Suburban Boston, the mid-20s. We've lowered the range from the mid- to high-20s last quarter. CBD San Francisco, high-30s. We've lowered the range from the low-40s last quarter. Suburban San Francisco, which is Gateway, the mid-20s. CBD Washington, the low-40s. Northern Virginia, the high-20s. And Montgomery County, the low-30s. Midtown Manhattan, the mid-60s, which now includes 399 Park Avenue and Princeton, New Jersey, the low-30s.

The reductions in rents we have used to estimate the current market rents have served to reduce the current existing portfolio embedded gross to about two cents per share. Please remember that the potential impact on earnings will be the difference between the straight-line GAAP rents in the last year of the expiring lease, typically less than that year's lease rate, and the straight-line new rents, typically higher than the initial rent after taking into account the contractual steps inherent in the vast majority of our leases.

The FAD calculation, which we provide in our supplemental, compares cash income versus our current dividends. Our third quarter FAD ratio is at 73.4 percent, and it includes total leasing costs associated with leases beginning in the second quarter and recurring capital expenditures for all properties, including the hotels. Our [refer] to capital expenditures includes in this quarter the extraordinary expense of approximately $1 million as we added security turnstiles in our New York City assets.

When we announced our 399 Park Avenue transaction at the end of August, we described the interim financing, a billion-dollar unsecured floating rate 364-day facility and stated that we intended to ultimately finance the project in a leveraged, neutral manner. Since that time, we have discussed the transaction with the rating agencies and have commenced a series of property dispositions, which we believe will accomplish our goal of putting the Company in a leveraged, neutral position by the end of the first quarter of 2003. The Company is in the process of soliciting bids for assets in all of our core markets. The most significant assets for fully leased CDB buildings in Washington, D.C. and New York City. We have engaged third-party advisors and are working towards purchase contracts. When we include cash generated from the sale, which closed this quarter, our total disposition program approaches about a billion dollars. Many of these assets are subject to short-term [indiscernible] pre-payable secured debt. We purchased 399 Park Avenue through a qualified intermediary, which allows us the unprecedented opportunity to recycle over a billion dollars of properties on a tax-neutral basis. We have two goals to meet through this process. The first is to bring the Company's capital structure back to the levels of pre '99 – pre-399 Park Avenue, and the second, which is to harvest the significant value that has been created within the Boston Properties' portfolio.

We're not prepared to give explicit pricing information on the sales candidates. However, we purchased 399 Park Avenue at a GAAP NOI yield of 9.07 percent and a [CAP] NOI yield of 8.2. We expect to sell our assets on a combined basis at lower yields.

Translating these sales into fourth quarter '02 and 2003 guidance is not simple. From a timing perspective, while it's possible some of these sales may close before year-end, the vast majority will likely close in the first quarter of calendar year 2003. But when you're dealing with a billion dollars of sales, month-to-month timing matters. We would suggest that the most straightforward way to think about the effect of the sale, as well as the contribution from 399 Park Avenue, is to view the net contribution from 399 once we complete our capital transactions, i.e., the sales of these assets, at about 10 cents per share annually for the full year.

The other variable critical to our capital structure is the mix of floating and fixed-rate debt. We financed 399 Park Avenue with a floating rate facility on an unsecured basis. This was done with the expectation that we might very possibly be an issuer of unsecured public debt. We continue to look very seriously at this market and expect to refinance or repay a significant amount of our floating rate debt before the end of the first quarter. We have always held the belief that Boston Properties' assets are debt-financed with long-term, fixed-rate debt, and we intend to maintain that strategy on a going-forward basis. This means that beyond the impact of fixing the remaining debt associated with 399 Park Avenue, we will give up some of the significant short-term benefit associated with other floating rate instruments. Today, that benefit is in the order of 350 basis points. So for each $100 million we finance on a long-term basis, we will be increasing our interest expense by $3.5 million annually, about three cents per share, or $292,000 per month.

If you review our debt maturity schedule in the supplemental, you will note we have a one [indiscernible] maturing in '02 and 12 maturities in '03. With few exceptions, each facility has extension options built into the existing financing agreements, which provides for the flexibility and monitor market conditions without any short-term liquidity issues. In '03, the loans maturing without existing extension rights are 2300 N Street, 2 Independent Square, our interim 399 Park Avenue facility, and our line of credit, which we are currently in the process of extending. We intend to repay debt through property sales and hope to tap both the unsecured and secured markets in '03.

Translating this into earnings guidance, all else being equal, if we have no property sales and no fixed rate refinancing, 399 Park Avenue's monthly contribution, as it is currently financed, is approximately 3-1/2 cents per share per month. To the extent we either close on an asset sale or fix some of our floating rate debt, the full impact would not be realized.

While earnings in 2002 will benefit from this, it will also produce on a comparative basis a negative impact in 2003 as we modify the capital structure. We expect fourth-quarter earnings to be between $1.07 and $1.09 per share, bringing 2002 results to approximately $4.03, a 13-percent increase from 2001, a result in these times that we are very pleased to be able to project. All of these estimates exclude the effect of any FASB 133 accounting charges.

As we consider 2003, given our internal view of the business growth, the lag effect this will have on leasing, we've extended our rollover assumptions, assumed a modest decrease in portfolio occupancy -- a modest decrease in portfolio occupancy -- and taken a very conservative view on short-term rental rates.

But here is the good news. Because of limited rollover in '03, much of it not occurring until the fourth quarter, we see a minimal effect on the in-service portfolio. In fact, if we looked at the portfolio before the effect of 399 Park Avenue in our asset sales, we would've expected 2003's in-service property results to be slightly positive. Recognizing that we have always intended to fix a major portion of our floating rate debt during 2003, we would have looked for flat earnings growth for 2003. So changes between 2002 and 2003 will largely be due to the impact of making our capital structure more conservative by replacing debt with equity and by replacing short-term floating rate refinancing with fixed-rate long-term financing. With this in mind, we're currently looking for 2003 funds from operations to be between $3.93 and $4.07.

Let me now turn over the call to Ed.

Thank you, Doug. Good morning, everybody. In the interest of time, I won't dwell on vacancy statistics, which, in any event, I know all of you receive from third-party sources. Suffice it to say that our tightest markets remain in the Washington CBD and Midtown Manhattan, where vacancy rates are 6 to 7 percent in the District and the low teens in New York. Our weakest markets are Cambridge, the suburbs of Boston, and the general San Francisco area. Vacancy rates in those sub-markets range from the low to mid-20s, excluding the San Francisco suburbs, where in some sub-markets, vacancy rates approach 50 percent. At the risk of repetition, the only bright news is that we believe the rate of deterioration in our markets is lessening, the amount of space being put back on the market to sublease is significantly diminishing, and speaking about Boston Properties, specifically, we are very happy to have very low rollovers to contend with in the near term.

With that as background, let me review the status of all of our development projects. We have two projects underway in West Virginia – our two-building Discovery Square complex, totaling about 360,000 square feet, and 2 Freedom Square, which is roughly 400,000 square feet. The first building at Discovery Square was put into service during the first quarter of 2002 and is 100-percent occupied, the second in the second quarter, and it is now 81-percent leased, bringing the total leased at Discovery Square to over 90 percent of the available space. This is in line with our projections, as is our expected return. Two Freedom Square saw its first tenant in August – first tenant in occupancy in August. It is, however, 60-percent leased, with a deal in final lease negotiation for another 5 percent of its available space. And, although dependent upon the actual pace of additional leasing, we fully expect that this project will also meet its original pro formas.

Now, a 257,000-square-foot second-phase building at [New Dominion] Technology Center is 100-percent leased, with occupancy scheduled for mid-2004. And we have recently commenced construction on 901 New York Avenue in the District, and are pleased to announce that over 60 percent of this 540,000 square-foot project has been precommitted. And we're talking about a building where initial occupancy won’t take place until the end of 2004 and into early 2005.

In Boston, our preleased [Shore] supermarket project is on schedule for the commencement of rent during the second quarter of 2003. At our 300,000-plus-square-foot [Waltham Western Carpet] Center, which was placed in service earlier this year, we have increased the lease percentage from 19 percent to 42 percent. And while demand for office space in the suburbs of Boston remains poor, we are in active discussions with tenants with space needs in excess of 150,000 square feet.

There has been no change in the leasing status of 611 Gateway Boulevard in South San Francisco, and if you will remember, our guidance has assumed that this building will not become income producing during either 2002 or 2003. It has, however, been categorized as an in-service building so that all expenses associated with that project are being taken as operating expenses. Therefore, its 250,000 vacant square feet impact our vacancy rate, our operating ratios, etcetera.

Let me make one further comment about San Francisco, and, more particularly, [Embarcadero] Center, since this demonstrates the ability of an asset of that quality to maintain occupancy despite significant market deterioration. Last month, we extended the lease with GADX in 4 [Embarcadero] Center, which had been scheduled to terminate in mid-2003. Although this extension was not without pain, since downsizing reduced their demand to 66,000 square feet from 103,000 square feet currently occupied, and market conditions provided them with the opportunity to improve their rent, we were able to retain their occupancy at a rate significantly higher than many of the other options they were evaluating. And we were able to re-let 12,000 of the space that they were leaving, reducing our total exposure from 103,000 square feet to 25,000 square feet.

Finally, with respect to our 1.2 million Times Square Tower building under construction in New York, active lease negotiations are progressing quite well with two tenants totaling 400,000 square feet, and we continue in term-sheet discussions with a third tenant, who would take 300,000 square feet. In a difficult economy, we are very pleased with the interest shown in this project. The building is also being considered by an additional five tenants, ranging from 50,000 to 150,000 square feet, and we remain very confident that this project will be an important contributor to Boston Properties' in-service income starting in 2004 and into 2005.

You all probably saw the announcement at the end of last week that the members of the House and Senate Conference Committee seem to have reconciled their differences and are prepared to propose enactment of a bill to facilitate the provision of insurance against acts of terrorism. We agree with President Bush's pronouncement that this bill is vital to the nation's economic well-being, and we are hopeful that it will become law in mid-November, removing a cloud which has existed for more than a year.

Given current market conditions, Boston Properties does not expect to begin any even moderately speculative projects for the foreseeable future And, therefore, I would like to comment on the impact on our administrative costs from the expense of people now working on our development projects. As Doug pointed out in his remarks, we've already reduced the amount of salaries being capitalized because as developments end, those salaries move into expense, and we will continue to do that. But what it is nice to be able to report is that we've also made progress in reassigning those people to other income-producing – in other income-producing ways. Throughout our history, as both a public and a private company, we've always operated under the theory that it was better for our people to be too – to have too much to do rather than to have too little to do. And we've also recognized the importance of finding ways to keep talented people profitably engaged. Therefore, as our development activities have slowed, we have [soft] or fee work, which not only absorbs administrative overhead but continues – but contributes profit to the bottom line. Three major fee assignments are either underway or about to commence. One is a continuation of work, which we have done in the past for the Postal Service at 90 Church Street in New York, which was impacted by the events of 9/11, since it was right next door to 7 World Trade Center, and was seriously compromised and made temporarily uninhabitable by those events. While we have no investment or ownership position in that building, nor any financial exposure, we will manage the redevelopment for the USPS.

The second project for fee is the expansion of the activities that I want to mention is the expansion of activities that we have performed for the NIH in the Washington area. These have actually expanded recently, so that we will continue to perform very significant assignment on that project.

And, finally, there's a new fee assignment in Washington, which a final contract has not yet been signed but which we believe will be awarded to us in the very near future. In addition, we are aggressively pursuing build-to-suit projects in both our Boston and Washington regions, several of which look very promising. While our main focus in a relatively good economy is always development for our own account, at times like this, fee development and build-to-suit work can be very valuable contributors.

Finally, I want to comment on matters of corporate governance. By far, the largest period of time in our recent Board of Directors' meeting last Thursday was devoted to this very topic, and we reviewed for the Board all the requirements promulgated by the SEC, the NYSE, and those resulting from the enactment of the Sarbanes-Oxley bill. While much will be required of us in the way of form, I am very confident – comfortable in stating unequivocally that our practices and the ethical principles under which we work met the spirit of what will now be required long before attentions started to be paid to corporate malfeasance.

For example, and as Doug mentioned, I believe that our financial disclosure has always provided the investment community with all the information needed to completely understand Boston Properties' financial conditions, and we continue to try and improve that disclosure each time an additional question is raised.

One area where action will probably be required relates to the size of our Board. We contemplate adding two, possibly three, new directors so as to comfortably exceed all the new requirements relating to independence and expertise on the various committees of the Board.

With that, let me turn things over to Mort, and then we'll come back for Q&A. Mort?

Good morning, everybody. My role is just sort of to discuss the general economy. And prior to this, my partners – Mr. Linde said that I cannot say anything like, "It's only when the tide goes up that you find out who's wearing a bathing suit," or similar things like that, all of which he said I have previously used in these commentaries, including that I view the next year with cautious pessimism.

But the latter is the best way that I have to describe, it seems to me, what we are looking at. I still am concerned that there is no strong way to get this country out of either a recession or, alternatively, out of a moderate growth pattern, which will feel like a recession in many parts of the economy. The reason why I say that is I think consumer spending, to some extent, has been cannibalized from the future by the very low levels of interest rates that stimulated both housing and consumer durables, especially automobiles, that business spending is still very, very low relative to previous years. We had a decline in last year and a decline this year, and with a fairly low occupancy of – in terms of capacity utilization and a lot of pessimism in the business community, I just don't see that pulling us out, nor do I see exports pulling us out. And government spending at the federal level, while it is stimulative because we have gone from 120-odd billion-dollar surplus to 160-billion-dollar deficit, or a 280-billion-dollar swing, 130 of that is from a revenue decline, leaving only 150 billion in the form of increased spending, and that has to be offset against declines in spending at the state and local levels, which next year I estimate will come somewhere north of $75 billion.

So it still seems to me that there is a reason to be cautious and modestly pessimistic as we go forward, and that is the basis on which we have calculated most of our own assumptions in terms of the real estate business. The real estate business, of course in the business that we are in, which is commercial real estate, is, to a degree, dependent upon business decisions. And business decisions these days are very cautious because of the lack of confidence that we are coming out of this recession next year in the business world.

Now, let me just say one other thing here. We have, as Doug has indicated, always the countervailing benefit, so to speak. If business is weak and the economy is weak, we expect interest rates to stay fairly low, and we will benefit from the lower levels of interest rates as we do the financing that we anticipate will take place next year at a corporate level.

I might point out to you, too, that roughly half of our real estate is in Midtown Manhattan and in Washington, D.C., which are two of the strongest markets. And we have seen very little declines in rentals in both of these markets, and we think they will both remain strong relatively as we go forward, and so we have that as a base for our activities, and we also have, once again, the opportunity to demonstrate why having Class A real estate or A+ real estate in each of these markets is the best place to be in during a general weakness in the office market because these buildings generally tend to do considerably better in bad markets, even as they do well in good markets, compared to the rest of real estate. Their rents remain higher, their vacancies remain lower, and, as I keep on saying, if you think about just in New York terms what residential real estate is like on Fifth Avenue and Park Avenue, you can really extend that to a degree to commercial real estate, and that's the sector of the market that we are in. So in that sense, I think we are well-positioned to deal with whatever may come up next year, and we do think, though, that chances are much better going into the year 2004 than they look going into the year 2003 that we'll have a much stronger economic uptick.

So that is sort of our skew of the world for the moment, and why don’t I just end it there and hope that what I said now does not restrict me when I speak next year, but if it does, I know that Ed Linde will remind me of exactly what I said, so I thank you for that, Ed.

My pleasure. We are prepared to take questions at this point. Operator, or [Claire], do we have to do anything to do that?

At this time, I would like to remind everyone if you would like to ask a question, please press star, then the number one, on your telephone keypad. We'll pause for a moment to compile the Q&A roster.

Your first question comes from Lee Schalop of Banc of America.

[Indiscernible], a couple questions. First, on 399, you talked about the likelihood of it being fixed at some point in 2003. Can you give us a sense of either your expected timing of that or factors you'll look at. If interest rates started to move quickly, would that accelerate your thoughts?

Mort, do you want to take that one?

Sure. Look, we are not delaying what we're about to do in the way of financing. We don't pretend to be able to predict the highs or the lows. We've already obviously had very rapid move in the 10-year treasury, as you know, roughly 60 basis points from about 360-something to about 420-something. So my view of that and our view of it is that we're just going to move as rapidly as we can, and we'll just deal with the markets as they are and as we find them, and we expect to average out over time. So that's where I am and where we are at this point. We're moving as quickly as we can, frankly, to get into the capital markets in the form of corporate financing, and, obviously, we understand that the first step in that is to finish the asset sales that we have. We have excellent properties that we're putting into the market. We think we will do quite well with them. And as soon as those agreements are signed, we'll be in a position to pick the time. My sense is that the best time probably to go into the market in any event is going to be at the beginning of next year, and that's probably where we're going to start our program of financing.

Okay, additional question on trends month by month. Have you seen anything in October different than September or September different than August, that you could share with us? You mentioned --

You're talking about market, Lee?

Market. Specifically rental levels and occupancies. So how the leasing's going on a – looking sequentially over the quarter.

I think, you know, all these changes are clearly at the margin, and none of them terribly dramatic. I think that it is fair to say that we're seeing somewhat more activity, that there are more – and that this varies a little bit from market to market, but certainly that there are more people looking at space. I think some of that is maybe a sense on the part of the tenant community that now is a good time, and if you are in a position to move up in quality or can do some consolidation and have leases that are coming due, it's better to move now and not wake up the next day and find out that all of a sudden the supply/demand equation changes. I don't think anybody – I don't think there's any panic that's set in yet, though, and, therefore, I think the move – the change in mood is very limited and slow to come.

And I think Alexis has a question.

Ed, on 611 Gateway, you mentioned that there's been no change in preleasing. Could you provide a bit more detail on that? Have you had any conversations with any tenants? Would you ever consider buying occupancy upfront with a credit tenant?

I don't know what you mean by buying occupancy. I would say that –

Oh, with TIs and leasing commissions.

Excuse me?

With TIs and leasing commissions.

We look at all deals on a net-effective rent basis, and so basically unless we can make a reasonable return on the money that we put into the space and amortize it over the term of the lease, we don't do the deal. And add to that, of course, the credit issues. We're not going to put a lot of money into space and find out that -- a credit problem on our hands, and, therefore, we'd never recover that money because the tenant goes out of business during the term of the lease. So that's – that applies to all of our projects, and if the right tenant came along at 611 that had the right credit and needed a further investment on our part, we would certainly consider making that investment.

Having said that, activity in that marketplace is slow to non-existent, and there are – there are a lot of sort of plug-and-play buildings that people can consider that are being put on the market for sublease or that have tenants in them that went bankrupt. So the activity there has just not picked up.

So there haven't been any conversations?

You know –

Or none where –

-- I don't want to characterize them as – if I said there'd been conversations, then the question is, have they been really sort of serious conversations. I would – we would be telling you -- if there were anything that we thought was going to be leading to a deal in the short term, we would report it. And we don't feel in that position at this time.

Okay, thank you.

Thank you.

Your next question comes from Anatole Pavnev.

Hi, good afternoon – or, I’m sorry, good morning. Quick question on 875 Third. With the refinancing on that, does that change your view, or does that put it out of the list of properties that may be sold in your –

Eight seventy-five Third Avenue, we paid off the mortgage at the end of – at the beginning of October, and we used our line of credit to pay off that mortgage. So there's a balance on our lines right now, which includes that. And, you know, so there is no financing issue associated with it.

We've retained the flexibility for that to be a property that is available for sale.

Okay, terrific. Thank you.

Your next question comes from Gary [Boschiff] from Salomon Smith Barney.

Gentlemen, this is Gary [Boston]. I was wondering if you could review the rationale for selling some of your New York and Washington, D.C. CBD assets, as opposed to maybe some of your other market assets, and if you could give us the characteristics of the asset that you're looking to sell?

I'll start, and, Mort, you can highlight anything if you think I missed it. The basic viewpoint was we looked at assets where we thought the capital markets would appreciate the characteristics of the cash flows better than those that it would in other markets, i.e., if we have a building that's got effectively 13 or 14 years' worth of long-term leases and we can buy that – sell that building at a very attractive capitalization rate, if the market is looking for that kind of an asset, those are the – that's the way we sort of thought about which asset we would identify. I would say the broadest place where the interest from the investment community is, is, in fact, in CBD Washington and in CBD New York City. That's where the overseas money, as well as the U.S. pension fund money, seems to have its most significant appetite. And the bidding on the assets in the last few months has been very significant. I wouldn't – I'm not sure I'd use the word feverish but pretty close to it. And given the amount of activity we are seeing on the assets that we've put up for sale, we're not going to be disappointed by the results we're seeing.

I guess those characteristics don't sound all that different than the characteristics of 399 Park.

I think that –

Mortimer Zuckerman: I – I—I—John, with all due respect, 399 Park is one of the three or four premiere buildings in New York City. It's a full block front on Park Avenue. It is extraordinarily well leased. I don't think that you can exactly compare 399 Park Avenue to 875 Third Avenue. I mean they're just not comparable real estate transactions, both as to location, the quality of the building, and, indeed, the quality of the tenants. I don't want to diminish 875 Third since it's still a very attractive property, but you can't compare them to 399 Park.

On your conference call on 399, Ed, you had talked about the leasing progress at Times Square. I guess it sounded like we would have some more news by now in terms of signed leases. Can you tell us how those – give us a little more color on how those negotiations are going and if you think –

If what I said today represented any change in what I said the last time, it was purely a function of what I had for breakfast this morning. The situation is no different than what I reported during the 399 conference call. We have signed term sheets and have lease negotiations well along with two tenants, and we have a third tenant that we are hopeful of striking a deal with, but we have not yet concluded. And in addition to that, actually since the 399 conference call, there are several other tenants that have viewed – looked at the building, viewed the building, and which we're talking to and may lead to term sheets and may lead to deals. So the situation is, at worst, neutral and slightly positive with respect to the last time I spoke about it.

That's good news. I think Gary Boston has two questions.

Thanks. In terms of – back on the asset sales for a second, I was just wondering if you would consider, you know, joint venturing some of these assets, retaining a minority stake and maybe getting the fees to sort of help offset some of the dilution that the whole financing package may result in?

We are considering lots of – lots of possibilities, but our main goal is to maximize the proceeds from the sale of the assets and to structure those transactions in a way that we can do them on a tax-neutral basis. And given our initial read from the marketplace, we think that we will be accomplishing what we set out to do and may or may not involve structuring; probably will be straight sales.

And, Doug, I was wondering if you could just give us a little more, I guess, granularity on the lease rollover schedule, particularly as it pertains to San Francisco. I know you guys accomplished a lot during the quarter, but just – since that market's especially tough, what sort of – what sort of big chunks of space are in that number?

Yeah, there's only big chunk of space in that number for calendar year 2003, which is the space I referred to as out in South San Francisco. That's 100 and – 180 or 190,000 square-foot tenant that [indiscernible]. Probably have to have a hard conversation with. Aside from that – and Bob Pester, if you're on the line, you can chime in – I believe the largest expiration we have in '03 is probably a floor, which would be about 25,000 square feet because we've already taken care of GATX, which was the other largest of the expirations in '03.

We have the AT&T lease, which is 186,000 feet, that expires –

That's South San Francisco.

South San Francisco, 1031. We do have another lease that expires late '03 at EC West or two full floors and a portion of another. And we are in lease documentation right now in that renewal. So that's for about 50,000 square feet.

Great. Thanks.

Your next question comes from Greg Whyte from Morgan Stanley.

Hi, good morning, guys. Just – Ed, not to beat a dead horse here, but what's the timing on the Times Square leases? I mean is that something that you've held off announcing until you're further done with construction? Or will you announce them, you know, in the next couple of months?

What you have to do, Greg, is you have to beat a live lawyer.

Right.

It's really – it's really a question of the – despite our efforts, the inertia that – maybe inertia's the wrong word, but, you know, it's the back and forth with the lawyers that are really – that's really – are delaying things. And we will announce that as soon as it's signed, but I don't want to – I don't want to speculate or probably – you know, we probably will announce – give you more information and hopefully talk about signed leases at our next call.

Just to give some clarification, Greg, I mean when a lease – when we assign leases of significance, we have not deemed them to be newsworthy and sort of made a public announcement. So generally at the end of the quarter, you know, at our quarterly calls, we will relate that information. Don't be surprised if it becomes sort of common market knowledge if a tenant chooses to put a press release out and say that they've signed a lease, which generally happens.

And we might put out a press release, so I – you know, I think the – but my hope is at least one of these will be signed in the relatively near future and the other just because getting lawyers to look at documents back and forth may take a little longer.

Okay, Ed, then just on the question of buybacks, I mean should we assume that until you've got more of this refinancing done and maybe come through the rating agencies, that that's somewhat of a sort of a moot issue right now?

I think that would be a – it would be a fair characterization to say that the most critical issue that we have from a capital perspective is putting our capital structure back where we want – where we want it to be, and we are looking at this point of selling assets in order to do that and not buying back stock.

Okay, and then just one sort of small point here. On the – the development of management fees, I guess around three million in the third quarter – how material is the additional contract that you're negotiating in D.C. right now, and what could those fees grow to in the next few quarters?

I don't want to – I really would rather not speculate about that at this point because of the sensitivities of the clients involved. But I would say that, you know, we're comfortable that they will be going into 2003 at the right rate.

Yeah, I would – I would just – I would say for – in terms of building a model that if you assume that we were going to maintain the rate we're currently at, that would be a very fair assumption and there might be some slight positive momentum going into 2003.

And then just, Doug, quickly on the balance sheet, we saw accrued rental income has grown progressively in the last four quarters. It's up, you know, about 40-odd percent over year-earlier levels. What's driving that?

It was driven by the accrued rent from the Ernst and Young building during the – during the second quarter at 111 Huntington Avenue, and this last quarter, it was driven by 399 Park Avenue and 875 Third Avenue, all the leasing we did there.

So that should come back down again?

It will definitely come back down. You know, during the free-rent period, we have the largest amount of accrued rent, so once we get into, you know, next year, that accrued rent balance will come down pretty dramatically.

Great. Thanks a lot, guys.

Your next question comes from Stuart Axelrod from Lehman Brothers.

Hi, guys. Talk about the – first, on the termination fees, you talked about one to two million going forward as well. Some other office companies said that this was more of an early-phase phenomenon, looking for lower-term fees in '03?

Are you looking for a comment or is that --?

Yeah, a comment. How do you look at that?

My comment is termination – termination, I think, is a really bad thing, number one. It means that a tenant is in distress. We continue to see in all of our markets tenants having a hard time with business prospects. Most of these tenants are smaller tenants. There's been so much corporate volatility from companies that are both, you know -- were solvent and should be solvent but have had bad announcements, and, therefore, they've had, you know, runs on their capital. And fluctuations with private companies that are hedge funds and things like that that I don't think we are anywhere close to out of the woods in terms of issues associated with credit.

Now, the good news is that – and as you look at our supplemental, 35 percent of our revenue comes from our top 20 tenants, the majority of which are in pretty good financial shape. So our issues have generally been with smaller tenants. We have not had to deal with a major significant revenue, you know, contributor going into – into, you know, a difficult situation. And that is why we believe that, you know, the sort of last two years is going to be a sort of a continuation for 2003.

I mean I think one of the reasons our run rate going forward is what it is is that it hasn't – we haven't seen it be exceptionally high in 2002 in terms of termination.

Okay. It looks like you're also moving up the asset sales volume from like 500 million [indiscernible] when you did 399 to a billion. Is that driven by bids or is that driven by the rating agencies?

I think – I think we've said – I think it was a billion all along.

Yes.

I think we said that we wanted to get 500 million of equity and would do that through sales of roughly a billion dollars, which would include equity and debt. I mean – I just want to make this point. The opportunity to sell a billion dollars of real estate, where there will likely be very, very, very significant appreciation, is not a small feat. And the fact that we have the ability to effectively trade all these assets into 399 Park Avenue is a very big deal from our perspective in giving us the ability to recycle capital. So we are taking advantage of that opportunity in trying to maximize anything that we can do to use that six-month window that we have.

Okay. And any – any leakage in terms of the real estate taxes in New York City, given the tax increase that we're seeing or anticipated tax increases?

There – you know, most of our leases do not have 2003 base years. We have a few at 875 Third Avenue, so we may have a little bit of an issue there, but the majority of our taxes are preset, and most of our buildings have long-term leases where the bases were set a long time ago. And a building like 5 Times Square has a triple-net characteristic about it. So, you know, hopefully, we will be in a relatively stable position.

Okay, great. Thanks.

You know that the taxes in the Times Square buildings are not subject to normal real estate taxes there by agreement?

Right.

Your next question comes from Lou Taylor from Deutsche Banc.

Great, thanks. Just to clarify, so the way we should we be thinking about these asset sales is roughly a billion dollars gross and then about 500 of net equity to be applied in other places. Is that fair?

That is a fair, straightforward way of thinking about it, Lou.

Okay, great. Secondly, is – when this financing is done, how much floating-rate debt as a percentage of your total debt do you anticipate having?

I think we anticipate fixing the majority of the debt. The question will be, once we fix it, will we choose to have any floating-rate debt in our system, i.e., will we put some hedges on to take some of that fixed-rate debt and bring it into floating? I think that we would be comfortable with somewhere between 15 and 25 percent of our debt floating at any one time, but given where rates are, we think, you know, doing more than less would be a good thing.

Okay, and then, lastly, with regards to the terrorism bill, as that gets signed hopefully next month, if there is a change in the terrorism insurance market, that in the first quarter maybe got more coverage, better pricing, etcetera, would that change your financing plan at all from maybe going [indiscernible] to a secure group?

Lou, I think that the – somebody had whispered to me. I may have missed the first part of this – but, you know, our financing decision is irrespective of the terrorism issue. We believe that being – having the ability to be both a secured and an unsecured borrower is a good thing, and so it was not dependent upon – not created because of the lack of terrorism insurance and is not dependent upon the fixing of that problem.

Okay, thank you.

Your next question comes from Jim Sullivan from [Prudential] Securities.

Given the more competitive market conditions, have you increased the commission rates that you pay brokers?

Commissions are a market-by-market decision made, and it is a competitive market. I would say, for the most part, commission rates have not increased significantly, but there's clearly pressure from brokers to increase commissions, and we have to respond to what our competitors are doing in order to make sure that we keep a neutral playing field. I don't know, Ray, if you want to comment on that?

Well, the only thing I would add to that, Ed, is that given that most of them are on a percentage basis, with the rates going down, the real dollars are actually down over what we were paying previously. I would think that in New York, in New Jersey, which were, you know, artificially high to begin with, they have changed a little. We've seen some modest uptick in San Francisco, nothing in Washington, D.C., and something – a little bit of an increase in Northern Virginia.

Okay, good. Secondly, you had talked about the lease at [Embarcadero] with GATX, where they looked to downsize significantly. What percentage of the tenants who have leases expiring are looking to downsize?

God, I don't – I can't – I don't know the answer to that question. I would say we can look it up, but I don't even know where to look it up.

I think it's fair – it is fair to say that the percentage of tenants that are looking to up-size is very, very small.

Yeah.

Okay. And, finally, if we assume that occupancy rates bottom sometime over the next year, how long do you believe it will take before you can expect rental rate increases on a cash basis for lease renewals?

I think – I think what you've got to really – the question that has to be answered is when will see job growth. That's the key. And so occupancy rates can stay flat or even – you might even get decreasing vacancy, but not have the real pressure that's required for – to see rent growth. And, you know, we are not – we are not forecasting rent growth for 2003 and even 2004. Now –

I guess my –

-- you know, I think it could very easily turn sometime in 2004, but at this point, you know, I don't know what the indicator – I haven't seen the indicator that would give me confidence in saying, yeah, you know, in June of 2004, we're going to see things change.

What you seem to be saying, Ed, is that you're going to have to have job growth before you can take your occupancy rates up, and it's going to be something –

Well, that's – I wouldn't say that because of the following. One, as I've said before, you know, our occupancy rates – if you mean general occupancy rates across the country, that may be the case. I mean we're pretty myopic about it, and, you know, we think we can increase our occupancy rates because, as we've said before, the – a move to quality. But – and even as people start to sort of expand their horizons and say, you know, let's position ourselves for growth, let's take some more space, or at least let's not cut back space, let's renew leases and maybe take another floor or something like that, they will do that, but they won't –probably won't do that in the face of increasing rental rates. They may do it and say, "Hey, we might as well take advantage of these good – of these good rental rates now and increase our occupancy." When you – what really kicks rental rates up is when people start to worry about their ability to house their employees and they don’t want their space requirements to get in the way of their ability to add employees to meet new demands. And that's what's required to get rental rates to start to move.

And obviously we're some distance away from that here?

I'm afraid so. I'd like to say otherwise.

Yeah, and one final comment. When you talked about sublease space – I want to make sure I understand your comment. I think you said that the amount of sublease space that's coming back is declining, which is a positive sign.

Yeah, we're not seeing new announcements except in some markets. We're not seeing new announcements of tenants saying, well, we're going throw another couple hundred thousand square feet back on the sublease market.

Now, are you anticipating a significant increase in sublease space, for example, in CBD – in CBD Boston given the layoff announcements in financial services there?

I think most of that is behind us.

Okay, very good. Thank you.

Your next question comes from [Raul Vitatchri] from Merrill Lynch.

Hey, Doug. There were a lot of details on the asset sales, but was there a cap [indiscernible] range on the entire billion dollars that you provided?

I didn't provide one, Raul.

Uh—

The way I looked at it was, look, we gave you the cap rate for the 399 Park Avenue, and we told you that we thought that the net-net would be about ten cents per share. So we would leave it to you to figure the rest out.

We don't – you know, we really don't want to announce to the marketplace what we expect these properties to sell for.

Fair enough. And then, secondly, what sort of increase are you budgeting for G&A in 2003? And as per Ed's comments, how much of the effect of the increase in your bottom line will get mitigated by the increase in the fee income? Is it sort of a one-for-one deal? Or, you know, is it only going to be a partial offset?

My hope is that we – my hope is that we can stay where we are, but it – you know, there could be some minor incremental increase.

Okay, and then a question for Mort, which is sort of a macro question.

Mort, are you on? We just got word – one of the reasons I was distracted is for some reason, Mort got disconnected from the call, and –

Well, you can take this, Ed, then.

We thought he could – yeah, that's risky, but go right ahead.

Which is just given sort of the bullish comments Mort made about Midtown Manhattan and the fact that rents have really held in there, I was just wondering, given all the regulatory changes and the anemic revenue environment on Wall Street, what, if any, is the probability that you could see a change in Midtown Manhattan's fundamentals to the same degree that you had out in San Francisco?

Well, I don't, you know – I’m glad you added a qualifier because I think we are clearly worried about further cutbacks in the financial services industry and the impact that that would have on overall demand in Manhattan.

However, I think that two factors have to be considered.

One, of course, is the difference between Midtown and Downtown, and although the two are not insulated from another – from one another, clearly, the pain is being felt much more – with much more difficulty in Downtown than in Midtown.

And, secondly, I think that the dimensions of the problem are nowhere near what has happened in San – in the general San Francisco area, you know, i.e., everything other than north of market, where a lot of the space that had been created was created for companies that not only downsized but disappeared. And certainly as you go down to the Peninsula, that happens to an even greater degree. So I think the magnitude of the problem is very, very different. Nevertheless, I do think that the cutbacks in the financial services firms will, in fact, dampen supply – dampen the demand in all of New York, including Midtown. How – it still exists. It still is the case, however, that large blocks of space are still relatively hard to find in Midtown Manhattan.

And any comments on the [Mowstein] site and, you know, whether that could potentially be competitive with your Times Square development?

I think it's a question of timing, so I don't consider it competitive.

All right. Thank you.

Your next question comes from [Kevin Lemco] of Edward Jones.

Yeah, my questions have already been answered.

Your next question comes from Stuart Seeley of UBS Warburg.

Morning.

Stuart.

I'm not looking for an average cap rate on the sales, but are you managing to the spread? In other words, are you changing the mix of the portfolio that you're selling to make sure that you get your – call it your dime spread?

No.

And is there fluidity in the investment sales market where you've got a feverish interest in D.C., New York City, and so forth, and a real waning in other markets?

I guess -- to answer your first question, the answer is absolutely not. We've looked at the billion-plus-or-minus dollars that we are currently actively in the market with, and those are the assets that we sort of look at, and we looked at the current leverage on those assets and the leverage that, you know, the sales prices that were – that we might have expected to get and sort of – the numbers just sort of dropped out at 10 cents. It's going to be what it's going to be. The – we have obviously not tried to sell, you know, suburban San Francisco buildings because, quite frankly, we think it's probably the wrong time to be selling an asset given where the market conditions are, so we have – we have put our efforts on assets with long-term, high-quality occupancy where there is typically a barrier to entry and/or some other characteristic that would incite significant interest from the institutional investor world.

Okay. And, Doug, you used, you know, the term uncovered lease expirations for next year, and if you look at your role between now and the end of '03, it's 5 to 6 percent depending on whether you look at square feet or rent. You think you're going to lose like 100 to 150 basis points. Does that mean that you have a high confidence level that you're going to renew, call it 70 to 80? Or does that mean you've already locked down 70 to 80?

It means that we are in negotiations with and have a high degree of confidence that we will lock down that kind of square footage.

Thank you very much.

Your next question comes from Gary [Boston] from Salomon Smith Barney.

Hello?

Sir, your line is now open.

Hello?

Do we any other questions, Operator?

No, no further questions at this time.

Okay. Mort, are you on?

I am on. Can you hear me?

Well, we just heard you, but the call is – I think the call is about to end.

Yes. First, they couldn't get me back on just because I got disconnected.

Okay, let's – let's just finish up by saying – by thanking everybody, and if you have any – I guess we will be speaking to you about a quarter from now unless we have something exciting to talk about in the meantime, which we hope we will.

I just hope that Ed does not comment on my contribution towards the end of this call as being excessive.

Bye.

Thank you for participating in today's conference call. You may now disconnect.