波士頓物產 (BXP) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Boston Properties third quarter 2005 conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Wednesday, October 26, 2005. I would now like to turn today's presentation over to Claire Koeneman, with the Financial Relations Board.

Good Morning and welcome to Boston Properties' 3Q conference call. The press release and supplemental disclosure package were distributed last night, as well as, furnished on Form 8K to provide access to the widest possible audience. In the supplemental disclosure package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg. G requirements. If you did not receive a copy, these documents are available at the Company's website at www.BostonProperties.com in the investor section. Additionally, we are hosting a live webcast of today's call, which you can access in that same section. Following this live call, an audio webcast will be available for twelve months on the Company's website in this investor section.

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

Factors and risks that because actual results to differ materially from those expressed or implied by forward-looking statements are detailed in yesterday's release and from time to time in the Company's filings with the SEC. Finally, the Company does not undertake a duty to update any forward-looking statements.

Having gone over all of that, with us today for management we have Mort Zuckerman, Chairman of the Board; Ed Linde, President and Chief Executive Officer; Doug Linde, Chief Financial Officer; and Ray Ritchey, Executive Vice President and National Director of Acquisitions and Development. Without further ado, I will turn the call over to Doug. Doug?

Good morning, everybody, and thanks for joining us for the third quarter call. As is traditional this time of year, we are going to begin our discussion of our 2006 outlook and try and lay out our baseline earnings assumptions and some general guidance. We did give you some big picture numbers in our press release last night. We're also going to provide an analysis of third quarter and talk about some of the operating trends, and the regional managers are available after we have our prepared remarks to discuss any of the specific property market-related questions you might have.

Before we go into the details, we thought it would be a good time to review our most recent investment activity, since these actions will have both a short- and a long-term impact on our future earnings. We are firm believers that the operating fundamentals in all of our markets are in fact improving, and that the real estate that we own will continue to appreciate over time. And we reflect these kinds of beliefs in both our underwriting of our existing assets, as well as our underwriting of additional investment opportunities.

However, we do remain concerned that making incremental acquisitions at today's pricing levels will reduce our ability to enhance our long-term earnings growth rate. Consistent with that prospective, over the past twelve months we will have sold, or are negotiating to sell, $839 million of assets. In almost every instance, while we believe the net operating income from the assets that we're selling will actually improve over time, we also think that the forward-looking return expectations that are embedded in the current pricing justifies those sales, even at the expense of a reduction of our portfolio.

Currently, we have entered into sales and negotiations in due diligence periods with purchases for both Embarcadero Center West and the Cambridge Residence Inn. If we include our Harvard Street industrial building, which is also under contract for sale, the gross proceeds from the additional asset sales are approximately $282 million.

The annual 2005 funds for operation contribution from those assets before debt is about $13 million. We expect those sales to close during the fourth quarter.

We continue to have significant capacity on our balance sheet to execute our new investments. And as we look forward to 2006 and 2007, we're working with a smaller operating portfolio than we anticipated twelve months ago. And we're concentrating on a growing development pipeline which we will discuss a little bit later in the call.

We had a solid third quarter with funds from operations of $1.07 per share, a couple of cents above consensus and about $0.04 above the midpoint of our prior guidance. The better-than-expected results came from a mix of what we refer to as opportunistic harvesting from the portfolio, stronger than expected third party income, lower interest expense, higher interest income, all totaling about $5.5 million. These items were offset by a lower-than-expected contribution from the hotel portfolio of about $400,000.

Specifically, we had promotional event income. That's the temporary leasing of space like that at Times Square Tower. Successful tax abatement judgments, higher percentage rents and earlier occupancy, and that all combined to total about $1.4 million.

We completed some rather complex leasing transactions that involved taking back space from tenants with the resulting termination income, but accompanied by leases with replacement tenants at higher ends – the best of both worlds -- these transactions average about $1.5 million of termination income on top of the 500,000 that we had previously budgeted.

We were able to sell additional third party services to our tenants, and we earned additional fees from developments service arrangements, and that all told was about $1.4 million. Finally, we had slightly lower than anticipated interest expense and higher than anticipated earnings in our cash balances. That, combined, added about $1 million for the quarter. That's sort of the macro explanation of 2005 third quarter.

If you define a rent spike as a 10% or greater increase in rents in a twelve month period, our portfolio at Boston Properties has experienced rent spikes in New York City, in San Francisco, in Northern Virginia, and in the Waltham submarket on Route 128 in Boston.

Our portfolio weighted average rent today sits at $42.35 versus an estimated current market rent of $42.44. That implies a roll up, not a roll down, a roll up of $0.09 per square foot. The spread was negative $3 a year ago. This is a major milestone for the portfolio.

I do, however, want to temper that good news with a comment that we still will be experiencing some roll downs over the next 15 months or so, as we bleed off some of what we refer to as the hyper-inflated leases that we signed in San Francisco and in Boston in 1999 and 2000. Expiring rents on the specific spaces that roll over the next 15 months indicate a roll down of about 4%.

Our largest exposure over the next year or so still remains in Boston, where the average expiring rent is about $31.25. And we still think we're going to have a roll down of about 9% in the Boston portfolio, the majority of that being in the suburbs.

This quarter, the second generation leasing stats, which break out the regional leasing numbers, show a 10% decline on a net basis in the roll down in rents, and a 2% decline on a gross basis. The number -- to illustrate the strong improvements in gross rents, what we refer to as space rents, though the net rents do illustrate the increase in operating expenses that we have experienced over time as taxes, utilities, insurance, cleaning all seem to go up year-to-year. Even with this, the same-store portfolio was up about 0.8% quarter on quarter on a GAAP basis and we were flat on a cash basis.

We completed 732,000 square feet of gross transactional activity during the quarter. If you combine that with the 2.2 million square feet we did during the first six months of '05, we're basically in line with our average quarterly activity which is about 1 million square feet a year, which we've been averaging for the last three years.

The quarterly activity was led in Boston, with 429,000 square feet, followed by D.C. with 113, San Francisco with 100, New York City with 88 and Princeton with 41. All those thousands of square feet.

Some of them were noteworthy transactions, including a ten-year early renewal on a full building at 191 Spring Street in suburban Boston, and our first lease in four years at over $60 per square foot at Embarcadero Center.

In New York City, with a 99% lease portfolio, we made some headway harvesting additional income from space that is currently leased. We've been able to negotiate some space take-backs that allow to terminate leases with no rental interruptions, and really space at higher rental rates.

In Washington, D.C., we're negotiating leases at the Capital Gallery redevelopment will bring the additional 300,000 square feet of space on at 85% leased with initial delivery in the second quarter of '06. End of the second quarter. Based on our current leasing expectations, we think this project is going to achieve an un-leveraged cash returned in excess of 13%.

We signed a construction contract, buttoning down our hard costs and we have commenced construction at 505 9th Street, that's our joint venture, and 73% of that space is already leased. That building is going to open in the third quarter of 2007, and if all goes as planned should achieve double-digit un leveraged cash return.

Our total in-service portfolio occupancy was basically constant at 93.3%. It was a slight up tick as of the end of the quarter. Our average lease length continues to remain high at 7.4 years. Our second generation leasing costs were a bit higher than we have experienced in prior quarters at $36 per square foot.

Of the 58 leases we put into service, 50% were new CBD leases, and we also had a ten year additional space that was leased for ten years from Genentech in South San Francisco. And just that transaction itself has about $65 of transaction costs when you include the brokerage commissions and the TI. Again, that’s a ten-year deal on the space that they've taken out on 651 Gateway.

Balancing this to some degree, our noncapitalist nonrecurring capital expenditures were lighter than typical for the third quarter. We expect some pick-up in the first fourth quarter on our nonrecurring capital expenditures, as we try and finish things out before the weather turns bad. But likely we're going to run below our budget for the year at $0.75 per square foot. Even with the higher leasing expenses during the quarter, our FAD payout ratio still remains at 83%.

During the quarter we completed a number of financing transactions. We arranged $425 million of forward starting swaps in anticipation of fixing more than 50% of our floating rate debt exposure over the next 15 months. The underlying average forward starting treasury was 4.32%. That includes the forward premium embedded in that number.

We repaid our EC West loan, reducing our leverage and creating some additional borrowing capacity. And finally, we found a commitment letter for take out-financing for our new development at that same 505 9th Street project I just referred to, locking in an interest rate of 5.73% starting in 2007 for the entire proceeds.

As we said at the outset of the call, we're focusing our energy and our capital on our current and future development pipeline. The current under construction pipeline is detailed in our supplemental package. We're working on a number of other additional projects which could get underway over the next twelve months. While none of these projects will have a material impact on 2006 performance, they do point to strong incremental future growth.

To illustrate, we wanted to provide three examples of projects that are moving forward, although I want to caution you that none of these projects are officially under development. First, we're in discussions with residential partners to develop our 200,000 square foot, 22-story residential building in Cambridge. That's an $80 million project.

Second, we're completing the permitting and marketing now for lease for next phase of our mixed-use Reston Town Center project. This phase includes a garage, 337,000 square feet of office space, 49,000 square feet of retail space, and 300,000 square feet of residential development. The project size, excluding the residential, which we are contemplating to sell, is about $127 million.

Third, we are designing and marketing an office building to sit on a parking structure platform we're currently building in Wisconsin Place in Chevy Chase, Maryland. That is an $88 million project. Collectively this represents $295 million of development which we will add to our portfolio at returns as much as twice the magnitude of the returns from acquisitions in today's market.

Turning to guidance, let's start with the remainder of '05. We expect flat same-store results from the third to fourth quarter, excluding the impact of the property sales discussed earlier. Our straight-line rent should remain flat for the fourth quarter. I think for the third quarter it was about $12 million. We expect the two remaining hotels to contribute about $7 million in the fourth quarter. And remember there's some seasonality of the hotels and that's where the spike comes from.

Termination income is budgeted at about $1 million for the fourth quarter. Again, those are predominantly transactions we are originating. We may have $1 to $2 million of savings in our G&A budget from what we've been budgeting previously during the fourth quarter. And that's as a result of some potential, not confirmed, but potential retroactive changes to some state tax legislation and an accompanying refund of money we've already paid.

Our interest income will be down significantly after we make the October 31st special dividend of $345 million. Interest expense will be reduced from repaying the mortgage debt on EC West. We expect, on average, the properties we intend to sell will be in the portfolio for about two-thirds of the quarter.

Taking all of this into consideration, we estimate the fourth quarter funds from operations to be between $1.04 to $1.05, bringing the full-year to 4.21 to 4.22. Our original 2005 guidance a year ago was 4.10 to 4.25 and it didn't assume $839 million of property sales.

As we look forward into '06, we are in the midst of establishing our property level business plan. We create space by space projections for the entire portfolio. And we review such issues as rising energy costs and the impacts of both the hurricane season and the potential expiration of the TRIA legislation, TRIA, on insurance costs and all those impacts on our operating budgets and future recovery income. My point is that while I'm talking about 2006, it's still a work in progress.

Comparing our same-store portfolio from '05 to '06, we will have sold $839 million of assets with an annualized 2005 funds from operations contribution before interest of approximately $42 million. We expect same-store results from the third quarter run rate adjusted for sales and termination income to grow up to 2% in '06. Included in that number are straight-line rents of approximately 50% of the level we experienced in 2005.

In addition we're budgeting about $1 million per quarter, $4 million of termination income. This year-to-date we've had about $7 million.

While we expect occupancy gains of about 75 basis points over the year, as we have been foreshadowing for some time, there are some large spaces that contributed extensively to the bottom line in '05 that roll in either late '05 AKA the Digitas space at Prudential Tower in November, or early '06, for which we are not budgeting any income for 2006.

The largest of those include 150,000 square feet at the Prudential Center; 100,000 square feet at Embarcadero Center 1; and 150,000 square feet at Democracy Center in Bethesda, Maryland. These large vacancies have the effect of muting the overall improvements from the same-store portfolio occupancy gains in 2006, while at the same time providing for strong growth opportunities in 2007.

It's not a question of not being able to lease the space. It's a question of when we will get the space under rental recognition, and is that going to be in 2006 or in 2007. Likely it's going to be in '07.

During the course of 2006, we will bring into service $261 million of development projects. That's all outlined on page 49 of the supplemental. And for modeling purposes we would assume the un leveraged GAAP yield is somewhere between 11 and 12%, as well as the cessation of the corresponding interest expense capitalization.

Interest expense for '06 after adjusting for the repayment of the debt that we paid off in '05, and increases from placing the new development in service, is going to be somewhere between $302 and $308 million for the year. Our interest income is going to be reduced by $6 to $7 million, since we will not maintain the same level of cash balances we had in '05.

Our G&A expense is expected to run between $57 and $59 million. Approximately $2 million of that increased stems from the natural ramp-up of the vesting program on our long-term equity comps program. Assuming no changes, we will have reached the stabilization rate on this five-year cliff vesting program in 2007. Cap wages are about expected to remain about constant with 2005 in 2006.

Our third party management and development income will continue to become more stable. You will recall that in '04 we had over $20 million of third party income. We started 2005 with the expectation of about $11 million, and we've been able to grow that business to over $16 million in '05. We expect '06 will remain at a level between $13 and $15 million, pretty close to where we are on a run rate basis in '05.

We assume a 5 to 10% increase in the hotel contributions for the two remaining hotels. That's going to give us about $19 or $20 million of NOI contribution from that portfolio.

So when you take and consolidate all these assumptions, our 2006 guidance for FFO is in a range of between 4.12 and 4.27. As is our practice, the guidance doesn't include any acquisitions or dispositions during the year. But I wanted to give you one last perspective on how to think about our 2006 numbers versus 2005.

If you were to assume all the property sales and the special dividend all occurred on January 1st, 2005, so you're taking all of that noise out of the portfolio, our 2005 funds from operations would have been $4.05. Therefore, if you're comparing apples to apples, our remaining portfolio is actually showing about a 4% growth from 2005 to 2006.

With that, I will end what I refer to as the technical portion of the call and turn things over to Ed.

Despite the fact that I think I was described as -- in one magazine article as the numbers cruncher and therefore the technical person, I accept the invitation to not be technical. Good morning, everybody. Let me start with just one organizational note.

Bob Burke, who had been with Boston Properties I believe since 1980 or '79, retired this last month as Executive Vice President for Operations. And while we clearly will miss Bob on a personal basis as well as appreciating the performance he provided, we're fortunate to have been able to pluck Mitch Norville, who had been our regional manager in our incredibly successful Washington region over the years. Mitch has been with Boston Properties for 21 years and has become our new Executive Vice President for Operations.

And in turn, to promote within Washington, Peter Johnston, who has been with Boston Properties for 18 years and who really headed up the execution of all of our developments there, to become the regional manager in DC. So we are very happy, frankly, with the bench strength we have within the Boston Properties organization. And I must say on a general basis, I think that exists throughout our organization in all areas of the Company.

I want to make one additional comment on the asset sales and acquisitions discussion that Doug had. I think Doug had mentioned we have potentially added another $300 million of development to our pipeline. And if you think about that, given the fact that in rough terms we can generate twice the return on developments that people are now paying for acquisitions, it is of course the same thing as acquiring $600 million worth of property.

I think that's a very interesting statistic, and it causes us of course to go with our strengths. As we've demonstrated since we became a public company back in 1977, while we made some fantastic acquisitions, in terms of efficient use of capital, development wins the day every time if you're comparing an equal amount of capital invested in acquisitions or development.

I want to do a quick market review. We remain quite optimistic about where the market is going in all of our markets. Some are stronger than others, but we're experiencing very good deal flow. Markets are showing absorption and there is rental growth.

Obviously, as we've said before, this is very location- and quality sensitive. And clearly view space rents better than non-view space. High-quality, well-located assets, which we believe characterize the Boston Properties portfolio, rent and do better than assets which may not be as well-located.

If I were to talk about storm clouds on the horizon, and I don't really mean to overemphasize--that metaphor is probably too strong. There is of course speculative development now showing up in many markets. And there may be an incentive for the merchant builders, who basically build and sell, to build and sell into this incredibly heated acquisition environment. They may be making a bad bet, depending upon when their developments are completed and how well they lease. But nevertheless, that competition is something that we have to be somewhat concerned about.

Let me look at the -- comment on the market region by region. In Boston, which you probably heard me say in the past is perhaps still the market that is not -- has not recovered as strongly as our other markets. It is interesting that at the beginning of the year our regional team set a goal of 1 million square feet of leasing to be accomplished during the year. We have exceeded that goal in the first three quarters.

So we are well ahead of that goal, and there is velocity, there is interest in space. We leased actually in the last quarter 400,000 square feet. Vacancy rates are down in all the submarkets except for Cambridge, and in places like Waltham and the immediately surrounding towns to Waltham, we have the bulk of our suburban space. That vacancy rate has dropped to below 10%.

And we are now approaching the point in Boston where market rents can justify the cost of new construction. I'm not indicating that one should go ahead and do speculative development, but at least you can quote rents to tenants, and we're trying to do a lot of predevelopment leasing. You can at least quote rents to tenants that can support the cost of constructing the building.

And frankly, that has not occurred for a long time. It was very hard to convince a tenant to do a build-to-suit when in fact that same tenant could go into the marketplace and find a market rent that might be $5 or $10 less than that. That's flattened out now, that's evened up now, which is very good sign.

In New York, our portfolio is 99% occupied. Doug mentioned some of the transactions we've done to really try and take advantage of this market, where we've seen $10 to $15 per square foot rent increases in less than a year. The vacancy rate in midtown is also roughly in the 10% range, and frankly in the best buildings, it's nonexistent. Witness the 99% occupancy of our portfolio.

Times Square Tower is now over 90% committed. Our problem, as we said before, is finding sites on which we can build new product, especially as we compete with residential developers in this overheated -- I shouldn't say overheated -- in however the folks who know more about residential development than I want to characterize the condominium market.

In San Francisco, it sounds so good I will say it again. Doug said we made our first $60 deal in four years. That's a very nice return to a stronger market, but not one that's going off the charts as it once did. We don't mind that, but we don't expect that to happen in the near future.

San Francisco is probably the best example of a bifurcated market. There is a clear and could be as much as $20 to $30 per square foot rental differential between great space like the view space in the Embarcadero Center, and commodity space, where multiple buildings are competing for the same tenants.

In the traditional CBD, there's a 12 to 13% overall vacancy, whereas the entire vacancy in the San Francisco market I think is still in the high 20s. So you can see the difference that location and quality makes.

The peninsula still has the larger overhang of space, obviously. So therefore we're extremely happy to have leased 550,000 square feet of space for Genentech. In Princeton, we're seeing roughly the same pace of leasing activity, modest rent growth, modest decline in market vacancy. Nothing spectacular, but then again, a very solid sort of performance.

And in Washington, activity still remains very good. The fact that we're 100% committed -- not necessarily with all signed leases at 901 New York Avenue, that our Capital Gallery expansion is 85% committed. That we have very strong pre-construction interest at Wisconsin Place, our project in Bethesda. And that we are -- we've gotten very strong support for a 400,000 square foot office building that we will be doing in Reston, that Doug mentioned.

All of that is very encouraging, and really speaks to what will be happening and what will show up in our earnings in 2007, 2008. As Doug said, developments don't get completed immediately, so the development has to be completed before we can start booking the earnings.

And with that, I will ask Mort if you would like to add anything else.

I think the one thing I would like to just add to what has been said already is that the market for investment-grade real estate continues unabated. If anything, we are now seeing properties selling at sub-5% yields. We have certainly seen that in New York and in San Francisco. So you do have still a tremendous appetite for high-quality commercial real estate.

It is fueled by several critical ingredients. One of them was implicit in the description, which you already heard of the various markets we are in. To wit, you're seeing declining vacancies, increasing activity, rents moving up, and the expectation that rents will continue to move up given the nature of the market, particularly for the kind of real estate for example that we have.

Another factor that is pushing up real estate is the replacement costs have gone up dramatically. Construction costs have moved up over the last several years in double digit numbers, virtually every year. And critically, too, land costs have moved up, pushed in large measure by the alternative use for land; to wit, residential, which has moved up dramatically.

In New York City, for example, when you can sell a residential space for $3500 a foot, when commercial space can -- for the best buildings right now approaching $1000 a foot, you really do have a sense of contrast between the competitiveness or the highest and best use, as we often refer to in real estate. And the competitive competition between residential and office space pushing up the land values is always a critical ingredient in the development of office buildings.

At least on that side of the real estate equation, we're seeing, if anything, an unabated demand. There is of course a third factor which I'm sure you're all familiar with, which if there was one factor that inhibited to a degree pricing of large-scale individual real estate projects, to wit, their ill-liquidity. Today the degree of interest in real estate is such that there is a hugely liquid market for high-quality real estate, no matter what the size of buildings going for the many hundreds of millions of dollars. Some of them in excess of $1 billion, and a lot of demand for the buildings.

And I might add, a part of the recognition therefore of value comes not just in the current yield, which compares in the minds of many favorably to alternative current yields, particularly in the stock market. But people are recognizing more than they ever have the residual value of real estate over time.

And again, given the quality of our portfolio I think that does speak well for our opportunities to have a recognition of the value of our current assets and the assets we're developing to levels that we have not previously seen. In fact, we have never seen values. Therefore, we're really able to feel very comfortable about value of our assets as they are recognized in the marketplace.

I think we're finally quite comfortable with the prospects for the demand for space over the next several years. Corporate America is still very, very profitable. Record profits are being earned; record cash flow, record cash reserves in corporate America. So we're seeing in corporate America and in the industries that service corporate America, particularly law firms and accounting firms, still a very solid flow of tenant interest. And we expect this to continue and to improve.

And we've come out of a period in which the market rents, as you marked to market, were below our rents. As Doug points out, we've come out of that. And now if we have to mark to market, we believe we would be above our overall rental portfolio, and we think this trend will continue.

So if we have a major problem, it is the ability or inability on occasion to get enough sites to do real estate development in our various markets. These are still at a premium. These are still being bought out more than we would like by competing use, called residential use because of the valuations that they could create.

And so we are still going to have to work very hard to accumulate these kinds of sites. We're working on it, they're not short-term projects. The average length of project that we've experienced in the last 40 years over -- for a large-scale project runs from beginning to end, five or six years.

But we're really working very hard at that because we think this is a very good opportunity. So do others, so is not an easy thing to do. But we've always been able to, as we say, get our share and we still look forward to that.

Anyway, this is a fairly general description, but frankly one that is increasingly bullish in terms of the fundamentals of market demand, both in terms of rental and in terms of valuation of assets. With that, I will just end my own comments.

We are open to questions.

(OPERATOR INSTRUCTIONS). Greg Whyte, Morgan Stanley.

You guys have given significant color on the various markets. And, Doug, you acknowledge the higher TI and leasing commissions was sort of the result of one major lease. Can you maybe just step back for us for a second, and even if it's just qualitative, can you talk about the level of incentives you're still having to give?

Ray, do you want to jump in on that?

I'd be glad to respond to that. Like all aspects of our business, just marking to market. I will tell you that given we have such high-quality buildings and high-quality spaces, I see actually a reduction in the cost of keeping tenants. We're negotiating a major renewal here in Washington D.C., a ten-year renewal. I cannot give specifics of it yet, but it will be forthcoming shortly, hopefully. We're only spending $5 a square foot to keep that tenant for another 10 years.

Could you maybe break it into sort of the extent to which you're giving hard dollar incentives versus free rent?

I would say I would say free rent, absent the period of time associated with the buildout, is diminimus. We're not seeing -- we're not inflating our rents. That's more of a practice akin to that of a merchant builder who will inflate a rate that he attempts to cap in exchange for upfront free rent. That's kind of a neutral situation for us, we do not endeavor to give free rent.

I would say the breakdown is, again market to market, anywhere between 10 and 20 on a consistent tenant to get them to renew. We're seeing virtually all of our submarkets -- positive marked to market in terms of rental rates.

Commissions, again this is very much market to market, but generally speaking 2 to 3% on renewal, 3 to 4% on a new deal. Again, as Ed and Doug so eloquently stated, it is very much a market by market, high-end use space, great demand commodity space we are being much more aggressive on our deal structure.

Just two other quick questions. Can you guys give any color on the additional two assets you sold, EC West and the hotel?

Just that -- I'll let Bob Pester describe the process on Embarcadero Center West in terms of the level of interest and the offers we had.

We had -- I believe 110 confidentiality agreements signed, and at end of the day there were 20 people that had submitted offers. Ten which were in a tightly knit group, all within a few million dollars of each other. That's all we can say on the transaction at this point.

Collectively, I think I said the contribution from those assets on a 2005 basis was about $13 million, and $282 million purchase price. So you can back into at least a 2005 number.

And one quick --

Greg, we ought to give other folks a chance. Sorry.

Jon Litt, Citigroup.

I want to follow up on the thought process you had for this year of selling. I think you said 839 million by the end of the year. Why not continue to do that aggressively in '06, and/or consider selling the whole Company?

I suppose, if somebody wants to come in and buy the Company for the premium that it would be worth, we would owe it to our shareholders to look at that. But I'm not going to tell you that that's something that we're -- our plan is to operate this Company and continue to deliver the kinds of results in we've delivered since we became public in 1997. And if you look at that on a total return basis, we're very proud of that track record.

As far as selling assets, the fact that -- as we've traditionally done, not assumed either the sale of an asset or the acquisition of additional assets, doesn't mean that we are not interested in doing both if the transactions are attractive enough. So we will continue to explore selling assets, and we will continue to underwrite any kind of an asset that seems to fit within our portfolio.

At some point, we hope that that underwriting will say to us, hey, it is worth that investment. But we're not going to lose the discipline that we've always practiced as we look at that process.

A question, can you give us the market rents in downtown Boston and San Francisco?

I'd say the average market rent in a CBD building in San Francisco from top to bottom in our portfolio is probably $35 to $65. Based upon view, size of building, size of the suite. So the bottom of EC One is $35, the top of EC Four is 65, maybe even $70 today.

In Boston, the gap is probably comparable, although the low end is a little bit lower. If you were to look at the low-end of a building in the financial district, where you have very large floors at the base of the building, you're probably in the low 30s. If you're at the top of the tower, like International Place or 111 Huntington Avenue, you're somewhere around $60 to $65 a square foot.

To add some additional color on the Boston downtown market, is that there is a division occurring between the Back Bay and downtown. And the best example is the vacancy rate in Back Bay for non-subway space is 5.6%, and downtown it's north of 11%. There's roughly a $3 spread in terms of average rental rates. So the Back Bay is starting to see a premium versus downtown.

Lastly -- this is Jordan Sadler here with Jon. Could you quantify the potential development opportunity or pipeline that's available beyond maybe the three you've identified? And sort of what you have in the next two to three year horizon?

I think over and above what we've already identified, I really don't want to speculate. We're working on a number of different situations in each of our regions. And they can range anywhere from -- the high double-digits in total value on up to $300 million. So I don't want to speculate.

I think it is important to note that we do have an in-place pipeline, an inventory of future development in excess of 6 million square feet.

Just in our landholdings.

My point is that we've already made bets that have tremendous -- not only value on the balance sheet in terms of just their underlying value, but the potential they have for future earnings through the development of the properties. That is our future raw material we've already inventoried.

Actually, Ray, there's another 3.5 million square feet of developable area that we have essentially under option.

That's correct.

Beyond the three you've identified, though, there's nothing that looks like it's coming to fruition in the immediate term?

Nothing I want to comment on today.

Ross Nussbaum, Banc of America Securities.

Good morning. I was hoping you could share with us some color on what your thoughts are for the value added office fund. Obviously the activity there has been pretty quiet over the last year. Any thoughts to getting more active there and using your partners' capital rather than your own?

Let me be very straightforward about the answer to that. There are certain investment hurdles that are built into that fund, and given the -- because it truly was created to be a "value added" fund. And given the way assets are being priced, and the fact that there seems to be a blurring of the distinction between core assets and so-called value added opportunities, the investment hurdles that we and our partners set for ourselves are -- have been extremely difficult to meet.

And so as a consequence, I can't predict for you that we're going to see much activity, simply because we can't find the product that fits the criteria.

I think the best testament to that is our partners are right with us in terms of the discipline and the underwriting.

What we're seeing -- this is Mort. Going back what I was saying before, there's just a flood of money coming into real estate in the way of acquisitions. And this is the proverbial type that has listed all the votes.

We are in -- inventory that we have in Boston Properties at the very top of that pecking order, the kinds of buildings and real estate we anticipated acquiring with a higher risk portfolio and high return portfolio, has also been priced down to such a level that we just do not feel that it warrants -- some sort of breaking the mold of what we have established. So we're just waiting to see that market comes back and we won't expect it to come back.

In fact, I think the value in real estate is almost equal to the increased value of banks. I expected to see Citigroup sold to the Banc of America shortly, we want to be there when that happens.

One thing that might be of interest that I would just like to add. If this was -- we look these asset acquisitions, traditionally when you would look at an acquisition, and we used to do -- we still do the IRR analysis and figure out where you're getting your return, you're finding it between annual return and residual return. It was rare that you would find that you were looking for 50% or more of the return to come from the residual. In fact, we like to think the 35% would come from the residual and 65% would come from the return.

Today, there are (technical difficulty) being done where 20% of the return comes from the annual return, and 80% is really -- it is expected to be generated by the residual.

At what point in time do you think that starts to reverse course? The question is, how long will you remain disciplined and take a lower growth path before you start to sit back and say, maybe we should start revisiting that thinking?

I hope we remain disciplined forever. But the question of taking a lower growth path is something we don't feel we have to do. And that we will find ways to grow without really investing capital in something less than what we consider our average cost of capital.

The one thing you do have to differentiate where we are versus where some of the more opportunistic buy and sell buyers are, is that the very nature of what we do, which is to really generate current earnings for our shareholders, is made much more difficult if 80% of the return that people are expecting from buying these assets at these prices comes from the residual. It's just -- what it means is that you are really deferring the returns for a long period of time.

Also, as you know, we are basically really focusing a lot of our efforts on the development side of the equation. In part because of what we've just talked about vis-a-vis acquisitions. And in part because we generate such high going in returns with developments. That's still the core DNA of this Company. We are in the position to do that in every market that we are in, and we expect we will do that and do that on accelerating basis.

We do believe in acquisitions, and we hope that we'll have that opportunity. But we are perfectly happy to sell some of our assets, which we -- in a sense are non-core assets, as we would define them, and use that money in one form or another to distribute to the shareholders, increase our development capacities, buy in stock, whatever it is.

What we are benefiting from could be very blunt about it, is the fact that we have 45 million feet of space whose value has gone up dramatically in this marketplace. And this will be translated to us in one form or another, including higher rents if we get into a much more favorable leasing environment. So we're -- it does change the nature of our business to some extent.

The competitive advantage of REITs in terms of being able to make these larger-scale acquisitions where we were very active, that competitive advantage is now matched to some extent by a lot of the real estate funds and the individuals able to put together a much higher rate of debt, level of debt, that exceeds what we are comfortable with. So we just have to sort of go with the flow on these things.

Carey Callaghan, Goldman Sachs.

Could you update us on your thinking with respect to a special dividend? I think you indicated on the previous call you would consider, in light of continued disposition activity, that you would consider a special dividend in '06. Given the comments about how expensive and it is to (technical difficulty)

(technical difficulty) valuation of our currency, and the board will have I'm sure an interesting and long discussion as to what the appropriate course would be. We are not suggesting that we wouldn't make another special dividend, but I'm certainly not suggesting that that would be the primary focus of our capital if in fact we sell additional assets we do that (indiscernible) (technical difficulty).

I think if we gave anybody the impression that we were planning on another special dividend for 2006, that would be -- then we obviously misspoke. We haven't even had the discussion that Doug just referred to.

Fair enough. On the 599 Lex, you talked previously about potential refinancing plans. Can you update us on your thinking there, if it's changed at all?

It hasn't changed. That has been temporarily refinanced with our line of credit, so we have $225 million outstanding on our line. We've been able to preserve the mortgage recording tax, so we can do a secured and unsecured borrowing on that.

The issue is, refinancing on a long-term for $225 million probably is not the most efficient use of that asset on a property-specific basis. Because we could probably get 60 to 65% financing at $450 to $500 million. Based upon the way the mortgage markets underwrite things. And as is obvious, we don't have a use of that capital today, so simply increasing our interest expense is probably not the right thing to do.

I think I did say we have started and have done some hedging. We locked in $425 million of long-term rates. So to the extent that we have the ability to do some long-term financing over the next 18 months, we locked in at least the underlying treasury. And we feel good about where we are in terms of our capital needs.

Lastly if I could, Ed, if you mentioned your seeing signs of increasing development in some of your markets and it's a long-term concern. Can you just put in context, of the three development projects you talked about I know one of them is residential. Can you put in context your confidence for those specific assets in light of potential supply a couple years out?

Yes. We are confident about those, because in each instance with the office projects, users had been identified. And we believe before we start construction, we will be in a position where we would announce a significant percentage leased.

Also, both of those submarkets had the highest barriers to entry of any market in the Washington D.C. area. Reston Town Center and Chevy Chase. There is no competing development there.

Chris Capolongo, Deutsche Bank.

I was having a little trouble getting to the low end of the guidance range. What's driving the downside?

I said our growth could be up to 2%. I don't want to sort of go through detail by detail, but if you just look at the same store and you look the low and the high, and you look all those other variables, you can probably get within that range pretty consistently.

There's nothing I'm missing of major consequence or anything, right?

I don't think so.

Quickly, why aren't the properties that you're selling recorded as held for sale at the end of the quarter?

Because the way the accounting literature works, from our perspective, is that we put a property as held for sale when we have a signed purchase and sale agreement. And at the moment, we're negotiating purchase and sale agreements, but until they are signed and effectively it's hard, we don't put it into held for sale.

In addition, to the extent we have continuing involvement in the assets from a management perspective, it wouldn't be in held for sale. It would go into, I believe, into our other category. (multiple speakers)

You're not going to manage these assets?

No, we will likely manage Embarcadero Center. We would certainly not manage the Residence Inn hotel.

Brian Legg, Merrill Lynch.

Are you looking for more residential opportunities to monetize them, this 10 million square feet of land bank beyond the Cambridge and Reston Town Center?

I think it's fair, Brian, to say the following. One is that many of the developments that we are involved with, or the ones that we would expect to be involved with in the future, are probably mixed-use developments. And mixed-use developments clearly have something more than simply office space. And learning and be getting better at understanding how those kinds of uses are completed and marketed and developed is something we're looking at trying to get better at.

And as I said, we're likely to bring a development partner in or marketing partner in with our Cambridge property. In Reston we're likely going to sell those development rights. But we will be very much involved in sort of how that project works. We have built one residential condominium project for a fee at the Prudential Center, so we're gaining some experience.

With regards to our existing land inventory, I think it is fair to say there are some locations that we think the short-term or medium-term solution for bringing that land into operation and getting revenue would not necessarily be as office development. And we're studying and doing design charettes and reviewing markets and zoning issues associated with some of those of other landholdings that we currently have. And it is possible that some of those might not be pure office buildings as they're currently conflated.

Can you just expand on other potential asset sales beyond the $282 million in the fourth quarter? Would you be looking to sell your remaining two hotels, maybe in '06? Or your Gateway assets in South San Francisco or anything in suburban Boston?

I think at this point we're not prepared to discuss what's next. As soon as we put something on the market or contemplate actually put something on the market, we will be sure to identify that and give the Street a heads up.

Steve Sakwa, Merrill Lynch.

I guess I wanted to maybe go back to the guidance. Because if you sort of listen to the call and you listen to the tone, it's a fairly upbeat, positive call about the markets, about where things have trended over the last year. If you go back and look at the guidance you gave a year ago, you're going to come in pretty much at the high end. And if you factor in the dilution that you're suffering from asset sales, you may even be above the high end of your range.

I guess I'm trying to figure out when you kind of look back at your guidance versus where things pretty much have played out this year, what surprises to the upside? And maybe asking the question a little differently about '06, where do you think the slack is? Is it really on the leasing front? Were you just taking a very cautious and conservative view with respect to space at Pru Center and Democracy and EC, and is that where the big swing factor is?

I would say the following, which is -- I said it on sort of my conclusionary remarks. If you stripped out the contribution from the sold properties, and you also stripped out the special dividend -- so we didn't have that use of that capital in terms of interest income for 2005, we would've been about 4.05. So we're basically saying, the portfolio going from 4.05 to call it 4.20, midpoint of our range.

If you look at just those three spaces as examples, the contribution from those spaces in 2005, the Democracy Center space, the Prudential Center space, and the space at EC 1, it's probably about $20 million. Just those three spaces in terms of if they were all leased for the entire year. So you're talking about $0.16 of potential short-term.

Like I said, that's some of the best space we have the portfolio. It's not a question of getting it leased. It's a question of, Digitas is moving out. They moved out of 250,000 square feet. We've leased 100,000 square feet, we've got 150 to go.

Cedric is moving out of EC One in March, and we have to base and assess this then we have to rebuilt the space. If we get a tenant in there, we are probably going to get a tenant in there in November or December. And we have -- we're working on a lease in fact on Democracy Center. The problem is, the tenant needs the space at the beginning of '07 and we've got to build out for him. So we just probably are not going to see income in 2006 on that space.

So the problems, if you will, or the opportunities are there, to really ramp-up and get that benefit in 2007. The fact of the matter is, it's unlikely we're going to see much contribution for those particular kinds of spaces in 2006 just because of the market dynamics.

I think it's safe to say that we are -- I don't think we're overly conservative in our leasing assumptions. We certainly don't assume we're going to lease every single space that comes vacant within two months and have rent commencement. So when we have specific spaces where we have to realize that it may be a 20-year-old space, or there's asbestos, or we've got a tenant, then we're prepared to put a block of space together to make up a larger use requirement. We're going to take advantage of those because we think they're the right thing to do for the long-term.

Let me ask a technical question. Another office REIT delayed earnings, and there seems to be a growing issue with regard to tenant improvement dollars and how they are accounted for. There seems to be -- I guess there's not uniformity across the accounting firms.

I didn't see anything from you, and haven't seen this issue arise at other companies, but it seems very sporadic. I'm just wondering if you can maybe addressed that for us, whether you have -- I'm sure you had other discussions with your accounting firms, but is this still an ongoing issue for you, or do you think this is resolved?

Here's my perspective. My perspective is, and I think this is the perspective of the auditors that we're dealing with, is that nothing has changed in with the accounting literature over the past eight years that we've been a public Company. The rules about revenue recognition haven't changed.

The SEC came out with a comment letter regarding retailers about a year and a half ago, basically saying retailers should rethink and review how they are dealing with tenant improvement dollars that they're getting from landlords, and whether or not they should take those in as revenue and straight-line that over the lease term. Or they should consider those improvements are theirs, effectively. (technical difficulty)

Our perspective has been that we have been consistent and done -- taken the same perspective on each and every lease that we've had since we went public, as an IPO. We recognize revenue when we have provided the tenant effective use of the space. And so to the extent we're building out the space, we delay revenue recognition until the tenant has occupancy. To the extent we're giving space to a tenant to build up themselves, we start recognizing revenue on that day.

With regards to the tenant improvement allowances, to the extent we're giving anybody rent inducements, free rent, cash that they can use to make up for whatever they want, they can use it for -- to basically pay rent over time if they don't use it for tenant improvement dollars. All of that kind of capital we take in and we take it as a deduction against our revenue when we're doing our FASB 13.

To the extent we're giving somebody and allowance, we deem that those improvements are ours. That those should be capitalized on our balance sheet. And they should be written off in amortization over the term of lease. That's the policy and the practice we're taking.

To the extent that NAREIT, or the FASB, or the SEC decides effectively what they want us to do is start recognizing net rents, as opposed to gross rents with amortization of capital costs, we are more than happy do that. We think it should be a decision that is universal and not one that certain accounts are inflicting or pushing upon their auditors because they need -- their clients because there's something different or wrong with what's going on. Because we've been very consistent and we've been doing the same thing for the past eight years.

Jim Sullivan, Green Street Advisors.

Ed made the observation that speculative development is ramping up. Washington D.C. is the market that probably has the most speculative development under way. Can you comment on how concerning the volume of spec development in Washington is to you with respect to the health of the DC market? And what are you doing specifically within your portfolio to prepare it for the deliveries '06, '07, '08?

Let me just say that on the big picture, we're extremely bullish about Washington D.C. long-term. Just the demand dynamics and the supply constraints in this market I think will continue to justify a major investment here. But you're correct, I think we have two things at work. We have -- actually three.

We've got speculative development and people are building -- they're saying if I could build buildings for 4.50 a foot and sell them for 6.50 a foot, I make a nice profit. What they forget going from 4.50 to 6.50 is the leasing. A lot of people going spec in areas that -- I'm a little bit concerned about, and so appears (ph) my concern. Number one.

Number two is, we're seeing a lot of large law firms, a classic example is the Piper Rudnick deal, we are pulling Piper Rudnick out of 1200 19th Street, leaving 300,000 square feet in the CBD. That's one of maybe seven or eight buildings where -- relatively well located, relatively good quality, 20 or 30-year-old buildings are having major vacancies. And developers are repositioning those as class A assets.

The last, the brack issue, which looms over our head relative in the future is pulling out a lot of the B and C tenants out of downtown who would be normally backfilling in that D (ph) product. So those three demand dynamics right now are affecting the market.

What we're doing about it is we're going out in advance, I mentioned renewal earlier in the call, where this lease had not expired until '09. Yet many developers are aggressively pursuing these large law firms as their lead tenants for the new developments in '08 and '09. We are renewing those tenants today. And we're making relatively strong deals for us and we think fair deals for the tenants to rep (ph) of those tenants today.

Again, the developments we're starting downtown, most specifically 505 9th and Capital Gallery, are all pre-leased or substantially pre-leased at rents that justify double-digit returns. So we're out in front with our renewals, we're doing development.

We're doing development on a very cautious pre-leased basis, and we're kind of keeping our power dry as we do it in all our markets relative to new acquisitions. We're not taking a tremendous amount of vacancy risks right in downtown for the next two or three years.

John Guinee, Legg Mason.

You guys obviously do a very thorough asset evaluation, wholesale analysis. And in today's world, most hotel analysis that I've seen would say, sell everything. But if you look at your wholesale analysis, you look at your NAV, you look at the replacement cost issues, increased development cost issues out there, in addition to your core business, core development business, really it would -- you should be -- it's (ph) aggressively buying back your shares. Can you refresh us on your (technical difficulty) process?

I'll take a shot at that. It's Mort Zuckerman. As I think we've tried to mention the last time, we had we thought very special reasons to engage in a special dividend because of special tax considerations. But as I think was implied by what Doug said, that's not our program or projection for next year if we decide to distribute funds.

I think there will probably be a different priority, and I think if we have to look at it in the context of today, nobody's made this decision and nobody's have these conversations. Let me be specific about that. I think we would look at it differently and would look much more favorably on the stock buyback.

Second question, if you look at your decisions to sell, it seems to me that the fundamental underlying decision that has driven the sale decisions has been a long-term question on the ability to really grow rent in markets like downtown Richmond, downtown Baltimore. If you screen your portfolio and look at all the submarkets where you're active, where do you see the least potential increase rents or the most risk of rolldown, for example, Princeton, suburban Maryland?

Our belief about all the markets in which we currently have assets is that we're now going to see rent increases. The pace may be different, but we do not think there's risk of further rolldown in those markets at all.

So it becomes a question of the specific asset within those submarkets, which one may be leased at a relatively stable return for a long period of time, and perhaps therefore doesn't give us the upside going forward. Which one may be not in the 100% location in that submarket, although I have a hard time identifying those in our portfolio, etc. I don't think it's a question of losing faith in any of the submarkets that we currently operate.

David Toti, Lehman Brothers.

Two quick questions. The first -- maybe the second one is not so quick quick. The first one, is there a significant cost related to the interest rate hedging program to date, and for the full program?

There's no cost. It's embedded. We paid a forward premium for those hedges. What we do is we purchase forward starting swaps and it's already embedded in the 432.

My second question is more sort of a high-level. If you had to sort of quantify, what would be your top three objectives or finance-related objectives for 2006?

When you say financial, I'm not sure what you mean. But clearly our objectives that have the most financial impact would be, A, to continue to increase our development pipeline so that we can invest money in development. B, to search out the acquisition opportunities that do meet our investment criteria. And C, to do the necessary blocking and tackling so that we cover those vacancies that Doug spoke of with -- in the most aggressive and productive way, so that if not in 2006, in 2007 we will be driving increased earnings to the bottom line.

I guess I was thinking the last sort of strategically more sort of balance sheet-related, financing-related. If there are any objectives in that front at all.

I'm a little bit embarrassed to say that we're so underleveraged right now that from a balance sheet perspective, it's very difficult for us to do much other than look at basically what our perspective -- and Mort has been unbelievably effective at doing this, and understanding which -- where we think interest rates are going to going. And determine whether or not we should be floating or fixing and what portion of our various expiring financings we should be hedging on.

Aside from that, there's very little in our balance sheet that really needs tinkering with because we have so much capacity. And unfortunately, until we get a sense that we're going to have a use for the capital, it's very hard for us to go into the financing markets and do much in the way of major transactions.

So there's no objective to loosen those positions you currently have in terms of the conservatism of your balance sheet.

I would say there's a very strong objective that we would like to see our conservatism sort of (multiple speakers, indiscernable) based upon, we want something to do with the money. I wish that I could find something, so that I can leverage out by balance sheet to some degree. That would be a wonderful opportunity.

At this time we have no additional questions. I'd like to turn the presentation back over to you for any concluding remarks.

I would just like to thank everybody for their time and their attention, and we enjoy answering those questions.

-- There are just different ways to make money in this business at different times, and I think we're happy with the way we're doing it now. We're still looking, as I said, to focus. And we will focus primarily on development as we go forward. We think that's where the greatest opportunity is and we bring a very special experience and core competency to that. We're going to work very hard to do some major development.

Thanks, everybody. Good-bye.

Thank you management. Ladies and gentlemen, at this time we will conclude today's teleconference presentation. We thank you for your participation on the conference. If you would like to listen to a replay, please dial 1-800-405-2236, or 303-590-3000 with access code 11040118. (REPEATS NUMBERS). We thank you for your participating in today's conference. At this time we will conclude. You may now disconnect, please have a pleasant day.