波士頓物產 (BXP) 2004 Q2 法說會逐字稿

Welcome to the Boston Properties second-quarter 2004 conference call. At this time all participants' lines have been placed 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, Wednesday July 21, 2004. At this time I would like to turn the conference over to Claire Koeneman with the Financial Relations Board.

Thank you. And good morning, everyone. The press release and supplemental package 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, Boston Properties has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure, in accordance with Reg G requirements. If you did not receive a copy of these documents they are available on the Company's website 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 12 months on the Company's website in the investor section under the header audio archives. To be added to the Company distribution list, please contact the Investor Relations department at Boston Properties 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 statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in the press release and from time to time in the Company's filings with the SEC. Finally, the Company does not undertake a duty to update any forward-looking statements.

I would like to move on to introduce management. With us today includes Mort Zuckerman, Chairman of the Board, Ed Linde, President and Chief Executive Officer, and Doug Linde, Chief Financial Officer. At this time I would like to turn the call over to Doug Linde.

Good morning, everybody, and thanks for joining us -- from your vacations or wherever you are -- for the second-quarter call. This morning as we discuss our second-quarter financial trends and results and provide an outlook on a forward-looking basis, you are going to hear evidence that leasing activity and lease economics -- and by that I mean rental rates and the concession packages -- are continuing to improve in New York City, in Northern Virginia and in the District of Columbia; the transactional activity is accelerating, though without any corresponding uptick in rental rates or occupancy in San Francisco and in Princeton; and that our Boston-area hotels have clearly turned the corner but the office conditions in the Boston CBD, the Boston suburbs and Montgomery County Maryland really haven't demonstrated much in the way of change yet.

It' still too early for these trends to impact our topline revenue or our same-store numbers or the property revenue statistics that we put in our supplemental every quarter. And the improvement, obviously, doesn't span all of our markets. But I will tell you that the people in the trenches at Boston Properties will tell you to a person that business is getting better.

Ed is going to provide some transactional overview of our leasing efforts in all the markets, as well as update of our development program, and Mort will conclude our prepared remarks with a discussion of the macroeconomic views and our outlook for investments.

We had a really strong first quarter. Our FFO on a fully diluted basis was about 5 cents higher than our estimated 5 cents, ahead of consensus. And to give you the big picture variances, it was from the following areas.

First, we had some earlier than expected tenant occupancies, other tenants who actually held over and paid above-market rents -- they paid us hold-over penalties -- as well as some percentage rent. And altogether, that component added about $1.3 million in the quarter.

We earned about $2 million of additional fee income in the quarter, though a portion of that -- about $1 million -- was accelerated from what we had projected during the third and fourth quarters of calendar year 2004. We had about $1.5 million of lower operating expenses and lower interest expenses than we had budgeted with Times Square Tower, which came online at April 1. And then our gross margin was slightly higher than we thought -- we had expected it to be, due mainly to two things.

One was we had a cool spring, and in New York City we had significantly lower energy expenses. And then we also had other expense savings across the portfolio, and collectively, the margin contribution was about $1.5 million. So that gets you pretty close to that 5 cents per share.

Our gross level of transactional activity, which is all the leases we signed during the quarter -- they don't unnecessarily hit during the quarter, but it's all the activity that we had -- was just under 1.3 million square feet during the second quarter of '04. During the first quarter, as a comparison, we had about 900,000 square feet of activity. And last year we averaged about 1 million square feet per quarter.

The activity was really pretty widespread. D.C. was the leader; they had 450,000 square feet. We had 283,000 square feet in San Francisco, 141,000 square feet in Boston, 175,000 square feet in Princeton and 233,000 square feet in New York City.

The highlights this quarter, clearly, include the 145,000 square feet of additional leasing we did at Times Square Tower, and that includes the 133,000 square foot lease to Heller, Ehrman which we announced in our press release, as well as three deals involving our prebuilt program. And just to give you a sense of Times Square Tower's contribution to our numbers during the quarter, that building contributed about $6.5 million of GAAP NOI, and it had corresponding interest expense of about $650,000, as well as a reduction in our capitalized interest on about $55 million of equity which was contributed in the 35 percent of the building that was brought online in the quarter. And our margin was over 90 percent, given the straight-line rent associated with the building, as well as the reduced operating expenses I just referred to.

As of today we have signed 582,000 square feet of leases at Times Square Tower -- that's signed leases. In D.C. this quarter we renewed the GSA for 261,000 square feet at Reston Town Center. That was a 10-year lease. We completed a 118,000 square foot 12-year renewal with a law firm at Metropolitan Square. We released Carnegie Center 211 which was previously 100 percent vacant; that was a 48,000 square foot building and that was for 12 years. And we completed the first of a number of our 2005, 2006 tenant renewals at Embarcadero Center. The first was a $65,000 square foot renewal (indiscernible).

While not part of the second-quarter activity -- so not part of that 1.3 million square feet I just referred to -- we can report that we have signed a 10-year lease with MIT for 231,000 square feet for our Cambridge Center development, and there are execution copies on our desks for 176,000 square foot lease with Lockheed Martin for a new building in Reston Town Center, and that is expected to be delivered to us next week. Finally, T. Rowe Price announced that it had signed a letter of intent to renew, extend and expand its premises at 100 East Pratt Street to up to 370,000 square feet, and that lease is going to go through 2017.

The in-service portfolio occupancy was 92.5 percent at the end of the quarter, and that was up slightly from the quarter before at 92.3. And remember that the occupancy statistics that we report in our release and in the supplemental disclosure only include spaces where the tenant has taken possession and we've begun to recognize revenue, not if we simply signed a lease. So for example at 611 Gateway, which is 100 percent leased, it's only listed as 57 percent occupied. And you'll note that in those -- the same statistics, 211 Carnegie Center shows zero percent occupied; so that tenant won't start until the end of 2004, beginning of 2005. Times Square Tower probably won't be part of our in-service occupancy stat, so it won't be in the denominator or the numerator until the first quarter of 2005.

We hope that the property occupancy statistics that we give you in the supplemental and in conjunction with the commentary we give you on the call will give you a help in developing a forward-looking perspective on the topline revenue picture. And quite frankly, it's probably more important for 2005 than it is for 2004, so let me go through some of that commentary now.

As we previewed last quarter, we did terminate a defaulted lease with the law firm at 265 Franklin Street, and that occupancy declined 6 percentage points. 170 Tracer lane's occupancy went down precipitously, but we have since renewed and extended the major tenant in that building, and that will bounce back up next quarter to where it was last quarter.

We have one industrial building in Boston, and quite frankly we have not assumed that that building is going to lease in the foreseeable future; it's 160,000 square feet. As I said, 211 Carnegie Center is fully leased. And in New Jersey, we have concluded our lease restructuring negotiations with RCN, and it was a little bit of a complicated transaction. But basically, they renewed 50,000 square feet at 105 Carnegie Center and they terminated 87,000 square feet of leases in both 105, 202 and 214. Now, we have already released a portion of that 87,000 square feet -- approximately 53,000 of that -- some on a short-term basis and some on a long-term basis. So the net reduction in total occupancy in our stat for this quarter was about 34,000 square feet, but there was a lot of movement in Princeton because of that transaction.

In San Francisco, as we have been previewing, we have finally seen the vacancy tick up in Embarcadero Center West. It went up about 94,000 square feet on this quarter, and that was a vacancy that we expected. But we are in active discussions for about 50 percent of that space for a mid-2005 occupancy. But we do anticipate extended downtime on the remainder, and the remainder of the spaces is located in the lower floors in the building, and Ed will comment later on our leasing trends in San Francisco and talk about what low floors and high floors, and how they all relate to each other.

Looking forward, the Old Fed of 140,000 square feet is going to be vacated next quarter, and that's, obviously, due to the lease expiration that we've been anticipating for two years. And in 2005 we have 106,000 square foot lease expiration on January 1 at EC Three, and that's due to the lease expiration from KMPG, which is moving out at the end of the year.

We also -- as you look forward, we are budgeting extended downtime on the Old Fed, and we are taking 100,000 square feet of space out of service at Capitol Gallery in Washington D.C. That's going to be vacant for a minimum of 18 months in order to accommodate the construction of the 200,000 square foot addition that we have described in our previous calls.

Then finally, during the fourth quarter we are going to experience about a 50,000 square foot reduction in occupancy at Tower Center in East Brunswick, New Jersey from another lease termination that we have not covered.

Our average remaining lease length has moved up again; it's back up to 7.2 years. And our remaining lease expirations in '04 totaled 3.3 percent of office square footage and 3 percent of gross revenues. In '05 the numbers are 7.9 percent of square feet and 7.3 percent of gross revenues. And then on page 48 of our supplemental, we have -- throwing in all the additional detail on second generation leasing stats on a region-by-region basis, and we not surprisingly have -- see better experience and better trends in New York City and D.C. They were both stronger than Boston and San Francisco. And just remember when you're thinking about our future internal growth, you have to put into perspective the context of these expiring rents and where the space is expiring.

So as we sit today, if you look at the uncovered office lease expiration in '04 and '05, the bulk of it is in Boston and San Francisco and it amounts to about 1.1 million square feet and 755,000 square feet, respectively. These numbers are all in the supplement package. And across the portfolio we have average expiring rents over the next 18 months of about $35 a square foot and expect a roll-down of about 12 to 15 percent. But in Boston and San Francisco the average expiring rent is $39 a square foot, and if conditions don't improve over the next 12 months we think the rent roll-down there will be as much as 15 to 20 percent for '05. So you've got to factor that in when you're thinking about our 2005 same-store and our existing portfolio.

Reviewing our transaction comps during the quarter, 56 percent of the leasing activity involved our CBD buildings, and the average term on CBD leases was 8.2 years, and it was 6 years for all the leases we did portfolio-wide. The second generation leasing costs were down a little bit to 23.59 from 26.23 last quarter, and were composed of about $15.25 of tenant improvements and $8.34 of leasing commissions. Renewals and expansions encompassed 75 percent of the activity and new tenants made up the other 25 percent. And if you look at the costs for renewals and expansions versus new tenants, it was $22.34 for the renewals and expansions and about $27.36 for the new tenants. So it wasn't a significant difference between those two. Based on the leases we are currently negotiating now we do expect the cost to continue to be in excess of $20 for the remainder of '04 and into '05.

Our dividend/FAD payout ratio for the second quarter was 78 percent; that includes all the activity for all the leases that began during the second quarter, even though the money (indiscernible) may have been sent in, as well as recurring capital expenditures for all of our properties, including the hotels, as well as the dividend for all our new share counts including our preferreds that were converted this quarter.

We apply the fully committed transaction cost in that quarter that a lease goes into service, which is important to note, because it doesn't match up perfectly with the cash. We continue to work on a whole bunch of early lease renewals like T. Rowe Price, and that may hasten the recognition of our second generation transaction costs, which will imply and increase in our FAD ratio in the short-term. So for example, it's very possible that all the costs associated with that T. Rowe Price renewal in '07 -- that's an '07 lease that we are renewing likely at the end of '04 -- as well as our Wachovia lease down in Richmond, which is another 285,000 square feet -- and that's a lease that's expiring in '05 -- all may hit our third quarter FAD numbers, even though the cash won't be spent in the third quarter and probably won't be spent until sometime until late 2005 or 2006. But this is the best way we have for reporting the way our FAD works.

We still expect to spend about 75 cents per square foot on our recurring capital expenditures. And to date we've been pretty low on that; we've only averaged about 12 cents per quarter. But I can tell you, just during the month of July we've already disbursed about $5 million, which (indiscernible) of 12 cents. So you will see an increase in our capital spending during the remainder of the year. And generally most of these projects are weather-dependent, and as we get into the good weather in the third and fourth quarters before the winter hits, we generally complete most of these projects.

On a year-to-year basis the hotels had a pretty strong second-quarter. RevPAR was up 13 percent, and that actually just -- that met our expectations. And the numbers that we've provided to you in terms of what we expected our hotels to perform for the quarter were in line with those numbers. And year-to-date, RevPAR is up about 8 percent from 2003. And the current period continues to be in line; it's well above where it was last year and it's in line with our previous guidance. So excluding the hotels, same-store NOI was down 1.7 percent on a GAAP basis and down 0.6 percent on a cash basis.

Reviewing our credit exposure, there wasn't much to talk about this quarter. We had one lease termination fee totaling $612,000 and it related entirely to a lease default at 265 Franklin which we discussed earlier. And since that termination involved a nonconsolidated venture, our share of the revenue doesn't show up in termination income, although we have footnoted it there. But it actually shows up in our consolidated ventures item, and you can see that in the supplemental as well.

Next quarter we actually expect to have some positive termination news. We are going to be negotiating a transaction, or completing the negotiation of a transaction in New York City, where we will actually get a tenant to pay us over $1 million to cancel a lease, conditioned on our signing a new lease with another tenant in the building, an expansion that will be paying a higher rent than the previous tenant in the building, which is -- we haven't seen that got quite sometime.

At the end of the first quarter, our accrued rent reserve was about $5.1 million against the balance of 213. And this quarter it increased to 5.4 million on a balance of 227. And we make a whole bunch of changes each quarter both up and down based upon the credit profile and our view of the tenants that are in our portfolio. This quarter, the most significant change involved one tenant which operates a restaurant in one of our buildings and is struggling, and has a bigger accrued rent balance. And our perspective is that they may ultimately not be able to continue to operate, so we reserved against that accrued rent balance. And our bad debt reserve against our AR balance was up by about $400,000 this quarter.

We closed a number of property transactions which were all detailed in the press release, and we had a book gain of about $25 million on a consolidated basis. Those transactions for all described in the press release, so I'm not going to go into them. But the 2004 FFO contribution, which you should know about as you look forward to '05, was about $1.4 million. So that's what we'll lose next year, based on those assets. We have two other signed contracts -- Forbes Blvd. in South San Francisco and Sugarland I in Herndon, and that's about $11.8 million of total proceeds (ph). And these transactions should close in the third or the fourth quarters. And then there's another $44 million of sales that we are also in discussions with but which we have not put into our estimates in terms of our net income numbers. So our net income numbers may go up or down depending upon if we are successful at consummating these other transactions.

At the end of the second quarter we had a cash balance of about $228 million -- probably more than people would like to have us seeing, and Mort will talk about that in a little bit. And, obviously, our capital structure provides us with a whole lot of capacity to do acquisitions and development. Our floating-rate debt is only now our Times Square Tower building and our New Dominion Two building, and I'll talk about that New Dominion Two building in a minute.

We will be completing a number of refinancings during the quarter and the remainder of the year. These include a three-year loan facility on 265 Franklin Street. That's a loan that expires at the end of October, and we're refinancing that for three years. And then we are doing a long-term fixed-rate refinancing on 901 New York Avenue. Both of those buildings are a part of our New York Common (indiscernible) joint venture assets. And then in addition, we are going to be permanently financing on a fixed-rate basis our New Dominion Two building, which was placed in service in July.

So based on the positive results that we had this quarter, as well as -- and you will hear more about this from Ed -- the continued strong demand in Times Square Tower, we ate raising our 2004 FFO guidance to 410 to 415. And again, that's based on no acquisitions and no additional disposition activity other than that that was mentioned previously, as well as no major capital market transactions. And our net income range is 2.67 to 2.72, and the FFO range for the third quarter is .1.03 to 1.04, and net income is 62 to 63 cents. And all that is outlined in the press release.

Our assumptions for the remainder of '04 are as follows. We expect again to have a slightly lower occupancy at the end of the year. It will probably go down a little bit in the third quarter and then recover in the fourth quarter. And we reviewed the major vacancies -- the Old Fed, EC West, Capital Gallery, 214 Carnegie Center and Tower Center in New Brunswick. And all that will reduce our occupancy, and then we will get some pickup when 611 Gateway and 211 Carnegie come back online from (indiscernible).

We are increasing our anticipated leasing volume for Times Square Tower. In '04 we have already leased 310,000 square feet, and that brings our total occupancy to 582,000 square feet. And we now expect to lease up to an additional 400,000 square feet before the year is over at Times Square Tower. If we reach the top end of the guidance we'll have leased over 700,000 square feet during '04, which is a pretty big accomplishment to our team in New York City. The building was put in service on April 1st and we will recognize revenue and stop capitalizing interest as we deliver space over the next 12 months, and we'll each quarter tell you what was put into service. As of July 1, 35 percent of the building was in service.

Again, we will experience a roll-down in rents on our expiring leases for the foreseeable future. Most of that is going to, again, be in Boston and in San Francisco. And the impact of that roll-down and the vacancy is probably a 1 to 1.5 percent decrease on our same-store revenue on a GAAP basis, and pretty flat on a cash basis for the remainder of the year.

We think our margins are going to be in line with our historical averages and possibly slightly lower, but not significantly. New Dominion Two comes online this quarter in the third quarter, and that's a $67 million investment. So you've got to throw that into your model. We expect to have straight lined rents of between 55 and 60 million for '04. And again, this is another increase from last quarter, and it really stems from projected additional leasing at Times Square Tower. And we have free rent for those tenants where we provide them with an allowance when they're building out their space, and we start recognizing that revenue when those leases are signed.

We are budgeting just around about $1 million per quarter for termination fees. This next one is important to think about. Our third party income we expect to be somewhere between 14 and $16 million for '04, and we have just had an incredibly successful year in '04. Unfortunately we have a bunch of projects that are going to be ending. And while we are probably up $3 million from our previous projections this quarter, we have reduced our budgeted fee income for '05 down to about $8 million. And that's really due to a number of significant projects that are coming to an end that -- and while we are working to replace them and are being successful, getting those numbers up in '05 are going to be pretty tough. But we are continuing to pursue new fee development.

We're maintaining our budget for our hotels at somewhere between 20 and $22 million. If you want to use $21 million it's probably a fair number. And that assumes the increases that we have seen on a year-to-year basis in RevPAR. G&A is going to run about $12 million per quarter, and that takes into consideration the cost of our long-term equity comp programs. And because of five-year vesting schedules, our restricted stock expense, or restricted equity compensation expense, it increases by about $2 million per year for the next three years if we continue to issue long-term equity comps consistent with '03 and '04. So you've got to calculate that in your models on a going forward basis.

Our guidance does assumes the sale of those two properties, and while we are reviewing our portfolio and have an eye to identifying other assets to sell, no other sales are assumed in the guidance. But we will likely update our assumption next quarter if those activities change. And while we continue to seek attractive acquisition opportunities, and we hope we're going to consummate some, for the purpose of our guidance we haven't assumed any for '04.

And with that I'll turn the call over to Ed.

Thanks, Doug. Good morning, everyone. I plan today to review current market conditions in each of our regions, and I think you will see that recovery in office-based demand is far from homogeneous, with some geographical areas showing much better results than others.

While we believe that continued national economic growth will translate into greatly improved real estate fundamentals in all areas, that recovery will take longer to manifest itself in, for example, San Francisco than midtown Manhattan.

But even in San Francisco, market conditions have improved. The San Francisco CBD occupancy rate has gone up by 2 full percentage points in the last six months, standing at 82.4 percent at the end of the second quarter. And there was 195,000 square feet of actual net absorption in that period. Nice to see.

Of some comfort to us is the bifurcation of the downtown SF market with view space in high quality buildings such as what we own in Embarcadero Center experiencing good demand with available alternatives being absorbed while more commodity like space still competes on price. In fact we have actually seen modest rent increases in our prime spaces but our challenge remains in the lower floors of buildings like Embarcadero Center West. Clearly activity is up and if all the deals on which we are currently working are added to the leases signed to date, 2004 activity would double, at least in terms of area leased, our previously most active year since we bought Embarcadero Center. Unfortunately, it takes two to three times the area to rise at an equal gross rental revenue than what we were achieving in 2000.

We have been extremely pleased with Genentech's reception of our Gateway property in South San Francisco where, as you know, they have leased the entire 250,000 square feet of the building at 611 Gateway. And we are hopeful that that commitment to the project may extend to one or two other buildings as well. But in South San Francisco, the overall market remains weak, with a vacancy rate which may be better than six months ago but still is above 20 percent. Having said that, it should be noted that many properties are now being brought to market in downtown San Francisco at aggressively low cap rates, signaling that buyers feel the San Francisco market will improve quite dramatically in the years ahead.

Recovery in the Boston CBD, Cambridge and the Boston Suburbs is at best quite slow. Recent changes in occupancy and rental rates are almost statistically insignificant with vacancy rates today even higher than they were -- and this is somewhat surprising -- than they were in late 2002 and early 2003. But rental rates have firmed and activity is clearly up. One very encouraging sign is that we now see some of our own tenants expanding whereas a year or two ago contraction dominated user thinking.

In our own portfolio there are more potential tenants tours and leases in negotiation than we have had for quite some time. At the Prudential Center our retail leasing activity remains very strong, and we have had very good interest expressed on several of the floors which will be part of the 280,000 square feet to be vacated by Digitas at the end of 2005. Just as in San Francisco, the downtown market is bifurcated, with upper floors in towers in great demand while non view space competes on price. One of the advantages we have at the Prudential Center in that our towers are freestanding rather than locked into a grid, and that provides good views even on the lower floors. Boston unfortunately must also absorb the contraction of space incidental to the Bank of America/Fleet and Manulife /John Hancock acquisitions.

As Doug mentioned, we signed a 231,000 square feet with MIT last week, allowing us to break ground on the $135 million Broad Institute Building, where some of the most important genomic research in the world will be carried out. The building is scheduled for completion in the first quarter of 2006. We are also working in Boston on several attractive fee development opportunities and are fairly optimistic that at least one of those will come to fruition.

While on an overall basis conditions in central New Jersey, including Princeton, remain weak, with slightly following vacancy rates -- and in fact, as some statistics show, unfortunately, decreased rental rates -- Carnegie Center has demonstrated an improving market with increased tour activity and more tenants seeking proposal. It is, obviously, the prime development in that marketplace and tenants love it and want to come to it.

Sublet availability is down just over 100,000 square feet in the complex. And in the last quarter we executed six leases compared to no deals completed in the same quarter a year ago. Our rental rates, despite the market, are stable in the high 20s to low 30s depending upon the building and deal structure. Unfortunately, the same cannot be said for East Brunswick, New Jersey, where as Doug mentioned we will be experiencing roll-over next year.

The Washington region has the lowest vacancy rate in the country at just over 10 percent, and leads the nation in year-to-date net absorption with nearly 4.5 million square feet absorbed, fueled by the addition of 80,000 new jobs in the 12 months ending April 30, 2004. Vacancy rates in the submarkets in which we operate are 12.2 percent in Northern Virginia, 11.7 percent in D.C. -- in the D.C./Maryland suburbs, excuse me -- and 6.9 percent downtown, demonstrating small but positive gains from a year ago. Clearly, the presence of the federal government and its increased spending growing out of the war on terrorism and security concerns is a powerful impetus for further growth. This has prompted new construction, unfortunately, because that has dampened the rental rate growth that we would have seen otherwise.

Overall, our Washington area buildings are over 97 percent leased. 901 New York Avenue, which will come online this fall, is over 80 percent leased and 90 percent committed. We've gotten in front of major lease renewals including T. Rowe Price in Baltimore and Wachovia in Richmond, where renewal letters of intent are now signed and lease drafting is well underway. There is very strong interest in the 300,000 new square feet which will be constructed at Capital Gallery in Southwest Washington, and we are confident that we are going to be able to start the construction of the 300,000 square foot building at 801 E St. downtown with at least 70 percent of the space committed.

Activity in Reston is quite strong and we expect to sign a lease in the near future -- I guess we now, as Doug mentioned, that lease is on our desk or on their desk; I can't remember which -- for 176,000 build to suit projects. And rents in that submarket have climbed 10 to 15 percent in the last year.

The office market in midtown Manhattan has been improving for at least the last six to nine months. The availability rate has dropped from 13.4 percent to 11.9 percent. And while overall rental rates have shown only modest growth, rents in the quality buildings such as owned by -- such as those that we own have risen considerably, while it is cheaper space that has suffered. The flight to quality is real. Year-to-date leasing activity is 9.5 -- overall is 9.57 million square feet, which equals the whole total for 2002 and 73 percent ahead of last year, with almost 3 million square feet of that activity representing net absorption.

Our own portfolio is 99 percent leased excluding Times Square -- Times Square Tower and 91 percent leased if that building is included. We reported the 133,733 square feet of lease Heller, Ehrman, as well as the smaller leases that we've done in our prebuilt suites. And proposals are in serious negotiation for considerably more space. We really remain very confident that we are going to hit that 700,000-plus number that Doug Spoke of, and Times Square Tower has to build our expectations. Good real estate, well designed, well constructed in the right location, leases.

With rents remaining -- for the remaining space ranging from the low 50s to the 70s, we expect upon stabilization to achieve a cash on cash return of between 9 and 10 percent. And please remember that the longer-term leases in that building have 5 percent rent bumps every five years. And by the way, we have now covered either through leases or very active lease negotiations and letters of intent, all of the O'Melvaney space at Citigroup Center that was vacated when they moved to Times Square.

On balance, therefore, while it would be nice for all of our markets to be booming already, we are comfortable looking forward that the office markets in general are coming back and that continued national economic growth will create the demand to reduce vacancy and increase rental rates across all of our markets.

With that, let me turn things over to our resident economist to comment about his view of the overall economy and its prospects. Mort?

Good morning, everybody. My very brief remarks, because what I'm going to do is just focus on that part of the economy that I think particularly affects commercial real estate, which is essentially a business decision by and large. And that's the sector of the economy that I think is going to be the main horse pulling the economic cart over the next couple of years.

I think business confidence has changed dramatically. I think there is a need for the business community to now feel that we are in for a very strong period of economic growth. I think business investment has gone from maintenance of existing equipment to replacement of existing equipment to expansion of capacity, and this is rippling through the entire process of business decision making. There's a huge amount of cash in the business community. There's a dramatic increase in overall earnings. Last year's earnings exceeded $1 trillion in corporate America for the first time. I think it came to $1.69 trillion. And earnings are up dramatically this year.

So I think we are in for a very good period of business expansion over the next couple of years, and the kind of real estate that we have is bound to anticipate in that. That is, very good high-quality commercial real estate in the best markets. I think you're going to see increasing amounts of development activity going forward in a number of our markets, and it's going to take a little time in some of those markets that are particularly impacted by technology. But even in the world of technology, it seems to me that is now not just to establish a floor but is beginning a real growth that will take on the dimensions of additional space absorption over the next 18 months.

So we are increasingly bullish over our prospects, and I think that's implicit in the reports you've heard from both Doug and Ed. And I certainly underscore it. I think that part of the economy is going to be very strong going forward for a couple of years. I don't see interest rates spiking up anything like it was in 1994 when you had a 300 basis point increase in the Fed Funds rate. I think you will have what Greenspan calls a measured increase; there will be some inflationary pressures but they will reflect, in my judgment, pressure on capacity and strong economic growth. And I think that's going to have a very, very good impact not only on rental occupancy but on rental rates as we go forward. So that will inure to our benefit. It will look -- make our marked to market numbers look a lot better over time. And I think we're just finding ourselves in an increasingly bullish mode.

That's all I have to say. Thank you very much.

We are available for questions, operator.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Smith Barney.

I'm here with John Stewart. I had a couple of questions on the Times Square Tower. Doug, you had mentioned $6.5 million in NOI, $600,000 in interest expense, and then you made a reference to the capitalized interest expense on the equity. I think I lost you on that. Can you just walk through that again?

Sure. If you look at our interest expense this quarter, I said about $650,000 was the interest expense associated with the in-service portion of Times Square Tower. The other counter-availing (ph) reduction in our capitalized interest or increase in our interest expense on a run rate basis is that if you look at the equity that we have invested in Times Square Tower, there's about $55 million of equity that's associated with that 35 percent. So if you were to look quarter-to-quarter, we had a corresponding reduction in our interest expense for the capital adjacent on that 55 which went away this quarter. So if you use the blended interest rate of 6.2 percent and multiplied that by $55 million for three months you'd come up with -- that's the associated reduction in interest, which is about $860,000.

(multiple speakers)

You mean increase in interest (multiple speakers)

Reduction in capitalized interest or increase in total interest expense.

So it went up. In addition to the 660, it went up on the equity piece as well.

Exactly.

You signed a leased during the quarter for 133,000 feet, I think it was. It looked like it commenced April 1. Am I reading that right?

That lease got signed on the 26th of June, I think. So it commenced at that point.

So they started paying rent on the 26th of June?

They didn't start paying rent -- they're not going to move into the building until the second quarter of 2005, but we started recognizing revenue, or free rent, as of July 1st.

That's the way New York leases work, John, as you know.

I got confused the way it was written. And then the 400,000 thousand square feet -- I guess you must be pretty advanced in dialogue on that 400,000 square feet to indicate that that will be done by the end of the year?

We are advanced in dialogue, but when it comes to New York, given past experience, we don't announce or put it in the win column until the lease is signed.

But just to give you a sense, that's five or six transactions.

So there's several things that could hit or could not hit (multiple speakers).

Greg Whyte, Morgan Stanley.

I want to just continue one Times Square for a second. There was some discussion, I think maybe at NAREIT you guys said you may even hold back on some of the high floors given the demand and the type of rents you were seeing. Can you give us some color as to where in the building the leases that you are currently negotiating are?

They're spread out across the building, and what we are doing in the higher floors is we're not holding out as much as increasing our rents to reflect what we believe is the market. So when I mentioned the 50s up into the 70s, obviously, it's the 70s that we are expecting to achieve in the higher floors of the building.

Ed, on the same sense, you said you signed a lease with Shepherd Miller (ph) at Embarcadero. Where in the building was that?

I'm going to have somebody in Boston help me on that.

Those were mid-rise floors.

What I wanted to do is just understand what the differential was in rents at Embarcadero as well between top and bottom floors.

Bob, you want to comment?

Lower floors we're going to be in the mid to high 30s; the upper floors, dependent on the building and the age of the TIs, we're going to be in the mid-40s.

Okay. And is there a meaningful differential in the TI and lease commissions between the floors (indiscernible)?

Again, it would depend on the age of the floor and the condition of the floor. So if it's a 20-year-old floor versus a five-year-old floor build-out, there is going to be a difference in TIs and commissions.

Just one more comment on that, Greg, which is that on the lower floors at Embarcadero Center, we are competing generally with tenants who are looking for the best value from their perspective. Which in many cases (multiple speakers)

I would say not the best value; they're mistaken. But they're looking for the lowest price.

Right. I was going to say -- which translates into the cheapest deal, and so we are -- we compete unfortunately with what you would refer to as commodity floors in also-ran buildings on Market Street or South of Market. And if they're offering a 50 or $60 (indiscernible) improvement package, unfortunately we tend to have to be more aggressive than we would like on those lower floors because that's the market from a demand perspective that we are dealing with.

Doug, you went through on your assumptions about $1 million for termination fees. I'm assuming that the New York City one is the $1 million in the third quarter; is that correct?

Hopefully, yes.

A more general question, if you wouldn't mind commenting -- obviously, you guys have been in the wings or on the sidelines on acquisitions for a while. I'm just curious if you can give us a little caller on what you are seeing in terms of cap rates? And what I'm looking for here is sort of granularity, literally in the last three months since we've had this bouncing around in interest rates.

Mort, do you want to comment on that?

Yes. They are still -- we frankly still continue to be somewhat aggressive and we continue to get our ass beaten in terms of acquisitions. The acquisitions in the Washington and New York markets remain around a 6 percent cap rate, in Washington sometimes even less. It's astonishing what these numbers are looking like in a historical perspective. But as I've said before, I think there's been a major shift in terms of the valuation of real estate because of the allocation of funds going into real estate and a still relatively benign interest rate environment. I think we are in for a long period in which the acquisition of property is going to be a much more difficult gain for REITs, at least at yields that we think make sense. And that's why I think given the demand, there's going to be a shift into more and more development, which fortunately is the real sweet spot of our company.

But we haven't seen any diminution. We were just involved in a competition this past week where we thought we were in good shape and we were outbid by a considerable amount in an acquisition of a property in New York. I would say there is no decent property in New York that you can buy for anywhere -- certainly not north of 6.25 percent in terms of a cap rate, and generally around 6 percent and even under. In Washington, I would say 6 percent is the top level. San Francisco, obviously, is also beginning to show some very, very attractive -- from the sellers point of view -- cap rates. So I think we are in a very, very strong market in terms of -- it's certainly a sellers market, not a buyers market in terms of the acquisition of real estate. And that has not moderated almost at all. I don't think -- there hasn't even been a 25 basis point shift from the lows.

Carey Callaghan, Goldman Sachs.

I'm reluctant to admit that I sometimes read the New York Post with Mort on the line, but I do. And they had you as a finalist on 603rd Avenue, and I'm wondering if that is accurate, given the source, Mort. Also, just to follow-up on Greg's question, can you comment on the volume of deals you're kind of picking through? And from your comments it suggests that maybe you're starting to shift more toward a development focus, and are you therefore giving up a little bit on this acquisition game in the next, say, 6 to 12 months?

Well, we're not giving up on the acquisition game, we're just going to continue to go after properties selectively. But as I said, I think the yields have still remained at very, very attractive numbers from a sellers perspective. I mean, you're talking somewhere, give or take 25 basis points, at a 6 percent cap rate for New York and Washington properties. And that's a very tough number if you want to be a publicly-held REIT on the basis of which you want to invest your money unless you can see considerable improvement in that yield over time. And as for the New York Post, frankly I think what you ought to just remember is that Richard Gephardt has become a Senior Officer at Boston Properties, according to their latest edition. And an announcement will be made by John Kerry as soon as possible.

Thank you for that. Just to follow-up on a couple of specifics. Can you characterize, at least in general terms, the GSA lease economics? And secondly, on the T. Rowe, could you just tell us how much of the building that will -- you'll have in terms of occupancy once they increase their space?

On the T. Rowe Price, we'll be somewhere in the mid-90s after they have done their expansion. And with regards to the GSA, we don't like to comment on economics on any transaction. But I will tell you that in Reston Town Center, gross rents are somewhere around -- when we did this lease, gross rents were somewhere around 27 to $29. And today they are at 32 to $34, and we're somewhere in between there.

Chris Capolongo, Deutsche Bank.

Doug, just a quick question on the expense, the under budget expenses. I'm wondering if expenses being under budget this quarter translates ultimately into a turnaround in revenue at some point, maybe as the buildings are trued up. Is that something that could happen if we're under budget for the rest of the year?

I don't think so. We try and keep our accruals down as low as possible on the revenue side, based upon where we expect the expenses to be. While some of the expenses may be popping up -- as for example, some repair and maintenance may have gotten moved from one quarter to another -- in general I think there was true savings. Whether or not it translates into the next year is, obviously, depending upon how the operating structure of any particular building works. For example, if we have a (indiscernible) building -- which is a building in New York City where we don't actually get operating expense pass-throughs, and we just get an increase based upon (indiscernible) wages, and our expenses were down this year, we get 100 percent of that savings. Or if we have a building where we are underneath our base for whatever reason, we're getting that whole savings. On the other hand, if we're above a base the savings doesn't translate through to any economic (indiscernible); it just ends up as a reduction for the tenant. So it's hard to sort of throw a forward-looking view on operating expense savings on a macro basis.

Just one quick one on the construction management fees. What was the impetus for the increase in guidance?

For this year?

For this year, yes.

We had two very successful transactions occur, and one was in New York City at 90 Church Street where we were successful in two things -- one is we signed a lease with the New York State Health Department, and got a commission for doing that; and the second piece of that was that we are going to be acting as the development manager for the Post Office and the creation of the space, and that will increase the fee income for the next six months from that transaction. The second portion of it was in our lease early renewal we did at Metropolitan Square, that was a 2006 lease expiration. And that lease translated into a fee as well, because that's one of our joint venture properties. And then finally, we hit a milestone that we didn't necessarily think we were going to hit this year at the NIH and received an additional couple of hundred thousand dollars there.

Ross Nussbaum, Banc of America.

I'm here with John Kim (ph). A question -- did you look at the Banc of America building in Los Angeles, and is Los Angeles a market that you're still quite interested in on the acquisition front?

We are still looking at various possibilities, but I would not want to imply that we're close to doing anything. We did look at that building very briefly. We didn't really even pursue much financial analysis on it because it was not at a price that we considered to be attractive. And plus, I think, as we've said before, we do not want to go into a market on a one-off basis. I think the secret of our success frankly has been to go into markets in depth, and to be able to establish the right group of people on the ground in those markets with incredible contacts, knowledge, and an ability to manage a portfolio in ways that are just how Boston Properties does business. So to look at a one-off property was not something that we were terribly interested in.

Can you give us an update on the status of dispositions in suburban Boston?

We are in now still in discussion on those. And I think, as Doug said, we're not putting them in our guidance, but we're hopeful that what we announced before may come to fruition.

With respect to the hotels, given the improved performance there, is there any update in terms of timing or your content to sell those assets?

I think the performance still has to improve above what it is today to make those assets attractive sale opportunities, but as that performance improves we will continue to look at it. And we continue to seek advice in the market, in the selling market, to see when the optimal time would be to consider that.

To what extent are your disposition plans impacted by the current ability to put money back to work at acceptable yields?

I think they're clearly impacted by that. As Doug said, we have great capacity right now. And of course, every disposition does increase that capacity. And we would like to put the money to work, so we have to find ways of doing it. Now, the ramping up of our development program also absorbs funds; so that's a good thing. And as has always been the case, we will get superior returns if we can do development. And although right now the market in most places is not attractive to go forward with development without significant pre-lease commitments, we have been able to land some of those pre-lease commitments. And in certain markets, if we get enough of a building lease in advance we will start development there, too. So we're hopeful (indiscernible) just to dispose of assets and create more funds is not something that we want to do. However, in this particular markets, there are certain assets which, when the cash flow from those assets -- predictable cash flow from those assets gets to a certain level, we will definitely and seriously consider selling.

Brian Labe (ph), Merrill Lynch.

When you talk about ramp-up and development, I believe last quarter you said that you expected $300 million of starts in '04 and '05. Are you taking that number up, and can you talk about the timing of some of the known development starts?

We're not taking that number up. I would ask Mitch (ph) to comment on the start dates for the developments in Washington. Is he on the line? Or Ray.

Basically at those core developments, the one we mentioned in Reston, the build to suit for the government agency we'll be starting in the next 90 days. We also mentioned Capital Gallery, which will be the 200,000 square foot addition to the 100,000 square foot existing building (indiscernible) starting in September.

But that really means 300,000 square feet (multiple speakers)

300,000 square feet in total. And then also, we mentioned the rumor about the (indiscernible) on the corner of 9th and E. And if that does come to fruition we'll be starting that in the first or second quarter of next year. And then lastly, we mentioned previously that we've had a joint venture with a group in Wisconsin Avenue and Chevy Chase; that's another project that may be starting in the quarter.

Turning to TIs, they were down modestly from the first quarter. Is that a trend or is that just market mix? And can you talk about TIs in your markets and what markets you're seeing less pressure on TIs?

I think it's market mix, Brian. My perspective is that -- remember that we do long-term deals. And when you do a long-term deal you're generally putting more money than if you're doing three or four year, or even five-year deals. In New York City for example, we're doing 10, 15, sometimes 20-year deals on renewals. And when you look at the associated CBD (indiscernible) of our platform, which is 75 percent, I think there are clearly going to be deals where we're putting very little money in on renewals. But if we are doing a significant renewal on space that may be 20 years old or 15 years old, in San Francisco, in Boston, in Washington D.C. or in New York City, we're going to be putting significant money in. That doesn't mean that those numbers are going up by any means. I think that they've been consistent as we've done deals for the past few years, and we will expect to see on average numbers in excess of $20 a square foot for the foreseeable future, for the TIs and leasing commissions associated with our portfolio.

Last question. What floors were the Heller, Ehrman -- will they occupy?

They are in the mid 30s.

Just again, going back to the question of where it sounds like it's going to be spread out, are you not -- it sounds like you're going to be leasing multiple tenants. Are you not going to have a large tenant in any of the floors?

As part of the 400,000 square feet we have some large tenants as well as some -- I consider a tenant, a two-plus floor tenant a large tenant in this market. So we'll have a significant number of those.

So part of this 400,000 square feet will be the upper floors?

We don't have 400,000 square feet available on the upper floors any longer, so we have floors five through 18 available and we have floors 47 through (indiscernible) --

And I don't want to be misleading. One of those deals would be a deal even larger than two floors, and it would be in the lower part of the building.

Tony Paolone, J.P. Morgan.

The 300 million in starts that you just walked through, does that include the build to suit with MIT that you talked about?

Yes.

It does. Other question -- your note on 599 (indiscernible) that comes due next year -- what do you think the probability is that the lender exercises their right to convert to equity?

Zero.

Keith Mills, UBS.

I'm here with Shrina Narajan (ph) and we have three questions. The first two were for Doug. Doug, on page 10 of the supplemental in the stat (ph) line items, could you help us understand the second quarter increase in the partner's share of the joint venture, second generation TIs and commissions? They when up pretty significantly relative to the first quarter and what you were seeing (indiscernible) in 2003.

I've got to get to the page.

Okay. (indiscernible) page 10 it's under the (indiscernible) the partner's share of JV second generation TIs.

We backed out that lease I was referring to at Metropolitan Square, the joint venture partner's share of that.

Next question for you is, in your expectations for the third quarter, specifically as it relates to FFO -- if you go through and you add back, as it relates to the EPS, the real estate depreciation and amortization, which is 43 cents -- if you assume there's about 115 million shares outstanding in the FFO calculation, that would be about $50 million in depreciation, whereas in the last couple of quarter's that's been running around $60 million. Can you talk about why there's a difference in the 50 versus the 60 if our math is correct?

I think the issue is the difference between BPLP and BPI, which is our operating partnership versus the general partner which is the corporation. And if you want, Mike Wallace (ph), can go through that with you after the call.

Okay. We'll take that offline with Mike. Thanks. I guess, Mort, the next question is for you. And that relates to the dividend policy. You spoke, obviously, very optimistically about your views for the economy over the next several years, particularly on the business side of the economy. And given that Boston Properties' FAD payout ratio right now is in the high 70s, what are your views on the dividend policy going forward in terms of dividend increases, I would presume, in terms of timing and when we could maybe expect those next? I know you just increased your dividend 3 percent in the second quarter.

You know, we by and large have a policy of trying to have a dividend increase every year, assuming that we are comfortable with the progress of the business. And I think we're becoming increasingly comfortable with what it looks like going forward, and this should translate into higher earnings over the next couple of years. And therefore, we would expect that a significant portion of that will reflect itself in higher dividends. I mean, that has been our policy all along and we're going to continue that. I don't want to make any specific predictions, but we look forward every year to increasing the dividend.

Could you talk about your comfort level with the FAD payout ratio where is it today in the high 70s? Is that kind of optimal for you? Or do you think that given your outlook from kind of a core business perspective, that you could increase that FAD payout ratio over the next several years?

Again, I think it's not just a question of that percentage, it's really in part a question of how you look forward to the way the business is going. And as I said, I think we are increasingly optimistic about the strength of this sector of the real estate business going forward. So I think we are going to have that reflect itself in terms of the dividend increases, without being specific about it. And I think that is something, obviously, that the Board has to approve. But I think the recommendation of management would continue to be within the context of a dividend increase every year, and perhaps an increasing proportion of what our available flow of funds is under the circumstances of an increasingly optimistic view of the commercial business.

Now, as we have come out of a -- frankly a very, very difficult period for the commercial sector of the real estate market over the last several years, we think we've come through very well and demonstrated that we can do well in a bad market as well as in a good market. But if we are coming into a very good market we'll just have to see how we're in a position to translate our capacities into the prospects for increased earnings. And I can assure you we will look very positively on how we translate that as well into dividends.

Please don't forget what Doug said, though, when talking about the FAD ratio earlier. Remember that some of these forward leasings such as T. Rowe Price or Wachovia will have an impact on the FAD percentage, at least as we report it, over the next several quarters. It could have an effect over the next several quarters, and bring that percentage up higher than where we are today.

David Shulman, Lehman Brothers.

This is a question for Mort. If it is very, very difficult to buy property given cap rates -- especially for REITs, given what REIT investors expect -- wouldn't it make sense to sell assets, shrink the company and pay a special dividend?

You know, that's one approach without question that we sort of think about. The unique part of our asset, our composition frankly, is we think they have extraordinary long-term values. This is not something that I say casually. We really look at them. As you can see, with some of our assets we felt that we could be in a position to (technical difficulty) of them. We really are in a position where we're going to continue to refine our asset base. And, you know, I think the option that you mentioned is something that, obviously, we have to think about. But for various reasons we haven't come to the conclusion that that's the right policy for us. Because we really do believe very strongly, as I mentioned to you, that this is a long-term game and not a short-term game. And we have said this before; that's why we protected ourselves in terms of going with long-term financing and earlier periods. And we think we've still got a great future in terms of what we're going to be able to do with our existing asset base. But if the approach that you said seems to make very strong sense, we're not going to shy away from it. But right now we still think that in this kind of a market, with where we think the strength of the economy is going and its ability to translate itself to commercial real estate, we think we're -- in my gut, frankly, I think we're going to see higher rent increases on a lot of people I'm thinking about in a lot of different markets. And the kinds of assets that we have, we think, still make sense to retain.

What your question implies to some extent also, David, is that there isn't any -- that there isn't portfolio of value in the assets that we have. And when you look at New York and you look at the collection of assets that we have -- and that may be a bad example because some of those we couldn't sell immediately anyway -- but there is synergy between those assets. And therefore, while the individual pricing of an asset at these low cap rates might be very attractive, we think that there is an increment of value that comes to us from having a portfolio of the best properties in any particular market.

Let me follow up with a more mundane question, I guess for Ed. The Democratic convention next week -- is that a plus or a minus for your hotel business?

It's a plus for our hotel business for sure. And it's a plus for me because I'm taking the week off.

(indiscernible), Lehman Brothers.

There's been a notable increase in building material costs in terms of steel, concrete, largely driven by demand or focus on China and shortages here. Do you see some of this -- price increases, in terms of cutting into your development deals potentially?

It's absolutely changed -- forced us to take a re-look at all of our construction budgets. But I think that we are quite comfortable, even after that re-budgeting, that in part we have provided for it and (indiscernible). And secondly, that the overall impact is absorbable. It may move yields down a couple of some basis points, but I think we are still -- we know we still have very attractive deals going forward on these development projects.

Frank Greywitt, Key McDonald.

I was wondering if you could speak to the build to suit in Cambridge, and who is -- if you are providing the build-out for the tenant there?

We are.

The necessary build-out consistent with the needs of a research laboratory?

Yes. It is backstopped by that MIT lease.

Our final question is a follow-up question from Jon Litt with Smith Barney.

It's John Stuart here with Jon Litt. I've got a couple of questions on the central development projects. First of all, on 801 E St., which I believe you indicated would be 70 percent leased -- what is the square footage on that project?

It's approximately 300,000 square feet.

Doug, did I understand you to say that the MIT project, the anticipated investment would be 135 million?

Correct.

Do you mind breaking down what the expect to spend would be on the other three projects?

The building in Reston that we refer to as the Lockheed Martin building, that's about $40 million. The E St. building is to total cost about $66 million, and Capital gallery is about $65 million.

Lastly, I know you don't like to talk about economics on specific transactions, but can you just refresh our memory in terms of the yields that you expect to build out to, and on a relative basis where these four projects would stack up at either end of the range?

In general, we strive for double-digit returns on our development transactions. Obviously, a GSA lease is probably going to have a lower yield than a lease to a technology company, based on the credit profile of that asset. But our goal and our belief right now on all the developments that we are currently doing is that we are going to be awful darn close to double-digit if not exceeding double-digit returns, based upon our budgets as we forecast it through the current pricing of construction material.

Christopher Haley, Wachovia Securities.

Good luck with that Wachovia lease. Here in Baltimore knowing that T. Rowe was looking at their options, it's good news to at least hear they're staying downtown. That's going to be good for the market. Two questions. Looking at that specific billing (indiscernible) East Pratt, what would you say -- with assuming that you were able to retain them over a long-term lease, what is the value of that building in your mind after you're able to lock that (indiscernible) lock the anchor up?

It's higher than it was if they left. I'm not trying to be cute. We don't see a value, asset-by-asset values, Chris, so I can't answer that question. But clearly, doing the transaction and locking in T. Rowe Price through 2017 and the quality of that cash flow, obviously, greatly enhances the value of that asset.

Does that make it -- thinking about Mort's comment in terms of trying to be at a marketed scale, does this, obviously, represent something that is more liquid today than where it would be have been in your future model?

I think it clearly has that potential.

Interesting to know, I was in Northern Virginia and D.C. last week, and I think you guys are pretty well positioned in most of the submarkets, particularly around Tyson (inaudible) Reston -- I have to give you a lot of kudos. Have you looked at some of the weaknesses further out, outer beltway around D.C., and maybe even some markets in Boston -- instead of buying dirt and building up, are there opportunities, if anywhere, that you see significant vacancy where you would rather by half-occupied buildings or empty buildings? Any markets that you're looking at?

We remain -- yes; we are looking at several opportunities. The surprising or interesting thing to us is that sellers are demanding and buyers are accepting very strong underwriting assumptions, I guess because they are still paying cap rates even for those kinds of assets that are -- that seem quite high to us. Now, you do have to differentiate because there are also assets where the risk profile is such, especially way out, where unfortunately the buildings become more like commodities than special, where we just don't like the underwriting assumptions that you would have to apply to them as far as the lease-up and rental rates go. So those have not been as attractive to us in fitting into the portfolio as we like to define it.

If you go out to Herndon or Dulles, (indiscernible) road, versus what you're going to be in with a market value of the land plus build-up, are sellers of those empty buildings, half-occupied buildings in potentially improving markets more than replacement cost or more than what you're going to be developing at?

I'll let Ray comment on that, because he's very close to that market. But I just want to say that we are also -- those are not going to be the markets in which we're going to be doing development either, because we do not -- we want to compete where we can bring something to the table that other people can't. And if it's a commodity building, then we can't do that. And so we shy away from that kind of a project.

Let me answer it two ways, Ed. First of all, relative to new developments, the run rates we're getting in and around Reston Town Center are so substantially higher than what we see in the commodities spaces that they clearly justify new construction, as per the build to suit (indiscernible). Number two is the activity on the defense and the intelligence communities (technical difficulty) public sector are driving demand for vacant buildings in that quarter to the extent that, as Ed said, either the sellers recognize it or the other competing purchasers recognize it. So there really are no values in the Dulles corridor at all that we see. Now that doesn't mean we're not out there trying to uncover nuggets of opportunity, but it's still very challenging and dynamic in the Virginia market.

One thing also to add is that we do have additional inventory for additional space right in Reston Town Center, or adjacent to.

And what we can replace in Reston Town Center on a new construction basis, even with increasing cost, is still highly competitive with what these buildings are selling for in less attractive locations.

Where do you think you'll be in all-in cost if you were to start new (indiscernible) Reston Town?

I would project that probably in the 250 to 260-foot range.

That includes the land value.

Mitch, are you on the phone?

I'm here but you can't hear me.

Yes we can.

You can? You couldn't hear me earlier; I was trying to talk. Yes, that's about right, Ray.

Is that the last question, operator?

Sir, at this time we appear to have no additional audio questions, so please continue with any further statements you wish to raise.

We will not add anything other than to say thanks to all of you have joined us and thanks for your support. We look forward to continuing to perform to your satisfaction, and our own, by the way. Thanks again.

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