波士頓物產 (BXP) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Boston Properties fourth-quarter 2004 conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Wednesday, January 26, 2005. I would now like to turn the conference over to Ms. Kathleen DiChiara, Investor Relations Manager with Boston Properties. Please go ahead, ma'am.

Good morning, everyone, and welcome to Boston Properties' fourth-quarter conference call.

The press release and supplemental package were distributed yesterday, as well as furnished on Form 8-K, to provide access to the widest possible audience. In the supplemental 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, these documents are available in the investors section of the Company's website at www.BostonProperties.com.

Additionally, we're 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 website in the investors section under the heading "Audio Archives".

To be added to our quarterly distribution list, please contact Investor Relations Department at 617-236-3322.

At this time management would like me to inform you that certain statements made during this call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, it can give no assurance that those expectations will be obtained.

Factors and risks that could cause actual results to differ materially from those express or implied by forward-looking statements are detailed in yesterday's press release and from time to time in the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statement.

With us today I would like to introduce Mort Zuckerman, Chairman of the Board; Ed Linde, President and Chief Executive Officer; Doug Linde, Chief Financial Officer; and our regional management team. And now I would like to turn the call over to Doug for his opening remarks.

Good morning, everybody, and happy New Year. We scheduled this call and did our release at about the same time that we typically do it in past years, although this year the demands of the new Sarbanes-Oxley Section 404 regulations have certainly complicated our schedule during the quarter. So I would just like to take a moment to tell you all where we are in that process.

During the last nine months we have been documenting and documenting and testing and testing, and then modifying where appropriate our corporate control structure as required under the new Sarbanes-Oxley regulations. Testing of some of our key financial statement processes like closing the books and our annual financial statement consolidation are still underway, because, for example, neither our internal auditors nor our outside auditors could begin a testing of our fourth-quarter financial closing process until we actually completed the fourth quarter close. So we are all immersed in our testing work, and our outside auditors are now conducting their independent audit of both our financial results and our control environment. And we expect to get all this work done within the SEC reporting requirements by March 15th of this year. With that, I won't talk about Section 404 again, I hope.

2004 was another solid year for Boston Properties as measured by many different standards. First, if you think about our funds from operation, 15 months ago we provided 2004 funds from operation guidance of 3.93 to 4.11, and that was with an expectation of some continued rental market weakness. During the year we were able to refine our guidance, both by narrowing the range and by moving the expectations higher. And our actual results as reported last night were funds from operations for the year at $4.16. For the fourth quarter we were at $1.05, which was in line with our First Call estimates, as well as our guidance from last quarter. Second, for the seventh consecutive year we raised our dividend. Third, and this is probably the most important thing, we completed over 6 million square feet of leasing in calendar year 2004 while managing transaction costs and our nonrecurring capital expenses. And we were able to cover our dividend while paying out 87 percent of our cash flow. Fourth, we commenced construction on $260 million of new development, which will be placed into service during 2006 with expected net operating income returns in excess of 10 percent. And fifth, we delivered a total return of 39.6 percent in 2004. That includes dividends.

We achieved these results while reducing our leverage. It has been frustrating and dilutive to maintain a significant cash balance during the year. But we remain convinced that the patience, restraint and investment discipline that has left us unwilling to match the high prices being paid for many assets is appropriate. We have $239 million of cash on hand, significant capacity to fund additional investment opportunities, and we look forward to investing that cash appropriately going forward.

Generalizations about the office leasing environment don't seem appropriate as we look forward to 2005 since there's considerable divergence in levels of activity to supply and demand balance and rental economics in the five separate regions in which we operate, and each of our regional managers will provide specific comments on market conditions in their areas a little later in the call.

In each market, our operating teams have completed significant leasing transactions not only for existing vacancies, but to cover major lease expirations scheduled for '05 and '06. As I said, we completed 6 million square feet for the year, and during the fourth quarter completed gross leasing transactions of over 2 million square feet. The activity was led by San Francisco with over 760,000 square feet, followed by 662,000 square feet in D.C., 434,000 in Boston, 123,000 in New York, and 66,000 in Princeton. The last two years our total transactional activity averaged about 3.6 million square feet versus 6 million.

From the vantage point of six months ago, our most significant upcoming leasing exposure was in San Francisco. So it's particularly gratifying to see what our regional team has accomplished since then. At Embarcadero Center we completed almost 660,000 square feet of leases during the fourth quarter alone, including 442,000 square feet of 2005 and 2006 expiration in addition to 155,000 square foot replacement tenant at 3 EC for a rent who is going to commence during the third quarter of '05 to cover the KPMG lease that expired on December 31st of 2004. If you think of lease exposure as the total vacancy and short-term rollover say the next two years, we reduced our Embarcadero Center exposure by 25 percent over the last 90 days. Our 2005 expirations at Embarcadero Center now sit at 155,000 square feet, down from 310 last quarter. And in 2006 the number is 624 versus 746. Those numbers are all in the supplemental in the back of our roll outs.

Other leasing achievements this quarter are as follows. In Boston our total occupancy increased to 91.2 percent. We did a 45,000 square foot lease at 33 Hayden Avenue, bringing that building to 100 percent. We did 52,000 square feet of leases at the Prudential Tower, which reduces our 2005 Tower exposure by over 18 percent. And we did a 54,000 square foot lease expansion at our Westin Waltham Corporate Center, bringing occupancy at that building to 89 percent.

In D.C., in addition to the 376,000 square feet T. Rowe Price renewal at 100 East Pratt Street which we have talked about before, we completed a 55,000 square foot renewal with the GSA at Metropolitan Square. We completed additional leasing at our development at 901 New York Avenue, which is just coming online and is now 88 percent leased. And we did two full-floor renewals at One Freedom Square in Reston. Our D.C. occupancy stands at 98 percent.

In New York City, we completed a 41,000 square foot recapture and expansion and 599 Lex. We leased an additional 80,000 square feet at Times Square Tower, where we now sit at 86 percent leased. That includes all the rebuild space. In total our New York City portfolio is 96 percent occupied.

And in Princeton we completed a number of renewals and expansions and we ended the quarter at 90.2 percent occupied.

Our total in-service portfolio occupancy was 92.1 as of December 31st, up from 91.8 last quarter. And our average remaining lease length has moved up to 7.6 years from 7.3, which I believe is our historical high. And our 2005 lease expiration totals is now just 5.2 percent of our office square footage, 4.9 percent of our current gross revenues.

Second-generation leasing statistics are broken out in the supplemental as well on page 49. This quarter the numbers show a 15.8 percent decline in rent by a net basis and a 9.5 percent decline on the gross. In fact, overall portfolio growth asking rents are actually going up. So we have operating expense increases which have continued to reduce the net rents.

The bulk of our uncovered lease expiration in '05 and the current vacancies still sit in Boston and San Francisco, however. Across the portfolio, average expiring rents excluding the retail space that we have, over the next 12 months there is $35.50, with a roll down of about 17 percent. So that's the whole portfolio. In Boston and San Francisco in the next 12 months the average expiring rent is $38.75, and we believe the roll down there is going to be about 23 percent for '05. So in Boston and San Francisco it's about 23 percent. So if you look at the whole weighted average portfolio not just for 2005 but going forward, the average rent is $41.50 and our view of market rents on a weighted-average basis is $38.75.

If you look at the transaction costs this quarter, our second-generation office leasing cost was 29.33. That number is a little bit misleading. The 376,000 square foot renewal at 100 East Pratt Street in Baltimore is included in the statistics. It has a very large impact on the results. If you strip that transaction out, leasing costs were only $19.44 per square foot, which is in line with our experience over the past three quarters of about $21.75.

Renewals and expansions in the fourth quarter encompassed 90 percent of all of our transactions. Based on leases we're currently negotiating, we expect average transaction costs in '05 to be somewhere in the mid-20s.

Our dividend/FAD payout ratio for the quarter for the fourth quarter, which we talked about, and I want to remind you again which includes all of the leasing costs associated with the leases that begin in that quarter, regardless of whether or not we're spending the money at that time, as well as all of our recurring capital expenditures for our all our properties and hotels. We apply all of the money in that quarter, even though the cash may not be spent at that time. So, if you think about the T. Rowe Price transaction again, and you realize that we accelerated all of the second-generation transaction costs into our ratio this quarter, the numbers are as follows. If you look the T. Rowe Price deal and include all the transaction costs, the number is 109 percent. If you strip out the T. Rowe Price costs which are going to be spent over the next three years, the dividend payout ratio is 89.2 percent. And as I stated earlier, for the year we were at 87 percent including the T. Rowe Price transaction for the whole year.

On a year-to-year basis, the hotels continued to show good topline improvement, not great topline improvement. RevPAR was up 9.5 percent for the quarter and for the year was up about 10 percent. If you exclude the hotel results, our same-store NOI was up 1.1 on a GAAP basis and 1.5 on a cash basis.

In addition to our cash, our current capital structure provides us with very significant opportunity for acquisitions and development. Our floating rate debt makes up about 8.5 percent of our total debt obligations, and the majority of that is in our transaction in Times Square Tower.

We have two maturities in '05, a $225 million loan which expires on 599 Lexington Avenue in July and a $92 million loan which expires at EC West in California in December. We are now examining all of our options, all the various debt market, evaluating the conditions there, and may refinance or hedge those markets over the next few months. So we may not wait until those maturities occur to do something.

Turning to our 2005 results, we are maintaining our current guidance, which is between $4.10 and $4.25. For the first quarter we're anticipating a range of 95 to 97 cents. I know there's some questions about the sequential decline, so let me address those.

The hotels historically have less impact during the first quarter due to the seasonality. So if you think about that, in 2004 the first quarter had a 7 percent financial contribution as a percentage of the total hotel portfolio for the year. The fourth quarter had a 35 percent conservation. Therefore, if you adjust down I think you will be able to understand why our first-quarter guidance is lower than our fourth quarter of 2004. So if you apply the seasonality for the hotels of 2004, I think you will get a good surrogate for 2005.

The other thing you have to remember is that there is percentage rent that we earn in our retail portfolio at Prudential Center which is all booked in the fourth quarter each year based upon our GAAP principles.

Looking at the makeup of our currently vacant space, there are a number of large blocks that contributed revenue in '04 that are going to be soon vacant for '05. These include space like the Old Federal Reserve and EC West in California. There's a large block at Tower Center in New Jersey and a large block at 202 and 210 Carnegie Center New Jersey, as well as about a 40,000 square foot block of space at the Prudential Center retail, which is now vacant due to the bankruptcy of a large restaurant which had occurred during this quarter. In addition, we have about 100,000 square feet of Capital Gallery, and what you have to remember -- which is the building that we took out of service to build a 200,000 square foot addition. And that's going to be out of service for about 18 months. We have some assets we're going to get a full contribution in 2005 -- 611 Gateway, all rent commenced as of December 31st; 211 Carnegie Center, we have a new tenant in there as of end of December; and New Dominion Two, which is our new development in Herndon, Virginia, and Times Square Tower, as well as some recent leases that didn't contribute revenue will contribute in the second half of '05, therefore increasing our contribution from some assets as well.

If you combine all of the property-level transactions, we are anticipating about a 100 basis point increase in occupancy over the year, although quarter-to-quarter there may be a 50 percent variation going up and going down. Again, we're going to experience a roll down in rents in '05 and we will probably experience a roll down in rents in '06 as well. So about 17 percent for the portfolio in '05. That again is offset by increased occupancy, as well as higher contributions from these newly delivered buildings like Times Square Tower and New Dominion which obviously have a higher gross margin. Exclusive of our hotel income, our in-service portfolio NOI should be up 3 to 5 percent over '04. And that number includes straight line rents at about the same level as 2004, which is in our supplemental.

Our 2005 interest expense is going to be up between 3 and 5 percent on a run rate basis looking at the fourth quarter. And that reflects the full-year elimination of cost capitalization on our development properties which were brought into service during 2004.

We think our margins are going to be slightly lower than historical averages based upon some of the roll down in rents, but it shouldn't be much of a difference.

And our guidance only assumes about $1 million of termination income. We have really seen a very dramatic slowdown in bad payors and bankruptcy issues and tenants struggling to get out of leases because they just don't like being in our space anymore from a financial perspective.

We earned $20.5 million of third-party fee income in '04, and several of those assignments have been completed. Consequently, we've reduced our budgeted third-party fee and development income to about $10 million. That's a $10.5 million reduction over Q4. We're going to continue to pursue new fee services. We're starting to get some of those projects now. And we're going to be able to partially restore that business and hopefully grow it in future years, but 2005 is going to be a struggle to get much above $10 million.

Our hotel contribution was $20.6 million in 2004 and we're budgeting between 22 and $23.5 million for 2005. That's about a 15 percent increase.

Our G&A expense for '05 is budgeted at 55 to $56 million. It's up slightly from '04, and it is due to two things primarily. One is the change in Massachusetts state tax code that's increasing our taxes by about $1.5 million in '05, as well as an additional year of vesting of our long-term equity compensation program. We have a five-year plan and we're now in the third year of that. So we have two more years of additional increases in vesting that will increase our G&A expense. The G&A expense is net of capitalized wages of about $6 million.

Our guidance is based on our existing portfolio. We have firm plans to market certain assets this year, and when we have a better sense of both the timing and the form of those transactions, we will adjust our estimates. But as of today, we are marketing $425 million worth properties -- probably in excess of that. But our numbers assume none of those sales.

Although we continue to seek attractive acquisitions, and we hope to at some point to consummate some during 2005, for the purposes of the guidance we have assumed no acquisitions in '05. As you look towards '05, we're going to be devoting significant energy and significant capital to our current and future development pipeline. At 7 Cambridge Center we have a $147 million building to build. Our Building E at Reston Corporate Center is $46 million. Capital Gallery, that expansion I referred to a few minutes ago, is a $70 million job. At 9th and E we intend to get going on a new building hopefully in July. Our share of that is about $60 million. We're in a 50-50 joint venture. We started a new development at a place called Wisconsin Place up in Chevy Chase, Maryland. The beginning portion of that is about a $26 million cost for the infrastructure. And we're pursuing additional development sites in our core markets. And in fact, our teams down in Washington D.C. led by Ray and Mitch were recently chosen by George Washington University to entitle and develop a major parcel on Pennsylvania Avenue that's going to get going sometime in '06. But we're going to be spending a lot of energy and some capital on that in 2005.

In summary, if you use a growth rate of up to 1.5 percent on the fourth quarter 2004 property NOI run rate excluding the hotels and all these other assumptions, and you assume a share count of about 139 to 140 million shares for '05 -- that takes into account the possibility of some option exercises -- our '05 guidance falls in the range of the 4.10 to 4.25. That guidance includes $10 million reduction in our third-party management and development income, a $3 million reduction in termination fees, which should be stripped out from a comparison if you're looking at '04-'05, and again, no additional property acquisition.

With that, I will turn the call over to Ed.

Good morning, everybody. Thanks for being with us. I am not going to make any prepared remarks today, but of course will be available during the question-and-answer session.

What we thought we would do today is to give you a closer insight into what's happening in the markets in which we operate. So I've asked each of our regional managers and to be prepared to discuss what's going on in their home regions. And will start with San Francisco, and let me ask Bob Pester to lead off.

We witnessed a much-improved market in San Francisco during 2004, and the vacancy dropped from about 18.2 percent at the start of the year to 15.4 percent in Q4. We had total positives absorption of just over 1 million square feet.

If you look at the market, though, it continues to be bifurcated. Demand remains extremely good for top-quality assets with view floors, while lower-quality commodity-type space continues to languish in the market. At Embarcadero Center we continue to be the beneficiary of this for the fight of quality of people trying to move up in better quality properties. And this is probably best exemplified by the new lease we signed with PwC for 155,000 square feet in the fourth quarter. They are actually vacating a South of Market location even though they have several years left on their old lease.

A significant portion of our 2005-2006 rollover exposure was covered in 2004 when we completed almost 1.3 million square feet of renewals or new deals. Based on deals that we signed in Q4, we see our high-end space commanding rental rates now at approximately the mid-40s.

Looking forward at 2005, our assessment is that San Francisco CBD market will continue to improve, but the improvement will occur in gradual steps rather than large spikes. Our expectation is that it will still be a few years until one can say that overall conditions in San Francisco are healthy from a landlord's perspective.

Looking at the peninsula, and specifically South San Francisco, the market remains a challenge and is anemic at best with a vacancy of approximately 25 percent. The good news is that Genentech continues to grow in our buildings at Gateway, having become the largest tenant in our San Francisco portfolio in 2004. We have continued to have discussions with Genentech about their space needs and are optimistic that they will continue to occupy more space in our project.

With that I will turn it over to Bryan Koop.

In Boston our focus remains in three markets -- Boston, Cambridge and Suburban 128. Let's look at Boston first.

It's the theme of high-rise versus low-rise. Availability and rental rates have become significantly different between high-rise and low-rise. Vacancy above floor 20 in the marketplace is 3.4 percent. Vacancy below floors 20 are 12 percent. This does not include sublease space. We anticipate rental rates in the commodity low-rise space to be in the mid-20 range. Former Fleet Bank space on lower floors will not help this trend. Rental rates in high-rise will be between 40s and 48.

Positive trends that we anticipate helping us in our focus for this year which is the releasing of the Digitas space at Prudential Tower include the shortage of the high-rise space with views. And we anticipate some growth from small to mid-sized companies, particularly in the Back Bay. Of the 279,000 square feet that we had with Digitas which will be coming vacant, we have 200,000 remaining. Those will be on three lower floors and five upper floors, or five high-rise floors. We do not anticipate much if any overall positive absorption in the marketplace, and we can characterize it as the malaise of the post-merger bank era and then also some small law firms merging as well.

Let's focus on Cambridge now. We see no signs of recovery yet in Cambridge. Market continues to suffer from tech demand being stagnant. Market space availability in the fourth quarter increased a little bit to 22 percent vacancy. We forecast more of the same for 2005. We believe rental rates have bottomed out. However, we do see some pressure on some of the top assets as the top assets are seeing a few expirations in 2005. Anticipated rental rates would be mid-20s to low-30s.

We continue to see little demand in growth from mid-sized tenant in the Cambridge market, and the suburbs have begun a very accessible location for tech companies. Where's the activity in Cambridge? It's in bio and lab. However, these companies are focus on specialized product. A good example is the development that Doug mentioned earlier, which is our build-to-suit with the MIT-Broad Institute. Bio-Lab and residential will be where the activity is in Cambridge this year.

Now let's focus on the suburb market, 128. It's slow but steady. A slow but steady recovery in 2005 was their theme. We were pleased with our 5 percent drop in our vacancy of our portfolio. However, the market in general only dipped by 2 percent. The Suburban 128 market remains at 16.8 percent, not including a 4 percent sublease market. We anticipate modest rent increases of 1 to $2 in Waltham, with fewer buildout concessions. However, we are achieving 5 to $8 above this in our assets. Market deal and transaction volume will remain expiration driven. However, we are optimistic of some internal growth as we witnessed last year with Oasis Semiconductor and Unica providing 40,000 square feet of internal absorption or growth in our portfolio. Another positive trend is the reduction of large spaces in this marketplace. Of our three markets, we are the most optimistic about the Waltham, however guarded.

I will turn it over to Mickey Landis for our Princeton region.

The current vacancy rate for Class A space in Princeton Route 1 market is 15.4 percent, which is more than triple Carnegie Center's vacancy rent rate of less than 5 percent. We expect modest positive absorption in the market with vacancy rates continuing to decline. For the first time in a few years, there are several large active requirements in the market. Should a few of these land, the market vacancy rates could possibly reach single digits. We're also starting to see spec development for the first time in several years. The Princeton market continues to be acknowledged as the most stable market for Class A office space in the state of New Jersey.

While Tower Center activity remains very quiet, there's no rollover there for the next two years. At the same time, we continue to see an increase in tours, proposals and leases for Carnegie Center. This increase in activity makes us optimistic about our re-leasing prospects in 2005 and in achieving increases in rental rates of 1 to $2 per square foot, returning to the $30 per square the range. Our rates are typically $5 above the rate for Class A space in this market. While we face the coming year with rollover of 285,000 square feet, we expect our total occupancy rates increase by a point or two by the end of 2005.

I will now turn this over to Robert Selsam, regional manager of our New York office.

As we look forward to the Midtown market in 2005, we believe that the strong positive net absorption experienced in 2004, coupled with a continued lack of new supply, is going to continue over the next 12 months as demand continues to outstrip supply. This will drive the vacancy percentage down from about 10 percent today into the high-single digits by year's end. Rental rates for high-quality Midtown space, which currently average around $50 per square foot, could increase by about 10 percent as a result. Our New York properties are hardly average in terms of quality, however, so that our 2005 rents will range from a low of the 50s into the 70s and perhaps even the 80s.

Rising rents over the last year have also been accompanied by following concessions, with free rent moving down toward the time it actually takes to build out of space and TI's moving back into the 40s. Reported midtown rents would have moved even higher, but for the fact that the better quality spaces have actually been leasing the fastest, thus taking these spaces out of the statistics, with the result being that the average rents and lowered by the more expensive spaces being taken out of the statistics.

Given that our New York portfolio was already 96.6 percent leased, and nearly 99 percent without Times Square Tower, we feel very comfortable with the leasing prospects for the approximately 260,000 square feet currently vacant and the additional only 4,100 square feet on which leases will terminate during the year. This availability of the 260,000 square feet consists of roughly 87,000 square feet at the top of Citigroup Center, and the balance is at time square Times Square Tower where we have only one full tower floor available. And our pre-built suite program continues to produce a high velocity of signed leases with 15 suites leased to date and a substantial pipeline of leases out and continuing supply of new potential prospects, despite the fact that we've raised prices on these suites. We recently signed our first retail tenant at the corner of 41st Street and Broadway, and we have seen a marked picked up in retail interest for the remaining space.

Let me now introduce Mitch Norville, regional manager of our Washington office.

Thanks, Robert, and good morning, everyone.

In the Washington region, like Boston, we focus on three markets -- the District, Northern Virginia and Montgomery County in Maryland.

In the District, even though we saw a very healthy positive absorption in 2004 of approximately 1.7 million square feet, the overall vacancy rose from 6.6 percent to 7.5 percent as construction deliveries -- approximately 2.5 million square feet -- continued to outpace demand. In 2005 we expect to see a similar outcome where product deliveries will again outpace overall demand. Approximately 3 million square feet of product will deliver in 2005, and it is currently a only approximately 33 percent leased. In contrast, as Doug mentioned earlier, our new development in 9)1 New York Avenue which recently delivered, is currently at 88 percent leased.

While new construction is still being driven mostly by the larger law firms and GSA tenants, we've seen a few developments start this year on a totally spec basis. In the case of most of the pre-leasing, they're paying premiums, full-service rates of approximately $60 per square foot, which is over our current run rates in the basis of 40 to $50 a square foot, in order to secure a large enough space to accommodate their growing needs. Given our lower vacancy and our minor rollover and the quality of our product, we're very confident that we will maintain our over 99 percent leased status again this year in the District.

In Northern Virginia positive absorption in 2004 of approximately 5.8 million square feet is driven mostly by defense and intelligence agencies with the government and related federal contractors. The overall vacancy rate dropped from 16.3 percent to 13 percent by year end, even though much of the absorption was the result of build-to-suit activity. Even with this activity, market rates have remained fairly flat except in a few narrowly defined markets such as Reston Town Center, where vacancies are less than 1 percent. We expect the weak underlying market to keep construction on the sidelines in 2005, and there's still a limited supply of large vacant spaces in the market. However, developers are actively tying up but sites and arranging approvals in order to be in position to start new construction as soon as vacancies tighten enough to result in rising rental rates. Much like our downtown portfolio, we have limited vacancy and rollover to deal with in 2005, and where we do we are well positioned in the Reston market. If absorption continues at or near the 2004 pace, we fully expect to see a pick up in build-to-suit opportunities during the year and real movement towards speculative construction by year end. We're well positioned to take advantage of these opportunities with our current land holdings in Northern Virginia.

In Montgomery County, Maryland in 2004 the absorption was positive for all four quarters and totaled approximately 1.2 million square feet for the year. Consequently, vacancy dropped from approximately 12.6 percent to 11 percent. The Maryland market in general and Montgomery County in particular is a steady, less volatile market than Northern Virginia. Based on the leasing progress of the past year and the lack of new construction starts, we would expect 2005 to be another year of market improvement that should result in rental rate improvements and further reduction in vacancies. As vacancies dip below 10 percent and rental rates start to rise, we will see the start of some speculative construction, mainly by the year end or early 2006. In our portfolio we saw a decided pickup in activity over the last quarter at our Democracy Center project, both in the number of prospects and the size of prospects. We fully expect to make a real progress this year in reducing our vacancy here and dealing with the rollover in this project based upon this increased activity and the general market improvement.

I now will turn the call over to Mort for his comments.

Good morning, everybody. As you can hear from the various comments of our regional leadership, there is a broad-based, across-the-board improvement in these markets. And I think we all sense that it's going to continue through this calendar year. Of course, it reflects as well the overall condition in the economy in which corporate America has a lot more confidence, a lot more profitability, a lot more cash to spend, and is certainly beginning to do that in many different areas. So we remain reasonably bullish about the economy and the office market going forward.

The interesting thing is going to be the direction of interest rates. It seems to me that it's going to be fairly clear that there will be rather steady increase in the Federal Funds rate, which have been going up at the rate of about 25 basis points a quarter. Depending on how the economy goes and how the inflation rate goes, I suspect that this rate will continue, but at no greater pace than what I think has taken place, and maybe even at a slower pace.

What is interesting is that the 10-year has remained around 4.20 on the treasury. And this is a remarkable stability for this particular piece of paper, because it's a benchmark for so much other financing. And the reason for it is not only the sort of supply of savings around the world or in the willingness of a lot of governments such as China to buy this kind of paper, but frankly it is also due to the fact that the core inflation rate has remained really quite low in the 2 percent range. And a lot of people feel that it will stay within that range, and therefore I don't think there will be that much upward pressure. It may go up somewhat on the 10-year, because as we saw, the short-term rates went up by 100, 125 basis points. And in fact, in the last six or seven months the ten-year if anything has dropped by about 50 or 60 basis points.

The other thing that is really remarkable about the real estate business, which in the sector that we are in, which really is an important piece of the overall ability to evaluate companies like Boston Properties, is what has happened to asset values. For all for all kinds of different reasons there's a tremendous amount of money flowing into the commercial real estate sector and the investment side of real estate. And values have exceeded -- in Washington, we're now above $700 a foot. In New York, we're for the very best properties above $800 a foot. And I believe that this is a trend that is not going to be diminished as we go forward, in part because of the low interest rates and in part because we're in a cycle now where really across the board we're going to see improved absorption, decreased vacancy rates, and increased rentals. If interest rates do go up somewhat, I think there is a sense that rentals will go up as well, particularly since the ability to add new supply in most of these markets is quite constrained.

So all in all, we really turned bullish last year. We remain bullish this year. And I think our experience in terms of going through what has been a very difficult down cycle in the commercial real estate cycle has really been quite positive because we were able to maintain through all of this our earnings and our earnings growth, even though it moderated somewhat. We do think we're heading into a much more positive cycle from the point of view of increased activity and increased rentals.

So we are feeling very comfortable about where we are with the basic business strategy that we have had in terms of concentrating on the best properties and the markets which have supply constraints. This is still going to be our basic strategy, and we're going to exploit it, and we're going to exploit it particularly through that part of the activity, the real estate activity in which I think we have as much competency as anybody in the industry -- it's really our core competency and how this Company developed over its first 27 years -- which is through the development of the Company. This is still something that we really believe we do extremely well, and have a great sense of how to do it well. And we're looking for a lot of development opportunities. For the obvious reason (indiscernible) going in on the development are significantly higher, are really in many cases higher than what you would get in terms of acquisition of real estate. And given the strength of the market for (technical difficulty)

We are also going to look to again the pairing of our portfolio to look to see which assets we ought to think about disposing. And as Doug mentioned, we have a couple of assets that we are definitely going to go into the market with. We have been peppered many times with inquiries about some of the assets that we have because we really have an absolutely top flight portfolio of assets, which were we to put these on the market would really inspire great demand. But on the other hand, these are impossible assets to acquire. So it's an interesting conundrum, particularly when we look forward to a period of increasing rental rates.

So that the sort of reflects our overall feel and value. I think we have a lot of credibility in the marketplace. We have a lot of funding that will give us the ability to do things and more very quickly. And I think we have a core management group that has now worked together for not just years, but for decades. In all of our markets we believe that we have the capacity to do multiple projects, particularly multiple development projects, and do them well. So we think we're positioned to take advantage of what we think is going to be a continuously improving market.

With that I will stop my comments. And Ed, do you want to --?

We will entertain questions at this point, Mort.

Let's look to the audience. I guess we have a substantial group of people listening in, and we're happy to answer your questions.

(OPERATOR INSTRUCTIONS) John Stewart, Smith Barney.

It's John Litt here with John Stewart. A question I guess for Doug or for Bryan. Doug, I think you had said in Boston that you had addressed a bunch of your '05 lease expirations. And I don't know if I'm reading the supplemental right, but it looks like there is still 700,000 rolling. And it doesn't look like it's down that much from last quarter's supplemental. Maybe I'm missing what's happening there.

Some of the stuff that has been done again is activity, but the leases haven't actually gone into service yet, so they haven't hit our supplemental numbers. In some of the spaces, it's already leased. So for example, Digitas is still in their space until 2005. We have relet the space, but it's still showing as the expiration until that space rolls, and then it will sort of disappear and go out to its new term.

What's the amount of remaining space that you have to deal with?

The biggest block that we have that's got an expiration in the CBD is the Digitas space which is about 270,000 square feet. And we've leased about 70,000 of that to date. Now some of that is extensions of existing subtenants, and some of that are new tenants that are going to taking over the space as Digitas moves out.

So you still have a fairly sizable chunk of 700,000?

Absolutely. The biggest chunk is that 200,000 square feet. The next largest rollover, John, is a 70,000 square foot chunk which expires at the end of August, which is at 265 Franklin Street. And that's our joint venture property with the New York Common Fund. And although we believe that tenant is going to be holding over for a period of time, so we are not (multiple speakers)

I guess that's my question. I don't know if it is 6 or 700,000 feet; after you cut through the Digitas it is less. But do think that more of that may go vacant? And I think you mentioned how much rents are rolling down, and I think I missed that.

The rents are rolling down about 23 percent combined San Francisco and in Boston. But I do think some of that is going to be vacant for a period of time.

San Francisco and Boston, what is it in Boston?

I don't have that number in front of me broken out.

So you might see occupancies decline in Boston, which is your largest roll this year. But you think overall occupancies will be up about a point?

Yes.

John Stewart I think has a question as well.

On the 80,000 square feet of leasing that you mentioned at Times Square Tower, how much of that was in the fourth quarter? And was any of that subsequent to year end?

Yes. Some of it was subsequent to year end, but most of it was in the fourth quarter. So the largest pieces of it were two half floor deals that were done in I think like December 17th, something like that. But most of these deals are between 4 and 5,000 square feet. So I don't have a handle in front of me of how much of it was post-January 1st and how much of it was pre-January 1st.

80,000 square feet was leased during the fourth quarter.

I know that Times Square Tower is not the swing factor it was, but --

Could I ask, based on comments that we heard -- but please go ahead with your question. But if each group could hold their questions to one, and then perhaps a follow-up, I'd appreciate it, because we've got some feedback from others that -- go ahead. You understand my concern.

Just to wrap up then, Doug, what do your numbers assume for lease up of the remaining retail space?

We expect that we're going to get the remaining retail space done in 2005. There will be some free rent associated with that retail space. So when it actually hits the books for might GAAP perspective, I can't really tell you. But we expect the space to be leased during the year. We've actually covered -- the leases isn't signed, but we have a deal pending on one of the floors that was retail space that we're actually converting to office space. It was one of the basement floors.

Thank you.

Gregory Whyte, Morgan Stanley.

Doug, you referenced the cash balance that you have right now. Versus our model expenses were a little higher-than-expected. It doesn't appear to me that you have ever been constrained on the acquisition front for lack of access to capital, so I'm curious as to why you're keeping such a high balance out, and is that foreshadowing something which you're not yet reflecting in your guidance.

It doesn't foreshadow anything. I wish it did, Greg. Unfortunately, we don't have much in the way of debt that we can prepay. And our viewpoint is that we should be financing our larger development properties with properties (indiscernible) debt, because of the time associated with those properties, and that we should keep our cash and our line of credit free for unavailable transactions as they occur. And we recognize that it is dilutive to be holding onto $239 million of cash, but we really haven't -- unfortunately haven't had a better use for it.

Thank you.

Lou Taylor, Deutsche Bank.

Doug, could expand a little bit more on your CapEx outlook for '04-'05 in terms of the T. Rowe lease? How much really hit in fourth quarter and drove up the fourth-quarter number? And how do you see it falling throughout '05?

The fourth-quarter number was driven up almost exclusively by T. Rowe Price. As I said, if you backed out T. Rowe Price, we're at about $19.50 a square foot. We expect that the actual cash from T. Rowe Price will be spent, believe it or not, over the next three years. They have signed a -- what is it? A 12 year extension. So the lease goes out now to 2017. And they're basically going to go through a systematic restacking of all their space over time, and that is going to taking a significant amount of planning and coordination on their part. And it's not going to be done in a six or a twelve month period. And I'm not aware that they've even begun any actual architectural drawing on that requirement right now. So I would expect it's going to probably be back-weighted towards the end of '05 and into '06 and maybe even into '07.

Thank you.

Jim Sullivan, Greenstreet Advisers.

Doug, you said, if I heard you correctly, that you're in the process of marketing 425 million. Was that correct?

You heard that correctly.

That dwarfs the size of your '04 disposition program, and I would characterize your '04 disposition as sort of nibbling around the edges. You sold some of the tech; you sold some industrial; you sold some non-core assets. Given the higher volume, are you changing your disposition thinking a little bit and maybe trying to take advantage of prices approaching 700 a foot in Washington, as Mort said, and 800 in New York? I guess said differently, would you consider selling a core asset to take advantage of current pricing?

Let me answer the first part of your question first. Nothing changed in terms of our thinking between 2004 and 2005. We think pricing was attractive to sell in 2004 and will continue to be attractive for sales in 2005. But what we accomplished in 2004 with certain assets is to improve the leasing picture very considerably. And therefore, it makes them even more attractive as sales prospects. And that's why we really deferred putting them on the market until 2005. And we think that we have actually maximized our ability to achieve the highest price by accomplishing the leasing first. So that accounts for the timing difference.

As far as disposing of what you I think described as core assets, I would just go back to what Mort said. These are irreplaceable assets. We have, as we have said before, have struggled with if we sold them, how would we replace them, number one; what will we do with the money, number two; number three, how would it impact our operations in our core market and our position in that core market when it comes to marketing space in those assets. All of that argues for not disposing of our core assets. Now having said that, there may be special situations which lead us to deviate from that strategy, but the basic strategy remains what I just said.

Does the 425 include any of the hotels?

No it does not.

Finally, for Bob Pester, one of the big holes in your San Francisco portfolio is the Old Fed building. It has been reported that you together with a partner are attempting to convert that from office to residential use. Can you comment on the status of that effort?

We continue to try and lease the building. We do have a LOI signed with a hotel developer that we would not be partners with; that if he gets his entitlement, he has the ability to purchase the building at a set price.

Thanks.

Carey Callaghan, Goldman Sachs.

I just want to add one other thing to this whole issue of core assets and values.

There are several features which are also continuing to drive up the prices of these assets. One of them is land cost, particularly in a city like New York, where land costs have soared in part because of use of land for apartment developing development. There have been a number of situations where the idea of developing sites for commercial office building development has just been swamped by the values that attach to land by apartment developers. And where that option exists, it has raised the prices almost to hundreds and hundreds of dollars a square foot just for the land. So it makes it a real challenge to be able to assemble sites -- I mean to see building today on a replacement cost.

And the other thing, by the way, the other side of it is that replacement cost have gone up because construction costs have gone up, and gone up in big double-digit numbers. And we think it might go up again in double-digit numbers this year.

So overall, when you add the land and the replacement costs figures, you are really getting to in New York, for example, $750 to $1000 a foot is not going to be an unknown number within the next several years just in terms of replacement costs or just land and building costs alone. So that is driving up the values of the real estate in place. And when Ed says our assets are irreplaceable, it's exactly the condition. And that gives them a very, very unique value in the marketplace.

That's why we want to keep them particularly. So you have the driving force on the cost side in terms of replacement costs and the driving force on the rental side because we see rental income and rents per square foot going up in our core markets.

Operator, we will take question five.

Carey Callaghan, Goldman Sachs.

On the George Washington University project on Pennsylvania Avenue, could you just give us a few more details on the physical side, the investment dollars and the timing for that project please?

First of all, we're in the process of finalizing our agreement with GW right now, so it's not an official deal.

The first phase is about a two-year process to entitle the site, which will be an extensive interaction with both the city and the neighborhood and the University. We're quite confident of a positive outcome that will include approximately 500,000 square feet of office space, which is our element, and then associated residential development. It's hard to predict the size of the cost above the ground lease. But suffice it to say to Mort's comments, we're probably looking in excess of $300 a square foot over and above the land lease. So it does represent a real extraordinary block of office space directly on the Avenue in the second business district of Washington, the top of Metro Stop, a very prominent site, probably the best site left in the city.

And the timing on that, if I could the, Ray?

If all things go correctly in the entitlement process, and obviously we are very comfortable with the market, I would envision possibly a start of that building as early as '08 probably for delivery in 2010.

Thank you.

David Toti, Lehman Brothers.

First question, do you have any intention of potentially putting the T. Rowe building on the market and would that be related to such a large package?

Yes.

Second question -- maintenance CapEx or recurring CapEx was a little bit high. Is that potentially a new run rate on maintenance CapEx (multiple speakers)

It is a catch-up. Believe it or not, it was lower than we expected it to be for the quarter. We expect to run somewhere around 65 to 75 cents a square foot on our in-service portfolio on a going-forward basis. For we refer to as nonrecurring capital expenditures, it doesn't include the money that we underwrite when we buy a new building and we realize that we need to redo the HVAC system or there is a structural issue that we have to deal with. It's the ordinary course for the elevators and roofs and redoing corridors and redoing HVAC equipment that (indiscernible) life.

So about 70 cents a square foot going forward?

Yes.

Lastly, the retail lease that you signed at Times Square Tower, does that give you any indication that future leases will be sort of above what you expect, below what you expected? Does it change your outlook at all?

No. I think we have some pro forma rents that we expect to hit. And it obviously depends upon the specific location. The location on the corner of 41st and Broadway is different than the location on 7th Avenue. So we have a retail broker who has been advising us, and I think it is fair to say that we're confident that we're going to achieve our overall pro forma on the retail space as a package.

Without commenting specifically on the rentals that we anticipate getting, there has been a dramatic strengthening of the market for retail space, especially in that area of the city. So we're feeling very, very good about the rental. And this is based in part as well on conversations with potential tenants.

Thank you very much.

David Shulman, Lehman Brothers.

What is Boston Properties role in potential development on -- well, call it the Penn Station West site? And when do you think is the timing where buildings may actually start there?

Our role is undetermined as yet since it's a competition. And we are one of, I think -- correct me if I'm wrong, Robert -- five finalists. Maybe it's four. Four finalists. And as far as the timing, I will let Robert comments on that, assuming that we were the successful -- we were chosen, as we should be obviously, as the successful applicant.

Proposals are due in February, and I suspect it will take a few months for the Empire State Development Corporation to complete negotiations and select somebody. And the start of the station work itself could be as early as late 2005. And I really couldn't speculate on a schedule for anything else.

How many square feet of office are we talking about?

There is an existing building there, the Farley building on 8th Avenue and the Annex on 9th Avenue. Altogether there is about 1 million square feet, I believe, of potential reuse of that space. And there is the potential for additional air rights development on top in the future.

But I think, David, it really would be inappropriate for us to throw out numbers at this point.

That I agree with. I am just asking generalities. I'm not asking for specifics.

A lot.

A lot. Okay. Thank you.

Keith Mills, UBS.

I have one question, but it's for both Bob Pester in San Francisco and Bob Selsam here in New York. And that relates to your 2006 expirations. Both regions have pretty significant lease expirations in 2006, particularly in the second half of 2006 with rents that are above market rent. Can you comment on the prospects right now for renewing leases with existing tenants that are set to expire in the second half of 2006 in both of those markets?

As far as our 2006 exposure, I feel very comfortable that we have a majority, if not 75 percent, of that exposure already covered where we have signed renewals or have renewals in discussion. Clearly they've got above market rents, and those are going to roll down to market. So there's nothing we can do about that. But I'm very comfortable with our 2006 exposure as far as retaining the majority of those tenants.

A lot of our 2006 space is over beyond the discussion in one form or another. So the combination of a rising market and a sizable but certainly also limited amount of rollover, I really don't see any issue with it.

Bob Pester, do you anticipate that rent roll down of the 15 or 20 percent in terms of the rents?

Off the top of my head I can't tell you exactly what the number is. But I can tell you that a majority of the 2006 exposure that we have is our higher-end view space which is commanding the highest rents in the market right now.

Finally, a question for Doug, and that's related to the 599 Lexington Avenue debt maturing mid this year. Maybe you commented on it, Doug, and I missed it, but can you give us an update on the status of refinancing that debt?

We're investigating what our alternatives are right now. We are looking at what we might do from an hedging perspective on that debt because we can't prepay it until July 17th, I think the date is. My expectation is we will come to some resolution in the next 90 days as to what the direction is going to be for that debt.

Thank you.

David Loeb, Friedman Billings Ramsey.

As you're talking about asset sales and the desirability of keeping your irreplaceable sites, I can't help but be struck by the fact that 599 Lex with the mortgage coming due is well leased at high prices at high rents. Is that a special case that might warrant consideration for sale if a big development project or an acquisition comes up?

It might, but I would go back to what we now said earlier in the call. It is a fantastic asset, and we expect it to continue to retain its value, and in fact increase in value with the passage of time. And we expect that the cash flow -- even though we have high rents in that building, we expect that over time that cash flow is going to increase. So while I will never say never, it falls into that same category of just irreplaceable terrific assets to own on a long-term basis.

As a follow-up, does the prospect of selling that building color your refinancing considerations? Are you more likely to refinance that with unsecured debt -- put that in the unsecured debt pool as opposed to putting mortgage on it?

I wouldn't say that we are going in one direction or the other based upon what our exit strategy is, because the exit strategy is a remote likelihood.

I will say one other thing just about buildings in New York City, which is there is something called a mortgage recording tax. And when you have a mortgage on a property and you take that mortgage off, you lose the value of that mortgage recording tax. And that's a pretty significant value and that's going to be a determination in what you're doing in the city when you go towards refinancing as well.

Great, thanks.

Brian Legg, Merrill Lynch.

You all haven't talked about potential use of proceeds for the 425 million of asset sales. Can you just talk about the acquisition opportunities out there and your interest in the Commonwealth portfolio?

As far as the Commonwealth portfolio is concerned, we are not active participants in the possible acquisition of the Commonwealth portfolio.

As to what we might do with the funds that are freed up from -- or that would be gained from the sale of those assets, the same thing once again applies to our -- our earlier comments still apply, which is that we are, A, obviously looking to reinvest as much as we possibly can in development opportunities; B, we're looking for the special situations where we can remove ourselves from a bidding process that relies simply on who has the best price. And as we demonstrated in the past, we have been successful in finding some of those situations where we bring something to the table that the normal bidder doesn't. And we will continue pursue that. And every asset in our core markets that is put on the market, we do a very thorough underwriting job. And we continue to hope that we find those assets and that we feel comfortable enough about their future and their future growth in earnings to bid on.

So that's where we would redeploy that money. And as Doug said earlier in his comments, it's always frustrating when we aren't able to acquire an asset. But we also think that it's prudent and it's what we believe is the appropriate course of action to be disciplined as we look at what the possibilities are.

We have a unique and competitive advantage in the development side of the business. And on the acquisition side of the business we have to recognize that given the limits to which we will finance properties compared to what a lot of privately-owned companies or individuals (technical difficulty) given the kinds of financing that is still available in the marketplace and the rates at which they are available, we are at somewhat of a competitive disadvantage unless we can find certain areas where, as Ed says, for various reasons -- sometimes size is one of them; sometimes what we have to do with the building is another -- we can play a unique role.

But we are doing very, very thorough analyses of potential acquisitions. And we're not prepared in -- given the fact that we're a public company and we want to provide a certain yield, we're prepared to be patient until we get the kinds of properties at the kinds of yields that we think are appropriate for our shareholders.

Thank you.

Brenda Thibodeau, Aetna (ph).

From accompany perspective, I was just wondering given the very attractive cost of funding in the mortgage market today, would you say that your bias is to maintain or increase your secured debt levels overall or to continue to reduce those as the rating agencies continue, I know, to focus on that track?

I guess I would not agree wholeheartedly with your viewpoint that your secured debt is necessarily any more or less attractive. There's been an incredible compression, incredible spreads on the unsecured market as well as the secured market. But we're -- so that in itself is not going to affect our decision-making.

We are committed to being an unsecured borrower. Also, we've made it very clear that there are appropriate places for us to be using unsecured debt to finance our assets. And I can't give you any asset-specific recommendation or commitment as to what we're going to do. But we're going to be faithful to our unsecured bondholders and we're also going to be faithful to the corporate equity holders in making those decisions in an appropriate manner.

Thank you.

Tony Paolone, J.P. Morgan.

Not to beat a dead horse, but from your comments then is it fair to assume that the probability of a special dividend this year with some of the cash is pretty unlikely?

I'm not going to take anything off the table. It depends on how the year unfolds because of where we -- what our continuing evaluation of uses of the cash shows us. If we become more pessimistic that we're not going to be able to redeploy cash that gets generated one way or another or the cash that's currently on our balance sheet, we would certainly consider the appropriateness of doing a special dividend. But at the moment, we certainly haven't come to that decision.

Thanks.

Gregory Whyte.

Just one quick follow-up. Doug, you gave a fair amount of detail about the proposed Value-Added Fund that you have in place. Can you just frame of magnitude of that for us from an FFO perspective?

You mean from a contributions to earnings?

Yes. I mean what does like a 100 million mean to the bottom line, if you are able to do that?

Let me try and back up, which is to say as follows. The goal of our opportunity fund is to create value, and most of that value recognition will come from the sale of assets. And the sale of assets is going to be predicated on us doing something. So from a short-term FFO perspective in terms of the next two or three years, while we're either looking for or redoing these assets in some shape or form, I think the contribution is going to be de minimus, because we're looking to buy assets that have a little bit of an issue associated with them. We don't have any obligation to have a high cash-on-cash return.

That being said, we're looking for internal rates of return in excess of in the mid-teens. And so there's going to be some lumpiness associated with the Value-Added Fund when we actually dispose of these assets. And we have a commitment to dispose of each and every asset that we acquire. And so two or three years from now we could have -- I don't want is a significant because it's a $400 million fund. We're a 25 percent owner of it. The equity is $140 million. And if we're generating 14 or 15 percent levered returns, my guess is that -- I don't know what that brings us; probably 50 or $60 million of increased value depending upon what the timeframe is. So we would get a disproportionate amount of that based upon performance. So it's going to be lumpy, but it's not going to be in '05 or '06. It is probably an '07 or '08 kind of phenomenon.

Are you suggesting that the lock down of this thing is somewhere in the three to five year period?

Yes. I think we're expecting to have a three to seven-year life for these assets. And then if this is successful -- and we've made a commitment to be very diligent about doing this, but we're not going to get in the business of putting money to work just for the sake of putting the money to work. If we think we think we can really generate a mid-digits IRR, we're going to do it. If we don't think we can, we're not going to put the money to work. But if we're successful and we run out of money in the next 12 to 18 to 24 months, my guess is we would consider going back and doing it again and maybe doing it in a larger scale. On the other hand, if we find that the opportunities are just not there, or we're not prepared to take -- buy core assets or value-added assets at core prices, then it won't be that (inaudible)

Thanks a lot.

Management, there are no further questions at this time. Please continue.

If there are no further questions, we will sign off. We appreciate once again your being with us today. We hope you found this informative. And we look forward to speaking with you again a quarter from now.

Ladies and gentlemen, this concludes the Boston Properties fourth-quarter 2004 conference call. If you would like to listen to a replay of today's call, please dial in at 303-5901-3000 or 1-800-405-2236 and enter the pass code 11020358. Those numbers again, 303-590-3000 or 1-800-405-2236 with the pass code of 11020358. You may now disconnect and thank you for using AT&T Teleconferencing.