波士頓物產 (BXP) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Boston Properties fourth-quarter 2003 conference call. At this time, all participants are in a listen only mode. Following today's presentation instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded today Wednesday, Jan. 28th of 2004. I would now like to turn the conference over to Miss Claire Koeneman from the Financial Relations Board. Please go ahead.

Good morning everyone and welcome to Boston Properties fourth quarter earnings conference call. The press release and supplemental disclosure package was distributed last night as well as the furnished form 8-K to provide access to the widest possible audience. Viewed in the supplemental disclosure package the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measured in accordance with the Reg G requirements. If you do not receive a copy these documents are currently available on the Company's web site at www.BostonProperties.com in the Investor Section. Additionally the company is hosting a live web cast of today's call but you can access in that same section. Following the live call the audio web cast will be available for twelve months on the web site in the Investor Section under the header Audio Archive. To (indiscernible) the company distribution list please contact the internal investor relations department at 617-236-3322. At this time management would like me to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Boston Properties believes expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be obtained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward looking statements are detailed in last night's press release and from time to time in the Company's filings with the SEC.

The Company does not undertake a duty to update any forward looking statements. And after all that I'd like to turn it over to management. With us today we have Mort Zuckerman, Chairman of the board; Ed Linde, President and Chief Executive Officer and Doug Linde, Chief Financial Officer. Without further ado, Doug, I'll turn the call over to you.

Thank you, Claire. Good morning and happy new year everyone. Thanks for joining us this morning. We had a very strong fourth-quarter reporting funds from operations on a per diluted basis of $1.05 per share -- that was 4 cents above the high end of our prior guidance and 5 cents above First Call estimates which were $1.00 share for the fourth-quarter.

Last January, we estimated that our 2003 funds from operations would be between 3.93 and 4.07 and we finished the year at 4.09. Due to the context of the challenging operating environment, we encountered and the balance sheet activities that we pursued at the beginning in the year of which -- just to remind you -- included deleveraging the Company through asset sales and extending and fixing our short-term floating-rate debt, finishing the year with funds from operation at 4.09 which is flat to our 2002 results to the testament of our operating strategy and our management team.

Our regional teams led by Brian Koop in Boston Mitch Norville , a regional manager in Washington D.C., Robert Selsam in New York City, Bob Pester in San Francisco ,, Mickey Landis in Princeton and Ray Ritchey whose deal making acumen instructions stretches across the entire portfolio continue to execute transactions during '03 that allowed us to exceed estimates which we believe will lead to growth in '05 and beyond.

Later in the call we've asked Mitch and Bob to spend a minute discussing details of a few selected transactions as well as general market conditions in their regions.

During the last quarter we expressed the view that from a macro perspective when we look back at the statistics two to three years from now, this will have been the bottom. Our experience in the third party surveys from the last two quarters has continued to strengthened this viewpoint . We're optimistic that the market conditions have, in fact, bottomed out.

Without strong job growth, we don't expect to see any meaningful improvement in occupancy or rental rates during '04. However the extreme cautiousness and indecision that characterized many of the business leaders in '02 and in '03 has been replaced by a widely held expectation that individual business prospects will stabilize and are likely to improve. These alternatives are disappearing and rents have no place to go but up.

Business leaders encouraged by their brokers will make rather than defer space decisions in 2004. This might not translate into an immediate earnings impact in '04 since any decisions made today likely won't have economic impact until the end of '04 which should to growth in '05 and beyond.

Our gross level of transactional activity signed leases covering future and current vacancy at our in-service portfolios and our development properties was up modestly in the fourth-quarter at 1.259 million square feet vs. 1.153 million square feet during the third quarter. Leasing highlights this quarter include a major long-term commitment from Genentec, at the currently vacant 611 Gateway Building in South San Francisco, earlier renewal and long-term extension of our lease with Hunton and Williams which had a 2006 expiration in Richmond, Virginia and the extensive expansion of over 100,000 square feet of leases in our in-service New York portfolio.

Our in-service occupancy was 92.1% as of December 31st, essentially flat compared to 92.2% last quarter. The occupancy statistics that we report in our earnings release and the supplemental disclosure include only the spaces where the tenant has taken possession and we have recognized revenue, not simply if we have singed a lease . You'll note that 611 Gateway is still carried at 0 percent occupied in our leasing statistics and possession won't occur until the second-quarter of 2004 and is not part of the 92.1%.

When you review the property by property occupancy statistics which are on pages 19 through 22 in our supplemental I offer the following commentary. As we previewed over the last few quarters we saw occupancy decline at 601 and 651 Gateway Center, a drop of 60 percent due to the reduction in premises of AT&T wireless on November 1st. And at 211 Carnegie Center that building became entirely vacant due to a natural lease expiration in December. At Embarcadero Center 3 we had a 50,000 square foot tenant expire November 30th which led to the occupancy decline at that building but during that quarter we released the 40,000 square feet of this space. Again it won't show up until our occupancy statistics until the second quarter of 2004 when that tenant actually takes possession of the space.

We've leased 2 1/2 floors at the Prudential Tower increasing that occupancy to 96.2%. We've completed a slew of 2,000 to 5,000 square foot deals in our Boston Suburban market, bringing our leasing at Waltham Office Center at 91. 7% and our Burlington Mall Road to 97.2%.

The GSA took occupancy of the remaining space at 7435 Boston Boulevard in VA 95 bringing down our occupancy to 100 percent, and we signed 4 leases at Westin Weston Corporate Center which brought that occupancy to 67 percent.

Our average remaining lease is still in excess of seven years and our lease expirations in '04 total 7.1 percent of the square footage and about 7 percent of current gross revenue. This quarter we added additional detail to our second generation leasing statistics which break out the regional leasing numbers and roll up or roll down in rent.

So I won't go through those statistics here. We provided the roll up and roll down, both on a growth basis as well as a net basis. We looked at a number of other supplemental packages and noted that many people were reporting it on a growth basis so we felt we should give it (indiscernible) comparable information to report on a gross and a net basis.

In 2004, our weighted average portfolio expiring rent is $37.15. In our view the market rent for this basket of space, today, is $33.79. This implies a 9 percent rolldown on our expiring space in 2004.

In 2005, assuming no improvement in market rents, the numbers are 36.44, expiring rent $32.37 market rent implying an 11 percent decrease.

Our second generation office leasing costs appear high in comparison to previous quarters which we have explained were well below our historical average of about $16 per square foot. This quarter the bulk of our leasing activity – 901,000 square feet for long-term deals on an average eight years in CBD buildings. The $24.55 which comprises about $18 of tenant improvements and $6.40 of leasing commission.

The dividend -- FAD ratio -- payout ratio for the fourth quarter was 89 percent and that includes the total leasing costs associated with all leases beginning in the third -- in the fourth-quarter and recurring capital expenditures for all properties including hotels. I want to point out that we applied the fully committed transaction cost in a quarter in which the new lease goes to service. The actual cash is not completed completely dispersed for months and in some cases years. So this quarter, the expense associated with the renewal at Hunton and Williams, and 300,000 square feet is included as a deduction when calculating our quarterly FAD.

If you were to strip out the costs associated with Hunton and Williams, our FAD for the quarter would've been 80 percent. The recurring capital expenditures for the fourth-quarter were in line with our previous guidance and ended the year at about $0.60 cents per square foot. On an annual basis for 2003, our FAD ratio came out at 74.4 percent.

Excluding the hotels, same-store NOI positive .2 percent on a GAAP basis and -1.6% on a cash basis. We experienced our third straight annual decline in our three Boston area hotels. For the quarter, RevPAR was down 12 percent and NOI was down 24 percent. We are in fact cautiously optimistic that 2004 will show a recovery for the Boston hotel market with the Democratic National Convention being held in Boston in July and a number of other citywide conventions on the docket.

Included in our fourth-quarter results are termination fees totaling approximately $1.4 million -- this is in line with our budget and previous guidance between $1 million and $2 million per quarter and almost all of it was associated with our Raytheon guarantee activity at Carnegie Center.

Our fourth-quarter margin was slightly above fourth-quarter period and previous quarter at 69.5 percent and operating costs were actually down compared to the fourth-quarter of 2002. We continue to use an internal rating based analysis of our accrued rent asset to arrive at an appropriate research, calculation. At the end of the third quarter our reserve was $5.6 million against the balance of $186 million. This quarter we decreased the reserve to $5.4 million against the rent balance of $201 million. Approximately 1.5 percent of our annualized revenues come from tenants who are rated in our lowest category -- the lowest being in bankruptcy.

Significant -- our bad debt reserve against our Accounts Receivable balance decreased this quarter by $760,000 -- a significant portion of the improvement came from our collection efforts that produced by $500,000 of receipts associated with these accounts. We have one tenant, RCN, that is being watched very closely right now. I'm talking about 137,000 square feet in Princeton with lease expirations in 2004 and 2005. Some of these premises are sublet spaces thru the terms of their leases.

Let me spend a minute explaining the 4 to 5 cent per share positive variance we spent this quarter. We had $3.7 million of what I would call unbudgeted revenues. Of this $3.7 million, 1.6 came from signage income at Times Square, percentage rent from our retail tenants at the Prudential Center and earlier than anticipated lease commencements or later than expected expiration to leases -- in the other words pure recurring revenues. We had $1.3 million which came from onetime items such as fee income. We had $336,000 which came from the decrease of our accrued rent allowance. This occurred when EMC purchased a company called Legato in a building in Tower Oaks.

We had $500,000 of collection from our account receivable balance. $600,000 came from lower than anticipated G&A and 1.4 million came from improved operating margins. We've one new pending acquisition -- 1330 Connecticut Avenue in DC -- that we described in our earnings release. We have completed our due diligence and have a non-refundable deposit at risk. The Closing is conditioned on the lenders approval of the assumption of the existing loan. This building is adjacent to the building we acquired this quarter at 1333 New Hampshire in DC. We anticipated an early second-quarter closing.

We will discuss the financial impact of the transaction next quarter but for modeling purposes we would assume an 8.5 percent NOI return on full acquisition price along with the loan assumption described in our earnings release.

We have concluded our bottom up property by property '04 business plan and while there's still uncertainty around job growth we have raised the bottom end of our 2004 FFO range by 10 cents from $3.93 to $4.03 and we have narrowed and raised our guidance for '04 to be between $4.03 and $4.13 for the year.

We expect net income for '04 to be between $2.33 and $2.43. For the first quarter of '04 we're estimating FFO of between 95 and 97 cents and net income between 53 and 55 cents.

On a sequential basis, the first quarter has always historically been lower than the fourth because of the seasonal variations in our hotels and our operating margin.

Let me give a few critical assumptions for '04 that are in our numbers.

Starting with the current in-service portfolio, we expect up to about a 50 basis point decrease in occupancy during '04 -- our guidance doesn't assume any significant recovery during the year. There are two major blocks of space we expect to see vacant for extended period in '04. The old Federal Reserve and Embarcadero Center -- 140,000 square feet will be vacant starting third quarter. And in May Embarcadero Center West in California we will see the expiration of over 150,000 square feet of tenants the majority of which were formally subtenants of industrial indemnity which went into receivership as you recall in the second-quarter '03.

We expect to renew a minimum of 50,000 square feet of this expiration.

Overall, we expect to make modest progress improving occupancy within the remainder of the portfolio during 2004.

As I discussed previously, we expect to see a cash rolldown of about 9 percent in our rent for expiring leases in '04. We expect our margins for the year to be slightly lower than historic averages based on the decreases in occupancy and the rolldown in rent. Not based upon increases in [indiscernible].

The guidance assumes an additional 200,000-450,000 square feet of leasing in Times Square for the calendar year,understanding the building will not come in line until the second-quarter of '04.

We've completed another floor of leasing there and as Ed will talk later we are very optimistic we will be well within leasing target. Our new Dominion Two building in Virginia will come online in the third quarter of '04. We expect to have straight line rent of between $40 and $48 million for '04 -- a portion of that straight line rent does come from the Times Square Tower where any lease will include the customary free rent during which tenant space is constructed.

We're budgeting termination fees between $2 and $3 million -- our third party income is expected to be between $11 and $13 million. That's down over $6 million from 2003. We continue to pursuit new fee for services projects and we may be able to improve this business as we move into the latter part of '04. For '04 we're budgeting between $20 and $22 million of NOI from the hotles . At the high end of that range we're projecting full year hotel contribution for '04 is 61 percent of this historical high reached in calendar year 2000 and still 6 percent below the results from 2002.

Our 2004 fully diluted share count is assumed to increase by 2 million shares over the course of the year, stemming from the vesting of equity compensation and expected option exercises. We've assumed our G&A expense in '04, growth by about 5 1/2 percent to account for the increase costs associated with Sarbanes Oxley, D&O insurance and our compensation expense. Our cost expense includes the cost of any long-term incentive compensation, which is expensed equally over five years, even though it may have cliff vesting.

The compensation committee has approved a grant of $9.2 million of restricted equity for the Company for 2003. This stock vests over the last three years of a five-year period -- 25 percent, 35 percent, 40 percent. The CEO and chairman who have not received any equity based compensation since 2000 are included in this grant. Approximately 1/5 of this expense will be taken each year so that the 2004 G&A expense includes approximately $4.2 million, associated with this year's grants as well as the cost associated with all prior years restricted stock grants .

Our guidance assumes the sale of property outlined in the press release as well as our interest in 140 Kendrick Street, a property held in joint venture with the common fund of New York. That property is currently being marketed for sale. We are constantly reviewing our portfolio with an eye to identifying other asset sales. No other sales are assumed in current guidance but we may update our assumptions if and when these activities change.

Finally we assume no additional acquisitions or capital market activity in '04 other than the transactions outlined in our earnings release and we assume no additional fixed-rate debt financing secured or unsecured in the year. Our floating-rate debt now consists almost entirely of our construction loan, on Times Square Tower in New Dominion about $376 million and borrowing on our line as of the 27th of January was $88 million. Excluding our construction loans our floating rate debt is only 1.75 percent of our total debt outstanding. And with that, I'll turn the call over to Ed.

Good morning, everybody, and my remarks with be brief since I do want to turn to the regional managers from both San Francisco and Washington so they can give you some color directly and information directly from their regions. I did want to comment on some of the things we've been reading where people have reported about the brokers have indicated there is enhanced activity at Times Square Tower. I want to confirm that.

We are clearly seeing additional activity at Times Square Tower and I think the desirability of that asset is something that we've always been very confident in. We are having very meaningful discussions with more than a handful of tenants, ranging from tenants that could take a floor up to a tenant that can take as many as 10 or 11 floors. Having said that I also want to caution everybody that meaningful discussions don't always result in deals. And we have followed a policy consistently and will continue to follow it, that we don't consider the deal to be made until a lease is signed. Nor do we preannounce who the tenants are nor do we preannounce what potential terms may be.

So why we're happy and are very happy to see, and it may -- gives us grounds for optimism to see this enhanced activity we are not going to frankly count our chickens until the eggs are hatched.

With that, I will ask first Bob Pester and after Bob, Mitch Norville to comment on was going onto the regions and also to specifically talk about some of the transactions that we have been able to complete recently. Bob.

Thanks and good morning everyone. Everyone knows that the Bay Area commercial real estate markets have experienced perfect storm during the past four years and while we're not going to suggest that it's all smooth sailing from this point, clearly, the worst is behind us and we are seeing market conditions improve specifically as it pertains to San Francisco Central Business District . The market statistics vary by brokerage firms according to the CAC groups who we consider to publish the most accurate market information, for the first time in the past four years San Francisco Financial district registered net positive absorption of 670,000 square feet in 2004. Probably more telling is that the brokers are telling us that there's approximately 2 million square feet activity in the market while some of this is simply tenants moving from one building to another there clearly is some net new activity in the market which is signalling that the conditions are improving.

The vacancy factor still hovers between 19 and 20 percent for the CBD -about 30 percent which is sublease space as opposed to last year which was 50 percent or 52 percent this time and although an ample supply of office space will take years to burn through, the market needs to look at something that is completely bifurcated between Prime Class A space and commodity space. Prime view space is rapidly leasing up and diminishing existing inventory.

Vacancy for premium space -- which Embarcadero Center comprises -- a big component of market should dip into the single digits in 2004 with rental rates rising and concessions diminishing.

Regarding commodity space the market is flooded with it and there will be little improvement for this type of space for quite some time. At Embarcadero Center we finished the year approximately 92 percent occupied excluding our retail component. Our rental rates ranged mid 30s to the low 40s. We anticipate in 2004 that our prime view space should command rates in the mid '40s. 684,000 square feet of leases expire in 2004 in our San Francisco portfolio as Doug mentioned the majority of which is in two blocks and also we have at the end of 2004, the KPMG (ph) space that expires in December 03. These are prime [indiscernible] that we think will be re-let before the end of the year.

In South San Francisco the biggest event to occur in our Bay Area portfolio in 2003 was our lease in December with Genentech for a 141,000 sq. ft. in our 611 Gateway Building and 4200 square feet in our 651 building.

The lease commences in June 2004. Genentech is a growing company and we continue to have discussions with them about helping with their additional office space needs at our Gateway Project. Despite the significant lease success the peninsula market continues to struggle with the vacancy of over 24 percent, net absorption for the fourth quarter in that market was 606,000 sq. ft. yet year-to-date net absorption only totaled 12,000 sq. ft.

That's our Bay Area portfolio in a nutshell. I'm not trying to perfume the pig and say everything looks rosy but it looks a lot better this year than it did a year ago at this time. Mitch.

Thanks Bob. Good morning everyone. I thought I would start off my remarks by touching base on the status on two of our active submarkets in Washington D.C. and northern Virginia at the end of the fourth quarter of 2003 and as I do so I'll add some commentary on the activity in, our existing asset base and our expectations for the coming year in each of these markets. I will close with a brief discussion on our development, acquisition, and disposition activities in the regions over the fourth quarter.

In Washington D.C. positive net absorption for the year was just over 900,000 sq. ft. However while Washington remains top office market in the United States during 2003 the citywide vacancy rate actually rose from 6.4 percent at the beginning of the year to 7.2 percent at the end of the fourth quarter. Large users and particularly large law firms had difficulty in finding large blocks of assessable space in existing buildings.

Accordingly of the approximately 2.7 million square feet of space delivered in 2003, approximately 54 (ph) percent of this is preleased and the 2 million sq. ft. that is scheduled for delivery in 2004 that is currently 46 percent preleased -- the vast majority of this preleasing effort was to law firms.

The downside of this construction activity is that this unleased space is now competing with existing buildings for the smaller tenants and creating a very competitive environment for smaller tenants have lots of options and seeing very competitive prices. We believe the vacancy will continue to rise slightly as space delivers unleased until the economy rebounds and companies of all sizes start to grow in our market again. We do not expect to see -- we do expect to see some build to suit activity from both the government and the private sector in 2004.

In our DC portfolio of approximately 2.4 million sq. ft., we continue to have a vacancy rate of less than 1 percent and we again have nominal rollover this year. Where we do have leases expiring and we've been very effective at keeping our tenants in place. At 901 New York Avenue -- our newest development project in DC -- of about 540,000 sq. ft. in the City's East End we are approximately 77 percent leased on the building that will deliver in the third quarter of this year. We continue to have good] activity remaining office and retail space. But we are seeing the competitiveness that I mentioned earlier on the smaller deals.

In total, no suburban market has seen a turnaround and demand for office space more directly than northern Virginia. However this demand has been focused on just a few of the submarkets in the northern Virginia region. Fueled by increased leasing activity by defense and intelligence agencies and a stable tech market we saw market vacancy for the entire region drop 7.7 percent to 16.3 percent during the year. There was positive absorption for the year of approximately 3 million sq. ft.. Approximately half of this absorption or 1.5 million sq. ft. was in the Reston submarket where our northern Virginia office portfolio is concentrated.

We are clearly seeing a flight to quality in this market with major users seeking value in the space selections. At the top of the market Reston Town Center has benefited from this activity probably has vacancy of less than 1 percent, while the overall market is still in the mid to high teens.

No new construction started in the fourth quarter in northern Virginia and construction from the year was basically limited to build to suit opportunities. We did, however, see leasing pick up again in the fourth quarter and with a positive absorption continues on the pace set in 2003 we would expect to see leasing activity continue to eliminate availability, desirable large blocks of space in the market and increase opportunity for build to suit development in 2004.

In our northern Virginia office portfolio of 3.3 million sq. ft. we have less than 1 percent vacant and no real rollover in 2004. Actual quoted rents have started to rise in the Reston Town Center area and we expect rents to broach $30 a square foot again this year.

Now I'd like to switch discussing -- switch to discussing some of the transactions we completed this past quarter. In Washington we have continued to see a frenzy of activity today for companies to place capital in the DC market either in existing assets or ground up development. In this environment, we feel very fortunate to have acquired the rights to marketing developed in partnership two different office sites totaling 1.4 million sq. ft. of development . Weclosed on a solidly -- solid fully leased CBD building that Doug mentioned earlier and we have placed under contract an additional fully leased CBD office building and we have begun the redevelopment expansion of an existing BP asset downtown.

The largest of the two development opportunities is the result of the formation of a partnership of a local partner to develop a site near Union Station approximately 1.1 million sq. ft. in multiple buildings. This site is in a long-term ground lease with the District of Columbia with virtually no ground carry . Site is well located for competing for large government build to suits we expect to see in 2004.

The second development opportunities is a result of a formation of a predevelopment agreement with local partners for the development of 9th and E streets northwest in the east end submarket of DC.

This arrangement allows us to market the site on an exclusive basis and provides for formation of the partnership when we have secured our preleasing commitment to start the building. The site will accommodate a 300,000 square foot Class A office building and is well situated for competing for large law firms tenant requirements and is just three blocks south of the 901 NY Avenue project and across the street from our regional office in DC.

In the Southwest submarket in DC we have designed and are starting to marketing the redevelopment expansion of our 400,000 square foot Capital Gallery project to a final size 600,000 sq. ft.. In the third quarter of 2004 we will begin construction to add seven floors 200,000 sq. ft. to the three-story portion of the project for delivery in 2006.

While under construction we will continue to operate the fully leased 300,000 square foot 8-story portion of the project.

As Doug mentioned earlier we have closed on the purchase of 1333 New Hampshire Avenue -- a 12 story, 315,000 square foot office building located in the Dupont Circle area of the City and this office building is 100 percent leased to law firm of Akin Gums. We have also signed a contract to purchase 1330 Connecticut Avenue -- a 10 story 259,000 square foot building located across the street from 1333 New Hampshire. The office space in this building is 100 percent leased to Steptoe and Johnson.

In Virginia, we have extended an amended our lease with Lockheed Martin for two buildings of a total -- little over 500,000 sq. ft. that are located at the intersection of Toll Road and the Fairfax County Parkway in West Virginia. WE have renewed the tenant for an additional five years beyond the additional five-year renewal we just completed couple quarters ago. Increased the rent to account for the addition of a 900-car garage that has begun construction on the site.

The tenants' increasing employee population, and existence of shared parking -- of a shared parking agreement that allows for the development of another 175,000 square foot building on the site generated the tenants' need to build this garage. Also in Virginia, we have signed a contract to sell one of our Sugarland buildings -- Sugarland 2 -- to the town of Herndon for approximately $120 per square foot. This as a one-story R&D building located in Herndon and is essentially 100 percent vacant. We expected to spend $30 to $35 transaction cost to release this building for rent in the $12 to $13 triple net basis. This transaction should close in mid-February.

In summary, the last quarter was a highly successful one for our region, we have maintained the strong leasing positon in our existing portfolio, we have purchased a solid CBD office building on favorable terms and contracted for another. We've disposed of a noncore asset on favorable terms in a sellers' market, we have secured two prime development sites in Washington D.C. for future development and we've started the redevelopment process for increasing the density of one of our most financially successful project in DC..

Thanks, Mitch. With that, let me turn the call also over to Mort who I believe is with us.

Yes, good morning. You know, I think we are all -- as I think you know -- looking at a more favorable business climate for the year 2004 than we've been able to project for either of the last three years. May be interesting that when the REITs first went out to the public in the 1990s, there was a lot of question as to how well they would do in a downturn and I must say to you that I'm extraordinarily proud of what Boston Properties has been able to do in a real estate market that by and large has been a very weak market for several years.

This is the first year, I think, that we believe that you're going to see a stronger real estate market reflecting, frankly, a stronger economy, especially a stronger business economy. The business economy having been the weakest part of recovery in the economy -- and the job market which to some extent affects [indiscernible], obviously, being the weakest part of the growth in the economy. We saw where the job increases for December were 1000, which was in comparison to the anticipation of 150,000 job growth. But I do think that by and large, despite that, we will see an improving job market in the forthcoming year, improving business confidence, still very favorable interest rate, improving capital expenditures, improving consumer confidence, improving exports as a result of the weaker dollar, the fact that we're going to be in an election year is not going to hurt the economy.

So I think we are more optimistic and the question is how is this going to translate into the office market? I do know that Ed Linde has been approved as one of the contestants for the job of apprentice to Donald Trump if that's any indication of how well we're doing but beyond that, I do think that there's going to be opportunity this year to do a lot better than I think that macroeconomic conditions would've permitted in the preceding several years and I think we did extremely well in those circumstances. As Mitch has indicated, the Washington market remains very very strong and we believe we will continue to be extremely strong as more and more of the federal deficit rolls through the general Washington economy. We're seeing, finally, a pickup in San Francisco. We do think that in midtown New York where we are located with all of our real estate and all of it in Class A office space, we have retained a very, very high occupancy rate -- I mean, really, much much better than even the occupancy rate for other Class A buildings. And as Ed indicated we have a lot more activity with Times Square on many levels and in the Boston area, we are also -- I think -- seeing some increased activity and expect to continue that.

Boston by the way, is on the verge of completing what has been properly known as the Big Dig which was about a $13 billion public works program which is going to dramatically improve all of the infrastructure of Boston in the way of transportation and access. And we believe this will benefit the Boston market and, particularly, where we are.

So all in all, I think we look forward to a better year this year. We've already raised our estimates from the fourth quarter estimates that we provided to you and I think that this in part reflects what we see going forward. So I think there is no doubt in my mind that the economy is going to grow and grow fairly strongly, given that we are still faced with very high [indiscernible] and especially monetary policies so it's hard for me to see that it will do anything but get better. The exact amount or degree to which it gets better when you translate into office space is always difficult to predict. But by and large the fundamentals are headed in a much better direction at a much more accelerated pace than anything we've seen for the last three years.

And in those three years, obviously, we've also done well even in 2003 over 2002 -- if you X out the onetime event we showed an increase. So I must say I'm really proud of the strategy that we have followed and we are going to continue to follow that strategy. We believe there will also be occasional opportunities for a company like ourselves to make additional acquisitions which we're constantly looking at. Those are, obviously, not entirely predictable but we're still a serious player in the market. In fact the market has become very heated and we have been outbid on a number of occasions from investors whom we thought were willing to purchase buildings at prices that we weren't.

Nevertheless, we believe we will still be active in that market and have our opportunities to go forward. With that I will just say that as a summary I think we see not only a better economy in macro terms going forward, but a better sector in terms of the office sector going forward than we've seen for the last -- this was the best year in four years. And as always we believe we will have the ability to participate in this in a successful way.

We're now available for Q&A.

[Operator Instructions].

Greg Whyte with Morgan Stanley.

The first question for the apprentice. Ed, could you give us a little more color on Times Square? I know you've been reserved about it but there's definitely been an improving tone to your comments over the last few quarters. When you think about the terms of the rent rates or whatever that you're talking to tenants about now how do they compare with the terms that you signed with the law firm in your other -- (indiscernible) primary tenants that have gone in so far?

Greg I'm not going to comment, specifically, because we are in discussion with various tenants and I don't really want to comment on specific rent terms. But, obviously, when you have a more -- the more people you have at looking at space, the more confident that you are in terms of where you sort of draw the bottom line as to what kind of rent you're prepared to accept. So obviously an improving environment improves your ability to make more attractive transaction.

To put it a different way. At this stage given the volume that you're looking at on the type of terms you are discussing would you anticipate having to materially adjust the return you expect on the investment?

I think we've already provided you with that information in previous quarters. And I would say if anything obviously as the market improves this return should improve. Now I'm not suggesting that it is going to improve dramatically, obviously, because I think that there's still tremendous pressure on rent levels but tenants are quite knowledgeable and their brokers are certainly knowledgeable and it's still a competitive environment out there but I certainly don't think our returns are going to go down from here on. I think our projected returns will go up.

Let me add one other comment to that. When we first started that building we were looking at -- we penciled it out with a mortgage rate in the 8 percent range -- 7 1/2 to 8 percent range so, obviously, on the other side of the equation of this kind of development, we have benefited greatly from the decline of interest rates because we picked up you could say 250 basis points. So I think it was Oscar Levant who said, "People always talked to about my drinking than ever asked me about my thirst." The other side of this thing -- the thirst part, which is the capital (indiscernible) -- has also improved [indiscernible] there has been a drop in rent. But it'll be interesting to see whether there is a real drop in margins after we do the ultimate longer-term financing for the building.

Doug, I know you got some details on the TI cost [indiscernible] [indiscernible] spike we saw in fourth quarter. Can you give us more color on how you see that padding out for '04?

Greg I would say that this quarter was slightly higher than we would typically expect, but when we're -- it really depends on where the rollover is and over the the next year I would say there is -- the rollover is probably tilted more towards our CBD properties than towards our suburban properties and so it's -- because we're signing longer-term leases the brokerage commission associated with a long-term lease in the CBD Property in particular are higher and the TI's are slightly higher but on average in fact giving $20 a square foot for our portfolio, we think is a pretty cost-effective way of keeping our occupancy in place and maintaining as good and as net effective rent as we possibly can.

One last quick question. The Industrial portfolio is a relatively [indiscernible] part of the total but they have a big [indiscernible] this year.

Most of the investor portfolio is going to be gone before the year is over and the one-piece that we have rolling over is 161,000 square the [indiscernible] in our Bucks County market which is all of that one building and that building has been on the market for sale or lease and we would expect something to happen one way or the other -- hopefully by the time it rolls over.

Jon Lit with Smith Barney.

It's Gary Boston here with John Lit. Doug, you gave guidance on straight line rents for next year. That looks to be less than the run rate that you had for the fourth quarter which was up pretty significantly from the prior quarter and yet there is some Times Square Tower straight line rent rolling in. Can you explain what the burn off is and how you get to that [indiscernible] [inaudible]

Burn off in the first quarter has to do with the way [indiscernible] Williams leases. Remember, (indiscernible) Williams had three years approximately remaining on his lease so when we redid that lease and the way we structured their rent in terms of when they're paying and how much they're paying it created a very short-term straight line adjustment for the fourth-quarter 2004 and I think there might be a slight one in the first quarter of 2003 third-quarter [indiscernible] (MULTIPLE SPEAKERS) fourth-quarter 2004 so that will go away quickly.

(MULTIPLE SPEAKERS) It is really dependent upon the amount of leasing we do in Times Square Tower and when the cash rent starts vs. when we are required to straight lining and recognizing revenue based upon [indiscernible] [inaudible].

Correct me if I am wrong so mid year is when the OMelvaney (ph) [indiscernible] lease kick in and that will light that back up.

Kicks in second-quarter, actually.

The other question I had and then I will hand over to Jon, the sale on the [indiscernible] buildings in California I didn't see a price on that yet.

The reason for that is we have a confidentiality agreement with the buyer and we hope that is going to close in the next week or so and as soon as it does we will put a number up there. We only own a 37 (ph) percent in that so it's not a significant number.

On the DC acquisition you said the cap rate was 8 1/2 percent --was that GAAP or cash?

That's a cash number.

What's the GAAP?

I can't really tell you that because, unfortunately, in today's world with the FASB 141 and the straight lining and the effective calculation of interest all being dependent upon when the building actually closes, it's almost impossible to give a good number until such time as we actually close the transaction. So that's why we're not doing that because we don't know if this thing is going to close in March, April, or May. (MULTIPLE SPEAKERS)

I'd say the leases are below market and more importantly it's a long-term lease with a very solid law firm and we are quite thrilled, given the vitality and the [indiscernible] capital markets relative to Washington -- we are very excited to pick up this asset.

I think we've done very well in acquiring both assets in Washington in terms of both yields, price per square foot, the market rent for -- the rent from the property compared to the market rent and I think it does [indiscernible] beginning to reflect -- sorry the confidence and trust that Boston Properties enjoys in that market due to the leadership of Ray and Mitch Norville and [indiscernible] really quite remarkable how well we continue to do in that market where we are by far in away the leading player in what is -- without question -- the best overall metropolitan market in the country today and one that promises to continue that way for quite a number of years.

Thank you.

Lou Taylor with Deutsche Bank.

Ed, can you just talk about your leasing strategy in some of your buildings where you have a higher vacancy, specifically, a couple of the Embarcadero buildings and then 101 Huntington? I mean, is your plan to lower rate to fill space or hold rate and just take a longer time to lease it? Just what's your leasing strategy there?

I don't think that -- we realize that we can't -- we don't make the market in terms of saying 'we're just going to hold out for a dollar that we have in our mind and market be damned.' On the other hand one of the reasons we own the properties that we own is because they do command a premium and I think that's been demonstrated in places like Embarcadero Center so there's always a fine balance, Lou. We will not -- we're not going to rent space at what we consider to be a number that's not going to sustain the value of that asset but I think as we've demonstrated and it's one of the reasons why we kept our occupancy level where it is that we're prepared to make deals. And we do that. And so we distinguish between kinds of space -- I think Bob's comments were right on point. There is space at Embarcadero Center which will command a premium and we fully expect to get that premium. There is other space that might be competing with space that's not so differentiated on a [indiscernible] basis, we're going to make deals to fill that space and we take each deal individually. We look at the net effective rent of each deal, we don't do negative deals where we just fill in space for the sake of filling it. If we can't cover our cost and the capital that has to go into the space then we won't make the deal.

And the second question is for Doug. Doug, what were the factors that contribute to your changing guidance for '04 [indiscernible] bringing up that low end?

Really Lou, was with more success in the fourth-quarter leasing space than we had anticipated including quite frankly that lease that Bob Pester was able to get done out in South San Francisco. Things like that, overall, in the entire portfolio gave us much more confidence in our ability to make [indiscernible] occupancy during 2004 and to have actually shown on paper at the end of the quarter much of that was going to be coming from.

Last question, what's [indiscernible] your 04 assumptions that you were going through earlier -- can you just repeat your comments on the Time Square Tower leasing in terms of how much square footage you expect to (indiscernible) this year?

We assume in incremental we already had -- we had about 280,000 second quarter we assume incremental 250 to 400,000 square feet at least some point during the year.

Carey Callighan with Goldman Sachs.

I was wondering if you could comment given your optimism from the outlook on your land strategy looks like picked up 11 acres or so in Rockville, Maryland, but what are you looking at in terms of land going forward? And then related to that can you give us an update on the core block in Boston? What's going on there with that bid?

That bid is -- we are one of the two finalists in that bid. We don't expect a decision until some time toward the end of this quarter, I believe. It's probably in March when there will be a decision. We think we have a very strong proposal. As you know it is a joint venture with both residential and retail developer and the first element of that will be a major retail development. There is going to be a long approval process, of course, before it but we think we have a very strong proposal in there and so we're optimistic about it. The Rockville land, I can't comment on.

Rockville, Carey, that was just a correction and we -- there was a typo in the supplemental that we corrected. We did, in fact, last quarter or two quarters ago pick up 1 additional [indiscernible]Reston Town Center, which does imply a belief that we are going to be building some buildings and I don't know, Ray, if you or Mitch want to comment on build to suit activity in and around Reston and how those parcels work with that strategy.

[indiscernible] comment first and you can jump in if you want to. The acreage we picked up in Reston Town Center is the last site in what's got be viewed as the strongest submarket in northern Virginia perhaps Washington suburban metropolitan area. And it is literally the hole in the doughnut and -- I would not be surprised if there is sufficient demand given our 1 percent vacancy at Town Center to either start a building or secure a build to suit in that location. You know, people look at the (indiscernible) inventory and it is a drag but it is literally the raw material that we need to continue our development presence. And given what I'm seeing in terms of activity to acquire sites not only just downtown but key suburban sites, we view that when inventories decided asset in our region as opposed to any type of liability.

Ray, what is the square footage on that site in Reston and perhaps you could expand on what the potential might be for the core block as well in terms of office additions?

That site, it depends on the balance between retail -- which is extraordinarily strong in Town Center -- and office and the real (indiscernible) that office is the capacity for parking as opposed to density but I think and Mitch you can elaborate, too, but I think we're looking between 60 and 80,000 square feet retail and between 450 and 500,000 square feet of office which will represent the last major office site in that very popular office area.

That's the right numbers and I would just add in the fourth-quarter we responded probably to two or three different RPs [indiscernible] activity in Virginia that we haven't seen for the last two years so larger tenants are seeing have a lot less opportunities for large bl;ocks of space and we expect that to pick up with all the activity [indiscernible] [inaudible] defense and intelligence and Homeland Security guards picking up, so ... [indiscernible].

The Office depends on the core block of about 550,000 square feet in two buildings.

One last question for Doug. Your year 2006 lease expiration schedule you reduced the expiring rents there by $20 million which I guess is mostly the Hutton and Williams contract so you reduced your risk profile there. What did you give up in terms of economics and how do you think about the trade off when you write those kinds of deals?

What we do and I think we said this before and [indiscernible] try to articulate it in a different way, we look at the opportunity costs of leasing space versus what we might have to do if the tenant were to go away and what kind of rents we would have to obtain and over what period of time would we be able to obtain them to replace revenue and what the transaction costs are? And we put all that into a financial model and we look at what the net record value of those two streams of cash flow are over that period of time and make a decision based upon that -- obviously, it's highly assumption driven. So what do we give up? We, basically, in the case of Hunt and Williams we lowered their rent very slightly for a year or so. We provided them with a tenant improved allowance before their lease term originally expired. And we gave them a brokerage commission.

And what did we save? We saved all the down time associated with the potential expiration and what did we give up? We gave up the potential of being able to lease that space at a higher rent in 2006 when that lease ultimately expired and I think, Ray, your perspective on Richmond was important and you might want to comment on that as well.

Well, Richmond is an interesting market in that it's been so slow that it's good and that it's one of a few urban markets in the country where there's been absolutely no new construction until the last few months. And as a result while Hunt had options and they threatened to go to the suburbs we were quite confident we were going to be able to keep them and we kept them at a number 16 1/4 triple net that we're not at all embarrassed about and the couple (ph) with a very competitive acquisition price and very attractive low-cost long-term debt still is a very strong cash flow asset for us in the Washington region.

Lee Schalop with Bank of America Securities.

There's a lot of talk about land parcels and potential development sites. Could you talk about how you expect over the next 12 months to think about that? Could we see an acceleration of development in '04 with the expectation of higher openings in '06?

I think the answer, Lee, is yes. There is one of the sites Mitch described which is the Capitol Gallery side if we're [indiscernible] moving, taking basically taking 100,000 square feet building out of service and building a 300,000 square foot building and I think, Mitch, we started calling it October September?

'04. Yes.

We're leasing that space now and hope to complete that within 18 months or so?

(Multiple Speakers)

Yes January of '06, we should have our first occupancy.

We are in heated discussions with a tenant or two out in the northern Virginia marketplace and we'd think we have the opportunity to start, hopefully, one and maybe more than one [indiscernible] sometime in the next 12 months. And, then, we know as Mitch and Ray described we have these land parcels in Washington D.C. and while you never know when you're going to start, clearly, the expectation is that there's activity and we can bring that activity to a signed lease we will start activity in 2004 on that as well.

Let me just also editorialize there, Doug, that the two development parcels that Mitch mentioned, the one for (indiscernible) million square feet and the other for 300,000 square feet, first of all. Very attractive parcels and a very high barrier market and we acquired control of those two sites with absolutely -- virtually no (indiscernible) cost of carrying those two sites which is extraordinary. Number 2 is, we're not totally in love with all these sites. If a user comes up and wants to buy, we will consider a sale and in fact have in the past and will continue to sell secondary sites that residential developers have found very attractive at a much higher land values we attribute to office use. So we [indiscernible] monitor our land inventory and acquire when appropriate and dispose of when necessary.

I know I am being overly cautious as my normal bent here but I do not want to give anybody the impression that we think that this is a time for most markets to be starting speculative development. So if that was the question -- if that was the import of your question, this is not intended to demonstrate that there's a change in that strategy. I think there are some special situations like Capitol Gallery one when -- are special but for the most part we will not be going ahead and building buildings without significant releases.

Got it and then in the press relates you talk about two factors in the fourth quarter of 2002 that you explain to try to make it comparable to the fourth-quarter 2003. And I'm probably being dense about this but the first one where you talked about the 11 cents generated by one and two Independent Square and other properties that were sold. Presumably those assets when sold, you got cash and that cash was put in other assets. So I am not sure how you can just exclude that number?

(indiscernible) 399 lease so we have 399 full quarter in both quarters.

Okay, so you're saying basically this represents the dilution of owning 399 other than owning these assets.

Yes.

Okay and then last question. Could you share your thought on the dividend?

[indiscernible] [inaudible] higher not lower [indiscernible] fourth-quarter [indiscernible] [inaudible] only 399 versus [indiscernible]

I'm sorry, could you say that again, Doug?

(indiscernible) Accretion because we were better off owning 399 than we were owning those others. After you strip them out.

Can you talk about the dividend?

(inaudible) talk about the dividend?

We look every year about at our dividends and feel that we will make whatever decisions that we make about dividends in a normal time and based on where we think we have been in terms of earning and where we think we will be in terms of earnings and, obviously, cannot make any commitments to you at this point. So I'm going to try and give you as much general conversation as possible and hope that it doesn't mean anything, until we act on it. But obviously we review these things in the same time every year at which it is not in the first quarter and we really do feel that if we can (indiscernible) moral obligation to our shareholders to -- as well as a legal obligation to share with them the improvements in the Company's performance as we measure it. If you understand what I'm saying I'd appreciate it if you'd give me a call later and tell me what it means.

Thanks very much.

Keith Mills with UBS.

Three questions for you. First is related to your focus going forward in markets you want to be in and don't want to be in four major regions in the country today -- do you intend going forward over the next, say, 12 to 18 months? Are you going to continue to focus on these markets or are you looking to expand from them to other markets and maybe [indiscernible] markets you're in now.

The answer is we're very happy with we're operating. As we said before, we believe that it is much better to concentrate on certain regions and not to try to spread ourselves out and we are not looking at any other regions at this particular time doesn't mean that we might not in the future but I think that chances are you'll see us operating essentially where we're operating now for the foreseeable future.

Keith, you mentioned four regions we are actually in 5 and I just wanted to emphasize what an extraordinary year the Princeton region had and clearly pound for pound they're one of our stronger regions and Mickey and the team there has done a great job there as well.

Yes we're gone six years from 11 million feet of space to 44 million feet of space in the market, basically, that you know we are in at this point. We do believe that there will be a lot of continued opportunities within these markets. Our basic strategy has been to concentrate in certain markets and to concentrate in certain assets mainly the top Class A properties that we can (ph) develop or acquire in these markets. We think that what is deemed the fundamentals of the real estate market over the last three or four years supports the wisdom of this strategy and where we have no intention of changing it. There may be some markets that may exhibit the same characteristics over time in which case we will look at them. But there are very few that we had seen that equaled the markets (indiscernible) we haven't seen any equal the markets that we are in. And I do think that there are just going to be a lot of additional opportunities in the markets that we are in and we expect to continue to be able to grow our asset base along the lines that we have in the past and that's still our principal strategy and corporate objective.

Markets are those that you have historically found to have a consistent [inaudible]

There's only one other market (indiscernible) today certain parts of the L.A. market, I think offer some possibility. We have had the chance, frankly, to look at a lot of other assets you can imagine that, frankly, a lot of other companies would like in some way or another to be acquired by us and every time we've looked at them we've really come to the same -- pretty much the same conclusion. They have probably a small portion certainly a minority of the assets that fit into our profile of the kind of assets that we would like to have and kind of market that we would like to have them in and the rest of them we have defined other ways to sort of dispose of them and we have just come to the conclusion that we had rather concentrate on buying individual assets and developing individual assets in markets we are already in than sort of diluting our efforts in some other way. And that's been our strategy and we passed on a number of past acquisitions others have made and are very happy that we did because I do think that we have been able to demonstrate to our satisfaction the benefits of this strategy and we hope to the satisfaction of the marketplace. We made a commitment when we went public to show a certain kind of return to our shareholders. I think we've more than met that commitment. I think we're probably calculated somewhere around between 16 and 17 percent compounded in total return based on original offering price. We look to that kind of effort over time. We don't want to dilute our performance and our projections in our own mind by diluting our efforts in the markets that we don't think will demonstrate not only the growth in good times but, frankly, the ability to do well in bad times. And that -- we've been on the downward slope and we've done very well on that trajectory.

Second question I guess is for Ed. Ed in the fourth-quarter you sold two properties that were more I guess technical R&D type properties. Could you share with us your views on that [indiscernible] space going forward if you intend to continue to dispose of assets in that space?

I think -- that doesn't represent a view on that particular type of space. They were very attractive offers. But I think it also -- they were properties that were really not core properties for the kind of business that we have. And we really are a 99 percent office operator and, therefore, disposing of properties like as Doug mentioned the industrial [indiscernible] Pennsylvania would also be something that we would clearly consider. So I think that you will see over time as people find these properties attractive that we will continue to dispose of properties that really don't represent the core of our business.

Okay, and just quickly, corporate real estate executives really focused on not surprisingly driving down their operating costs but in addition to that, more flexible lease terms going forward. Can you share with us, Ed, or maybe those in the region what Boston Properties is seeing today that negotiates leases either with existing tenants or new tenants in terms of the tenants wanting greater flexibility? For example, are you finding that you're having in the leases maybe more moderate lease termination clauses?

I don't believe so, but I'm going to let Ray comment on that.

It's true that they're concerned about cost and [indiscernible] led to some major renewals where the corporate people decided to stay in place in a first-class office space and not going through the tremendous capital expenditure to relocate offices and the disruption to the operations that (indiscernible) maintained very high renewal rates on our core assets. In terms of deal structures you know we really haven't [indiscernible] lot of the users think that this is -- as we do -- a tranch in the market and they're locking in these rates for long-term. As said the Hunt and William deal renewed for 12 years and building was already 15 years old confident that we're going to maintain it and believe in that they're locking in [indiscernible] longer-term so our flexibility is important. I really think they fill good about staying in the BPS and trying to lock in what they considered to be a real value for as long as possible.

I can't think of any instance where we really have had to agree to deals with early termination rights with the exception of early termination rights that are really quite expensive to the tenant because you have to remember we're not going to ignore the transaction costs that go into any deal. And so it may be desirable on the part of the corporate executive but on the other hand I don't think that we could really agree to termination rights that would provide them with the sort of absolute flexibility that they might like to have.

So really not seeing much of a change.

We really haven't.

David Shulman with Lehman Brothers.

Mort, I think you're spending too much time with your friend Alan Greenspan. On your (indiscernible) comment.

They put it the other way. They think he's spending too much time with me.

To his benefit. Question -- is Bob Pester still on the line?

I am.

My question is on the Genotech (ph) deal -- can you go into if you can what the net rent was there? What kind of TI packages were given in that kind of transaction?

The lease was structured as a triple net deal. It's a 1980 starting rate and it escalates at 22.5 percent a year. Over the 10 year term. So on an equivalent basis, it's almost a $32 gross rate and (indiscernible) $60 (ph) a square foot. (indiscernible) $60 square foot.

TI package and this [indiscernible] leasing commission on top of that -- does that include the leasing commission.

No, that doesn't include the leasing commission. The leasing commission in that market (indiscernible) additional $15.

So about a $65 package for you to get them in.

(Multiple Speakers) Above the shell, David, so [indiscernible]

(Multiple Speakers)

Could I interrupt [indiscernible] Bob I know that perhaps (indiscernible) tenants may not be sensitive to this but we have refrained from giving the specifics of any particular lease transaction in the past. I think that's a practice which we should follow in the future and so, David, you got your answer but I would like to cut off that discussion at this point.

At least I got an answer -- you should hang out more with Alan Greenspan. (MULTIPLE SPEAKERS)

And since you got that answer I think it was Bob and the folks in that region that should be congratulated just on an absolutely wonderful transaction [indiscernible] tenants' point of view by the way.

Let me ask another -- let me ask another question which is indirect -- I don't think it's direct. Is this -- this is all raw space above shelf right? And not building? (MULTIPLE SPEAKERS) And when you budgeted it, I assume you were budgeting what? A $20, $30 TI anyway, right?

No, when we gave our original budget it was significantly (indiscernible) for rock safe, it's $45, $50.

Okay, so this was just so -- this is your package above the raw, basically just finishing out raw space. And then next question on that. This is mainly office use as opposed to lab space for those guys?

That's correct.

Dan Sullivan with Wachovia Securities.

I promise I won't be specific relative to tenant questions.

I can't hear you.

Is this better?

Not much. Go ahead.

Is this better? I do have a TI question I'd like to ask. Doug, you mentioned -- I want to make sure I am looking at this on an apples to apples basis, that [indiscernible] the full amount tenant allowed cost, when the lease is signed am I correct in that and ...?

When we give you what our funds available for distribution [indiscernible] [inaudible] we take all of the cost associated with the transaction in the quarter that we recognize at least as having commenced and so in the case of Hunt and Williams we won't spend that money probably until sometime in 2005. We've taken a hit for it in this quarter.

And then relative to Hunt, again I won't ask you specifically on that. When I look at the total space lease in the quarter of 949 [indiscernible] Hunton (ph) would be included in that number.

Yes, absolutely.

But relative to Genetech, that does not start until first-quarter -- doesn't start till January that would not be included in space lease or TI?

(Multiple Speakers) [indiscernible]

Included in that the quarter counter year 2004.

So it is apples to apples -- just wanted to make sure.

Jim Sullivan with Greenstreet Advisers.

The 8.5 cap in Washington, that's on a building you acquired in the quarter or it's a pending acquisition.

Pending acquisition. The financial information on the building (indiscernible) quarter I believe was in our press release from the previous quarter.

That if I understood (indiscernible) correctly high-quality building, long-term lease [indiscernible] tenant great location, if you've given me that description and asked me to guess the cap rate I'd guess mid '7s or low 7s?

Let me just comment on that, Jim, which is negotiations that we've had with the tenants have really centered around them needing somebody who could effectively redevelop this asset because they did own the building for what rate? 15 years?

No. Over 20 -- it's the equivalent of sale leaseback.

And the building was owned by them and they recognized we believe that a needing somebody to effectively reposition the entire asset while they were in place and so Ray and Mitch and our development leasing folks in Washington D.C. have spent a long long time negotiating a satisfactory transaction from not just an economic perspective, but a real impact perspective in terms of the business condition of the building and what that's kind of have to live through. And I think that our ability to do that allowed us to create a kind of return that you're seeing from that asset.

And how much of the high yield is reflective of the above market or mortgage that you're assuming?

It's hard to equate one with the other. The mortgage goes from until 2011 Jim, and so I guess, certain people would argue that whatever the mortgage amount is times whatever the interest rate we might get over that term is quote unquote a reduction in yield and if you do it that way you can probably come up with a number to your satisfaction.

The other thing we look at Jim, too, is price per pound and you acquired it in the 335 range, we're putting 40 some odd dollars on it, so we're going to be all in at 375 which I can tell you for a CBD building in Washington it's substantial with [indiscernible] replacement costs and given that there is effectively no (indiscernible) risk [indiscernible] 14 years, we've given them very solid location. We're very pleased with the asset.

And, fundamentally, no capital because we're going to have basically have spent $11 million on redoing the entire construction of the building.

That 1 million is not just cosmetic [indiscernible] building systems and everything else. We're going to have a fully renovated building for 14 years with positive -- very solid cash flow in an irreplaceable location.

Speaking about acquisitions more probably during Mort's comments if I understood or interpreted correctly, sounds like you want to be more active on the acquisition front. Despite challenging leasing fundamentals in each of your markets, there's certainly no shortage of capital for any deal of the quality that I would assume you would be buying. What's changed? Why are you more interested in acquisitions now than, say, [indiscernible]?

We were interested a year ago and we still are. All depends on the leasing profile of the buildings you acquire and as we indicated, we have as you say there's a lot of capital pursuing real estate assets. And in part because of low interest rates and that's going to continue for a while but we still have the ability to make acquisitions. And in particular as we saw in Washington in both cases I think there was a concern that there would be the right quality of management and ownership in buildings going forward and this we are seeing in other aspects of acquisitions opportunities. It doesn't mean that we're going to be able to do anything and as you can see from the projections that we have given or the estimates, the guidance we have given we're assuming no additional acquisitions. Just telling you that this is something that we are still active in. We've been very active over the years in the acquisition side. We're going to continue to be as active as we can be consistent with the commitment to the strategy of very high quality buildings in the markets that we're in and we've done that. We're going to continue doing that and we may be shut out of the market because of the willingness of other people to pay much higher prices than we're prepared to pay and that just remains to be seen whether we can be competitive or when we in a sense would pursue certain assets as we have said many many times as far as we're concerned this game is a long-term game not a short-term game and that's the way we play it.

We didn't not buy assets for lack of trying last year. We did bid on buildings like the GM building and others and we were outbid.

Also, Doug, we did acquire a great portfolio of assets but everyone of them was a very unique situation where it wasn't broadly marketed and they specifically sought out Boston Property [indiscernible] partnership or a desire to have relationship with us that allowed us to acquire assets at very competitive yields.

Scott O'Shea with Deutsche Bank.

Question for Doug on the One and Two Reston property. The mortgage there comes up this year. Do you anticipate rolling that property into the unencumbered pool? Or refinancing secure. Any comments there?

I don't think that we have any specific plans other than we intend to refinance it when it matures.

Thank you, everybody, for being with us. Look forward to speaking with you again next quarter if not before. And appreciate your patience and feel pretty good about the last quarter.

Ladies and gentlemen, this concludes the Boston Properties fourth-quarter 2003 conference call. If you would like to listen to a replay of today's conference please dial 303-590-3000 or 1800-405-2236 followed by access number 564 857. Once again, we thank you for your participation in today's conference. At this time, you may disconnect.