波士頓物產 (BXP) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Boston Properties first-quarter 2005 earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Wednesday, April 27, 2005. I would now like to turn the conference over to Kathleen DiChiara, Investor Relations Manager of Boston Properties. Please go ahead, m'am.

Good morning everyone, and welcome to Boston Properties first-quarter conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. 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 in the Investor Relations section of the Company's website at www.BostonProperties.com.

Following this live call, an audio webcast will be available for 12 months on the website in the Investor Relations section under the heading, "Events and Webcasts." To be added to our quarterly distribution list, please contact the Investor Relations department at 617-236-3322.

At this time, we would like 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, they can give no assurance that the expectations will be obtained.

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

With us today, I would like to introduce Mort Zuckerman, Chairman of the Board, and Doug Linde, Chief Financial Officer. During the question-and-answer portion of the call, we will have Ed Linde, our President and Chief Executive Officer, and our regional management team also available.

And now, I would like to turn the call over to Doug for his formal remarks.

Thank you Kathleen. Good morning everyone, and thanks for joining us for the review of the first quarter. In which, I think as you noticed and we summarized in our press release, capital transactions are predominantly in the form of asset sales -- played a pretty important part. Most of my commentary this morning is going to relate to those transactions. But before I turn to that subject, I will spend a few minutes discussing the operating portfolio, the results and provide some color related to those operating statistics that are in the supplemental.

We are going to leave any specific market condition commentary until the Q&A section. And as Kathleen said, all the regional managers of our regions as well as Ed are on the phone and will be available to answer any specific questions regarding market conditions at that time.

We reported funds from operations of $1.03 last night, which was $0.05 above first call on our prior guidance. The variance was really attributable to what I would characterize as four different components. The first were several one-time items, which total about $3.3 million. And this includes about $1 million that came from a successful settlement of a tenant lawsuit. $1.2 million was termination. And interestingly enough, the majority of that termination income was surrounded a floor in Embarcadero Center Four, where we actually terminated the lease as part of a relocation. And the new rent is going to be about $6.35 higher than the prior rent; although, that new rent is not going to start until September of '05.

There's about $600,000 of additional percentage rent and parking income. I am characterizing that as one time because it is from 100 East Pratt Street. We had about $350,000 of holdover rent, which is just rent of tenants who could not get out of their own way and remained in occupancy past their lease termination dates. And we had about $300,000 of one-time third-party fee income that was a little bit higher. So that is the first component.

The second component are what I would refer to as run rate gains, and that equals about $2.2 million. So this is something we hope to see consistently going forward. And that came in the form of both higher percentage rent, higher garage revenue. We're doing better and better on our garage revenue on a quarter-by-quarter basis, as well as earlier than anticipated lease commitments. We had budgeted certain leases starting in the second quarter, and they started in the first quarter.

The third component totals about $1.9 million, and it is predominantly operating expense savings. And it comes from two or three major items. The first is simply budgeted not escalatable expenses, which we did not actually spend. The second would be higher overtime HVAC usage and then a corresponding reduction of building energy bills. So we make a profit on HVAC, and we also reduced a component of the operating expense. And then a little bit of it came from the 2004 operating expense true-up process, which occurs at the end of the quarter when we go back and we look at all the operating expenses and we review what we have collected in reimbursements.

The fourth component is interest expense savings. And that was about $725,000. So that really is the explanation for the $0.05 plus of better-than-anticipated earnings for the quarter.

During the first quarter, we had lease executions that continued at a very brisk pace. We totaled about 1.25 million square feet and 93 leases and/or amendments. And that activity was broken up as follows. We had D.C. with about 415,000 square feet; San Francisco with 320,000 square feet; 275,000 square feet in Boston; 175,000 in New York; and 65,000 square feet in Princeton. And again, those are just leases that were signed. Many of those leases don't come on in 2005.

Some of them for example include buildings like the 230,000 square foot lease that we signed at 505 9th Street in Washington D.C., which will come online in 2007. That is a 318,000 square foot project, which is in a 50/50 joint venture with the land owner. And we are going to start construction in the third quarter of 2005. The remaining speculative space consists of the top three floors of that building. And as I said, we expect this building to come online sometime during the fall of '07. And if all goes as planned, we should expect an unleveraged cash NOI return in excess of 10% on that development.

Also in the District of Columbia, we have completed an additional 70,000 square feet of leasing on our Capital Gallery edition with a 3/4 lease with the Smithsonian Institute. And so that speculative 300,000 square foot project is now 46% leased with deliveries scheduled for the second quarter of '06.

In San Francisco, Genentec has leased all of the available space at 651 Gateway, and we anticipate reaching a termination agreement with the last current full floor tenants and leasing that space to Genentec during the second quarter for a late 2005 lease commencement. So by the end of 2005, Genentec has leased over 525,000 square feet at Gateway Center. That is up from 0 a 1.5 year ago.

At Embarcadero Center, we continued to negotiate lots of renewals on our 2006 expiration. The largest this quarter being a 41,000 square foot lease, which we completed with no tenant improvement dollars.

In New York City, we completed about 125,000 square feet of long-term extensions and expansions at 399, which reduced our 2006 rollover to under 200,000 square feet. The leasing at Times Square Tower now sits at 90%, and we are in very active discussions with a number of retailers for the remaining first and second floor retail spaces.

In Princeton, well, not in the first quarter stats, we recently executed a 10-year lease extension with General Electric for 116,000 square feet at 104 Carnegie Center, which will reduce our 2005 leasing exposure to 145,000 square feet total.

The total in-service portfolio occupancy percent as of March 31st -- however, 901 New York Avenue has been added to the portfolio, and it hit the statistics at 86.1%. Although signed leases on that building, which haven't commenced yet, bring the actual occupancy to 96%. And if you take the old Federal Reserve out of the portfolio, that building was sold in April, it would adjust our San Francisco CBD occupancy to 84.3. And the portfolio occupancy as of today would be 92.4%. The average remaining lease length has remained the same, and it is 7.6 years still.

The second-generation leasing statistics, which are broken out in the regional leasing numbers, show the roll ups and roll downs. And I won't go over those explicitly. This quarter, I do want to make one comment however, which is that what we show as an 8.5% decline and rents on a gross basis at a 14.8% decline on a net basis -- included in those numbers is a 55,000 square foot lease that we did in Washington D.C. 6 years ago -- where the tenant required a -- effectively an option to terminate. And we structure that by amortizing all their above standard TIs over the first 5 years of the lease and then giving them a pre-negotiated option rent. So if you remove that transaction, this quarter, the decline in gross rents falls to 6.1%, and the decline in net rents falls to 9.7% -- as I think gives you a better sense of where the portfolio actually occurred this quarter.

Across the portfolio, average market rents continued to move up in all of our markets. The only market where I would say we haven't really pushed our market rents are Boston CBD and Cambridge. And if you exclude retail, we still have a rollover. For the next 9 months, it is still about 18%, and that's largely because almost 50% of our exposure is in the Boston metropolitan area. The average expiring rent in Boston is 39.37%, and we think we are going to have a roll down in Boston of about 20 to 24% for '05.

But here's the -- I think what is the critical thing to look at. The portfolio weighted average rent, as we look at it today, is $41.85. And we view our average estimate of current market rates for our portfolio properties at $41.04. So that's about a $0.80 difference between our current rent and mark-to-market. $0.80 to the bat, so there would be a markdown of $0.80.

If you look back a year ago, the comparable numbers for our portfolio was $41.23 versus a market rate of 37.28 or $3.95 of a roll down. So over the last year, we have made tremendous progress in our portfolio of getting almost back to an equilibrium vis-a-vis mark-to-market on the portfolio, which I think is pretty important to weigh -- distinction.

The second-generation office leasing costs were pretty low this quarter at 11.85. And that was primarily due to a number of short-term transactions, which averaged only about 4 years and were done on an as-is basis. And they all came into the portfolio.

Based on the leases we are currently negotiating, we still expect average transaction costs if you want to do a run rate on our FAD to be in the mid-20s for 2005. Our dividend to FAD ratio dropped dramatically. It was 75% during the first quarter. And non-recurring capital, expenditures, as you also saw, were very low. We still expect to have a run rate of between $0.50 and $0.75 on an annualized basis for the year. So you should think about that as you are looking at our FAD on a going-forward basis as well.

During the quarter, the hotels continued to show good topline improvement. Revpar was at 5.3%. I think less than most people anticipated they would be. Excluding the hotels, our same-store NOI on a GAAP and a cash basis were essentially flat.

Let me now turn to some of the capital transactions, which were summarized in the press release. In San Francisco, we sold the Old Federal Reserve for 46.8 million square feet or $300.12 per square foot, assuming a 150,000 square foot building. Let me also note that 20,000 square feet of that building is in the basement. And there's 14,000 square feet of mezzanine space and 3,000 square feet of retail space.

In 2003, I'm sure many of you will recall, we were faced with a decision to renew the Old Fed's then existing tenants. And that transaction would have required a long-term deal with an immediate rent reduction of approximately $25 per square foot. So we're basically cutting up an old lease and reducing rent by $25 -- a full tenant improvement package as well as extensive base building improvements that were required by the tenant. Operating expenses on the tenants' lease, specifications at that time, were running about $22 per square foot. And at the market of the low to mid-30s, the net effective rent would have been negative. And the building cash flow after an additional investment of about $50 million was going to fall to about $2.3 million. We chose to pass on that renewal, since we believe the building was going to be worth more vacant than with that lease encumbrance. I think the sales dramatically confirms this decision.

And as an aside, as a vacant building, the Old Fed may have been overlooked in some analysts' current valuations of Boston Properties for the last 12 months. It has been vacant since July of last year.

In Boston, we sold a land parcel on Boylston Street that will be developed into a Mandarin Oriental Hotel as well as four rental apartments, condominiums and retail space. In total, that project is about 480,000 square feet. And in addition to the $50.1 million consideration described in our press release, we also earned an additional $7.5 million in '04 when a purchase that terminated an agreement to acquire this property. This land is on our balance sheet at $31 million today.

We sold two parcels of land in Maryland, acquired in a portfolio acquisition in 1998, and we sold those to an apartment REIT. They were carried at a basis of $3.7 million, so the land was sold for more than 39% more than its carrying cost. All the remaining land we own is on our balance sheet at cost. And sites like Carnegie Center, which can support almost 2 million square feet which is a long-term option, represent no value on the balance sheet despite their obvious worth. If you extrapolate the percentage gains from the sales described above, our land value is dramatically understated versus balance sheet carrying cost. And incidentally, we get this question -- we do not include any gains from sales in our funds from operations.

Turning to the larger asset sales. We signed an agreement to sell 100 East Pratt Street, our 639,000 square foot building in Baltimore, for $207 million or $325 per square foot. We purchased this asset in 1997. And at the end of the first quarter, the gross book real estate value was $147 million. Net proceeds after debt repayment will be approximately 117 million.

Riverfront Plaza, a 910,000 square foot building in Richmond, is also subject to a sign, purchase and sale for $247.1 million or about $272 per square foot. We purchased this asset in 1998. And at the end of the first quarter, the gross book real estate basis was $190 million. So net proceeds after debt repayment for Riverfront will be about 137 million. When these transactions close, we will report the gains net of all debt pre-payment expenses and not reduce reported FFO by any pre-payment penalties. A detailed explanation of this is included in the guidance section of our press release.

The 2006 NOI on a cash basis from these assets is budgeted at about $29.5 million. And on our sales price of 455 million on a combined basis demonstrates a selling cash NOI cap rate at 6.5%. I think this demonstrates that the cap rates used by the market in valuing our portfolio may be understated.

In addition, we expect to continue to manage these properties under 3 to 5-years market management contracts, adding to our ongoing third-party fee income. The combined leveraged IRR for these two buildings based upon our hold period and the tropicsdisviget (ph) was in excess of 19%.

At the end of the quarter, we have cash balance of $209 million including the proceeds from the land sales that closed. When the sales described above closed, our cash balance may approach $500 million. The interplay between our deployment of this capital and our 2005 earnings projections are very fluid.

As we looked toward 2005 and 2006, we will be devoting significant energy and capital to our current and future development pipeline. These projects are all outlined in the second to last page of our supplemental package and total about $355 million of capital commitments. They include Seven Cambridge Center, Building E in Reston, the Capital Gallery, the 9th and East Street project, as well as Wisconsin Place.

We are pursuing additional development sites in our core markets. And as outlined in our press release, we have been chosen by George Washington University to entitle and develop a major parcel on Pennsylvania Avenue in D.C. We continue to pursue the Farley Office redevelopment project as well as the East River Science Park in New York City. So it is unlikely that decisions on those two projects will be made until the latter part of this year. So unfortunately, we are not going to be able to give you any news one way or the other as to where we sit on those projects.

In addition, we are finalizing plans for 200,000 square foot, 22 story residential tower in our Cambridge Center project that may begin in 2005. And we are planning and permitting a 1 million square foot mixed use office retail and residential project on our site in Reston Town Center.

I think the most straightforward way to think about and speak about our 2005 FFO guidance is to look at our full year estimates excluding the property sales that we have just talked about. And then to adjust for the sales, assuming we invest the cash at current short-term rates of about 3%. So these are sort of the critical assumptions behind the numbers that I'm going to give you. We are going to maintain our outlook on our occupancy, which we anticipate being about 100 basis point increase over calendar year of 2004. And occupancy could go down -- up plus or minus 50 basis points in any one quarter, but net net at the end of year I think will be up over 100 basis points.

We will still see a roll down largely due to Boston of about 18% on our expiring leases, but it is going to get offset by increased occupancy and higher contribution from the buildings that we delivered last year. And included in that number is straight line rents of between 60 and $65 million. And Times Square Tower for the quarter had about $9.8 million of straight line rents.

Our 2003 interest expense run rate should follow pretty much what the first-quarter actual results were on average during the year. We think our margins will be basically where they were. They might be a touch lower due to the roll down in rents. We have increased our budgeted third-party fee income in '05 to approximately $13 million. And the management fee income we earned from the sold properties will add about $1 million in '06. We expect additional termination income of about $1.3 million, and that's an increase from our prior guidance.

We are budgeting hotel contribution of between 22 and 23.5 million. We are going to stay flat where we expected our G&A expense to be at between 55 and $56 million. And while the first quarter is 14.8 -- may look higher on a straight line basis, our compensation goes down over the quarter's based upon FICA taxes rolling over an option -- restricted stock that we had to vest during the first quarter based upon various issues.

During the last call, we estimated that we would sell in excess of $425 million of assets. And the deals we discussed earlier total about $500 million. And although we continue to seek attractive acquisition opportunities and we hope we can consummate something, for the purpose of the guidance, we have assumed no additional acquisitions or dispositions in '05.

So in summary, before the effect of the sale and excluding the 3.3 million of one-time items, using a growth rate of between 1 and 2.5% on the first-quarter 2005 NOI, no property acquisitions, and an estimate of between 139 and 140 million shares in '05 -- we would have revised our 2005 guidance had we not sold the buildings to $4.20 to $4.30. That's where we would have been assuming no sales.

However, based on an assumed June first closing for Riverfront and 100 East Pratt Street -- and those will obviously be diluted -- we expect the incremental funds from operations reduction from the sales for the remainder of '05, including the corresponding interest expense reduction, to be about $10.6 million. So that is what we are going to lose. And if we reinvest the incremental proceeds at about 3% for the remainder of the year and we adjust for this net dilution, that's where you get to our current guidance of between $4.15 to $4.25, which is an increase of the bottom end of our range from the last quarter where we were at 4.10 to 4.25.

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

Good morning, everybody. Heard from Doug, we've had a very solid first quarter. And we feel that the trajectory of activity and rents in virtually all of our markets is favorable. Certainly, the New York market is moving up quite strongly. Washington is extremely active. What is encouraging of course is San Francisco, where rents have really moved up, particularly for what we call the view space compared to the commodity space. And Embarcadero Center is substantially view space. And we have done very well in South San Francisco.

So by and large, we are really comfortable with the way the markets are going. Of course, what we have also been working on is the growth of the company, primarily through development, which is where we feel not only that we have core capabilities, but where the yields are much more attractive at this point than the yields on acquisitions. The market for completed high-quality properties, which we have been successful in acquiring in the past has moved up very, very dramatically in all of the major markets that we are in -- but particularly in Washington and New York and even in San Francisco, where buildings are now selling for dramatically higher prices on a per square foot basis than they were 18 months ago.

And so by and large, we are looking to continue a solid growth pattern. We are not, I think, as competitive as we perhaps would like in terms of the acquisition of some of the major buildings that have been on the market, simply because the prices have been bid up to a range with the availability of unique financing that would not be suitable in our judgment either in terms of price or in terms of financing for a publicly held REIT. So we have been unsuccessful in those kinds of acquisitions. And that is one of the reasons why we are focusing our activities on additional development projects, which we are working on in various markets.

Essentially our issues now are -- how do we deploy the cash, which we have now accumulated, and the credit, which we now have available to us? And these are questions -- all the usual options are on the table -- these are questions, which we will address with the Board. And they will include everything from -- an assessment of where we can make additional acquisitions of development sites, if not for immediate development, then at least for intermediate development; the possibility of acquiring stock; the possibility of special dividends, etc. But we really have not made any final decisions on that but expect to -- as we see how the acquisition opportunities unfold.

With that, I think I will end my comments and open the floor to questions.

(OPERATOR INSTRUCTIONS). Jonathan Litt, Smith Barney.

Good morning. It is Jon Litt; I'm here with John Stuart as well. I'm assuming from Doug, from the way you've laid it out that the $500 million in cash is earmarked for development. I guess I am wondering if there's any other considerations to (technical difficulty).

Hello? Did we miss somebody, John? Just as you were asking the key part of your question, I think somebody from some competitive real estate firm got in and buzzed you off. So could you repeat it?

Sure. The question is -- with the $500 million in cash, it sounds like it is earmarked for development. But are there other things you are looking, such as stock buyback given the apparent discounts and (indiscernible) you think you are trading at, stock dividends or other alternatives?

Yes, I mean, as my colleagues always remind me, these are the problems of success. And we are certainly going to be as a first priority looking for and committing to any development project that we think works out within our sort of not only core competencies in core markets but the kinds of things that we believe we can make value added contributions to on a substantial basis.

But as we look forward to that and as we see where our funds flow comes from, we are certainly going to consider other alternatives, including two of the ones that you mentioned, which is the buyback of stock and/or a special dividend. We haven't frankly addressed these issues. But certainly, these are issues that we are going to contemplate frankly because we are also going to look at the continuing process of the sale of assets, as we have been doing for the last several years. It is a very good market in which to sell real estate. In fact, it's an unprecedentally (sic) good market. And we believe that there are some assets that we should look at in that context. And we will do that, and that will affect how we decide what to do with whatever funds we have.

Doug, you had mentioned $355 million in a development pipeline. I wasn't sure if that included 9th Street, the George Washington deal as well.

It doesn't include the George Washington deal. And it doesn't include the Reston Town Center transaction or the Cambridge Center Residential. Those are incremental developments. And we just don't have really firm budgets yet for those. And so it is hard for me to put a number on them. I will tell you that you're talking about an incremental additional 300 to $400 million at a minimum though.

Doug, I'm not sure. Does that include Wisconsin Place as well?

Wisconsin Place is in there, yes.

And then Farley and East River are going to be substantial numbers?

Yes. I mean, Robert Selsam is on the phone. You can sort of give a magnitude, Robert, of the Farley and the East River projects if you want.

Well, East River, let's do that first is -- would be a three-phase project over a number of years, totaling around 1 million rentable square feet. The Farley project involves the construction of a new train station, but it also includes about 750,000 square feet of potential retail and office space with the potential of 1 million square foot future tower on top.

Well, but in terms of dollars, the Farley project will come in close to $1 billion. And the East River project, Bob, what was the budget overall budget amount for that?

I believe -- well, you know what, I do not want to guess. Give me a minute, and I will look at them.

So I guess these are the potential use of the cash, in the event that you don't find either acquisition opportunities or stock buyback, etc.

Right.

Although, they are pretty far out there in terms of when you would need the cash, so raising the cash today wouldn't necessarily be a necessity.

Dispositions -- you continue to look at dispositions? I assume they're non-core? Or there are dispositions in some of your core markets as well?

Well, I think -- not to be too critical about the Old Fed, but I think the Old Fed would be considered a core asset.

But I'm thinking more of the Virginia and the Baltimore.

Right. So I guess I would say that we are -- nothing is off the table. I'm including the hotels as well as either portions of -- or larger buildings in markets like Manhattan.

Carey Callaghan, Goldman Sachs.

Just on your guidance, just to be clear, you are planning to take a $0.09 charge related to debt retirement in the second quarter, is that right?

Yes. Although for that guidance that we are providing you, we are adding it back.

Great. The Wisconsin Place estimated investment rose somewhat from 26 million to 32 million -- not a big deal in terms of magnitude. But are the returns in that project slipping a bit?

No, not at all. It was basically the way we were accounting for our portion of the land. Because we don't have to pay for the land for quite some time, and we just decided to add it into the original basis.

Doug, let me just comment on Wisconsin Place. We haven't even start the marketing on that project yet. But the demand is probably among the strongest of any project we ever encountered, certainly in Washington. We have had three or four tenants literally begging us for proposals. And we have been holding off until we get closer to delivery and our costs are more set.

Okay. And then Citibank is reportedly selling Court Square One in Long Island. You own a lot of other former Citibank properties. Is that something you're taking a look at?

We are aware that it is being sold. I don't think we're spending much time on it.

No, our interest in Citibank is not the Citibank tenancy but the Citibank real estate. If that property was on 53rd and Park, we would be very interested.

Okay and then just lastly, there's a large D.C. area portfolio, about 1.2 billion in estimated value. I think most of your northern Virginia for sale. Is that something you might be interested in as well?

Well, we looked at that, and we are frankly not convinced that the numbers that are being brooded about for that portfolio that we will be players at those levels.

Greg Whyte, Morgan Stanley.

A couple of questions. Doug, on the sale of the Virginia and the Baltimore assets -- I mean clearly they were off your typical beaten track of full prime and cities. But I'm just curious to know why you sell them now as opposed to holding them until you had a more obvious use of capital.

No, our perspective, Greg, was that our regional marketing team did just a fabulous job re-leasing the buildings with, I think, what is arguably the commodity that is most sought after -- which is high-quality, high credit long-term leases. And with a brand-new lease with Tyro Price (ph) for 12 years, a brand-new lease with Hunton & Williams, and a brand-new lease with Wachovia -- we felt that we would be able to maximize the value today and felt that it was the right thing to sell those buildings regardless of whether or not we had an immediate use of the cash.

So you are basically -- you are just saying that this is the best time to maximize value?

Well, it's certainly one of the best times to maximize value. In fact, I do not know what anybody else has experienced. But from the perspective that I have, this is one of the best markets for the sale of assets, since I've been in the real estate business. And this frankly gives us a chance to liquefy some of these assets and reinvest the funds in development deals, where we can we believe do very well. When you can sell assets like a Richmond and a Baltimore, never mind the core assets, if the yields that are presently being accepted as capitalization rates -- frankly, it justifies looking at doing something with those assets when you have the chance to do it. As I have said so many times, we frankly look upon this as a long-term business of building values, which we believe we have done.

When we made the acquisitions of Richmond and Baltimore, there were some who questioned why we bought them, given the fact that they were not in our core markets. But we have done extremely well with them. As you can see, when we had a 19% plus compounded rate of return for the years that we have owned them.

So we are sort of in this sense opportunistic. We think this is a very good market in which to realize values on some of the assets we have. And we will continue to do that without necessarily having an immediate use for the funds. Because there's always the option, as was implicit in Jon Litt's question -- buying back stock or special dividends.

Okay, just on theGillette lease -- can you recap for us what the terms of that are? And once they are recognized as contracts for them to continue paying, if you had any early discussions with them on the space?

Sure, I will give the factual information, and I'll let Ed talk about the lease itself because he has had the conversations with the people that I guess they are still at Gillette.

The lease goes through the end of 2009, 12/31/2009. So it is basically now, 4 years and 4.75 years. They are paying effectively $20 on a net basis, which is approximately 35 to $36 on a gross basis. We believe the market rent for the space at the top of the Prudential Tower would be somewhere in the mid to high 40s. This base is very well built out. And we believe from a real estate perspective that this will allow us to release that space should Gillette move out of a significant portion in an orderly basis. And Ed, I will let you talk about the conversations.

We have been in contact with Gillette since the first announcement. We have very nice relationships with the people who are at least were running that company. They are still however going through their planning as to which people go where. That does not -- that shouldn't be taken as optimism on my part that a lot of people who occupy the headquarters building, the headquarters space, which is what they have at the Prudential Center, will be remaining in Boston. I do not think that's the case. But their planning has not gotten to the point where they have been able to give us guidance as to what an orderly departure from the building might look like.

We are very happy that we have the lease term remaining that Doug just outlined for you because I think it does put us in a position to be cooperative with Gillette with a certain advantage to us. Because they can relieve some of their financial obligations, while still contributing to our ability to take the space back over time and to lease it to other people. And the space is very beautiful space at the top of the Tower, so we are optimistic about its long-term rentability (sic).

Okay and then just one final thing. Doug, in suggesting the add back of the debt extinguishment costs, you had a similar cost I think of roughly $0.05 in first quarter of '04. Was that related similarly to an asset sale? And I just sort of wonder --

Yes, it was. It was precisely -- I will tell you that I am a little bit frustrated with the lack of action on this whole gain on sales concept with regard to NAREIT and as funds from operation. And the fact that we're selling an asset selling the debt and should have to take the charge for the pre-payment penalty against their current earnings -- just seems nonsensical. And so we are reporting FFO for the NAREIT definition, but we are also providing it with the add back at summer.

Ross Nussbaum, Banc of America Securities.

Can you give us an update on what's happening with the value-added funds with teachers and AVT? Do you plan on having any activity there this year?

Well, I will comment on that. This is Ray Ritchey. We're trying to maintain the same core discipline we would spend if we were spending our own funds, as we spent on behalf of our partners in that transaction. We have high threshold for returns and some reasonable standards for quality of assets. And we haven't met either of those standards than what we see in the marketplace. We have looked at over nearly 100 different opportunities in the last 6 to 9 months and have closed on one. We are still shaking the tree, hoping something will fall out. But we are not going to get away from our principles that have guided us for 31 years to do deals that just don't make sense.

And just to add, that is the basis on which the investors wanted us to look at this fund.

I think on the last call, you discussed that you were one of the finalists for a redevelopment project here in Manhattan on the West Side. Can you give us an update on where that stands?

Well, this is Mort speaking. They have narrowed it down to possibly two finalists in this end.

Officially still three, Mort.

Officially, it is still 3. And we are all three have been in dialogue with them. So there's no outcome yet to be able to convey to anybody. But we are still involved with it, as we are on the East River.

Okay. And the final question is -- this is actually somewhat of a technical one. In your supplemental for your leasing date on the same-store pool on page 46 -- you talk about 416,000 square feet of space leased during the quarter. But when we look at the rent spreads that you disclosed, only about 300,000 square feet is included for those rent spreads. And it looks like you are excluding anything that was vacant for more than a year.

Yes.

If we throw that space into the mix, how much worse does rent spreads look?

I couldn't tell you because I don't have the numbers in front of me. Honestly, we have always tried to basically say to people -- we are going to show you -- what we're trying to -- the snapshot we're trying to provide you is -- if you look at the roll down in rent on space that was recently occupied, what does it look like? And so some of that vacant space may have been vacant for a year or have been vacant for 5 years. And if it were 5 years -- I am being -- this is hyperbole here, I am exaggerating. But the rent could be a lot lower than what the current market rent is. So it could be skewed one way or the other, Ross. And that's why we haven't done it that way.

David Harris, Lehman Brothers.

This is David Toti. Just a couple sort of quick big picture questions. The first is that it would appear you have a growing interest in residential in terms of both what's going on in Reston and at the Prudential Center. Have you taken any serious consideration of residential conversions on any of your projects or assets?

Do you mean office assets?

Yes.

I think -- we do not believe that our office assets are susceptible to good residential conversion.

Okay. And if you are going to participate in any of these residential developments, would you be doing them on your own or always with a JV partner or what's your sort of perspective on that?

As you know, up to now, we have been doing them with a JV partner. That would in all probability be the pattern that will continue. But you ask a very interesting question, which is not something that -- it is a question that we been asking ourselves recently as well. So while I will not change the prediction I just made, it is certainly something that we're thinking about.

And then just one other question. With regard to TRIA, Terrorism Risk Insurance Act, -- do you have a specific view on that? Do you feel it will be renewed at the end of the year?

This is pure gut. Yes, I think it will be renewed before the end of year. But it goes up and down, sometimes I am more optimistic than others. There's been a period recently of not a hell of a lot of action. There's been instead a -- this is a period of data collection the big government is trying to find out as much as possible about how the absence or actually how the industry reacted when TRIA was first put in. And what potentially the absence of TRIA might do if it isn't extended. We still think the case is overwhelmingly in favor of TRIA being extended. There are some in the government who have a very different point of view. But at the end of the day, we really do believe TRIA will be reenacted, frankly because it is needed. And it would create real chaos if it doesn't get extended.

Lou Taylor, Deutsche Bank.

Just one question for Doug, what are the plans for the debt maturing at 599 Lex, Doug?

At this point, I would say in all likelihood, Lou, in the short-term, it will be rolled over on a property-specific basis. And we can actually do that with our line. Our line allows for an abundance of caution mortgage so that we can preserve the mortgage recording tax. And then we will -- the issue is doing a long-term mortgage on that property and/or raising incremental debt is -- when you are sitting on $500 million of cash, raising additional debt is something you've got to think long and hard about.

And the building is grossly underleveraged today. So to put a permanent fixed rate mortgage on it at this current proceeds just doesn't seem to make a lot of sense.

Brian Legg, Merrill Lynch.

In your remarks, you talked about rent growth in a number of your markets. Can you quantify across your markets what type of rent growth you are seeing and what kind of rent growth you expect to see over the next 12 to 18 months?

Why don't I let Ray and Robert and Bob talk about that specifically, and I will comment on Boston.

Well, I will start. This is Ray Ritchey. I think I could talk about it anecdotally. And let's just use Reston as an example. Reston is -- the recovery there has been just extraordinary, especially in the Reston Town Center. Where in a market, where there's an 11% vacancy and Class A rents in general going for 2671 in Reston Town Center and the surrounds where we have 2.5 million square feet -- we have 1,400 square foot vacant that just came on the market a month ago, and we're asking $38 a foot.

So in the very constrained markets in Washington, we are seeing very solid rent growth, especially in the larger blocks or in the barrier to entry markets like Reston and downtown. So here in Washington, we are feeling good about uptick in rent growths, specifically in our assets.

In midtown Manhattan, we've seen a continued strengthening of the market. While leasing volumes down this year from last year, rents are continuing to firm up and to rise. And many people see potential increase of as much as 10% in Midtown rents at the end of this year over the end of the prior year.

In San Francisco, we're seeing very little rent movement for commodity space. But for view space, which the vacancy now is down into low-single digits, we've seen rents go from let's say the low to mid-40s late last year to some transactions that we have just completed in the mid '50s. We actually have a couple of high-end view floors that we are going to push the market and try to achieve rates in the low to mid '60s.

And in Boston, Brian, we've actually seen a pretty dramatic pickup in suburban Boston. As of yesterday, we had a piece of space that had been vacant for quite some time. I think we are going to average $29 or $30 a square foot. And a year ago, I would have said that number was going to be 25 or $26. That's a 7,000 square foot slug. So suburban Boston, which is really the Walsam (ph) greater 120 markets, I think things are up dramatically.

Cambridge and Boston are pretty flat. There has not been much in the way of a reduction in rental rates. But there's just not a lot of activity, and there continues to be this overhang of sublet space from both Bank of America and from Manulife. And until those are completed, and then we see what happens with Gillette, I think it's going to be a slow road ahead for strong rent growth in the greater Boston CBD. Not to say we won't get good, strong rents in well-placed view space in places like the Prudential Tower or 101 Huntington Avenue or 111. But for commodity space, it's going to be hard.

And just looking at your rent rolls in San Francisco and in Boston -- you talked about view space. You are seeing, at least in San Francisco, you are seeing some upward rent movement. If you look at your rollover over the next couple of years, would it be -- would the majority of a roll over be in the view space versus the lower floors?

In San Francisco, it is primarily in the view floors. Right, Bob?

Correct.

In Boston, I would say 50% view floors and 50% suburban. We have, just to give you some big picture highlights -- in 2005, we have 200,000 square feet in the Digitas floors, and that is 18 to 24. And then we have a little space at 265 Franklin Street, 60,000 square feet, which is floors 12 through 16 -- which is almost view space. So that is 260 out of 600,000. And then the largest other blocks are in greater suburban Boston.

In 2006, our largest block is actually out in Bedford, which is really R&D space -- 253,000 square feet. These are two-story, older R&D buildings. And 162,000 square feet at 191 Spring Street, which is the building where we could really see some big pick-up in rents versus where the current market is today. So that is almost 400 out of the 900,000 square feet that expires in '06.

David Copp, RBC Capital Markets.

Here with Jay Leupp as well. Most of my questions have been answered. But one follow-up as regard to asset sales -- looking at your kind of rationale for some of the more stabilized assets you have and based on the leasing you have done down at Gateway lease that was sort of be an asset that is certainly right for a coin (ph)? Is that safe to assume that that's an asset that is kind of on the block here shortly?

I wouldn't say it's safe to assume anything is on the blocks per se. I think it is certainly a building that we are going to evaluate along with a number of other assets. I mean, we're not going to sell everything. We're going to be selective, and it may or may not be one that we hit the market with in calendar year 2005 or 6.

Jim Sullivan, Green Street Advisors.

On both the Richmond and Baltimore sales, you have very sizable gains. It doesn't sound like doing 1031 exchanges is the game plan. How do you deal with the tax aspects related to the gains on sale?

We have enough cushion in calendar year 2005, Jim, to not increase our distribution requirements. And maintain -- and take that whole gain through our earnings. We build up a sizable excess, and we also had some non real estate expenses, a.k.a. option exercises, which is a compensation expense for example that allow us to offset gains. So we actually don't have to make any distribution in 2005 and are not required to do a like kind of stage (ph).

Okay and then Doug, you talked about the market value of the land being well in excess of booked. What is your estimate of that GAAP?

I don't want to hazard a guess. I can just tell you that it is very significant.

And then finally, maybe a question for Mort. Mort, has the gap in rents between Midtown and downtown New York continues to expand, as the number of big blocks of space in Midtown start to dwindle -- does your interest in downtown -- or has your interest in downtown evolved from where it has been historically?

Frankly, no. There is no doubt but that there are very few big blocked areas left in Midtown. What this intrigued us to do is to try and acquire sites, perhaps on the west side of New York. These are not going to be short-term development opportunities; they are going to be longer-term development opportunities. But I still feel that in terms of whether it be good markets or bad markets, the declines in downtown and the appreciation -- the declines will be greater and the appreciation will be lesser. And frankly, unless you could really find a unique opportunity to buy a building at a fairly low price per square foot that is fairly well leased that is to say a long-term lease with a good credit, we would not be interested.

And frankly, we would rather devote our funding to different kinds of acquisitions. And particularly obviously to development where we can create a really significant appreciation because of the GAAP between the yield at which we bring in developed properties and the yield at which we can sell them. Even if you assume some increase in cap rates, which I'm not necessarily sure is going to take place in a while, I am really astonished -- and I don't know who would have predicted that after all these increases in the short-term rates that the 10-year treasury would still be around 4.25.

So something is going on there that I think a lot of people including myself missed. And I think it is going to stabilize, or stay there for quite a while. And that means that the ability to translate a development value into a sale value, that GAAP is really so attractive to it. That is where we would really like to focus our efforts.

Chris Haley, Wachovia Securities.

I'd like to make a comment. I think your sale of Baltimore and Richmond is fantastic. As a skeptic in those deals, when you first bought them, I think it is fantastic that you have been able to record such a gain and record a short and tremendous unlevered rate of return.

Well, thank you.

I do have a question on the value-added fund. I am assuming that the value-added fund is looking broadly geographically. I'd be interested to see whether or not you feel as though any of the deal that you have underwritten, either geographically or building type -- in today's market, you're being able to buy below where you think replacement cost is?

Chris, this is Ray Ritchey again. And first of all, I want to thank Wachovia for renewing their lease at Richmond that enabled us to do so well down there.

Well, unfortunately, we moved to Baltimore, but we kept enough presence in Richmond to help you out. You're welcome.

Well, it put us over the top. Thank you.

On the value-added fund, again we are trying to focus on a relatively strong properties in markets we know well. And we are seeing just the opposite. We had hoped to go in there and find undervalued properties where we could acquire them at or below replacement cost. And it's just not the case. In fact, we're seeing assets trading, even you would consider to be quasi-distress situation -- selling at substantially above where we can place it for new development. So this is the challenge we face not only in the value-added fund but in our common approach to development, as Mort said.

Neither One York (ph) is a classic example -- the building we just delivered, which by the way, got "Building of the Year" in Washington last night. We built that for 325 a foot. And with current sales going in excess of 600 foot, you see the value there is created through the development. So on the value-added fund, we are seeing absolutely no breaks in terms of core and buildings, add or roll over replacement costs.

(OPERATOR INSTRUCTIONS). Management, there no further questions at this time. Please continue.

Well, I guess we are all done at this point. I want to thank you once again for the opportunity to have this dialogue with you. Well, obviously, the real estate business is never a constant. And what has happened in the last couple of years in terms of the appreciation and the value of completed assets has really forced a re-examination of various policies including -- retaining buildings, selling buildings, and what we do with the funds that we get. But this is I think still a very, very interesting time.

And the appreciation of assets through the reduction of that cap rates caused by a lot of asset allocation funds into real estate and a lot of foreign money going into real estate -- is really a phenomenon that really has had an enormous impact on the real estate business in general.

So with that, we thank you. We look forward to talking with you all again during the year.

Thank you, sir. Ladies and gentlemen, this concludes the Boston Properties first-quarter 2005 earnings conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 or 800-405-2236 with access code 11027376. (Repeat.) You may now disconnect, and thank you for using AT&T Teleconferencing.