波士頓物產 (BXP) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Boston Properties third-quarter 2004 conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Claire Koeneman with Financial Relations Board. Please go ahead.

Thanks, Erica. Good morning, everyone, and welcome to Boston Properties conference call. The press release and supplemental packet were distributed last night, as well as furnished on a 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 measure in accordance with Reg G requirements. If you did not receive a copy of either of these, these documents are available on the Company's Web site at www.bostonproperties.com in the Investors section.

Additionally we are hosting a live Web cast of today's call which you can access in the same section. Following this live call, an audio Web cast will be available for 12 months on the company's Web site, also in the Investors section under the header, "Audio Archive."

To be added to the Company quarterly distribution list, please contact the Investor Relations department of 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 obtained. 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.

With us today I like to welcome management. We have Mort Zuckerman, Chairman of the Board; Ed Linde, President and Chief Executive Officer, and Doug Linde, Chief Financial Officer. Additionally a number of the regional managers will be available during the Q&A.

So without further ado, I will turn the call over to Doug for his opening remarks. Doug?

Thanks, Claire. Good morning, everyone, and thanks for taking the time to join us on this call this morning. Many of you also joined us either in person or via Web cast at our Analysts Investor Conference a few weeks ago in New York City, and we just want to thank you again for your attendance there. We know how valuable your time is.

We had a great response to the content of that conference, but if there was one point of what I would call constructive criticism, it was that some of our presentations were somewhat light on numbers. I hope to rectify that situation this morning. We're going to discuss our third-quarter financial results and trends and provide an outlook for the remainder of '04 and 2005 and review the guidance that we put in our press release last night. And I promise we are going to give you lots of numbers.

Ed is going to expand on the new ventures that were outlined in our press release, and with the election less than a week away, Mort might even have some comments on the political picture. But before I get into the numbers, I thought I would take a moment to spend some time giving you some anecdotal evidence of our experience with regard to expansion and and contractions in the portfolio because I have heard that that's been a point of pressure on a bunch of the other calls that have gone on prior to ours.

Starting in California, Genentech has taken on additional 112,000 square feet at our Gateway project, and that more than doubled their space commitment to us in the last six months ago. At Embarcadero Center we have three deals we are working on, one of which is closed, for law firms that have expirations in '04/'06 totaling 325,000 square feet in total, and each one of those tenants is taking more space.

We also have another 11 expansions pending or signed with existing tenants, and the existing tenants range from 6,000 to 90,000 square feet, and we have one transaction that we are working on which involves a contraction. We have 50,000 square foot tenant that is contracting into about 42,000 square feet.

In New York City at 399 Park and at 599 Lexington Avenue, the major legal and financial services users have either exercised expansion rights, leased additional space or are looking for additional space. At Citigroup Center we have a 140,000 square foot law firm that has extended and expanded its preference to more than 210,000 square feet.

In Baltimore, T. Rowe Price is expanding up to 370,000 square feet (inaudible). And in Richmond, both Hunton and Williams and Wachovia took additional space as part of their long-term renewal. The major law firms at Market Square North have all exercised their five-year expansion options, and at 901 New York Avenue there have been some mergers that have actually resulted in growth for two of the three major law firms we have in that building before they actually move into the building.

In Northern Virginia, Lockheed Martin signed a lease for an additional 182,000 square feet at our Sunset Hills project. In Boston we have a major tenant at 101 Huntington Avenue that has recently taken an additional floor as part of a renewal. We're relocating a law firm out of 111 Huntington Avenue over the Prudential Tower in order to accommodate their growth, and we have another tenant at the Bristol Tower that has gone from one floors to two floors in the last couple of weeks. And then in suburban Boston, we just completed a 54,000 square foot expansion for a 30,000 square foot tenant out at Westin Waltham Corporate Center. And we had a 50,000 square foot tenant that just renewed and expanded over at the Lexington Office Park.

Now you can't infer from all this data that the Boston and San Francisco office markets are covered or that our occupancy is waging a strong recovery or that our same-store top line is growing. We still have some big holes to fill, and we have a bunch of situations where tenants are consolidating out of our buildings. For example, we have talked before about Digitas moving out of 230,000 square feet in Boston, although we have covered 52,000 square feet of that to date. And we have KPMG relocating out of 100,000 square feet out at EC3, and Orrick moved out of the Old Fed. And we are going to talk about in our 2005 outlook where our specific leasing challenges are for those spaces and some others as we look forward to 2005.

We had a pretty strong quarter in the third quarter at $1.07 per share FFO on a fully diluted basis. That was about 3 cents higher than the high end of our prior estimate and 4 cents ahead of First Call.

The big picture explanations are as follows. We settled some ongoing litigation with a third-party vendor relating to the building of some prior year's operating expenses, and that was about $1.8 million, which is included in the line item "Parking and Other Income" in our supplemental package. It represents a portion that we recognized after taking into account all the refunds of operating expense escalations due to certain tenants in occupancies during those periods in question. We had actually budgeted about 1.3 million for the quarter for that, so we had about $500,000 positive variance from that item.

We earned about $800,000 of additional fee income that had not been projected during the quarter. We had about $1.9 million of either percentage rent, holdover rent or earlier than expected tenant projections, and that includes Ann Taylor, which is obviously straight line rent and not cash rent.

We had unbudgeted termination income of about $500,000. As you recall last quarter, I spoke that we were dealing with one tenant where we were taking back some space, and we were going to recognize some termination income. The hotels contributed about $250,000 more than we expected, and we had about $1 million of lower operating income expenses during the quarter.

On the negative side, we stopped interest capitalization on Times Square Tower during the quarter, and that increased our interest expense by about $400,000. And the restructuring of our land option transaction with the Landis Group, which was discussed in an 8-K we put out two days ago, that resulted in an additional expense of about $750,000 this quarter, and that number is in our G&A item. Ed is going to provide some more detail on that transaction in a few minutes.

For those of you who want to isolate the impact of the Times Square Tower transaction, they operated at about a 92 percent margin during the quarter. It generated about $12.5 million of income, which includes about $7 million of straight line rent and it has an interest expense of about $2.1 million. And the reason that margin is so high is that the building is not fully occupied yet. We're recognizing revenue on all the leases where the tenants have taken possession.

Gross level of transaction activity was very strong during the quarter. Just under 2 million square feet at 1.95 million. Just to give you some comparisons during the first and second quarters, we totaled about 2.2 million square feet of activity, and last year we averaged about a million square feet per quarter. The activity was really spread throughout portfolio.

In addition to Ann Taylor at Times Square Tower, we have leased an additional two floors -- full floor deals -- and we have nine other deals involving our prebuilt program, and those all occur during the quarter. And then last week, we signed a tenant for the top 45,000 square feet of the building. So as of today, we are just over a million square feet leased at Times Square Tower.

The in-service portfolio occupancy was 91.8 as of the end of the quarter, and that is down from 92.5 last quarter. But we are including Times Square Tower now in the statistics, and that's a pretty major change to the portfolio mix. So after opening in April, the building was placed into service fully on September 7 and is currently 83 percent leased. If you were to exclude Times Square Tower, the in-service occupancy would have been 92.3 compared to 92.5 last quarter.

The occupancy statistics that we give you in the earnings release and our supplemental remember only includes spaces where the tenants have taken possession and we recognize revenue. So remember, for example, if you look at 611 Gateway, the building is 100 percent leased. But it still listed at 57 percent in our statistics because we don't have the rental revenue commencing until the fourth quarter on the space that they leased last quarter, and likewise 651 Gateway where we just leased 112,000 square feet won't actually hit the statistics until the third quarter -- the second and third quarter of 2005 as Genentech moves into that space.

The average remaining lease has moved up a little bit. It is 7.3 years. And our 2005 lease expirations now total 5.8 percent of our office square footage and 5.4 percent of the gross revenues. Second generation leasing statistics are broken out in the supplemental.

There is once again a little bit of color behind those numbers. We had one transaction in Boston of 134,000 square feet. That was completed with very little in the way of tenant improvements. So if you take out -- and correspondingly the gross rental rate was lower. So if you were to take that out, excluding that transaction, instead of being down 22 percent and 15 percent, which is reported in the supplemental, the portfolio would have been done only 12 percent on a net basis and 9 percent on a gross basis. So again the numbers don't tell you the whole picture.

The bulk of our uncovered lease office expiration in 2005 and our vacancy right now is in Boston and San Francisco. Across the portfolio we have average expiring rents during the next 12 months of about $35.75, and we expect a gross rattle rate rolldown of about 14 percent.

In Boston and San Francisco specifically, the average expiring rent is about $37.50, so it's a little bit higher and the rolldown is also higher. We believe the rolldown is going to be about 16 percent for the remainder of '04 and '05. But 70 percent of our exposure is in those two markets over the next 18 months.

Reviewing our transaction costs for the quarter, we were down $18 from about $23.60 last quarter. Again, we believe that costs are going to be somewhere in excess of $20 for the remainder of '04 and '05 in terms of our total cost of transactions on new and renewals. Next quarter we expect a pretty high number because the T. Rowe Price numbers are going to hit, and that is a 13-year renewal with a pretty healthy TI package.

The dividend FAD payout ratio for the second quarter is still low under 100 percent at 83.7 percent, and again that includes all of the leasing costs that were hit in the third quarter, as well as all the recurring capital expenditures for all the properties. And remember again during next quarter, all the T. Rowe Price numbers are going to probably hit. So as you look at our FAD ratio, it could spike even though about money probably won't be spent or will not be entirely spent in 2005, 2006 or 2007.

In terms of capital expenditures, we still think we are going to spend about 75 cents per square foot annually on recurring capital projects. To date we've only been averaging about 58 cents annually per quarter, but we think we are going to jump up a little bit in the fourth quarter as we catch up on projects that start in the summer where we are finally getting the work completed and built.

On a year-to-year basis, the hotels continue to show pretty good topline improvement, and they exceeded our expectations slightly by about $250,000. RevPAR was up 14 percent for the quarter, and it is up 10 percent for the year. And this still is pretty consistent with our existing guidance. If you exclude the hotel results, the same-store NOI was up .7 percent on a GAAP basis and 2.2 percent on a cash basis.

During the quarter, we closed two smaller property sales transactions, and they are described in the press release. We currently have a signed contract for our 560 Forbes Boulevard building in South San Francisco, which is going to close in November, and we have some land parcels in Montgomery County that are also going to be closing, probably just around the first of the year.

At the end of the quarter, we have cash balances of $214 million, and in addition to that cash, our current capital structure provides us with very significant acquisition and/or development borrowing capacity. Our floating-rate debt now consists almost entirely of our Times Square Tower project which stands at about $415 million of that loan, and we have one maturing loan in the next 12 months. So our 2005 earnings have very little sensitivity to interest rate movements in the next 12 months.

During the quarter, we completed a few refinancings, including a three-year facility on our 265 Franklin Street building. That is the project we have with the common fund. And we placed a permanent mortgage on the New Dominion II building which was placed in service in July, and we have recently locked rate and are documenting a long-term fixed-rate financing of 901 New York Avenue, which is our other New York Common asset.

Now turning to the guidance. We are in the midst of establishing our property level on 2005 business plans, and while we review our budgets no less than quarterly, each year we ask our original teams to spend some extra time at this time of year looking at long-range capital issues, operating and leasing issues and we think about what assets may be appropriate for this position. We create a space by space projection of the portfolio's occupancy, revenue, expenses, and it is really based on our regional team's best estimates for the next 12 months.

So if we look at the makeup of our currently vacant space, there are still a number of blocks of that space that contributed good revenue in 2004, but are going to really remain unleased for large portions of 2005. Let me go through some of these specifically. We have the Old Federal Reserve, which we have talked about ad nauseum before. That's 140,000 square feet, and that is again going to be vacant for much of 2005.

We have our Harvard Street building, which is an industrial building in Massachusetts. That is 152,000 square feet. The Tower Center building in Northern New Jersey. There is 66,000 square feet of vacancy there, and we have a tenant that is moving out at the end of the October. So we are going to have about 120,000 square feet of vacancy in that project. And then at 202 Carnegie Center, we have about 41,000 square feet. At 210 Carnegie Center we have about 50,000 square feet, and then we have the other two projects in California that I mentioned before. EC3, where KPMG is moving out at the end of that year, about 106,000 square feet. And the lowrise of EC West where we had Fremont Industrial move out late in June of last year or this year, and there is about 100,000 square feet of vacancy there. All of that space from our perspective and from a budgeting perspective and built into our model we think is going to be down for a good portion if not all of 2005.

In addition, we are cautiously taking out of service 100,000 square feet of Capital Gallery, and that is going to be vacant for the next 18 months in order to accommodate the construction of our 200,000 square foot addition. And so that is another 100,000 square feet that is going to be out of service.

Now, however, there are a number of places where we are actually going to be seeing increases of occupancy for portions of space that were vacant in 2004 that are going to be fully revenue producing in 2005, or a portion of them are going to be revenue producing. And we've mentioned 611 Gateway, which is another 100,000 square feet and 651 Gateway which is 112,000 sf.

We recently did a lease at the Newport Office Park on some vacant space for 58,000 square feet, which is going to fall right to the bottom line starting next month. At 211 Carnegie Center, we had that building vacant since the beginning of the year, and in late December, they are going to start paying there on 47,000 square feet. And we've leased out almost all the remaining vacant space, which has been vacant for a good portion of 2004 at Riverfront down in Richmond. That's about 68,000 square feet. And then ultimately we are going to be getting a full year from our new development properties, Times Square Tower and New Dominion.

So if you combine all the property level transactions, we are actually budgeting a 75 basis point increase in occupancy over calendar year 2005. So it could go up or down by 25 to 50 basis points at any one quarter. Our 2005 guidance is really no longer terribly sensitive to the anticipated leasing velocity of Times Square Tower, although in our budget, there is an assumption we are going to lease up the remaining 17 percent at some point during 2005. We are going to experience a roll down in rents in 2005 on our expiring leases of somewhere around 14 percent and slightly higher because on the San Francisco and Boston assets that I have talked about.

Now this is offset by the increased occupancy and the higher contributions from the newly delivered buildings like Times Square Tower. So exclusive of our hotel income and our other non-recurring items, which I will talk about in a minute, if you take our quarterly in-service portfolio NOI for the third quarter and run-rate that, we think we are going to be up somewhere between 2.5 and 4.5 percent in 2005. And that includes straight line rents at about a level similar to where we are today.

Our 2005 quarterly interest expense should also go up slightly, about 2 percent to 2.75 percent, and that reflects the full year of elimination of cost capitalization on our development properties. We had termination income of about $3.3 million to date this year, and we are not budgeting any for the fourth quarter of 2004. If we include that income and the income that we received from the settlement discussions which is about 1.8, that brings us to about $5.1 million for 2004, and that is sort of a non-recurring item. And for 2005, the guidance that we gave last night in our press release assumes about about a (technical difficulty)--. So that's down about (technical difficulty)-- million dollars from 2004.

To date we've earned about $15.1 million of third-party senior comp, and I have talked about this in previous quarters . We actually now expect at the end of the year we are going to be close to $18 million. We have reduced our budget for 2005 down to $9 million, so that is a $9 million reduction in third-party fee income based upon projects simply ending that have been going on for a number of years.

Now we're go to continue to be perceive fee for services, and in fact, we are getting some good traction on that with some of our joint ventures, but those projects are not going to ramp up quickly in 2005. And they are just not going to be able to make a meaningful contribution during the year.

Our 2004 budgeted NOI from the hotels is still going to be somewhere around $21 million, even though we were slightly higher in the third quarter. Although I would say that the chances of us being on the high side as opposed to being disappointing on our hotels is probably pretty good right now. And we are actually budgeting a healthy increase for next year of somewhere between $22 and $23.5 million for '05.

We continue to use our G&A run-rate of $12 million per quarter for '04. In this quarter there is about $1 million that hits that number that's really not run-rate. It is onetime items, including that $750,000 payment I described. And remember because of the five-year vesting schedules on our long-term equity comp program that that program generally increases at $2 billion per year for the next three years, assuming we continue to issue long-term equity compensation in amounts consistent with the 2003 and 2004 branch.

So taking into account the increased costs associated with the Sarbanes-Oxley 404 certification process, and by the way we have spent at least $600,000 to date of third-party expenses this year, not including what resources internally we have been generating and using for that, and you include a cost of living increase to our payroll expense, plus that equity compensation program increase, we think the G&A is going to run between $52 and $54 million for 2005.

As part of the business plan process as I said, we are looking at the portfolio and identifying potential active dispositions. Now we have not assumed any asset sales in our current guidance, but we're going to be updating that on each quarter. But I would note that we sold about 150,000 -- $150 million of assets in '04. We would not expect to be any less than that in 2005.

At the end of the quarter, we had cash investments of about $214 million. Although we continue to seek attractive acquisition opportunities, we really hope to consummate some. For the purposes of this guidance, we just have not assumed any in 2005. So our numbers, our 410 to 425, assumes no acquisition increases.

Just to give you a sense, though, if we were to purchase a property at 7 percent and apply absolutely no leverage and just use our cash, that would add about $12 million to our earnings for 2005. So by holding cash, we're effectively sacrificing short-term earnings.

So to recap, our FFO guidance for '04 is between 415 and 416, so that is a $1.04 to $1.05 for the fourth quarter. To put all this together, if you use a growth rate of 2.5 to 4.5 percent on that third-quarter 2004 property NOI run-rate, excluding the hotels and those non-recurring items, termination income and the settlement payments, as well as third-party development and management services reduction and all the other assumptions that I have outlined, and if you used an estimate of between 139 million and 140 million shares for '05 to take into account the profitability of some option exercises and additional restricted equity grants, our 2005 FFO guidance gets you to the range of $4.10 and $4.25. Now again there are no acquisitions in that number at all. The 2005 guidance assumes our third-party development and management income is going to be down $9 million and the termination fees are going to be down 4.1.

So if you (technical difficulty) we're doing the comparison and you were to strip out the higher development and management services income, as well as the termination income from 2004, you would probably get to a normalized rate of '04 of about 405. Comparing that to the midpoint of our 2005 range implies about a 3 percent growth rate in our funds from operations for '05 with no acquisitions or dispositions.

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

Thank you, Doug. Good morning, everyone. Let me add my thanks for you being with us today.

I want to begin if you will allow me to play my customary role of tempering at least mildly some of what Doug said about the markets because it feels very nice to us as we see our on tenants expand and as the quality of our assets and operations provide us with more than our proportional share of deal flow, I think it would be a mistake to think that we are going to see landlords retain or regain their pricing power and occupancy rates move up significantly until you get more significant job growth, and especially in markets like Boston and San Francisco where general market demand growth remains pretty anemic.

So that is the more environmental context in which we operate, and we expect that probably will continue for the foreseeable future. Although we are hopeful that perhaps we will start to see capital investment in technology change that environment.

Let me now turn to providing some additional information on a few of the significant events which have occurred over the past several weeks. Earlier this month the three-party venture of Boston Properties, New England development and the related companies entered into an agreement with the Pritzgers to acquire the 21 acre Fan Pier property in the South Boston waterfront district. I think it is generally acknowledged that this is by far the most promising future development opportunity available in Boston, and our own enthusiasm for the transaction and frankly the third-party confirmation of that judgment has been pretty overwhelming.

There may be a lot of additional land available in that district, but due to its front seat location directly on the water and its proximity to the existing financial district, the Fan Pier site is clearly the 100 percent location. It is where the future of Boston is going.

Perhaps there is only one other parcel, which is the adjacent Pier Four site, which could even be matched with it, and our partner New England development controls that parcel and has agreed to integrate it into the venture. So what we are talking about is land with a total development capacity of about 4 million square feet, about a third of which could be office space, with the balance being residential, retail and hotel uses. And as we have proven to ourselves through our own experience at the Prudential Center, synergy really does create in a multiuse project a whole which is greater than the sum of its parts.

The project will, of course, be developed over multiple years and has the flexibility to respond to market conditions which will change over that period of time. The one thing that we know is that the conventional wisdom on any given day seems to be unconventional a year or two years later. However, the status of the entitlements that are already attached to that project and the immediate demand for certain uses make the venture partners very optimistic about our ability to begin development than might generally be expected.

In fact, although I don't want to make too much of this, after this call I am going to make a sales presentation to a 300,000 square foot plus office tenant. I will get back to you right away if they sign on the bottom line today, which is probably doubtful. Nevertheless, there is really interested in the location.

Important to point out is that in terms of structure each venture partner will be an equal participant in all aspects of the project, so that our interests are truly aligned and we can design the project so that, in fact, it meets market conditions at any particular point in time and we are all in this together. And I would also point out that in our opinion our partners are unsurpassed as the developers of those uses for which they will be responsible. So we think it is an incredibly strong team, and I would also point out that I think the city believes that it is an incredibly strong team as well and is very happy with our entry into this project.

We are also involved in another development venture with New England development at the site of the Hecht's store on Wisconsin Avenue in the heart of Chevy Chase Maryland. The third participant in that deal is Archstone Smith who will be doing the residential aspect of the project, although Boston Properties will not have an interest in that particular portion of the development. We commence construction on the project in August, and it will include a new Hecht's, 125,000 square feet of additional retail space, including a Whole Foods; a 400 plus residential unit, and 305,000 square feet of office space which we are now actively marketing.

Due to certain phasing requirements, the office space will not be available for occupancy until 2007, which is a little bit unfortunate only because of the kind of market reaction we have gotten to the site and to the prospect of that office space availability. It is a location that is in high demand.

We also filed on Monday an 8-K, which detailed some aspects of our restructuring agreement with Alan Landis, from whom we acquired Carnegie Center in 1998. These changes really recognize that Alan has played less of an active role in Carnegie Center than he might have expected to play. And consequently we modified the transaction to provide him with a predetermined but cap consideration as additional buildings are constructed on the site, and you will remember that there is about 2 million square feet of additional development capacity down at Carnegie Center. But in return for these predetermined considerations he gave up what were potentially greater proceeds than had been originally contemplated. So that was the trade-off.

I want to point out that what has not changed, and which was a very important part of our initial transaction with Alan, was his obligation to hold and carry undeveloped land until Boston Properties makes the election to acquire on an individual building by building basis individual development parcels. And as I said before, for fixed predetermined price per developable foot, and the details of that I will not bother to repeat because they are covered in the 8-K. As Doug mentioned, it also involves a payment of $750,000 as a catch-up to some obligations that we had with Alan for the period from 1998 through today.

Also important to note that this modification in addition, as I will talk about in a moment Alan's decision to resign from Boston Properties board next spring, do not make any change in his or our desire to continue to consult and work with each other as the future of Carnegie Center unfolds. Alan is and continues to be a very significant investor in Boston Properties, and of course, with a major investment as I mentioned in the Princeton land, and that investment will only get realized as individual buildings are developed. So both of us want to take advantage of his very considerable talents as a marketer and as a developer for our mutual benefit, and we will be calling on Alan as appropriate for aid in that process, and Alan wants very much to be available to provide that aid as time rules on.

His planned resignation from our board is motivated by two factors. First, as an active investor in real estate, Alan found that his position on our board restricted his ability to take any action and we was very scrupulous about that, which might have been perceived as creating a conflict.

More importantly, from our point of view, he was also not considered an independent director under the New York Stock Exchange rules. Therefore, his resignation will allow us to continue our program in expanding the number of independent directors on the BP board without necessarily increasing the total number of directors, which we think is a very positive thing.

I wanted to show an initiative announced in our press release last night is the venture we have formed with ABP and Teachers to invest in turnaround opportunities. (technical difficulty)--.

Our acquisition and regional staff look at a lot of potential acquisition possibilities and often identify assets that have significant short-term value creation potential, for which even after we develop them would not be consistent with the profile of our core portfolio for long-term ownership. Given that we want to employ the talents of our marketing construction and property management personnel to accomplish that value creation and then realize the benefits of increasing value through the sale of the repositioned asset after it has been stabilized, it seemed appropriate to think about a mechanism to do that. And our conclusion about our ability to create value were shared by ABP and Teachers, resulting in the capitalization of a venture at $140 million of equity, of which ABN and Teachers will be contributing 105 million, and Boston Properties will contribute 35 million.

If you assume a loan to debt value rate -- a debt level of 65 percent, that gives us a total investment potential of $400 million. And we do not expect any individual transaction to be more than about $80 million, and some less than that.

As I said before, we want to employ our existing staff to source and then carry out the redevelopment. We will only be looking at acquisitions within our existing geographical regions. And let me stress once again that these are properties which will be outside of Boston Properties' core portfolio. In other words, true turnaround opportunities for sale to third-party investors after their repositioning.

Boston Properties will -- and this is important -- within certain parameters have discretion in making investments, and we will earn fees for asset management property management, leasing and redevelopment management, and we will receive enhanced returns when certain thresholds are met.

Finally, let me comment on the continuing good news/bad news aspect of the acquisition market. As you all know, investors continue to demonstrate a voracious appetite for high-quality real estate, and I suggest that if you apply today's mortgage standards to our portfolio of buildings, which we believe is second to none, you will as investors be very gratified by the resulting valuation.

At the same time, since we still apply I guess what would be considered conservative criteria by considering return on investment at relatively conservative levels of debt to be an important acquisition factor, we have been uncompetitive when forced to bid in an auction process against offshore capital or pension funds or private investors, or the other mostly private investors who are looking to acquire high-quality assets of the kind that Boston Properties already own and seeks. So we find ourselves with excess cash, and as Doug pointed out, the combination of excess cash and underutilized debt capacity creates an opportunity cost which dampens earnings.

This may actually even increase because since we do want to take advantage of the appetite investors to acquire the premier assets such as those found in Boston Properties' portfolio, there are certain assets that we are actively considering selling. So the magnitude of our underutilized liquidity may grow. Obviously this is a frustration to us. But it is not so frustrating that we don't believe that it is appropriate and prudent to be patient and to do the same kind of underwriting that we have always done. And so we are convinced that getting into an auction process in almost all cases is just not appropriate.

At the same time, just as we demonstrated last year by our two acquisitions in Washington, we will continue to identify special opportunities where our organizational and reputation edge allow us to complete transaction where price is not the only criteria. And as I think we have also demonstrated over the years, we will produce far superior returns through development, which is why we are particularly happy about our ability to get development underway even under today's market conditions and why we think it important to position ourselves with such things as the Fan Pier project for future development that will drive our growth in the years ahead.

So we will be retaining cash to fund special opportunities, to invest in development, and to pursue acquisitions when and if the sale environment changes, recognizing that at least on a short-term basis this is going to impact earnings.

But one thing that we have learned over the years I guess is the advantage of being both gray-haired and bald that there is no such thing as a steady-state. We are really very confident that attractive opportunities will arise, debt markets change as other external factors begin to come into play.

With that, I will end my formal remarks, ask Mort whether he would like to add anything, and then we will open it up to Q&A.

I think you all ought to know that Ed has been involved for many many years, so he's very much accustomed to the wisdom that that --.

Look, I think we have had conversations before in earlier conference calls about our own views of where the economy is heading. We still think now that there is (inaudible) in the economy. We think there is reason to anticipate that real estate markets will improve. They never go in a linear form, so they could accelerate or they could (inaudible) a little bit more slowly.

Technology markets in the financial markets, financial industries have been improving certainly over the last year. And with the improvement in the IPO market for some of the technology stuff, we think you're going to see an improvement in these markets. It is always difficult to predict exactly when, but I think the fundamental direction of these markets are such to inspire a greater degree of confidence and the accumulation of confidence as we look forward to next year or the year after it.

I don't think these trends are short-term. I think they are long-term. They may go a little faster or a little slower depending on a number of events, but we are bullish about the economy at large, the macroeconomic forces. We are bullish about corporate investment. We are bullish about corporate profits. We are bullish about the financial markets making it possible for corporations to grow faster and for jobs to grow faster. So I think we're going to see a continued improvement on the demand side of the equation. At the same time, there has been a dramatic constraint on the supply-side.

There is virtually no large blocks of space, for example, in midtown New York. It is extraordinarily difficult to find sites in Washington, which represent two of our markets. We are positioning ourselves to take growth positions in some of our other markets. Boston and San Francisco are the two slower ones. We've had a good steady experience in Princeton, and we still think that we are going to see a good pattern of demand growth and a constrained supply in a number of these markets that will justify the confidence as we look forward.

I think I will just there, and I will not make a prediction on the election contrary to Doug's assumption, except that one of the two candidates will win and will win by a very very small margin.

We are ready for the Q&A.

(OPERATOR INSTRUCTIONS). Jim Sullivan. Greenstreet Advisors.

A question on the ABP/Teachers joint venture. Can you help me understand why you have elected to pursue a venture where the value-add opportunity is being done in the venture as opposed to a strategy where you do those deals on your own balance sheet? And then once the value has been added, sell those assets to the ABPs and the Teachers of the world?

Well, for one thing, Jim, we do have the advantage of doing it that way of basically getting rewarded in a more than proportional way for the value creation. As I said to you, we get enhanced returns after certain thresholds are met, and we get a significant fee generation from the venture, which we think is very productive. And we did want to distinguish between these kinds of assets and the assets which would ordinarily go into the Boston Properties portfolio. So those are the three things that motivated us.

What might be an example of a value-added investment in a non-core office asset?

Well, there is one that actually we have announced which I think probably serves as a good example, which is called Worldgate down in the Herndon market. It is a property which consists of three buildings, two of which are leased, one of which is not leased. Four buildings, sorry. Three of which is leased, one of which is not leased. The quality of the buildings are I would say B rather than A, and we think that the marketing program out there has been not as aggressive or as well done as we would have done it. So we believe that we will be able to increase the cash flow on the properties, and at the end of the day, though, they are three office buildings which would not distinguish themselves in the way that we feel almost every asset in our portfolio distinguishes itself. So that is the difference.

I think in that scenario that the difference between Ruston, where the vast majority of our assets are, and Herndon is pronounced. And so this provides us an opportunity to use the Boston Properties franchise name to Class B buildings to get the maximum rent possible.

And once these properties are repositioned with a stable cash flow and enhanced cash flow, we believe that there is say and given the size, that there is an investor population out there that will be very interested in acquiring these properties for more than their acquisition costs, plus redevelopment costs.

Thanks for that. Ed, a separate question on your comments regarding auctions today. When I think back to your purchase of Embarcadero, your purchase of the Prudential Center, in both of those cases you were part of an auction, and those who did not win the auction said you paid too much. In hindsight the deals looked pretty good.

When I think about New York and Washington perhaps over the last year or two years, had you participated in more auctions, you would have found assets worth more than what you have would have paid? What has changed? Why step aside on some of these auctions today versus a few years ago with Embarcadero and Prudential?

I will comment and I will let others add. First of all, I think the profile of investors who are looking at these assets today is different than the investors that we competed against, at least in part, at Embarcadero Center at the Prudential Center. We were competing against other -- in Prudential Center certainly -- against other public companies that had the same outlook on debt, for example, that we had. And also at the time where we are looking at I think things from a much more current earnings perspective or at least short-term earnings perspective than is being implied by what people are paying for assets today. So I think that's a very significant change, especially the debt part of it, Jim.

But you know you make a judgment as to how low a cap rate are you prepared to except and also what that implies about future growth and earnings. And our judgment is different than the judgment of some of the offshore or other investors who may be making the right decision from their point of view because of the timeframe from which they are looking at and because of the debt they are putting onto these assets. But you know it is a judgment call, and we are comfortable and confident about our ability to make those judgments at any point in time. It is true, and by the way you could apply that same logic to our purchase of 399 Park Avenue which now seems like the homerun of all times. But trees do not grow to the sky I have been told.

Let me just interject there, too. I think the difference between the acquisitions we made in the late '90s and early 2000s were we acquired these assets at or below replacement costs. The assets that are out today in Washington specifically are now in the mid-5s, close to over $600 a square foot. We're completing the development of 901 New York at $330 to $340 a square foot. So our ability to develop new value assets in our core markets versus the acquisitions which are substantially below replacement costs just do not validate these acquisitions.

Thanks, Ray. Is there any mechanism in place that prevents Alan Landis from becoming a direct competitor of yours in the New Jersey market?

No.

Do you think that he might?

No.

He has an economic interest still in the (inaudible) of what we're doing with the additional land obviously. He does not get paid until we use up that land. So it would go directly against his economic interest to do that.

And in addition, the Carnegie Center site I believe is clearly the best site in Princeton.

Thank you.

Let me add one thing, Jim, to the answers before -- it also is inspiring us and pushing us in every way that we can into the mode of development because obviously the returns that we can make in development are significantly higher on an obvious level and not above replacement costs. And so this is going to be an increasing focus of our efforts, and we're going to adopt strategies there that if anything are more aggressive than we have to date because we think that is where we can maximize our returns on the capital we have available without getting ourselves into an overleveraged position, or paying as Ray says what we are able to do which is to bring in buildings at replacement cost because we built them.

David Shulman. Lehman Brothers.

With respect to the restructuring of the Alan Landis deal, as a result of this deal, does this make you more or less likely to develop in Princeton?

I don't think it changes that at all. Our development pace at Princeton is a direct function of how we feel about the market, and this will have no bearing on it.

As a follow-up, does this make it more or less likely you would sell assets there?

It does not change that either. The nature of our agreement with Alan with respect to things like tax protection has not been changed.

Okay. Can you give us some more color on the fee structure with the ABP/TIA transaction?

David, I would just say that it is -- you know in concept it is more akin to an opportunity fund than it is to a straight joint venture. So you know, we put equity in, which is a preferred return to everyone, and then we get a pretty healthy promote, assuming we create a good hurdle rate.

John Stewart. Smith Barney.

John Stewart here with Jon Litt and Andrew Calderon. Doug, thanks for all the numbers but I missed a couple. Could you give us or repeat of your guidance for lease termination fees and other income in '05, the non-recurring stuff?

$1 million.

$1 million, okay.

This is -- it's a good question because I think as a point of comparison I have heard that that debt number is a number that is significantly different than some of the other numbers that some of our peers have. Our viewpoint is that we have gotten through the bankruptcies/restructuring part of the economy hopefully, and we are in a growing economy. We're not going to see the defaults and the bad issues that occur in our portfolio. So we are not assuming that we are going to be receiving any of that either.

Thanks for that color. With respect to the occupancy decline in San Francisco, obviously the Fed building we knew about, and I apologize if you went through this, but did you address the drop in the occupancy at One Embarcadero Center?

No. In One Embarcadero Center I think there was one major tenant of 25,000 square feet that expired during the last quarter. That did not really make it to my screen as significant compared to the others that we have there.

Okay. What do you expect the mark-to-market or the rolldown will be on your 2005 San Francisco rollover?

I think unfortunately I blended it with Boston because the numbers are actually -- there is more square footage in Boston than there is in San Francisco. But I think the number is generally somewhere in the high double digits. You know 16, 17 percent, and slightly less for Boston, although there are a few specific transactions in each markets where we have some very high rents that are expiring in 2005. Obviously those are probably five-year deals that were done in 1999, and so we are having to except the rolldowns because of that.

Okay. Ed, you mentioned that you are seeing significant interest for certain uses at Fan Pier. Which uses would that be?

Well, the residential would appear to be the most immediate demand. It is amazing how many people have just anecdotally expressed excitement about the possibility of locating down there. And so I think that would be probably the one that would be the most immediately developable.

Okay. So then what would the expected timing be for breaking ground on the office?

You know that as I said is really a function of what we find in the marketplace. The earliest that one could expect would certainly not be more than 18 to 24 months from now.

Okay. And what you would you expect the total investment of the project to be all in?

At the end of the day, well over $1 billion.

Would it be as much as 2?

No. I think someplace between 1 billion and maybe 1.5 billion, 1.7 billion.

Lou Taylor. Deutsche Bank.

Doug, you were very specific with regard to some of the delta between some of the '04 and '05 line items. They would suggest that would bring you to kind of a point estimate. What are the things that would move it to the low or to the high end of the range?

I think it's really a question of we give you sort of a range of our third-quarter run-rate of between 2.5 and 4.5 percent, and that is probably the biggest driver. And that is really a question of the velocity of the leasing that we're going to do during 2005 and how quickly we gained that 75 basis points of occupancy. Because if we gain it all in the fourth quarter or at the low end, if we start gaining it in the first and second quarter, we are at the high-end.

There is a little bit of variation in the hotel. $1.5 million plus or minus dollars. The G&A had about I guess $2 million range in there. So you add those things together, and you can pretty easily get to the high-end or low side of that.

Okay. The next question or series of questions for Ed on the Fan Pier. Are there any plans to bring more public transportation or any public transportation to the site?

There actually is public transportation already planned. It's called the Silver Line, and it will be an extension of the mass transit system right past the site. And there it actually already -- MBTA station is already built waiting to accept that transit.

All right. And is the city providing any incentives to move to the Fan Pier area?

No, not as we speak. There are no built-in incentives. But that maybe a subject of dialogue in the future.

And then lastly, where do you expect the tenants to come from? Just the general Boston CBD, or do you think it will attract tenants from some of the suburban markets?

I think primarily from the Boston CBD. I think it will represent the logical expansion into a better location for tenants that are already in the financial district.

One thing that even those of us who have lived and worked our entire lives in Boston could not contemplate by looking at a map is just how significant the infrastructure improvements in that district have become. And I want to once again thank everybody around the country for helping financing the big dig.

But it is quite amazing how acceptable that part of the city has now become. In fact, there are many tenants who have offices and the financial district who will drive down to the approximate location of the Fan Pier to get off of the interstate system and then circle back to the financial district because it is quicker to do it that way than to get off at an accident that is right within the financial district.

So the infrastructure is quite incredible. The access to the airport, of course, is even -- Boston has always had great access from downtown to the airport -- it is even better than from the traditional financial district. So there are all these location and infrastructure improvements which make this an extremely attractive site.

And the last question, with a 3-0 lead, is there any concern that the Red Sox are actually going to blow it like the Yankees did?

Well, you know -- we in Boston refuse to get ourselves out on a limb, of course. We are much more conservative than New Yorkers like Mort who is still in mourning by the way about last week. But for somebody to come back from a 3-0 deficit, a team to come back from 3-0 deficit twice when it has never been done before in history, probably gives us a little room for conference.

Greg Whyte. Morgan Stanley.

Just a couple of clarity issues. On the new ABP/Teachers fund, what is the likely timing on that, and do you have any fees included in the third-party in your guidance?

No. The first transaction, hopefully it will close in November. And I mean these are obviously -- we get fees based upon actually completing events like signing leases and things like that. And there variability of that is too significant for us to through into the numbers beyond -- we have assumed on the asset management fee, but that is a pretty de minimus number for 2005.

Are we to assume that the bigger component of fees here is going to be the flip profit of the pulse of the management fee?

Absolutely.

Just a little clarity on this Times Square building, I just want to make sure when you say 83 percent of it, is it 83 percent leased or occupied?

83 percent is leased and almost all of that is quote on quote in the tenants possession, which means we are booking revenue on it, and as I said, we have pulled the entire building into service. So we have seized capitalization on 100 percent of the project.

And then just on your guidance for '05, I understand you're not including any acquisitions in that. If we were to see similar volumes into the (inaudible) positions that you did in '04, what is the delta on that? Is it three or four pennies?

It's a lot more than that. We are sitting on cash, and so just as I said, $214 million of cash at a 7 percent return and obviously we're gaining -- we are getting a percent plus on our cash as we get now, that is in excess of $12 million.

But in terms of if you did a similar pace to what you did, I think you did what? 120 odd so far?

Yes. Yes.

Keith Mills. UBS.

Good morning, gentlemen. A few questions for you. The first is for Ed. Ed, in listening to Mort Zuckerman's comments and optimism about the economy in the corporate sector and job growth and then listening to Doug's comments about the expectation for lower termination fees, it seems as though from a fundamentalist's perspective obviously, in many of your markets you're doing quite well. Although from an investment perspective, your comments seem to be more cautious. Could you talk about what events or catalysts that you're looking for that may result in Boston Properties being more active or aggressive on acquisitions?

Yes, let me first comment, though, that you now understand why Mort and I have been partners since 1970. I think a lot has to do, of course, with the debt markets. And also as I said to you, a lot also has to do with our ability to identify acquisitions which are not necessarily standard and not necessarily subject to the kind of auction process that we see a lot of the premier assets being subjected to.

And finally, we're always looking for acquisitions which represent upside potential going forward. Now my comments are really directed to the general market as well. And as has been demonstrated in some of the information that Doug provided to you, we do feel that we have an edge just in terms of how tenants look at our properties versus how they look at properties in general. And so when we look at acquisitions, if there is rollover, if there is opportunity to increase rents, if there is opportunity to increase occupancy, we believe that we will get more than our proportional share of deals out there and that also will inform our underwriting as we look at acquisitions.

But the bottom line, the basic bottom line, is what Mort talked about, and that is, while it is not linear, the economy is improving. People are investing in capital and technology and other kinds of capital improvements. Business is feeling more optimistic about their prospects, and that is going to work its way through the economy, and as that happens and as we can see increasing cash flow from acquisitions that do have rollover associated with them, then we will be willing to be more aggressive about making those kinds of acquisitions.

Well, the metric that you focused on as well, just going back and listing to Ray Ritchey comments earlier, will it be replacement costs?

It's certainly not to be ignored, because as Ray pointed out, it does seem a little bit illogical to buy an asset for $600 a foot when you can replace it for not much more than half of that. And, of course, those assets may be leased for a long time or may have a location which is unfortunately not able to be duplicated. But that is certainly a criteria that we would apply.

And you also talked about dispositions. Right now I think you've got one property, Fords (ph) Boulevard, marked for disposition. Can you talk about increased dispositions next year in terms of more properties being added to that? Can you talk about the types of properties that would be included in that. Would you include any core properties?

As we have said before, there are properties which will have tremendous appeal in the marketplace, but which may not be consistent with a long-term hold simply because of geographical location, or also properties where the upside potential may have been locked in for some extended period of time. That is what we are thinking about.

There are also other properties which are -- which we cannot look at either because of the timing in which they were developed which would require -- which might be difficult to deal with because of REIT Regs or our tax protection agreements that we entered into when we acquired those properties.

Okay and just two questions for Doug. Doug, the first is if you look at the lease expirations for your retail space that you have in Boston and San Francisco and Washington D.C., if you look at those expirations, for example, for 2004 and then if you look at maybe '05 to '08 for specific specifically D.C., and you compare them relative to where they were at then end of the second quarter, it looks like they have increased sequentially. Why would that be the case?

That's a question I'm more than comfortable looking at and getting back to you because I don't think it is material. So I will get back to you sometime today on that.

And finally for you, Doug, could you talk to us about your debt maturities for '05, '06? I think it totals about $600 million in aggregate. I think about a third about is associated with 599 Lexington. Can you talk to us about your plans for those maturities?

Well, we have not really focused on our 2006 to be fair. For 2005 our loan at 599 Lexington expires in July, and we are looking at what the most appropriate way of recapitalizing that would be. And maybe (inaudible) mortgage. It may go into our unencumbered asset pool. We may finance on a short-term basis. We just don't have any specific decision made yet.

Do you think you will have a decision made by your fourth-quarter call?

Probably not. I mean we might have done some hedging to give ourselves an opportunity to lock in current treasuries, but I don't think we will have made a decision as to which way we will go.

John Kim. Banc of America Securities.

I was wondering with the ABP/Teachers joint venture, if it was open to acquisitions in all your existing markets and could potentially include Class B Manhattan or suburban New York office assets?

The answer is yes on the Class B Manhattan you know if you can find an asset that is $80 million or an interest in a building that's $80 million. We are not -- I would say we are not really looking at suburban New York. We are obviously looking at the Northern New Jersey market because we are in that market.

Okay. Do you believe this joint venture could potentially serve for you to be long-term owner and a different asset type?

Asset type or location?

Asset type and location like Class B Manhattan.

We don't expect that to happen. No.

Okay. Doug, I know you gave a lot of numbers on Times Square Tower, but can you provide a going in yield including the recent leases signed?

You know I'm going to choose to beg off on that question. What I said before is that we expect when it is stabilized, the yield on Times Square Tower will be pretty darn close to double-digit. Originality it was in the higher double-digits, but we still are confident we're going to get there.

And can you provide an update on retail leasing given the current Target promotion?

Sure. The Target promotion was I guess you could consider it a charitable contribution from Boston Properties, but it certainly has created some pretty terrific exposure for the building. We are in discussions with a number of retail tenants right now. I think we are leased with one smaller tenant, but I don't know if it's going to happen. But we are negotiating a lease. And we are looking for some significant rent from the space that is on the street level, and obviously there is some retail space either below or on the second floor, and that space is not at quite the same premium, but we are looking to bundle it altogether and have multistory transactions to maximize the benefit from the retail.

Okay and last question. Doug, I think you mentioned that you have a lease signed this quarter in Boston with minimal TIs, and I was wondering if that was the tenant-driven lease, or was this a focused effort on your part to minimize TIs with buildout space?

I think it was a combination of our desire to use what it is one of the -- one of the arrows in our quiver, which is the realization from a tenant that if they could get comfortable with doing modification to their spaces as opposed to going to the market and saying we need brand-new space and we need to spend $60 a square foot, that we could provide them with a more attractive long-term economic proposal, and that is clearly one of the advantages you have as a landlord.

Now there are some tenants who say, we don't care. We are just trying to get the largest amount of net presence value from the marketplace. And you know if you don't give up $45 a square foot or $60 a square foot, someone else will. There are other tenants who look at this hopefully what we would consider a little bit more sophisticated way and say, if you are amortizing that into the deal, if we reduced the TIs, you're going to reduce the rent. And if we can live with tinkering around the edges as opposed to the scorched earth philosophy, we're going to be better off and you're going to be better off.

We are seeing, Doug, a little bit more disciplined from other landlords in the marketplace. Not TIs, not enough to be significant, but at least there's more discussion taking place about it than there was 24 months ago.

That was Bryan Koop, our Regional Manager here in Boston.

Okay, so that includes Boston, New York and D.C.?

Yes.

Tony Paolone. J.P. Morgan.

Doug, you mentioned reinvesting the cash on hand at 7 percent would add quite a bit to earnings. It's roughly the rate that your debt matures at next year. Do you not assume that you use that cash to just invest more or less in that?

Yes, we have to assume that we are going to basically pay off debt. We have assumed the cash is going to be either on hand or it's going to be used to fund development activities or those kinds of endeavors, not delever the Company.

Why not think about it that way, or why not just use the cash given that you have so much liquidity anyhow it seems to either just not continue to draw on the construction line or to pay down debt?

I guess because in my heart of hearts I believe that we are going to find some opportunities to invest that capital, and you set up these facilities and you borrow based upon I guess a medium-term strategy not a short-term strategy, and it is really that that has been driving these facilities on our new projects.

And just one question on the Alan Landis deal. Does the change there have any impact on staffing that came over from the Landis organization?

No. The Princeton region was set up independent of Alan. We did take on some of the people that had worked there, but that was really for our own account not for Alan's. And those people who were valuable employees down in that region became employees of Boston Properties, and this will not change that at all.

Carey Callaghan. Goldman Sachs.

I wonder if you can just share with us the magnitude of the investment in the Hecht's site and what your anticipated yield might be?

The office building is a 305,000 square foot building, and it is somewhere in the neighborhood of $250 to $300 a square foot, and that includes an allocation of a parking infrastructure. We are going to own about 67 percent of that asset.

But we have not made any decision on ultimate debt either. So in terms of equity, we have not -- we are two years away from starting.

And would you get maybe a double-digit return on that (multiple speakers)?

Well, we are certainly going into it assuming we're going to get double-digit return. That is our goal (multiple speakers) and it is a realistic one.

The demand for space in that market is extraordinary. The (inaudible) represents one of the highest payers to entry in the whole D.C. region.

Terrific. Then, Doug, it looks like the landholdings in Reston dropped by three to four acres in the quarter. Was there a sale involved there, and was there any income recognition associated with that? Then you also mentioned there would be a land sale, potentially Montgomery County. Is that reflected -- is there any kind of FFO contribution reflected in your '05 estimate?

Well, the answer to the first question is Parcel E (ph), which is now under development. That is the site in Reston, that Lockheed Martin, and that we commenced construction or brought into that -- redid the classification. And the gain on sale from the sites in Montgomery County, you know right now they don't hit FFO because gains on sale are not included in FFO. Obviously they will affect our EPS for 2005, but they are not in my guidance.

And they are not sales of income producing properties.

No, they are land parcels.

When they get around to modifying FFO to include both gains on sales and impairment, then it obviously would change things. But they cannot seem to get there.

Okay. I thought because there is land, it might be a candidate. Okay.

Just lastly on the yield that you expect from your joint venture with ABP and TIA, can you give us a sense of what your hurdle is before and after promotes?

Very high double-digit return. Our goal -- I mean I will put this in the context of -- the hope for an opportunity fund like investment is midteens, and the general partner of an opportunity fund generally gets to promote that. It is a lot of dig into that number, so that is the goal. But there is a preferred return and a return of capital that is required before we as the general partner will receive any of that, those dollars. So as someone asked earlier, obviously we're going to get paid when we sell these assets.

Frank Greywitt. KeyBank Capital Markets.

Looking at New York, you're rapidly becoming fully leased with the lease of both Times Square Towers. Is there any opportunity or appetite for you guys to acquire core office assets in this market?

(multiple speakers). The answer is yes. But, of course, as we have said before, it is a yes but, because it is a pricing question. And as Jim Sullivan pointed out early on, maybe we are victims of our own conservatism because previously we paid prices that seemed high at the time and turned out to be real bargains. But most of the assets that we have looked at and competed for in New York have gone for pricing that is higher than what we would be prepared to pay for some of the reasons we talked about before and especially even in New York because of the replacement cost problems.

What is frustrating to us, of course, is that we would love to be doing more development in New York, and we are very very aggressive about exploring potential site opportunities, but they are very difficult to come by. So that continues to be a major focus, but it is a focus that so far we have not been able to deliver on.

Thanks and moving quickly to termination income, the $1 million assumption, is that consistent with prior periods when the economic environment was as it is now?

Yes, I would say it is probably pretty consistent. If you look back to -- it was different, though. If you look back to '98 or '99 or 2000 when the market was very strong, we were doing termination transactions and marking up the rents to the tenants. But we are now in a situation where we have tenants who are expanding. Rents are not appreciating dramatically. We have just moved out of a situation where we are basically getting forced termination income. So I hope that we have some positive termination based upon the movement of tenants and tenant expansions, but it is what it is.

And then finally on Times Square Tower again, do you expect there to be anymore income into 4Q '04 relative to 3Q '04 due to the timing of the space moving online?

Yes.

Can you quantify that?

I can't.

How much square footage? Can you give me that number?

I don't have it. It's a question of during the quarter we had certain leases that came on at various times during the quarter. So as of August 1, we had stuff coming online. We had stuff coming online as of September 10. It's just too much movement.

David Copp. RBC Capital Markets.

It is Jay Loop (ph) here with David, RBC. Doug, just with respect to 2005 and the guidance that you gave us, could you give us just a little bit more color with respect to tenant improvements, commissions and CapEx? I'm looking at your various markets. Do you think that the market is set to work back in your favor with respect to these dollar items, and what sort of functions do you have right now folded into your 2005 guidance?

Well, I guess our numbers are consistent with what I have said, which is I think on average we are going to be spending somewhere in excess of $20 a square foot on our TIs on a blended basis. That his renewals and new transactions.

Remember that we're leasing space today for 2005. So we are in today's marketplace, and in Boston it is different so. It is still a tenant market, so you're being required to put in significant capital. I don't believe that we're going to see any significant reduction in those numbers. I hope that as we do it more expansions we are going to be able to reduce those numbers because we obviously spend less money with existing tenants than you do with new tenants on average. But it is a unfortunately fact of the market that transaction costs -- our tenants continue at their current rates until the markets truly recover.

Okay. And then just one follow-up item and then give some color on possible asset sales going forward. But just with respect to your hotel assets and the fact that we are in a low (inaudible) environment for just about every asset class here. What is the possibility that we actually do see you selling the hotel assets sometime in the next 18 months? If not, why wouldn't we take advantage of this environment?

18 months is a hard one to predict. There is nothing sacrosanct about the hotels and about the potential sale, while you're quite correct that cap rates are very low for hotels. The other thing that has been low in our particular case is the NOI being produced by those hotels. And we did not want to be selling or even consider selling hotels off of an NOI, which as we have described before, was 50 percent of what it had been at its high point.

As the NOI recovers, we will be taking another look at that. So a combination of recovering NOI and certainly the ability of respective buyers to be optimistic about where our NOI is going, coupled with low cap rates, may make one or more of those hotels very desirable disposal opportunities. Whether that occurs within the next 18 months or not, I don't want to speculate but it could.

Fair enough. Ed, with respect to the big dig on behalf of California taxpayers, you are welcome.

Thank you. Thank you very much.

(inaudible) which was mentioned at another point was full impact of the changes by Marriott Long Wharf are just really now being realized, and it changed that whole neighborhood in a significant way.

I want to be sensitive to everybody's time, so we will try to put some cap on the call looking forward from now maybe with a few more questions.

David Loeb. FBR.

I will be very quick. I want to follow up with Ray on one particular item that was discussed earlier. Ray, having grown up in St. Louis where do your loyalties lie?

Check, please. I am a die-hard Cardinals fan, and I held my words there when we are talking about the 3-0 comeback, and I think it would just be the ultimate Red Sox turnaround if the Cards prevailed 4-3.

Yes, it would, Ray. Where will you be working next year?

Thank you, gentlemen.

Thank you everybody for joining us, and we look forward to talking to you next quarter.

Thank you. Ladies and gentlemen, this concludes the Boston Properties third-quarter 2004 conference call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000, or 1-800-405-2236 followed by access number 11010532.

Once again, we thank you for your participation. You may now disconnect.