波士頓物產 (BXP) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Boston Properties' first quarter 2004 conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded today, Wednesday, April 28, 2004.

I would now like to turn the conference over to Ms. Claire Koeneman, Please go ahead, ma'am.

Hi, good morning everyone and thanks for joining us at Boston Properties' first quarter call. The press release and supplemental disclosure packages were distributed last night, as well as furnished on Form 8-K to provide access to the widest possible audience. In the supplemental disclosure package the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements.

If you did not receive a copy of these documents, they are available on the Company's web site at www.BostonProperties.com in the Investor section. Additionally, we are hosting a live webcast of today's call, which you can access in the same section. Following this live call an audio webcast will be available for twelve months on the Company's web site in the Investor section under the header, "Audio Archive." To be added to the Company's distribution list, please contact the 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 the expectations reflected in any forward-looking statement are based on reasonable assumptions, we can give no assurance that its expectations will be obtained.

Factors and risks that cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in yesterday'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.

Having said all that, I would like to introduce 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. Additionally, all 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 Linde.

Good morning everyone. And thanks for taking the time to join us for our first quarter call. Let me just give you a quick summary of what we're going to go over this morning. I'm going to take some time to review our first quarter financial trends, our results and provide an earnings outlook for the remainder of '04. Ed is going to talk about our very active development pipeline and touch on a few of our markets. And then Robert Selsam is going to spend a little bit more time reviewing New York City leasing activity with focus obviously on Times Square Tower. And Mort is going to conclude our prepared remarks with a discussion of macroeconomic views and our forward-looking investment perspective.

In preparation for the call, I went back over my notes from about a year ago, and just to refresh you, last April we were talking about significant overhangs of space and the total absence of any signs of job growth. Rents were declining, corporate consolidation and retrenchment were rampant, and we were certainly not prepared to call the bottom of the market.

Conditions have certainly changed. The economy is recovering. We have seen hard evidence of job growth, and there are high-quality space alternatives slowly disappearing. And in general, while rents and lease transaction economics are still not improving, we have experienced a few situations in our portfolio where Boston Properties has actually been able to increase rents in response to improving demand.

And we're currently engaged in new development negotiations where tenants are prepared to pay what we refer to "replacement cost" in order to satisfy unique real estate requirements, even when the existing inventory can provide lower cost options. We would summarize our outlook today as guarded optimism.

Our first quarter funds from operation on a fully diluted basis was 2 cents higher than the high end of our prior estimate, and 2 cents higher than First Call consensus. And I'll provide a summary of the positive variances and explanation for that in a few minutes.

Our gross level of transaction activity, which are the signed leases covering future and current vacancy at our in-service portfolio in our development properties was just over -- under 900,000 square feet during the first quarter. And that compares to about 1 million square feet per quarter in calendar year 2003.

The activity was spread throughout the portfolio, led by New York City where we had just about 300,000 square feet of activity, 215,000 square feet in D.C., 110,000 square feet in Boston, 54,000 in Princeton, and about 185,000 square feet at Embarcadero Center.

The leasing highlights this quarter includes resigned deals at Times Square Tower, the Manatt, Phelps deal, the Pitney, Hardin deal, and another floor taken by O'Melveny & Myers. That was an extension. And we began recognizing revenue on Times Square Tower on April 1st.

And just last night, Genentec signed a lease amendment committing them to the remainder of 611 Gateway by the end of 2004. So that building will be 100 percent leased by the end of the year. Our total portfolio occupancy was 92.3 percent as of March 31st, which is a slight improvement compared to last quarter of 92.1. The occupancy statistics that we report only includes spaces where the tenants have taken possession. So if you look in that schedule, you'll see that 611 Gateway, which is now effectively 100 percent leased, is still showed as zero percent occupied in our leasing statistics. And possession won't occur until the second quarter, so that won't change until next quarter.

I would like to offer the following commentary on the property occupancy, which will help you get a sense of our occupancy is going to be as we sort of move through the year. In Boston, this month we terminated a defaulted lease with a law firm at our 265 Franklin Street joint venture property with a common fund. And so next quarter you are going to see the occupancy in that particular property decline by 12 basis points. And as part of that transaction we're going to recognize about $600,000 of lease termination fee in the second quarter. One industrial project in Boston still remains vacant and there is relatively little activity on that, so we don't expect much change in that for the remainder the year.

In D.C., we finalize leases at the Sugarland Business Park and at 800 Granger, which is over at VA 95 campus, which saw significant occupancy increases as we forecasted last quarter. We also completed a very complicated sublease take back and releasing transaction in our Reston Overlook II property. And that brought that occupancy up by 9 basis points.

In Princeton, at 211 Carnegie Center, that building a showing as 100 percent vacant today, but we are in lease discussions for a full building user, which we expect will get done some time in the second or third quarter. And in Princeton we have one negative transaction that is going on. RCN, which we talked about last quarter, is in bankruptcy or pre-packaged bankruptcy discussions. And they lease about 137,000 square feet in three buildings, Building 105, Building 202 and Building 214, with lease expirations and '04 and '05.

They are moving through their process, and we fully expect them to terminate their leases in Buildings 202 and 214 because they're not using any that space. So we are actually are in active discussions within an existing tenant to expand into one of those spaces. And we expect them to renew in their 105 Building on a significant portion of the spaces are they are in there.

Finally in San Francisco, at the end of next quarter we're going to see a significant vacancy at EC West, with the expiration of about 150,000 square feet. And then in the third quarter of 2004, our old Federal Reserve building, which is 140,000 square feet will be vacated due to a lease expiration covering that entire building. And again, 611 Gateway will become revenue-generating during the second quarter, and Genentec will take possession of the remainder of the building by the end of 2004.

Our average remaining lease length still is about seven years. And our remaining lease expiration for '04 is about 5 percent of our square footage and 4.5 percent of our gross revenues. On pages 47 and 48 of the supplemental, we have given some additional details to our second generation leasing statistics, which break out the regional leasing numbers and the roll up or roll down in rents.

This quarter the numbers show a 2 percent increase in net rents, and slack gross rents. But this is a result of a large lease in the Boston region that commenced on January 1st, but actually was signed about 18 months ago. So if you eliminate that transaction, the results are a 22 percent decrease in second generation net rents to the Boston region, and a 16 present reduction in second generation net rents for the portfolio, which is, quite frankly, which you should have expected.

We have provided the roll up and roll down based on both gross rent as well as net rents. And the gross rent information gives you a good data point when you are comparing our future expiring in place rents and the comparable market rents as of today.

In '04 our weighted average portfolio expiring rent is about $32.37, excluding our retail space. And if you looked at that basket of space, our view of the market rent for that space today is about $29.00, which implies about a 10 percent roll down on that expiring space in '04.

In '05, assuming no improvement of rents, the numbers would be $35.62 for the expiring, and $31.22 for the basket of that space on a market rent basis, which is about a 12 percent decrease.

This quarter 68 percent of our leasing activity involved our CBD buildings. And the average term in those CBD deals was about eight years. The second generation leasing costs were $26.23, and they reflect that CBD mix. And its $19.45 were for TI's, and $6.78 were for leasing commissions.

Renewals and expansions encompassed 70 percent of that space, and new tenants made up 30 percent. The renewal expansion cost, if you broke it out, would have been about $24.64. And the cost for our new tenants were $28.16. Based on all the lease we are currently negotiating across the portfolio for the remainder of '04, we expect cost to be slightly above $20 per square foot for the remainder of '04 for our second generation Tenant Improvement and Leasing Commission costs.

The dividend FAD payout ratio for the first quarter was 82.3 percent, and that includes all the leasing cost associated with any lease that began in the first quarter, recurring capital expenditures for all properties including the hotels, and the dividend associated with our new share count.

We applied the fully committed transaction cost in the quarter in which the lease goes into service. And we continue to work on new early lease renewals, which may hasten the recognition of some second generation leasing costs in 2004, and may increase our FAD ratio in the short term. We expect to spend about 75 cents per square foot on recurring taxable project in calendar year 2004.

Excluding our hotels, same-store NOI was down about 1.3 on a GAAP basis, and .9 percent on a cash basis. On a year-to-year basis the hotels look like they've reached the bottom. For the quarter RevPAR was flat, so slightly under what we expected and what we had been provided to expect by Marriott.

We are pretty optimistic about 2004, that it is in fact the recovery year, and we are going to be on the upswing of the curve. The DNC is coming to Boston in July, and there are a number of other city-wide conventions on the docket.

RevPAR figures for period 4 were obviously higher. And so if you look at the sequential numbers, that is the reason for the drop between period one of this year and period four of last year, because there was more time in period 4 each year -- the thirteen period year, and there is an extra period in the fourth quarter of the year.

Included in the fourth quarter results are lease termination fees, totaling about $1.5 million. This was a little bit more than we had budgeted. We had budgeted 750,000, but about 675,000 of that came from the settlement of a bankruptcy in New Jersey, that we had actually had budgeted to occur in the second quarter, so it was really a timing issue, it was not unexpected.

At the end of the fourth quarter, our accrued rent reserve stood at some $5.4 million, against a total accrued rent balance of 201 million. And this quarter the reserve was decreased by $300,000 to $5.1 million against a accrued rent balance of $213 million. And this was due to the resolution of MCI being in bankruptcy. And as they came out of bankruptcy we adjusted their risk rating and reduced the reserve that we had on them.

Our bad debt reserve against our account receivables balance decreased by $685,000, and $570,000 of that decrease came from cash that we actually collected through our collection efforts.

We completed a host of capital transactions which are all described in our press release, and the specific dates and the dollars involved with each are there. On March 30 we completed our public offering of 5.7 million shares of stock. And the final trade on that day its proprietary after market sale was 52.52. The proceeds from that offering, net of the underwriters' discount and the offering cost, was $291 million. On a run rate basis our fully diluted share account now stands at about 138 million shares. That's what you should use on a going forward basis.

As a result of the March offering, we have used the majority of the shares available under our 1998 shelf registration statement. And in order to continue to maintain the flexibility we've always had for managing the Company's balance sheet, we will likely file a new shelf registration with the SEC in the near future. SEC rules require me to say that this statement does not constitute an offer of any security sales. And I should add, nor will it necessarily let to one.

Collectively we sold about $91 million of properties during the quarter. It contributed annualized unleveraged funds from operations of about $7 million in 2003. We closed on our previously announced purchase of 1330 Connecticut Avenue, finally. And on that asset we project an annualized unleveraged stabilized FFO return of 10.6 percent, and an annualized unleveraged cash return of 8.7 percent. And the details of all these numbers are in our press release.

We also purchased the remaining interest in our 140 Kendrick Street joint venture property, which is located in suburban Boston, for $21.6 million and the assumption of debt. And on that asset we project an unleveraged FFO return to be 11.99, and the unleveraged cash return to be 10.9.

We are currently today marketing our 38 Cabot Boulevard Building in Pennsylvania, our 550 Forbes Boulevard Building in South San Francisco, our Sugarland One Building in Herndon, Virginia, and three suburban Boston buildings, 164 Lexington Road, 204 Second Avenue, and 33 Hayden Avenue, all for sale. And we're shooting for a second quarter close on the majority of those assets. We expect to generate about $41 million from the combined sale of those assets. And the 2003 annualized unleveraged FFO contribution from those assets was about $2.8 million.

At the end of the first quarter we've cash balances of about $182 million. And our current capital structure, after paying off $110 million of secured mortgages and $53 million balance on our line of credit, provides us with significant borrowing capacity. Just as an aside, our floating-rate debt now consists almost entirely of our construction loans on Times Square Tower and New Dominion Two. As we sell additional properties we will generate additional cash. And I will leave the discussion of our pending capital requirements and our outlook for investing to Mort and Ed.

As I said earlier, we had a very strong first quarter with funds from operation on a fully diluted basis of 99 cents per share, about 2 cents higher than consensus and our estimate. The positive variance can be explained as follows. We had approximately $1 million of higher revenues spread out throughout the region. We had onetime expense savings of about 1.8 million, which included real estate tax abatements across the portfolio from prior years, and reduced operating expenses. And as I explained about, we had excess lease termination fees of about $700,000 above what we had projected, and reductions in allowances and collections on bad debt of about 1 million.

So in total, if you add all of that up, before taking into account any of our capital transactions, our funds from operations on a gross dollar basis was about $4.5 million higher than we expected during the first quarter.

Engaging the impacts of our capital transactions on the results, the income associated with the ground lease termination payment and the purchase of 140 Kendrick Street added about $700,000 after the offset of all the prepayment penalties we had, and the dilution from our property sales.

And if you take into account the impact of the additional 5.7 million shares for a third of the quarter, because we did that offering in March, as well as the dilution from all the exercise of stock options that we had during the period, you get to $0.99 per share for the quarter.

In January we provided guidance for '04 of $4.03 and $4.13 based on no acquisitions or disposition activity and no capital market events. During the quarter we did sell $91 million of assets, and we're forecasting now the possible sale of an additional $41 million of assets during the remainder the year. We purchased the remaining interest in 140 Kendrick Street, and we issued 5.7 million shares of common stock. So there were a lot of capital changes in our assumptions from quarter to quarter.

Each quarter we also review the property level leasing plans, concentrating on the major leasing assumptions for each of our properties. And after completing this process and taking into consideration all the transactional activity for maintaining the bottom end of our 2004 FFO range of $4.03, and narrowing the top end of our range to 4.10 for 2004. And that includes the dilution associated with the 5.7 million shares of additional common stock. Our net income for 2004 is 270 to 277. And for the second quarter FFO is estimated between $0.99 and $1.00, and income between $0.74 and $0.76.

And here are the other critical assumptions for our numbers for the remainder the year. We think we're going to see a slight decrease in occupancy during '04 based upon the transactions I reviewed a few minutes ago, but no more than 50 basis points. And obviously the biggest are the old Federal Reserve, EC West in San Francisco, and the buildings that RCN occupies at Carnegie Center, Buildings 105, 211 and 214.

Overall, we do expect the occupancy in the remainder the portfolio to improve during '04. We have increased our leasing velocity for Times Square Tower and Robert will talk about the activity there in a few minutes. To date, we've leased an additional 160,000 square feet, bringing our total leasing to 436,000 square feet. And so our guidance on a going forward basis assumes an additional 150 to to 400,000 square feet of office leasing during the remaining three quarters at Times Square Tower. This is up from 200 to 400,000 square feet. That was the assumption we had less quarter. The building was put into service on April 1st, and we will recognize revenue and stop capitalizing interest as we deliver space over the next twelve months.

As I said previously, we will experience a roll down in rents on our expiring leases for the foreseeable future in '04 and in '05. The impact of this roll down and the vacancy we assume upon any lease roll over will translate into a 1 to 1.5 percent decrease in our same-store revenue on a GAAP basis, and basically a flat year-to-year same-store on a cash basis.

We will receive the full benefit of our two acquisitions, 1330 Connecticut and 140 Kendrick Street. We expect our margins to be slightly lower than the historical averages, but well within where they have been on a year-to-year basis.

Our fully leased New Dominion Two transaction, that is the building in Herndon, Virginia. That will come online at the beginning of the third quarter, and that's an investment of about $67 million. So we will see the benefit of that on our run rate basis for the third and fourth quarters.

We expect to have straight line rent between 45 and $55 million. That is up from last quarter and stems from additional leasing at Times Square Tower that we are projecting, where any lease will include the customary free rent to tenants during their tenant construction time.

We are budging termination fees of about $1 million per quarter. And I mentioned that we've already got 600,000 of that for the second quarter of 2004 on the books. Our third party fee income is expected to be 11 to 13 million for '04. And that's down over $6 million from '03, and it will contract even further in '05. We continue to pursue new fee-for-service projects, and we may have the ability to partially extort the fee business as we move into the later parts of '04 and 05, because as Ed will speak, much of our development activities are now focused on our existing -- our owned portfolio.

We are maintaining our '04 budgeted NOI projection for the hotels of between 20 and $23 million. Our '04 fully diluted share count takes into the effect our March offering, as well as increases of about 500,000 shares over the course of the year stemming from option exercises.

We are using a G&A run rate of $12 million per quarter for the remainder of the year. And it was slightly more than that during the first quarter due to the vesting of some restrictive stock and the payroll tax payments made in connection with option exercises. The G&A number does take into consideration the cost of our long-term equity compensation program, which vests over the last three years of a five year period, 25 percent, 35 and 40 percent each year -- sequential years 3, 4 and 5. And approximately 1/5 of this expense is taken each year. So in '04, the quarterly G&A expense that we have given you includes approximately $1 million per quarter associated with this year's grant and the cost of all prior year’s restricted stock and other equity compensation grants.

Our guidance assumes the sale of the properties that we outlined for the $41 million. We are continually looking to prune the portfolio with an eye to identifying other asset sales. While we haven't identified any in the current guidance, we may be updating our assumptions if and when those activities occur on a going forward basis.

Although we continue to seek attractive acquisition opportunities, our projections don't assume any additional acquisitions or capital market activities in '04. So there aren't additional fixed-rate financing secured or unsecured during the year.

And with that, I will turn the call over to Ed.

Good morning everybody. Let me begin by just sort of amplifying some of the things that Doug said about the market. Robert is going to speak specifically about New York, so I'm not going to talk about New York or Times Square Tower, except in one sense, and that is because Robert and his team are responsible for this, but they probably would not take the credit for it. But as Doug said, we moved O’Melveny & Myers into their space just a few weeks ago. And I think, once again, I'm feeling very good about our performance in terms of bringing what is a very complicated project in on time, on budget and with a very happy tenant. And I think that is no small accomplishment, and we take great pride in it. And I think once again recognize that one of the things that Boston Properties brings to the table is an ability to carry out complicated developments very well, and in fact make enhanced returns because of that.

Now obviously this climate has not been one where one is wildly optimistic about starting and doing developments. But as I will talk about in a little while, we are also quite happy with our development pipeline, considering the environment in which we are operating in.

Let me just review some of the other markets. Washington continues to be probably the strongest market in the country. And we are -- we had very little roll over in Washington, but certainly when we have vacancies, we can fill them. And I think once again, it also demonstrates something that is equally important in our strategy, and that is differentiation in terms of some markets.

There is a lot of commodity space even in a market like Washington, which competes on what is strictly a price basis. But the bulk of the assets that Boston Properties controls in that region can command a premium because of their location.

Buildings in Reston Town Center do not compete with commodity buildings that are up and down the Dulles Corridor. And I think that we, especially at a time like this, or over the last several years where market have been weak, we've taken full advantage of that differentiation. And I think that it speaks well for the strategy that we've always followed.

And I would say the same thing holds true, by the way, in Princeton, where as Doug mentioned we have had some roll over that was unintended because of bankruptcies and things of that nature. And there too the quality of Carnegie Center leads us to be able to replace tenants when they leave, and not to see erosion in rents.

In the Boston region, we are seeing -- I think that there are pickups in the suburbs. And we are seeing good activity now in our Western Walfam (ph) Corporate Center. And we expect that project will approach full occupancy in the not too distant future. That's obviously subject to continuing negotiation on certain leases. But we are feeling good about that activity.

I think the CBD of Boston is a little bit slower. And we have not seen tremendous pickup in velocity there. I think there are still options available to tenants. But I think that the tone of the market is changing, and I will comment on that in just a minute.

In San Francisco, clearly there is still weakness there because of the overhang space that was created during the boom years that ended in 2000, and especially down on the Peninsula or down at the Silicon Valley. But here too there's significant differentiation. Blocks of space in buildings in the higher floors in buildings like Embarcadero Center with Hughes (ph), command a premium. And in fact, tenants seeking large blocks of space have fewer and fewer options, and we're quite encouraged by that.

Obviously, what I referred to before as commodity space is a very different situation. And there is still tremendous competition for that space among a number of different alternatives that are available to tenants.

And so, the bottom line, and I think it extends through all the regions, with Washington being the best because I think the market is stronger in Washington, is that we are seeing increases in velocity. We're seeing increases in tenants out in the marketplace looking at potential relocation possibilities. But we still are not seeing much in the way of pricing power. It is still a very competitive market when it comes to price. And I think that will change, and we are optimistic that that will change, but we are still waiting for the hard evidence of that.

But clearly, as alternatives have start to disappear, we as landlords will have the opportunity to, I think, get much firmer in terms of where we are prepared to make deals. And by the way, we have turned down, as Doug said a little bit earlier, we are sort of looking forward to trying to negotiate deals now for a roll over that might occur in 2005. But we also expect an improving market in 2005.

So we're not prepared to what would essentially be devalue our assets by doing deals which give a tenant, whose lease may expire at the end of 2005, a new rent today which reflects today's market. Because we think that the market will be better at the time that that tenant's lease expires. And as a consequence, we're not prepared to do deals where the net effect rent is so much below what we believe the value of the real estate is, that we would be in essence devaluing our assets, our portfolio by doing those kinds of deals.

And one of the important things that I think that tenants and their brokers are starting to recognize that that's going to happen. And therefore, the brokers are telling the tenants, hey, this is the time to make your deal. And if you don't, you're going to miss the opportunity. And we selectively will take advantage of that, but that doesn't mean that we are going to sort of roll over and say, hey, anything is okay with us as long as you are prepared to make a commitment.

I spoke about our development capacity a little while ago, and our desire to take advantage of that development capacity. And we are encouraged by what we're seeing out there. We are working on a deal that was announced in the papers, so although it is not a firm deal as yet, I will talk about it. And that's the Brode (ph) Institute, which is located -- which wants to locate in Cambridge Center.

That's a venture that MIT and Harvard are sponsoring. And the site that we have in Cambridge Center adjacent to the Whitehead Institute is the selected sites. There is a term sheet that has been negotiated, and which we are turning into formal documentation. So that's going to be a build to suit opportunity that will begin in the not too distant future.

In Washington, we described to you a number of site that we had under our control. One was at the corner of Ninth and E. And on that particular project, which we said we would not begin until we had a commitment from a tenant, we are very encouraged that we will be in a position to secure that commitment in the very near term. And so that's a project that we would go forward with. It probably would not start construction until 2005 because of tenant scheduling, but we think we can be in a position to put that definitely in the to-be-built category in the not too distant future.

We talked to about our onetime opportunity here to expand Capital Gallery, which we intend to. And there too we've had very good reaction from the perspective tenant base. In fact, there are home-ground tenants, tenants that are already in that complex who we believe will take some significant portion of that space. And we have told you before about some additions to our building out -- that Lockheed Martin occupies -- out in the Reston area, which we are moving forward and which we have a firm commitment on as well. So, we're looking right now at a total of in excess of $300 million worth of development that would be -- that we would start either in 2004 or 2005. And we're feeling very good about that.

I would also like to mention, Doug talked about the hotel, our hotels in Boston. And we are projecting some increase this year. And I think it's the right projection that we have made. But we are seeing a pickup in tone in the hotel market. Occupancy has been -- occupancy has been relatively strong all along, but rate has been a serious problem. And we're being told by the hotel operators that clearly there is a rate firming, and that they are starting to, I think, regain control in some sense of their ability to fix rate, rather than being at the mercy of the various company that are selling hotel rooms over the Web. And I think that also is obviously a very good development in terms of our three hotels in the Boston area.

I am going to let Mort speak more about the acquisition environment, but I will say one thing, as Doug said, we have a pool of capital available to us that we would hope to use for acquisitions. As we all know, the capital markets for the kinds of assets that Boston Properties wants to control and wants to own have been very competitive. And we have chosen not to be the high bidder on some of these auctions that have been held.

We do think, though, that that will change. And we do think that there is -- certainly not a one-to-one relationship, but a relationship between moves in interest rates and what people are prepared to pay with respect to cap rates in acquiring assets.

I'm a very poor tennis player, but I take lessons on occasion. And the pro says be patient, wait for the ball, don't rush things. And I think the same thing has to apply here. We have to be patient and watch this market, and we think the opportunities are going to come to us.

Let me make -- one other thing I just wanted to point out, although I think it was in our press release. We will be, our proxy statement has offered an additional Director for election, Carol Einiger, who is the Chief Investment Officer for Rockefeller University, is up for election as an additional board member of Boston Properties. And she would be also an independent Director, our tenth director, and would bring our -- the number of independent Directors up to 6 out of the 10.

Before Rockefeller University, she was CFO and acting President of the Edmond McDonnell Clark (ph) Foundation. And before that ran the capital markets department and short-term finance department at First Boston. And in fact, was the first female managing Director at First Boston when it was still an independent firm. We are very happy to add Carol to the board. I think she's going to be a terrific Director, so we are very enthusiastic about that.

So with that let me turn things back to Robert Selsam, who will give you some more specifics and color on the New York market.

Good morning. There's a pretty broad consensus that the midtown market has rebounded off its bottom, which was reached toward the end of 2003. The anemic demand of the last two years has begun to strengthen as the economy has improved and employers have started thinking about expansion.

Seasonally adjusted job growth in New York City has been positive for the first quarter, with some 22,000 new private sector jobs added. Most of these were in January, however, and the job growth since has only been mildly positive, so somewhat tempering expectations. Leasing activity for midtown so far this year has been quite good compared to the last two years, averaging nearly 1.8 million square feet per month. These numbers are somewhat skewed by two large transactions, the TWC and Bank of America deals, but nonetheless, indicate a healthier market.

At the current pace, adjusting for those two large deals, 2004 leasing velocity could result in 13 to 15 million square feet leased, which would be in sharp contrast to 2002 which was a low point with only 9.6 million square feet leased, and last year with 11.3 square feet leased. The decade from 1992 to 2000 averaged 13.75 million square feet leased per year. So in this context a return to that decade's average would be significant.

Total availability in midtown stands about 12.6 percent, down a full percentage point from its high in late 2003. And this results from four consecutive months of positive net absorption. Sublease availability has continued to shrink. It is now at about 36 percent of available space, down from a high of 46 percent. And concern over large amounts of so called shadow space hitting the market has disappeared. These spaces have either been leased or being retained for use.

Blocks of over 200,000 -- (indiscernible) square feet are in relatively short supply with smaller tenants still having multiple choices. Asking rents are steady or up slightly, but landlords are having to reach a little less on the concessions than they did last year in order to close deals. As a result, net effective rents in 2004 should match or slightly exceed those of 2003.

With regard to Times Square Tower, the building opened, as Ed mentioned, for business three weeks ago when O'Melveny & Myers began operating from its new space as scheduled. And they tell me that they are very happy with their new space. Clementon Insurance will be joining them in early May. The Pitney, Hardin space is well along in construction. And Manatt, Phelps will be starting theirs very shortly.

On the leasing side, we've seen a substantial increase in activity with spaces ranging from 4,000 square foot suites to full floors and multiple floors at both the bottom and top of the building. We are currently marketing two floors of pre-built suites, and activity has been brisk with several showing a day.

These floors are designated expansion for existing tenants, and doing pre-builts will enhance our leasing of these five and ten-year spaces. They'll also accelerate rent commencement as tenants can move their furniture right in and plug in their phones. These spaces also give us a window into the small space market, which we would otherwise not have. It is noteworthy that more than a quarter, it is actually 26 percent, of all space leased in 2003 was in deals of less than 10,000 square feet.

I can also report that we are in active discussion with tenants seeking both single and multiple floors in the building. And we are optimistic that these discussions will result in some substantial transactions over the next several months.

With respect to our East midtown properties, these remain at over 99 percent leased, with little roll over in 2004 or 2005. This occupancy rate speaks well to the quality of these properties and their position in the marketplace. There is good demand when spaces do become available. And several of our tenants have approached us about early renewals.

The only significant vacancy consists of the two floors recently vacated at Citigroup Center by O'Melveny & Myers that we haven't yet leased, and we have significant interest in these floors. Interestingly, looking at our entire midtown portfolio together, including Times Square Tower, we are 89 percent leased in midtown, 11 percent vacant, still ahead of the average availability in midtown of 12.6 percent.

In conclusion, we're seeing the beginning of a strengthening market with positive long-term fundamentals. If job growth continues and the availability rate continues to fall, the conditions for rising rents will be present.

I think I will just turn it over to Mort, and then we will be available for Q&A.

Good morning everybody. I guess after four years of being relatively pessimistic, I have got to reorient my -- both mood and language, because I am increasingly optimistic now about fundamentals in the real estate business, and indeed in the whole area of capital commitments of tenants.

I think we're heading in for a very strong period of economic growth. I think a lot of companies are going to do very well and are absolutely going to be making expenditures. And we see this in a number of areas. Advertising, for example, for the first time in four years has turned up very sharply. If you want to look at a magazine like U.S. News & World Report, which depends on national advertising, the revenues are up in the first four months of the year by over 35 percent, which is unprecedented. This is the first time we've seen anything like that in four years.

The real estate market in my judgment is firming. And in fact I think is going to accelerate in its positive trends over the next -- over the rest of this year and well into next year. I think we're going to see a much stronger market than I have been anticipating for four years, simply because of the way the economy is moving and the continued strength in the economy.

I might add that there has been -- there are two sides to the real estate business, one is the revenue side and the other is the cost side. The cost side being principally interest rates and capital costs. And capital costs have declined dramatically. And therefore, the margins if anything are not only sustained but increasing and improving.

And the low interest rates, of course, have had a dramatic effect on the quality of real estate that we have. The averages, for example that Bob Selsam gives you includes all space, but Class A space has a much lower vacancy. And Class A space in the kinds of real estate that we have in markets like New York and Washington, in terms of their valuation the cap rates have dropped to 6 percent and below.

We were looking at a building in Washington that sold recently at a 5.3 percent cap rate. And sub 6 cap rates are typical all across the board of the quality of real estate that we have. So the evaluations of real estate have gone up, even as rents were soft. Now that rents are firming I think we're going to continue to see very strong evaluations of real estate, especially the kinds of real estate that we have.

We are in a unique position I think compared to most other firms. I might add, if you don't mind my sort of mentioning this because we were very pleasantly surprised to find this out, Fortune Magazine did a survey a whole group of sectors, probably 20 to 25 sectors in the economy, and Boston Properties was ranked as the most admired Company in the real estate sector. The number one Company, the number two being Simon (ph), being considerably behind us. And I just think that is a very good statement about the overall breadth of the Company's assets, financial condition and management skills.

And that helps us a lot in terms of a lot of the dealings that we have with a number of tenants and with various communities and people who want to joint venture their real estate in terms of development. Because we are in a position to do additional development, as Ed has mentioned and Doug has mentioned. And I think we are going to have an accelerated program in that area as well.

But while I think we are still feeling some of the residual effects of the first four years of this decade, I think we are now looking at a picture in which almost everything is pointing upward. And it is just a question of how fast. And I think in the nature of the way business makes decisions, once the mood changes and once the decisions are made, I think we're going to see a much more rapid improvement in the real estate market than trend lines would presently indicate.

So I think we are for the first time in four years increasingly bullish. And we are in a very strong position financially to take advantage of this market. We have, as you know, been deliberately trying to finance themselves in a different way then many other companies, because we kept a virtually no floating-rate debt. So we're not vulnerable in that sense to whatever interest rate increases. In fact, we think if there is a modest improvement in yields as properties are sold, we will be in the position to do things that many other companies, I think, could not easily do without any stain on our financial capacity.

So, frankly, we are somewhat -- certainly more bullish than in the past three or four years. And I believe we're going to see an accelerating picture in terms of the trend lines. So we are looking forward to the rest of this year. I think we are going to improve our occupancy across the board. And I think we're going to see increases in rates over this year, and indeed over next year as we negotiate our way in this market.

And so we are, for the first time as I said, I think we're looking at a much better picture going forward than we have been in terms of the revenues side. And I did not see that there is going to be a huge increase in interest rate, certainly through the rest this year. So I think this is sort of a very good combination for the kind of activities that we enter into.

So I think with that I will stop. I guess we'll open the floor now to questions. Is that right?

Right.

(OPERATOR INSTRUCTIONS). Lou Taylor, Deutsche Bank.

Doug, can you just over some of those Times Square numbers you had mentioned earlier with regards to leasing activity? Another 100 to 400,000 between now and the end of the year, and that was a delta from -- what was the previous guidance?

Our previous guidance last quarter was a total of 200 to 450,000. We've already done 160, and our projections are an additional 150 to 400, so that would bring the totals from 310 to 460,000 square feet.

All right. Super. Secondly, can you just talk --?

(indiscernible).

560, okay. Can you talk a little bit more on your lower bad debt reserve? I know you had mentioned that you had -- your collection efforts were successful. How are you feeling about credit from here? Do you see that reserve just coming down more naturally as just there are fewer bankruptcies, etc.?

Yes, I would say net net -- I mean RCN is the only company that we have an experience with right now where we are having issues with regard to a significant tenant retracting from what their obligations are.

And quarter by quarter we've come down, come down, come down, so our reserves has come down 3 or $400,000 per quarter over I would say the last three or four quarters. I don't think it's going to marginally get significantly better, but I think we're going to see a slight improvement and we're going to see less in the way of terminations with regard to bad lease transactions opposed to tenants who actually growth issues and therefore they terminate because they want to expand or do something within the portfolio and they need to get out of their lease for good reasons as opposed to bad reasons.

Okay. The next question is with regard to some of your debt repayments during the quarter. There were some pretty hefty prepayment penalties in there. Can you just discuss the rationale on some of those prepayment?

Sure. We had three pieces of debt that we prepaid. The first one, which was the Reston Overlook transaction, the debt was due in July and I had actually a relatively diminimus -- the rate was over 7 percent, and we looked at what the cost of that prepayment was, we actually was saving money within two months.

On the other two the issue was twofold. One, those assets were very loaded -- underleveraged. The loans on those assets were probably somewhere between 25 and 30 percent of the value. And we're building two projects on that complex, and did not have the ability to finance those other two projects with the existing debt in place without having to basically work with one -- our lender and potentially keep the leverage at levels close to where they were. And so we made a decision that we could better debt utilize those two assets by paying that debt off.

Okay. And then just a --.

Lou, just to give other people a chance, I think we really should move on to the next questioner, if we could.

Dan Oppenheim, Banc of America Securities.

I have just really a couple of questions here. I am wanting to talk about the differentiate by submarket concept that you were discussing with the occupancy levels. Given the recent property sales is that something that you're going to target going forward, just to own fewer of the assets in some of the more monetized submarkets? So that we should potentially expect to see more of that?

I think it is the nature of the assets rather than the submarkets. What we are doing is looking carefully at our portfolio, and as you have probably noticed, if you look at the assets that were sold, we have really been concentrating on some that are either small in comparison or of a different type, like industrial, or of a lower quality level.

So we are really trying to basically have a more consistent portfolio across all of the regions. Now, that does not mean that we may not sell some other assets that are larger and of a high-quality, depending upon what the market conditions are. But that's really -- our strategy is really to get more consistency across the board.

And then, Doug, one question for you in terms of the occupancy counts. You said that occupancy could trend down over '04, but no more than 50 basis points. Is that essentially -- by market we're seeing that essentially it is coming down in San Francisco and Princeton, but potentially going up maybe in New York? Is that the way we -- and also Boston -- is that the way we should look at it?

I would guess I would say the answer is on a big picture, yes. New York can't do much further up. I mean Times Square Tower is not in our leasing statistics yet, and it doesn't go in until it is stabilized. So that building itself does not affect that. But for the most part, the deep decline in occupancy is stemming from those transactions that I described in San Francisco and then those few buildings in Princeton.

Okay. Thanks. And I will turn it over to Lee Schalop then.

Just one follow up question. You guys have had the benefit of being through a bunch of real estate cycles. And given Mort's relatively optimistic view on the economy, how do you see that playing out over the office cycle. Will we see occupancies increase first, and at that 12 months out don't we see rents increase -- second, 24 months out? Given us -- given if Mort is right about the economy, how will it impact the Boston Properties office properties?

I will let Mort follow up on this, but I think you called it right, and I is what I said before. We're seeing a pickup in activity but not a pickup in pricing power. And what happens, of course, is that you don't get the ability to push rents until people feel there is scarcity out there. And so, first the space has to -- the vacancy rate has to come down somewhat, and the alternatives have to get fewer and further between, and then you can start to apply pricing power.

Now whether that happens in 6 month, 12 months, 18 months, I wish I was smart enough to say. I think that's it -- I think it's probably somewhere between a year and a year and a half away to get real pricing power. We will see marginal increases, but nothing dramatic.

I will again be slightly more optimistic. I think you're going to say both things happening at the same time. Obviously the absorption will be the precedent to all of this. But we are seeing activity and increased absorption in many markets, with the possible exception of San Francisco. And I think we're going to just see a steady improvement in rents before you get -- an acceleration of an improvement in rent, which is when you'll think real pricing power. But I think you're going to see the improved pricing power without question really show up in 2005.

Greg Whyte, Morgan Stanley.

Just two questions and maybe the first for Ed. I think I heard you alluding to the fact that you thought a rise in rate environment might have a similar impact on cap rates. And I would just love to hear your reconciliation of the disposition at what might be particularly attractive evaluations with your appetite for acquisitions.

And then the second question on the leasing and rent rates on Times Square. I know you guys bought the land there with certain tax advantages and wondered to what extent that was playing into your marketing and ability to attract tenants?

Well, to answer your first question first, we are as Doug said, we have properties on the market now and we are getting attractive pricing on those properties, although they are not -- they are certainly not the properties that Mort spoke about where people are paying 5.3 percent or even 6 percent cap rates for those properties, you wouldn't expected them to be.

And some of them are not them are not -- don't have the profile of current lease status that some that the capital markets are looking for. Now, my talking about the impact of rising interest rates on cap rates is also something that has not played out as yet. And so, I'm not sure where and when that will occur. My gut tells me that there's going to be a change, but we are still waiting for that. We are still waiting for that change.

Might you accelerate some of the assets that you -- sort of are lukewarm about owning here in terms of dispositions?

Yes, I think as we -- some of those assets would be better sold if we can complete some current leasing activities in those assets. And so, that's really the timing issue that we are dealing with. But that's why you see the assets that Doug mentioned are being offered for sale today, Greg. It is to take advantage of this particular environment. And we've had good response to those, by the way.

Including for example (multiple speakers) in San Francisco which we sold at slightly over a 7 percent cap rate. You now, that reflects I think a particular tenant need, or a buyer need in this space. It's also an example of the fact that there has been a structural shift I think in the evaluations of real estate. People have just felt a lot more comfortable about owning real estate. And a lot of money has come into that field, as you know. And particularly, in some of the markets in which we have our largest divisions (ph), to wit, that frankly Boston, New York and San Francisco.

We competed on a number of these properties, and we were blown away by the prices that they were able to obtain. That I think also, frankly speaks well to what is beginning to be a much more active development program. Because that's one of the major core capacities of this Company. And we are certainly looking to do more and more development, because that is an area where we can get much higher returns, get first-class assets and really be able to add to, not only the quality of our portfolio, but to the yield on our portfolio.

Greg, what was your second question?

My second question is probably the best answered by Robert. I'm just sort of curious as to what extent you're using the tax advantages you had on the Times Square Tower developments. Like are you getting better traction there than some of your competitors might be for ultimate spaces?

Let me answer it this way. Most of the tenants that we deal with have sophisticated brokers, and they do very elaborate financial analysis. And so, they do build into that analysis the benefits of all our way below market tax (indiscernible) and so it does get reflected in terms of how we do.

I also think that it is important to point out that they also look at the fact that our taxes are contractual, because of the pilot program. And therefore, they are not exposed to the increases that could occur if the building was taxed in the normal way.

Keith Mills with UBS.

A couple questions for you. The first is -- I guess this may be for Doug. Doug, as it relates to CapEx for the property you just recently acquired in Washington D.C., 1330 Connecticut Avenue, can you tell us about the CapEx that you'll spend over the next few years?

Yes, it is outlined in our press release (multiple speakers) $11 million I think.

Right. That will that be -- what type of CapEx will you be spending there in terms of --?

Is for two things. The first, is that the building, and I think we talked about this last quarter, the reason that this building was purchased by us and not somebody else was this building is currently occupied by a law firm who own the building. And the law firm did not take care of the building the way we would of taken care the building. And it is at a point where the mechanical systems of the building basically have to be replaced.

So, a significant portion of the money is for that. And the remainder of the money is as we replace the HVAC, we are going to take floors off the market -- out of their service for them. And they are going to redo their tenant improvements because they have signed a sixteen year lease. So a portion of that money is for TI's and a portion of that money is for basically a redoing of the guts of the building.

And I am going to make the assumption that the mortgage debt on that property will probably not be refinanced in the near-term?

No. Exactly.

The next question is for Ed. Ed, you mentioned in your prepared remarks commodity space and you referenced the new Reston Town Center and how that wasn't a commodity market. The properties that you're selling at this point, I'm going to make the assumption that most are commodity type properties. Can you tell us about where else within the Boston Properties portfolio you believe you may have commodity-type properties? And then going forward what your plans are for those properties?

Well, you now I think we have been very good at and careful to not have many of what I would describe as commodity properties. And you are quite right, we have identified the ones that we -- in terms of sales, we have tried to identify those that I would classify as that.

Without going through a list of our properties, I have a hard time doing it, but I don't think that, frankly, there are very many in our portfolio. We still have a number of industrial properties, which you know you might argue are not consistent with what is essentially an office portfolio. But a lot of those have been turned into R&D buildings and are very well lease. And so, I don't think those would be on the disposition schedule.

So I think we've really basically have worked through, and the properties that we are offering for sale today probably bring our asset -- our total asset profile to the point where there is very little in the way of -- a nicer way of saying it of undifferentiated properties within the Boston Properties portfolio.

This is Mort. I would say that if you had to look at the total portfolio, the kinds of properties that you're asking about are probably in the single digits. I haven't found the calculation, but looking across our portfolio, we have an extraordinary high quality of assets across the board. And I think that has served us very well in the weaker markets that we were in, and will continue to serve us well as the market get stronger and stronger. Because these properties have always done better in good markets and much better in poor markets. And I think that has been our experience. We are very happy with the basic strategy that we have followed, actually for 40 years.

Just one final question for you, Mort, and that is related to the Board. I believe you currently have nine directors on the Board, including yourself. The addition of Carol will make it ten.

Right.

What are your views on kind of the M&A you need in terms of size of the Board to manage effectively going for?

I do think we will probably look for one additional Director. I think we're now at least comfortable with the numbers of Directors, given the amount of work that Directors have to do in terms of spending time in the various committees as the result of Sarbanes-Oxley, which is another retirement program for the legal profession.

I think we perhaps could use one more Board member, I think, and we would be very comfortable with that. But we are very comfortable with where we are now, given both the quality that we have at the Board level and the activities that they have.

Kerry Callahan, Goldman Sachs.

Did you say Goldman Snacks?

On the development pipeline, Ed, that you enumerated perhaps you could show us just a rough sense of where you think development yields could come in? And then secondly, at $300 million what is the kind of shadow opportunity -- could over the course of '04, and especially into '05, could it be twice that much that you're potentially pursuing?

I think we are pursuing -- we are constantly pursuing development opportunities. And a year ago if you had asked me, do I think we'll have $300 million worth of development opportunities on the books, I would have said no. So these things turn out to be positive surprises. And I think, as Mort said, the environment is improving and we see potential users who are not satisfied with the existing alternatives. And that leads to development opportunity, even though market rents may not have come to the point where you would go forward on a speculative basis, based on replacement costs. So I think there is clearly upside potential on that. What was your -- and there was a --.

The range of development yields you expect?

Yields, I knew there was a reason I blanked that, because we don't generally talk about them. But clearly, as we have demonstrated in the past, we believe that we can generate development yields that are on an FFO business double-digit, and on a cash basis, if not double-digit, damn close to it.

Great. And then just lastly, Doug, you mentioned that the TI Lease Commission expectation over the course of a year would be a bit over $20, which suggests a little improvement from where you were in the first quarter. Is there anything that giving you some confidence that it will come in relative to where it was in the first quarter?

It is just (indiscernible) the leasing is taking place. We had a number of leases in New York City during the first quarter, and clearly New York City leases, based not just actually on the tenant improvement side, but on the Leasing Commission side, because their rents are so much higher, drive that number up. And you know, as its spread out throughout the rest of the region my expectation is that it will come down closer to 20 then to the $26 we were at the first quarter.

John Litt, Smith Barney.

Good morning, it's Gary here, with John. In terms of the range of guidance, I was wondering if you could just give us a little color on what's driving that range? Since you don't have any acquisitions in there, what are the variables that you're looking at to get you to one end versus the other.

I think the biggest is the Times Square Tower. I mean I gave a range of 300,000 square feet of additional leasing. That and what the straight line impact of that number is, is probably the most significant variable. And then everything else is basically turnover and vacancy on our existing portfolio.

So you are assuming that vis-a-vis for some of this prebuilt space where they could actually -- the leases could commence immediately in '04?

Just remind to everyone how it works. If we were to sign a lease for 200,000 square feet of space where we delivered the space on October 1st, and they may not pay rent until March of 2005, we would straight line starting on October 1st. So in the fourth quarter we would have a pretty significant straight line adjustment which would run through our FFO. And it's those kinds of things.

Right. So they would have to commence this year the lease, even if they weren't paying cash?

The lease would have to be signed, and we would have to deliver the space at the end of this year.

Deliver for their construction.

Sure. Just in terms of another piece of leasing that comes up this year, and I know you're already working on it. Maybe just some update on the prospects for the Old Fed space in San Francisco?

Bob, do you want to -- is Bob on the line? You want to talk about it?

Sure. We continue to tour it on a regular basis. We had several law firms looking at. And we also have several hotel users that are looking at the possibility of converting it over to a hotel right now. I can't tell you that we have a signed deal or an active prospect that is going to materialize here in the next 30 days.

Okay. And then just last question on San Francisco. Any chance that Genentec takes a look at the other Gateway building as a potential expansion opportunity?

We can't speculate on that at this time.

Chris Cuppalongo (ph), Deutsche Bank.

Just one quick question. I just wanted to make sure I did not miss what you said the use of proceeds -- or that you would do with the cash on the balance sheet? And I guess based on the guidance it seems that you will have 200 million in cash by the end of the year? Is that realistic?

It is very realistic. And I'm pretty sure you did not miss anything, because we didn't specifically have a use of proceeds. But Mort, I don't know if you want to comment on that?

Obviously what we are positioning ourselves to do is to make some major acquisitions. Whether we can or cannot do that is something we can't predict. But we certainly going to be major players as different opportunities come up. And I think we're in a position to do that with the very, very solid financial structure that we now have with virtually effectively no short-term debt other than the construction debt and a lot of cash, and the opportunity to do a lot of additional financing for a major acquisition. And that is what we're going to be spending a lot of time trying to put together.

And then just quickly on the Boston lease, I wasn't exactly clear on the reason for the roll up being so high. Was there any sort of -- it was signed last year?

It was exactly 18 months ago. We did a lease in one of our, a major lease in one of our buildings that was negotiated in late 2002. And rents have obviously gone down since then. But that least did not commence until January 1st of 2004, so that when it hit our statistics. So the statistics are what the statistics are, but if you would have knocked that lease out and looked at the numbers, they are more consistent with what we've seen in the last three or four quarters.

Jim Sullivan, Green Street Advisors.

Can you talk very broadly about the economics on Times Square Tower? I guess when I look in your supplemental at the estimated total investment that number has not changed from many quarters, yet some of the key drivers of your ultimate costs have changed favorably -- lower interest costs unfavorably -- higher TI cost.

Without getting into the details on the leases that you have been signing can you talk about the economics? And I guess the biggest question is -- is the building going to be worth more or less at the end of the day based on the leases that you are doing and looking at cap rates in New York City?

Let me start, and then I will let Ed and Mort jump in. From a budgeting perspective, Jim, when we set a budget out at the beginning of a project, we keep the budget and we don't change budgets. So the budget is what the budget is, and we basically reconcile at the end of the day. Obviously, we know where we are on budgets, but we don't reports where we are going to be because there are lots of variables and it could go one way or the other. And as you correctly suggested, interest rates have gone down, but construction costs have not gone up because we had the GNP and improving leasing conditions have really not gone up. And the issue is the amount of income we have been getting and the velocity of the leasing, which is obviously extended out the total development. Because our development models include what the costs are, or the revenue, or lack of revenue depending upon your perspective until we get the stabilization.

So that is how the numbers work. In terms of what we have said publicly about the economics of the deal, we have said that rents are going to be in the high 40s at the bottom of the building and low 70s at the top of the building. And that those rents are probably 15 percent less than what we had expected when we started the building two and a half years ago. But that we still expected the total cash return on this asset to be somewhere in the high single digits. And if we're lucky, in the low double-digits, although I'm not sure we are going to be lucky. And if New York City office buildings are being leased -- being sold at 5 percent cap rates, I would suggest that the value of this building is significantly more than what the cost is.

By a wide, wide margin, Jim.

Okay. That is helpful.

Helpful to us all, Jim.

Question for you, Mort. I think you said that you have been blown away by the prices that have been achieved on some of the building sales that you looked at and been outbid on. But when I look at your disposition strategy, you're kind of pruning around the edges, selling some industrial, lower quality assets. Why not take advantage of this market for sellers that it is generating prices that blow you away, and sell the buildings that are generating the prices that have blown you away, the higher quality, fully-leased assets of which you have many?

Well, I guess because our basic philosophy is to end up with a portfolio of the highest quality assets that will continue to appreciate over time. The assets that we believe that we have are in that category. If we are, as you say, pruning around the edges, we don't have many edges to prune around. And frankly, what we are looking to do is to acquire some of these assets where we feel there will be the opportunity to have a reasonable yield going in and the opportunity for a long-term appreciation.

I mean, we are in this for the long-term and not for the short term. I don't think that the evaluations of some of these assets are going to go down, because I think rents are going to go up. People always -- I always quote Oscar Levant who once said, "You know, people talk to me about my drinking. They never talk to me about my thirst."

I'm not as concerned as others seemed to be about the possibility of higher interest rates, because in my judgment this is going to be reflected and then some in terms of the increasing rent picture and the evaluations that will come out of that.

So you know, what we might lose on one side we will gain on the other. And that's why we put ourselves into a position where we could in a sense do some major acquisitions. Our view is that we are going to continue to try and both develop and purchase the highest quality assets, and have a portfolio that will do extremely well over the longer term. Nobody is in a position to make every -- to guess every twist and turn in the market. But over time, I think our strategy has really been exactly what I have described. And we have done extremely well with it, and we believe we will continue to do well with it.

I think, as I tried to say before, the real estate market does not work in sort of linear straight line directions, either up or down. And I think we are going to be in, in the next 18 months, into an accelerated growth period in the office sector. And I am looking forward to that. And I think we're looking forward to participating in that, not only through the assets we have, but through additional acquisitions.

So our view is that we are in the business not to sell the assets but frankly, to watch these assets and participate in these assets as they continue to appreciate. And that is what has been happening. You look at the buildings that we have bought, and by and large they have continued to do extremely well. Now that are some of them are going to be in difficult market for different periods of time. But over time, I think we're going to continue to do very well with them. And that has sort of been our basic strategy. And we are going to follow that. And frankly, we are looking to be able to add to that portfolio the highest quality assets, not to sell them.

Okay. And the final question on the Kendrick Street purchase of your joint venture partners' interest. What was the background for that purchase? Was the price contractual or was it negotiated?

It was a negotiated price. Just for full disclosure, the partner, which is the New York Common Fund asked us if we would consider selling them the building on an open market basis. We went out there and we looked at what the offers were. We had a different view of what the market should be willing to pay for the building than the Common Fund did. And so we negotiated a price that we found acceptable. And based on our underwriting of the real estate, and secondarily, our underwriting of the credit of the tenant, we think we made a smart acquisition.

David Schulman, Lehman Brothers.

this is for Mort. Given your view that markets are firming. Given your view that cap rates will stay low. Isn't it logical to assume we will see a lot more construction started next year than most people are thinking about?

That is possible, but again, if you have to make that judgment, you have to look at the individual markets that we are in. It's very difficult in New York. And believe me, we have been trying like hell to find another site or two in New York to develop in midtown. We don't want to be downtown, but we are certainly anxious to do work in midtown.

They are still very difficult to come by, extremely difficult to come by. And we have been working for several years to assemble sites, and we're still working on that. And a lot of other people are having the same kinds of problems, which is why I am more optimistic about the markets that we are than a lot of other markets.

The same thing is true in Washington. We have been very, very successful in Washington in terms of gaining control of various sites. Frankly, because we have such a pre-eminent position in that market due to the leadership of Ray Ritchey and Mitch Norville. And we have extraordinary credibility with landowners who want a joint venture deal, or with tenants, or with government. And we are really in a position there with the inventory we have and the inventory we're trying to acquire, to develop buildings. We're not doing it on spec, but there a lot of activity now in terms of built-to-suits, that I think we're going to do very well with.

It is true that there might be some activity in terms of development and some of these markets that in fact may sort of change the balance of supply and demand. I don't think much is going to start next year, unless it's on a built-to-suits basis. If I had to see speculative development beginning in the way that I haven't seen for a while, I don't think it'll happen for 18 months to two years. I think that will have to be higher rents in most of the markets; not so Washington, I might add, and maybe not even so of New York. But except for those markets, you'll have to see higher rents before you see speculative developments.

But there are now built-to-suit development that we are seeing in a number of different locations, in part because of the inventories we have and part because of the fact that we have the credibility in the marketplace that we have. And that is something that I think you will see, but not much in the way of speculative development I don't believe for at least until the year 2006.

Would you pioneer something in the far west midtown in Manhattan?

It in the far -- well, yes, it all depends there -- where I think New York -- I spoke on behalf of the New York City partnership shortly after 9/11, and I argued then and I felt then and feel now that what New York City needs are large floor space sites. These are very difficult to come by. At that point we had had a major tenant who was looking for a huge -- it was just shy of 2 million square feet of space, but needed large floor areas. And they wanted it somewhere in the midtown area. We could not find that location.

If in fact, what the city does, going down on the west side of New York, the far west side of New York, what will happen will be -- there will be a number of large floor sized sites that will become available. And we will certainly look at that very carefully because that is the kind of user that I think we will look again to locate in New York and to locate in midtown New York. And the west side of New York is closer to, and closer into the midtown area, that that will be acceptable to a lot of tenants. I don't think downtown is going to be nearly the same kind of location that it has been for decades.

Dave Copp, RBC Capital.

Hi, good morning. I am here with Jay Lupus (ph). Well, I had a quick question for Bob Pester with regard to the retail portion of Embarcadero Center. I know you have been making a move there to try to improve the -- I guess upgrade the quality of your tenant base there. But in walking around the space in the last couple of weeks there appears to be more vacancy than I'm used to seeing there. Is that part of the strategy we are trying to aggregate some spaces to build out in the larger sense? Or is there something else going on the?

We had several move outs that occurred in December, at the end of December from retailers that were either going defunct or no longer planned to have operations in San Francisco, including Speedo and FYE (ph), which was (indiscernible) store.

We are in the process of consolidating several vacant locations into an expansion of the health club. And we also have signed several new retailers that -- candidly, the lobby level space is challenged right now and will remain a challenge as it is for most of the retail in San Francisco. The retail climate in San Francisco is just very difficult at the present moment.

Would you say that's proven to be a weaker retail locations than say union Square or some of the more traditional locales? (multiple speakers) I think FYE was a record store before it was FYE. Is that just kind of just proving to be maybe a less desirable location for business such as that?

There's no comparison between Union Square and the retail we have at Embarcadero Center. I mean Union Square attracts the carriage trade and the high end retailers. Ours is more of a mall type atmosphere.

I might add that retailing at Prudential Center has been very strong. And retailing at the base of the First Building in Time Square is doing extraordinarily well as is the advertising signage in Times Square. That market has really, really strengthened as well.

(OPERATOR INSTRUCTIONS). Keith Mills, UBS.

I just had a follow up question. Doug, in your prepared comments you spoke about development. You have got tenants that are interested in new builds and not interested in paying lower rents at existing properties. Can you just share some color on specifically the types of tenants that are expressing interest in having Boston Properties build properties for them, which markets, what type of industries they are in?

Let me answer that question, I think I cited a couple of examples. Let me be specific about that. One of course is, as I mentioned to you, the transaction we are working on in the Boston area, actually in Cambridge, adjacent to MIT for the Brode Institute.

The other is the difficulties that larger tenants have in finding good space for them themselves in places like Washington. And that is why we are hopeful that we will be finalizing a transaction that will allow us to go forward with our 9th and E development. And we also mentioned the Lockheed Martin deal, which is really adjacent to an existing building and where there are very special requirements, and therefore we can do a built-to-suit there that is -- that they wouldn't be able to match any existing inventory of available space. Do basically our built-to-suit activity at the moment anyway is in Boston and in the Washington region.

Keith Mills I appreciate you going through that. Thanks, Doug, or I'm sorry -- thank you.

I think that was the last question so I would just like to thank everybody that is still on the line for being with us this morning. And we look forward to being with you again one quarter from now where we are very hopeful that we can have another positive report for you. Bye, bye.

Ladies and gentlemen, this concludes the Boston Properties first quarter 2004 conference call. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236, or you can dial 303-590-3000 and enter a pin of 575142. You may now disconnect. Thank you for using AT&T Teleconferencing.