波士頓物產 (BXP) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Boston Properties fourth-quarter 2005 conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, January 31, 2006.

I would now like to turn the conference over to Kathleen DiChiara, Investor Relations manager. Please go ahead.

Good morning, everyone, and welcome to Boston Properties' fourth-quarter and year-end 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 available 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 statement are based on reasonable assumptions, it gives no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in 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 statement.

With us today, I would like to introduce Mort Zuckerman, Chairman of the Board; Ed Linde, President and Chief Executive Officer; Doug Linde, Executive Vice President and Chief Financial Officer; and during the Q&A portion of the call, Ray Ritchey, Mitch Norville, and our regional management team will also be available to answer questions.

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

Thank you, Kathleen. Good morning, everybody, and thanks for joining us for our call this morning. I'm going to begin our discussion with some comments on the fourth quarter and some commentary on what we accomplished in 2005, and how the Company in our operating portfolio are positioned as we move into 2006. Ed is going to follow that with a review of the market conditions for our portfolio, then he is really going to try and focus on the impact of new development starts in 2006, and how those market conditions may be assisting us in getting going on some stuff. And then Mort is going to conclude our discussion by talking about some of the strategic initiatives that we intend to pursue over the next few months.

So I'll get started. The improvement in market conditions that we saw in our regions clearly exceeded our expectations of 12 months ago. We experienced stronger rental rate growth in New York City, in San Francisco, in Washington DC -- particularly Northern Virginia -- and the Boston suburbs. And if you remember back in 2004 at this time, we had a negative mark-to-market on our portfolio of about $3, at $2.90 per square foot. Today, it's a positive $0.40 a square foot. So that is an 11% change, positive change, on a weighted average basis in our portfolio market rent during 2005. And clearly, not all of our markets went up, so those markets that did go up went up considerably more than 11%. That is a pretty meaningful improvement.

We do expect this trend to continue. But its impact, in terms of how it cycles through the portfolio, is going to be somewhat modest, just given the magnitude of our 2006 lease expirations, some of which will reflect the high rents that we achieved in the late '90s. And I want to just remind people that in our supplemental, we do give you a breakout on a quarterly basis of our leases and our mark-to-market on those leases, so you can get a sense of what the rollover is going to be each quarter for each region.

Average expiring rents, excluding our retail portfolio, during 2006 are expected to be about $37.25. And while we will still have some rolldowns, we anticipate the rolldowns are going to be somewhere between 5 and 6%. And that compares to a forecast of about 18% when we had this call one year ago -- again, a pretty meaningful improvement.

And in Boston and San Francisco, which make up almost three-quarters of the office rollover in 2006, the average expiring rent is $40.79, and there we think the rolldowns are going to be somewhere between 7 and 10%. Some of the very high San Francisco and Boston rents that will terminate in 2006 will lead to a few quarters where there will be some skewing in our statistics. But again, if you look at the supplemental, you should be able to see a foreshadowing of where those events will occur.

2005 was another solid performance, as measured by many different standards. If you start with FFO, 15 months ago, we provided FFO guidance of 4.10 to 4.25, and our actual results reported last night shows that for the full year, we were at $4.25. That is $0.04 above FirstCall consensus and above our own internal estimates for the quarter.

This quarter, the better expected results came primarily from harvesting of unexpected leasing opportunities within the portfolio. And that ultimately shows its way in termination income -- and I'll describe those in a minute -- as well as from resolution of two bankruptcy cases. And again, where the money is showing up is in the termination line item on our income statement, as in our supplementals we break it out. Unfortunately, these aren't what I would refer to as net incremental additions to our earnings on a run rate basis, but nevertheless they are important.

Our New York City team completed another lease recapture with a replacement tenant in tow, and that produced $2.3 million of termination income. So again, this is a landlord-originated event.

We also closed out a guaranty involving a previous bankruptcy in Princeton, and we recorded $1.3 million of income. Again, that shows up in our termination income. So we collected $4 million of termination income this quarter versus the budget of about 1 million. And we remain current on a bankrupt retail tenant at five times square, and that resulted in a $2 million positive result this quarter. $1.5 million of that was the reversal of an accrued rent reserve from the prior tenant.

Just a little bit of commentary on that transaction. We had a tenant in bankruptcy. The lease was assigned, and the assignee was paid over $1 million in addition to going current on our obligations, as well as ultimately having to change the use from a brewery to a soft goods user, and the associated costs that will be involved in that transaction.

We had lower anticipated interest expense and higher-than-anticipated earnings on our cash balances, as a result of the timing of our sales activities, and that added about $1.2 million. So net net, the numbers that I just described all total about $5.9 million or about $0.04 per share. And that really explains the variance in the fourth quarter from what we had previously described, as well as where I think most of FirstCall was.

In the fourth quarter, we completed the sale of Embarcadero Center West for $206 million, $434 per square foot, as well as our Cambridge Residence Inn for $68 million or just over $308,000 per key. The annualized 2005 GAAP NOI from those properties was $13.3 million on a GAAP basis, 13.2 on a cash basis. So that implies a 4.8% cap rate on those properties.

In 2005 in sum, we completed the sale of $838 million of assets while retaining property management on the most significant properties. A full summary of the 2005 sales is included on the supplemental on page 48. The combined 2005 annualized NOI contribution from these assets would have been $41.7 million on a GAAP basis and 39.2 million on a cash basis, implying a cap rate of 4.7% on that $838 million of sales. And as result of the sales, we paid a $2.50 special dividend in October, in addition to our eighth consecutive annual quarterly dividend increase which occurred in July. So in sum, Boston Properties delivered to its shareholders a total return of approximately 23% in 2005.

Our operating teams completed over 4.1 million square feet of leasing in 2005. That compares with an average of about 4.6 million over the last three years, and we continued to prudently manage our transaction costs and our non-recurring capital expenses, and were able to cover our recuring dividend while paying out about 85% of our cash flow. Our funds available for distribution payout ratio for this quarter was slightly higher, at 89.3%, but still well below one times.

During the fourth quarter, we completed leasing transactions of about 1.1 million square feet, led by 450,000 square feet in Washington DC region; 273,000 in New York City; 223,000 in Boston; 106,000 in San Francisco; and 71,000 in Princeton. Some of the more noteworthy transactions included additional leasing at our Capital Gallery development project, where we are now 83% leased with a pending lease, which will increase the occupancy -- or the leasing -- not the occupancy just yet -- the building won't be completed until March -- to 93%. We completed a 290,000 square foot ten-year forward extension with a tenant with a 2009 expiration in one of our other CBD Washington buildings this quarter. Gives you a sense of the market in DC and where people are thinking, in terms of where they think rents are going and what it is going to take to reproduce large blocks of space.

We leased two vacant floors in New York City, one at Citigroup Center and the other at Times Square Tower, both with starting rents in the mid 70's, each with $5 bumps every five years, and had another tenant at Citigroup Center exercise expansion options on two additional floors that will be vacated at the beginning of 2007, with a fair market rent determination to be determined.

In Boston, we leased two of the lowrise floors formerly occupied by Digitas, totaling about 50,000 square feet at the Pru Tower. And we completed a 42,000 square foot expansion in one of our Cambridge properties.

In San Francisco, we leased two floors at starting rents in the mid-50's for space in the lower third of one of the EC buildings. Just gives you a little bit of color on the activity in 2005 in the fourth quarter.

In each market, our operating teams have completed or are negotiating significant leasing transactions, not only for existing vacancies but to cover major lease expirations for 2006 and beyond. The Washington DC is a good example of that.

In certain cases, the financial contribution from this activity is not going to be reflected in our results in a meaningful way during 2006, since it involves late 2006 or early 2007 rent commencement. And in a few minutes, when I shift the discussion to our 2006 guidance, I want to discuss the financial impact of these kind of transactions on our actual results for the year.

Our total in-service portfolio occupancy was 93.8% as of the end of December. That is up from 93.3% last quarter and 92.1% at the end of last year. After adjusting for the property sales, the same-store portfolio went from 93.2% to about 94% during 2005.

We anticipate somewhere between a 50 and 75 basis point increase in occupancy during 2006. Our average remaining lease length continues to be high at 7.3 years, and our 2006 office expirations totaled just 4.5% of total square footage and 4.7% of gross rental revenues.

This quarter, the second-generation leasing stats, which break out the regional numbers and the rollup and rolldowns, show a 1% decline -- only a 1% decline -- on a net basis, and a 1% increase on a gross basis. And the regional numbers illustrate the strong improvements in gross rents, in particular in San Francisco. So the net rents do illustrate that we are going to still feel the impact of increased operating expenses over time.

One note in Boston, where the statistics are a little bit skewed. In November, Digitas vacated 280,000 square feet at the Prudential Tower. To date, we have completed 100,000 square feet of long-term leases. There is another 55,000 square feet where we extended short-term leases on an as-is basis, with tenants that had sublet some of the space from Digitas, thereby partially covering some of the interim vacancy as we re-leased the remaining square footage. If you strip out those short-term lease transactions, which were done again on an as-is basis, so they have much lower face rents, our decline in Boston shrinks from negative 21% to 12% negative on a gross basis and from negative 31% to negative 18% on a net basis, just to give you a sense of the devil is in the details in these numbers.

Overall, the same-store portfolio, excluding our hotels, was up 1.8% quarter to quarter on a GAAP basis and 4.6% -- I think that is probably a little bit more than people expected -- on a cash basis, but that is due to the inclusion of Times Square Tower, which finally hit the same-store statistics this quarter.

Our transaction costs came in at $27 per square foot this quarter. That is slightly lower than our average this year, and very much in line with what we expect on a year-in/year-out basis with our portfolio with a concentration of CBD assets. Balancing this to some degree, we did catch up a little bit on our non-recurring capital expenditures, which again we expect to be somewhere between $0.75 and $1 on an annualized basis.

I would also note that we are for 2006 completing a $6.5 million room renovation at the Cambridge Marriott, and we will see those numbers showing up in the first and second quarters of 2006 in our reporting.

Our press release outlines a number of capital transactions completed during the quarter. I just want to highlight a few of those. We increased our long-term hedging program to $500 million, so we now have $500 million of fixed-rate money linked to a benchmark treasury of about 4.34%, which we can use between now and the beginning of February of 2007. And we closed on a forward loan commitment on our 505 9th Street project in Washington DC, locking in a fixed-rate of 5.73% on $130 million, starting in late 2007 when that building is complete.

In addition, we closed on two acquisitions in late December, and I just want to provide a little bit of color on the Prospect Place transaction. Prospect Place is a 297,000 square foot Class A office building in the heart of our Waltham Route 128 portfolio. We actually own a parcel of land adjacent to the building, and are planning a 270,000 square foot office building, with 100% structured parking on that site, and the cost will be in excess of $300 per square foot, excluding land.

In comparison, we purchased Prospect Place for $212 a square foot. It is 67% leased, and the majority of the leases, as you can see in our supplemental press release information, with the FASB 141 adjustment, are significantly below market. The building has great real estate fundamentals, but has languished from deferred maintenance and a lackluster image. After we remedy these operating issues and we complete our re-leasing program, we expect to yield a stabilized cash return of approximately 8%. These are the type of acquisitions we would like to do, but unfortunately they are few and far between.

As we outlined in our press release, we have maintained the 2006 guidance that we provided last quarter. We have completed our 2006 (technical difficulty) bottom-up asset level leasing plan, and established operating budgets and leasing objectives for each and every one of our assets. One of the insights from this exercise is that while on the one hand we are covering much of our current vacancy and our 2006 rollover, on the other hand, the transaction involving a lot of the space will not provide strong revenue contribution in calendar year 2006. In the aggregate, we have identified almost 600,000 square feet -- that is 2% of the portfolio -- of either currently vacant or 2006 big-block space rollovers which are subject to either signed leases or lease negotiations where our anticipated lease does not commence until 2007. The foregone rent from this forecasted downtime is in excess of $10 million in 2006.

Let me just give you one example of that. We have signed a lease covering 140,000 square feet at Democracy Center Three in Bethesda. 24,000 square feet of that space is currently vacant, and 116,000 square feet expired between June and August of this year. The tenant buildout isn't going to be complete until we deliver all that space, and ultimately the lease won't commence until March of 2007. So while the stage is set for strong revenue increases in '07, the impact from the same-store portfolio occupancy gains in '06 is going to be somewhat modest.

We do expect same-store results for '05 after adjusting for the recorded income from the sales in 2005, and that was $19.6 million, and termination income -- which is $11.3 million and includes the landlord inspired termination income, not defaults -- to grow up to 2% in 2006. Included in the number is an assumption that straightline rents are going to be about 50% of the level of 2005. In addition, we are budgeting termination income on a run rate basis of about $1 million per quarter. We expect the hotel to contribute somewhere between 20 and [$21 million (Company corrected following call)] to our bottom-line NOI in 2006. And the projected financial contribution from Prospect Place is outlined in our press release, so I won't go into that.

Many of our current developments are coming online in 2006. Seven Cambridge Center came online in the middle of January. Capital Gallery will have its first tenant in April, and be 83% leased and occupied by November 1st. And 12290 Sunrise Valley, also referred to as our Building E project in Reston, will be fully placed in service during April. We expect a fall annual run rate from these assets starting in February '07. So for modeling purposes, we would assume an unleveraged GAAP NOI yield of somewhere between 11 to 12% and a contribution of between 22 and $23 million in 2006, as well as a cessation of the corresponding capitalized interest expense as those buildings come online.

In total, our interest expense for '06, after you adjust for the repayment of the debt that we had during 2005 that is no longer on the balance sheet and the increases from the new developments, will be somewhere between 302 and $308 million for the year. And that assumes some amount of floating-rate debt, as well as increases in LIBOR. Our our interest income is expected to be somewhere between 3 and $4 million, a significant drop from '05 since we're not going to assume that we're going to have the same kind of cash balances that we carry during the year.

Our G&A expense is anticipated to run between 59 and $60 million. Again, approximately 2 million of that increase stems from the natural ramp-up of vesting on our long-term equity compensation program. And assuming no changes to that program, we'll reach a stabilized run rate on the five-year back-end loaded vesting in 2007. And it is reduced by capitalized wages, which we expect to remain somewhere in very close approximation to where they were in 2005. Again, that number is outlined in our supplemental disclosure package.

Our third-party management and development fee income will continue to become more stable. As you'll recall, in 2004 we had over $20 million. We started 2005 with an expectation of somewhere around 11, and were able to grow it to about 16 million. And we expect 2006 is going to be somewhere between 13 and $15 million.

We do want to make clear that our guidance doesn't assume any effect of sales or acquisitions, nor any assumption of the use of proceeds from any sales or acquisitions. Clearly, these activities, if they occur, will have the potential to have a significant impact on the 2006 actual results.

Our 2006 guidance remains where it was when we talked to you last quarter, $4.12 to $4.27, and our number for the first quarter is $0.99 to $1.01. When you compare the fourth-quarter results to the first quarter of 2006, just keep in mind a couple of things. The first is that we always have a lower contribution from our hotels, due to seasonality. In general, the first quarter is about 8% of the total hotel contribution versus 34% for the fourth quarter. We're budgeting $3 million of lower termination income for the first quarter of 2006 versus the fourth quarter of 2005. And our G&A is going to be about $3 million higher versus the fourth quarter of 2005, based upon the changes that we have in our compensation -- of our long-term compensation, as well as the front-end loading of payroll taxes.

With that, I'm going to conclude my remarks and turn things over to Ed.

Thanks, Doug. Good morning, everybody, and happy 2006. Best wishes to all of you for a wonderful year. Let me just quickly run through the markets and just give you some sense of where things stand. I don't want to be redundant, but I probably will be, since I think the story continues to be pretty much the same -- the markets are continuing to improve -- and that we have been very gratified by the success in 2005 as we move forward to leasing space, getting higher rents, as Doug outlined.

Let me first touch on New York City. As you know from the numbers, we have less than a 2% vacancy in our overall New York City portfolio, even including Times Square Tower; and I really shouldn't say even including, since Times Square Tower is essentially complete and fully leased. Rents in the city in our buildings range from $60 to as much as $100. I can't say that we're doing a lot of $100 deals, but we are, in fact, on occasion reaching that level. And so New York City continues to be, I would say, the strongest of our markets in terms of rental rate, but perhaps and on an equal with Washington overall.

In San Francisco, as Doug mentioned, we made a lot of progress this year. In fact, overall, there are some surveys in San Francisco that claim that there has been a 25% jump in rent over 2005 from beginning to end for a good view space. And in fact, we have finally pierced the $60 level of rental rate this year with a deal in San Francisco, and there are more of those that are going to come along.

We've said before there is a difference between so-called view space and so-called commodity space, and that is clearly the case. And it doesn't really matter as much as to where a tenant might be in a building, the difference between being on the 35th floor or the 15th floor, as long as that 15th floor space has views. And one of the great advantages of Embarcadero Center, of course, is that many of the lower floors also have the advantage of wonderful views.

It is still hard to justify new construction in San Francisco, and so I don't -- in addition to the difficulty of even starting office space in San Francisco -- but as you all know, some projects are moving forward. I still think that given where our properties are located, and the basic strength in Embarcadero Center, that we will compete very effectively against those new projects.

In addition, B&C properties are being removed from the market. Rental -- conversions into residential, for example. At Princeton, we have continued to have very good success in replacing rollover tenants, achieving low $30 rents -- a very stable market where as space becomes available, there seem to be tenants ready to fill it.

In Boston, we're very happy that our portfolio is in the Back Bay. Boston has shown some strength in recovery, but still, Back Bay is much tighter than downtown. That is why Doug could report the results that we had with the Digitas space as it became available, and we are quite optimistic about re-leasing the rest of that space.

It is also nice to be able to report, although I can't in good conscience say I think we're going to make a deal the day after tomorrow, but we have begun some dialogue with tenants who have '08 or '09 needs for space about the possibility of going forward with our office building at 888 Boylston Street. Now as I said, this is all highly speculative at this point. But frankly, it's a dialogue that we couldn't have had a year ago.

Let me just now focus on the suburbs of Boston, because that is where we are in a position to commence some development activity. And it will -- the development activity that we will commence will be in the Waltham slice of the Route 128 pie. It has always been the best place to build suburban office building in Boston. Over my entire career in this city, that has been the best place to make an investment. And actually, the statistics bear out that basic premise. While there may be double-digit vacancies, if you go around 128, the direct vacancy in Waltham is about 6%. And even if you include some sublease space, that may get up close to the double-digit level, except that as we know, some of that sublease space is simply out on the market, just sort of see what the market will bear, in terms of re-leasing it, and probably doesn't represent real availability.

There was a second year of leasing in Waltham that exceeded 400,000 square feet. 400,000 square feet were absorbed in 2004. 100,000 square feet of actual net absorption in 2005, but primarily because there weren't a lot of opportunities for tenants. And there have been 375,000 square feet of forward commitments for premier space in the market. In Waltham as well, 25% increase in rental rates in the premier properties.

So we are actually quite optimistic about our ability to get development under way in the not-too-distant future in that market. We have two projects already entitled, which could total 350,000 square feet. Excuse me -- actually more than that. They would total 450,000 square feet, I believe. Let me check my number. 450,000 square feet? And in addition to that, we are working on acquisitions of sites which will be followed by entitlements for another 0.5 million square feet. So we're quite optimistic about that segment of the market. We do think that that part of the Boston office space demand has come back very strong.

In Washington, where the CBD remains incredibly tight, and where our vacancy rate is essentially zero, we have been very fortunate to discover sites, move forward with projects like 505 9th that Doug reported on a moment ago. But the same tightness exists in Reston Town Center. The vacancy in Reston Town Center is probably essentially zero, in terms of existing space. Even Northern Virginia as a whole, it is just a little bit over 10%. In Northern Virginia over the past quarter, there was 0.5 million square feet of net absorption.

We have a 335,000 square foot office development, which also includes in addition to that 50,000 square feet of retail, under construction in Reston Town Center. Almost 40% of that space is already either leased or under firm letter of intent. And we're doing deals in the low to mid-40's, with a 50,000 square foot lease with an international telecom company, 75,000 square feet with another company that is basically a worldwide company with similar economics.

We have an additional 230,000 square foot potential of another building on that same site. And we're now working on another possible entitlement in that same location, which would allow us to build a third building of roughly 200,000 square feet.

So the building -- by the way, when I spoke of the building that is currently under construction -- the 335,000 square foot office building -- we are essentially doing infrastructure work now. I don't think we have had an official -- I guess it wouldn't be groundbreaking. I guess it would be a groundbreaking, because we have to build a garage first. In any event, an official groundbreaking until sort of the end of this quarter.

So in sum, in certain markets we are now seeing the markets coming to play to our strength, which as you all know is development. Our frustration, as always, is finding the sites in the CBD which can allow us to move forward with the kind of development that is really differentiated Boston Properties from a lot of other companies. We continue to aggressively seek sites in Manhattan. We are working on lots of different opportunities, but those opportunities are very difficult to complete.

With that, let me turn things over to Mort. I think it is appropriate, given the day, that he deliver the State of the Union address. And so with that, Mort, why don't you (inaudible)?

Good morning, everybody. Let me join with Ed in wishing you all a happy and healthy near year. Let me talk a little bit just about our basic strategic vision of Boston Properties as we go forward. As Ed says, I think we feel that single best utilization of our management skills and the availability of capital that we have is in the development process, where the yields to the amount of money that we invest generally exceed double-digit returns, which obviously is significantly above what we are able to do when we make acquisitions.

And indeed, the market for real estate has continued to be extremely robust. There is a great shortage of supply of assets on the market that would be in the category of the Class A assets which make up most of the holdings of Boston Properties. And given this, and given the valuations, we will continue to look at the possibilities of the sale of the assets, perhaps even some of our core assets, depending on the pricing that we are able to obtain.

It is our belief, for various reasons, that we will be able as well to do some acquisitions that will in some way combine the availability of capital and finance to us, and certain abilities to do things with respect to the assets that make us a unique buyer for the sellers. Of course, as Ed says, we are looking very aggressively at the acquisition of sites to develop in our major markets, and by that I refer primarily to the Washington and New York areas, where we continue to see very strong demand and very, very limited new supply coming onstream that is competitive with us at the quality levels that we continue to focus on. So in this sense, frankly, we're a little bit more optimistic. Not that I want to diminish in any sense the complexities or difficulties of closing transactions, but given what I know that we are working on, we're a little bit more optimistic that we will be able to get some major developments under way. And so between the possibility of new major developments and the possibility of new major asset sales, we feel this is the way to continue to translate the values that Boston Properties has brought to the real estate business.

We are, I think, very happy with the game, the disciplined and to date very successful strategy that we have followed of focusing on very specific markets and very specific assets in those markets. Over time, it has worked out that these assets, as we have said over and over again -- they do better in good markets and much better in bad markets. And one way that they have done better than even we expected is in terms of the way these markets have been valued by purchasers who have come into the real estate market as an alternative investment vehicle.

One of the reasons why we believe that the valuations of properties have made a fundamental shift is because the availability of funds have changed the liquidity factor, even for the very largest of assets. These assets are salable within a fairly short period of time. There are many competitors for them. There are many investors, indeed more investors both from the United States, but from other parts of the world, including Shanghai and the Middle East, people who are really looking to buy American assets. And we think that this may be an opportune moment to take advantage of that market as well, given what we think the values are and what we hope will be the alternative uses of funds.

With that, I think I will just terminate my comments, and I guess we will open now this -- questions.

(OPERATOR INSTRUCTIONS). Ross Nussbaum, Banc of America Securities.

My first question is there were some comments made about mid-$70 per square foot leases signed at Citigroup Center and Times Square Tower. And I guess I was surprised by that. Is there any differences in terms free rents or the TIs? Why were the rents so similar at those two assets?

You are surprised that there isn't more of a spread?

Exactly.

It does, of course, depend upon where they are in the building and what the total terms of the deal are. Does anybody want --?

Let me just say that in Citigroup Center -- indeed, in 399 Park -- those rents are going well above those levels at this stage of the game. I don't know specifically what you are referring to, but I do think that the market is strong. The market in the Times Square Tower is very strong. We have virtually no space available. The space we do have available is what we call prebuilt space. And for those pieces of space where we have, to some extent, built out the space -- not totally, but too a much greater degree than we normally do -- those are the rents that have gotten into the mid-70's and above.

So in general, I think the market is very strong. We are getting in the 80's in the Citigroup Center, and now we have just had several transactions that we are working on where we are virtually reaching agreement in the $100 range in 399 Park.

On the asset sales front, are you considering a sale of 601 and 651 Gateway, now that the debt has been repaid on those assets?

We will consider, depending upon valuations, the sale of any asset. There is no asset that is off the table. Specifically, those assets are not in the market as we speak.

Greg Whyte, Morgan Stanley.

Just two quick questions. Doug, I think you said the mark-to-market was $0.40. Is there a way for you to give us some indication of how that might differ by market?

Not off the top of my head, I can't. I can go back and sort of look at all of our statistics, and get back to you.

Great. We will do that off-line. Just one other question. When we look at the balance sheet, tenants and other receivables and also accounts payable sort of increased a lot from the prior quarter, and they have been increasing on a consistent basis. Can you just give us some color on why that is happening?

For the fourth quarter, it is really just a factual deal with the way our leases work, which is that in New York City we recover a real estate taxes in big lump lump payments. And our taxes are due on the 30th from our tenants and they're paid on the 3rd of January from our perspective. So to the extent that we didn't receive the cash on the 30th from our tenants, we have a much larger receivable.

Lou Taylor, Deutsche Bank.

Doug or Ed, can you give a little bit more color on your '06 lease expirations in Boston and San Francisco, with regards to what percent do you feel good about that are going to renew? What percent do think think that a high probability of leaving? And then maybe give a sense for who are the tenants that are taking these spaces and expanding and contracting or just relocating from other buildings in the area?

I will take a stab at that. The largest expiration that we have in Boston after Digitas, which has occurred, is an [R&D] building that we have out in Bedford, and there is 100% certainty that tenant is going to not renew, because the tenant relocated to California. And that is 250,000 square feet of the expiration.

I would say the next three or four major blocks, which range from 90,000 square feet is the next largest down to 15,000 square feet, in four out of five cases those are going to be renewing tenants. One or two of them are going to be expanding tenants and the others are just going to be straight extensions.

In San Francisco, the largest block of space that is expiring is the space that we have been foreshadowing for almost over a year now, I think, which is the space that a law firm called Sedgwick, Detert, Moran & Arnold had in Embarcadero Center One. That is 125,000 square feet, approximately. That tenant is going to be expiring the end of March and they will be moving out of the portfolio. They have actually already relocated. We are actually -- have conversations with one of our existing tenants to take four out of those five floors, but not until 2007.

The next two largest tenant rollovers are in the 55,000 square feet block. One of them will be a modest expansion, but basically a renewal. And the second will be a slight downsizing. The rest after that are really in the call it 30,000 to [15,000] square foot range and I would say 60% of them are probably renewing. 40% are probably expiring and moving out of the portfolio.

Just as a last question, so with regards to possible asset sales this year, how do you feel about the hotels, your probability of keeping those two remaining assets this year versus possibly selling them?

I don't want to speculate on any particular asset. In Boston, I think the hotel market has come back more slowly than in a lot of other places in the country. And so the real question for us is when is the opportune time to put those hotels on the market if we decide to exit that? And I think it is logical that we might decide to exit the hotel business, but it is really the question as to whether this is the right time to do it.

Jordan Sadler, Citigroup.

I'm here with Jon Litt. I would just like to delve into your capital plans a little bit. It sounds like you guys still have a bias towards opportunistic sales, given the pricing environment. How should we think about this year, in terms of if you were to do a significant asset sale, what would be your bias, at least initially, in terms of reinvestment -- would it be stock buybacks or opportunistic acquisitions -- in front of being able to deploy proceeds into development?

I don't think there should be any confusion in that regard. So let me state it very clearly. Our bias is always to reinvest the money in ways where we can create value. The history of this company and what the greatest asset we have, we believe, is our ability to create value in the real estate business. The most dramatic way that we do that is through development. The second most dramatic is by picking up properties where there is upside potential that because of our skills we can realize.

Now, we have also said that it is not easy to do that in this environment, especially on the acquisition side, because of pricing. It is difficult to find places where one can increase return over a relatively short time and impact our earnings in that way. And development continues to -- it is really a question of trying to find sites. I think we have done better than most. But it is still a hard business.

So I think that is clearly our bias. To the extent that we can't use the money, as we have demonstrated last year, with the special dividend, we would at the appropriate time make a decision whether it is better to do a special dividend or do a stock repurchase or -- but I don't want to prejudge that, because we don't know the timing, the magnitude, the tax impacts or the other details that we would have to consider.

On a separate note, I saw on the value creation pipeline one of the land purchase options, I guess in DC, rolled off sequentially. I was just wondering if that went onto another schedule, Doug, or --?

No, there is a site that we had for what I would refer to as big user GSA kind of a requirement on H Street. The owner of that parcel really thought that the best use of that parcel would be residential. And so they had the right to move forward and change the use or are intending to do that. And our perspective is that if they are going to do that, we are probably not the right partner for them. So that site is a site that is sort of rolled out of the portfolio.

Ray, do you want to add any color on that?

No, I think that is a correct assessment. The large GSA market combination of both a slowdown in defense spending and the erosion of the demand to Crystal City has slowed that market down. So the person decided that [Palms] development wasn't maybe the highest and best use at this time.

I had a question. Doug, you had said that the mark-to-market went from a negative $3 to a positive $0.40, and that you guys were a little surprised that the 11% move happened. Do you think that we might see a similar move in '06?

Sure. No, I do think that we are seeing increased demand by office-using tenants in the markets in which we operate. And that is what creates rental increases, obviously.

We're certainly going to see it in New York.

Sean Smith, Stifel Nicolaus.

John Guinee, Stifel Nicolaus. Two questions. One, probably for Ray. You're up to over $300 of [foots] build in Waltham. Can you give a little summary in terms of [shell] versus TI versus [soft-cost] versus parking, [to get there] in addition to land and then compare that to say Reston or the DC markets?

I'm going to address the DC market. Ed, do you want to take a crack at Boston?

Go ahead. Give the numbers on DC in rough terms.

In DC, in a suburban setting, the big variable, as you know, is the parking cost. And so that for instance, parking costs could range anywhere from $10 a square foot to a surface park to $30 a square foot for structured park to 50 to $60 a square foot for low-grade. For instance, in Reston Town Center, our cost without land and our land cost is relatively low there. Again, similar to that, in Boston there is about $300 a square foot all in, including TIs and financing costs and commissions. A more generic suburban site, without the structured parking and without the higher TI values associated with the Reston Town Center, would probably be closer to the 250 a square foot range.

And then Boston, obviously, you have the same issues with parking costs. I think the big variable also is the cost of labor, with union being a predominant source of construction in Boston, and we do non-union for most of our suburban construction in Washington DC.

The numbers aren't terribly dissimilar, and parking is the big variable. Since we're in some negotiations about some land parcels, I would really rather not sort of attribute, at the moment, numbers to land. I think there are still suburban opportunities in Boston where land has not reached the same level that it has, for example, in Washington.

But parking is a big issue. More and more, we're going to deck parking, and deck parking is going to cost you 10,000 to $15,000 a space. And that is really an average, with some of it still on grade, some of it in a deck. Base building costs are in the low hundreds, but when you add TIs and leasing commissions, etc., you're up to $150 of construction; then on top of that, of course, is financing, leasing and finance. So the numbers aren't terribly dissimilar. You have to look in terms of mid-300's for total development costs.

One other quick question, I guess also for Ray, is Corporate Office Properties Trust has a wonderful little niche within the defense industry in the [Baltimore]/Washington marketplace. You guys are most likely to compete with them, it’s absolutely amazing how few people compete with them. Any chance of you getting in that business a little more concretely?

As you know, we are not exactly chopped liver in that department, either. We're just completing the expansion of the National Geospatial building in Reston. We are going to be the beneficiary, own a 1 million square foot office park immediately adjacent to the gate of Fort Fort Belvoir in Springfield, Virginia. It will really be a source of some major upticks. And we are having discussions with Corporate Office Properties' main campus across the street from the site that we are working at [Nanarando] County that we are taking a look at. We haven't made any final deals there. But we're obviously nosing around NSA, as that is a major source of new jobs in this as well. Again, we're probably as comfortable with the defense establishment as Corporate Office Properties is.

Brian Legg, Merrill Lynch.

Turning back to Boston, developing in the Waltham area, first of all I just want to reconcile on your -- I think you said 450,000 square feet of development potential in Waltham. On page 50, it shows 202,000 square feet.

It's 202 plus 350, so I only misspoke twice. 350 -- excuse me, just to clarify, the 350,000 is in what we call, I believe, the Weston Corporate Center. And the 200,000 is at 77 4th Avenue.

But it shows the land is 74 acres, but you can only build 350,000 square feet in Weston? Why is that?

It is a very pretty site. It is an old quarry. There's a mammoth lake on the site, which is part of that acreage, and then there's another portion where development is restricted in part because of the way the approvals went, because of neighbors, etc. So unfortunately, we would love to be able to do a bigger development there, but just the nature of the zoning, the nature of some wetlands issues and the nature of the lake is what does that.

I think that really highlights how difficult it is to assemble sites of any density in the Boston suburbs, and thus the importance of the Prospect Place acquisition at close to $100 a square foot.

I guarantee you, though, the tenants that we will add, though, at the Weston Corporate Center are going to have a very beautiful site upon which to work.

Just to get to your typical development yields, when you're talking X land $300 a foot, you need to get net rents in around the $30 range. Is that where rents have gone in that area?

They haven't gotten to that point yet, but we certainly expect them to. I think we would still be prepared to do starting rents that are somewhat lower than that, because we know that -- and build in increases, and because we know that with time, rents will continue to increase if you have the right location.

Last question. Looking at the Prospect Place, it seems like that would fit in the value-added fund. Why didn't that go into to value-add fund? And how do you determine which goes into that fund and what does on your balance sheet?

First of all, a number of things, but the most important is that that is -- it is true there is a value-added opportunity to it, but it is clearly a core asset. When we develop, it will be a core asset, which we would intend to hold for a longer period of time, number one. And number two, given its size, it was not appropriate for that, as well.

The real issue is there is a return expectation for the value-added fund, and the return expectation is midteens IRRs. And with leverage and its current, in terms of short-term financing where it is, leverage doesn't help you very much. And when you're buying an asset like that one, which has got a pretty low going-in return, it is really, really hard to get a leverage return over a five to nine-year hold in the double digits, when you've got that front-end loaded return expectation that is really limited. We've actually looked at it for the value-added fund, and it just didn't meet the economic parameters.

And can you still acquire -- if you can acquire at less than $250 a foot, why don't you acquire more buildings like that that have the lease-up potential instead of building at an excess of $300 a foot?

The problem is it is very hard to find buildings that you can acquire for that price. We think we made a very good acquisition, but they are very difficult to come by.

Jim Sullivan, Green Street Advisors.

Please quantify your rent growth expectations for Midtown for '06 and '07?

Midtown New York?

Yes.

I think you're going to average 10% for each of those two years. There's a real shortage of supply. A lot of demand, and a lot of big tenants looking for space. And I think we will see a possibility of a real spike in rents. But in any event, it will be at least 10%, I believe, for each of those two years.

You talked about 25% rent growth in San Francisco before for view space. When you look at the employment growth statistics or lack of employment growth statistics, it is hard to me to understand what is driving that tenant demand, what is driving those rent increases. Can you help me understand why the rents have moved so far, so fast?

We may not have -- you mean in San Francisco?

Yes.

I think there has been a complete revival of business optimism in San Francisco. And if you understand how that psychology is driven by the technology sector, they are just referring to that world as Google World, and they're going berserk. So I think everybody in all levels is becoming much more optimistic about the future. Maybe they are taking space -- at this point, doesn't reflect the existing new hires, but I think everybody there is very, very bullish about what is coming down the road in San Francisco. There has just been a U-turn.

I also think there is a bifurcation in the marketplace. I think that you're seeing those kinds of increases and that kind of demand in certain buildings and you're not seeing it in others. It gets to Mort's point of earlier, which is in markets -- both bad markets and recovering markets -- the high-quality space just commands a premium, and that is why rents go up in that space. I don't know, Bob Pester, if you would like to add anything.

There just is a big difference between the view and non-view space. Most of the rent growth is occurring -- the huge rent growth is occurring in the view space, where there's just simply a lack of (inaudible) vacancy right now.

Bob, have you done any direct deals with tech companies, or the deals you're doing, the residuals at the law firms, the accounting firms doing business with the tech companies?

It is primarily hedge funds, VC money and law firms.

But that was the case back in the late '90s, as well.

Finally, Doug, you talked about landlord-inspired terminations generating some of the fees you saw in the quarter. Can you help me understand what a landlord-inspired termination is? And at the end of the day, do the economics end up being better or worse or neutral for you guys?

Basically, they're opportunities where we have a tenant that has a contractual lease and doesn't need the space and probably doesn't have the right to do much with that space, given either the term or under lease of the term remaining on the lease. And we have other tenants in the buildings that are growing. And we figure out ways to make one plus one equal at least three, and maybe four, where we either sublease that space from those tenants or we terminate the lease that that tenant had, and we re-let it to the growing tenant in the building. And net net, we wouldn't do it if it wasn't much more advantageous on an economic basis.

And I would add that we do it without risk because the new deal is in hand at the time that we make the deal with existing tenants.

We have it now in one of our buildings on a floor and there's a $20 difference (inaudible) pay, and we have two tenants for the space, and we think we will be able to make those deals. So there is a real -- there are these locations that while I would -- I think it is a nice way to put it, landlord-inspired. All it really means is that we are present at the moment and we have the opportunity to take advantage of it.

Jamie Feldman, Prudential Equity Group.

Could you just briefly address the risk of excess supply in DC by [submarket]? I know you made a comment that at the higher end, there is not much risk. I was curious if you could just add more data to that.

I will be glad to comment on that. In downtown Washington, like virtually all of our markets, we see very much a bifurcated market. The Class A high-end space is in very short demand. But the pipeline is being filled both by new construction and by large blocks of existing spaces being repositioned to be first-class.

For example, we're building a new building at 9th and E where we have the top three floors available for late '07 delivery. We have tremendous demand on that. Conversely, the space that Piper Rudnick is moving out of, at 1200 19th Street, is going to be repositioned by [Gerald Heinz] into a 300,000 square foot new building, and to my knowledge they have virtually no activity on that.

So there is the combination of both new construction and the backfill of large, older blocks of space, which has an attempt to soften that market. I'm also a little bit concerned about the B&C space, both from a standpoint of supply but also the erosion of the market to Crystal City, which I talked about previously.

In the suburbs, specifically Northern Virginia, the rush of capital, it is really increasing the supply out there. Although again, the difference in the market at Reston Town Center, with the existing base of between 3 and 4 million square feet and virtually no new supply, we are extremely confident about leasing that. But the more generic office space out the corridor, there is a possibility for overbuilding out there.

David Toti, Lehman Brothers.

I have two sort of big picture questions. The first is whether or not you're seeing any movement in cap rates in your four core markets, either up or down, sort of in general?

You want us to answer them -- go ahead, Mort.

Cap rates certainly have not gone up, and in some instances are still going down. And there is still a tremendous demand for the prime properties in these markets. I have to emphasize the word prime. There is going to be a difference between prime properties and other properties.

Which of the four markets do you believe there is still the greatest pressure in downwards directions?

Frankly, New York, Washington and San Francisco.

My second question is more a little bit along the lines of tenant concessions. And it seems most of your peers, even in strong markets, believe that these tenant concessions are still high. Yours appear to have gone down slightly this quarter. Do you feel that these tenant concession packages are somewhat structural at this point, or are you seeing reduced demand across the board?

They are absolutely structural to a point. You have to basically look at it on a market-by-market basis. And unfortunately, and I know this is not easy to sort of articulate, but it really is on a very much a tenant-by-tenant, space-by-space basis. So for example, if we have a brand-new piece of space that has seen one tenant on it, we're going to have a much lower tenant improvement allowance, and we are probably going to give much less in the way of, if it were in New York City, tenant buildout time -- in our other markets, a rent commencement date versus the space that is 20 years old, and that was done for a law firm that may have been using 20-by-20 offices, where the new configuration of offices is 10-by-12s.

And so there's just sort of a -- as you move through the portfolio, very much a variation in terms of how much you're going to spend on a space-by-space basis. Net net, I'm not aware, in any of our CBD markets, where we are not spending a minimum of 25 or $30 a square foot, as well as the brokerage commission. And the brokerage commissions obviously are dependent on a market-by-market basis. I think that as the markets have gotten better, we have been able to basically put a stoppage on the increases in our concessions, and in fact have reduced what we're offering as inducements for tenants. But I don't think they will ever get to the point where we no longer have to provide inducements because the market is so strong. It is just built into the rent structure.

In terms of the actual materials and labor costs, are those increases more than exceeding any softening of that demand?

Absolutely. The amount of money that the tenants are having to put into space to build out what it is that they would prefer to have are significantly more than they were a year ago, and probably 25 to 40% more than they were four or five years ago. It is both in labor, as well as materials. In materials, for example, today it is drywall. Drywall is just that much more expensive than it was. And so, a buildout -- a warm shall is probably costing somewhere in the neighborhood of 25 to $30. And that is basically your ceiling and drywall along the perimeter and no real office layout. And so you've sort of got to start from that and move up, in terms of what it's costing to build that space.

Michael Dimler, UBS.

I just wanted to -- if I look at your leasing trend, the vacancy trends, what you classify as renewal space seems to have gone down significantly in 2005. I was wondering how much of that would be the landlord-inspired retenanting or how much is tenant terminations?

I'm not sure I understand the question. I will try and answer what I think I heard, which is that we had a significant amount of rollover of older space, where we and the tenant agreed that it was probably more appropriate for them to move to another location. There was very little termination income associated with those types of requirements. Almost all the termination was basically associated with us taking space back and re-letting it, or termination income from a tenant that had gone bad, not a termination where a tenant sort of paid up and then just left the premises.

Operator, I think we probably ought to limit this now to just two more questions, since this has been going on for a lot of time, and then we will be available in some other way afterwards for any individual questions.

Sri Nagarajan, KeyBanc Capital Markets.

One quick question. I just wondered if you could provide an update on any of your future development pipelines, specifically with reference to two projects that you talked about last quarter, namely Cambridge Residential and Wisconsin Place?

On the Cambridge Residential, we are in discussions with a residential development partner. And we are negotiating an agreement with that partner, with an anticipation that we will get going on actually breaking ground sometime in the third quarter or fourth quarter of 2006.

On Wisconsin Place, we are proceeding with construction. As you know, that involves relocation of existing department store to the rear of the site. We're still on schedule for delivery late '07, early '08. And the leasing activity has been tremendous. We have three or four major tenants who have expressed strong interest in [coming to] the projects and we are negotiating with them at this point in time.

Steve Sakwa, Merrill Lynch.

Maybe this is for Mort. Can you talk maybe a little bit about I guess maybe your development philosophy? Some would argue that maybe you have been overly conservative, and maybe how you have underwritten projects and continue to shoot for double-digit yields, which is great. I think some of your private competitors are lowering the development hurdle, largely because cap rates have fallen on existing assets.

I guess really the question is twofold. One, are you I guess at all thinking about changing where you're willing to develop today, in light of where cap rates are? Secondly, do you worry at all that the lower thresholds for many others will ramp up the supply faster this cycle than it did last time?

As for the latter, no. But as for the former, I don't think that we have set at an absolute standard double-digit returns on development. It so happens that in the developments that we are pursuing, we're able to bring those about, but your point is well taken. We are certainly prepared in any number of markets to accept single digit returns in development. That, of course, should reflect at least the difference between the development yield and the acquisition yield. But we're not looking to just stay there with double-digit returns in a market which clearly may not support that activity. It is not that we're being deliberately conservative, but we have tried on any number of sites to -- it's the acquisition of the site that has been the more difficult thing, and there have been ones that frankly we did miss. We were not as aggressive perhaps as we should have been.

But I think we're not looking to establish a double-digit return as a standard. That is certainly not what we're about. We do, frankly, find that we're able to achieve them in these kinds of markets, given the presence we have in the markets, the sites that we have and the activity that we have. But we are certainly prepared to accept single-digit returns in markets. If we were, for example, to find the right site in New York and we could get a 7.5 or 8% return on development deal, we would be very happy to do that. We're looking at a number of them, frankly, in that range.

I guess with respect to the first part, you're not worried about so many developers having so many plans and land parcels ready that people just get kind of the itchy trigger finger and hold deals with those lower returns?

What is happening is that if there is an excess of supply coming on the market in any sector of the real estate market, it would be on the residential side. The prices that are being paid for residential development, including the land for residential, are significantly above what the office sector has been able to afford. So we have basically been, if anything, pushed out not by the unwillingness to accept a yield under 10%, but frankly by the inability to pay anywhere near the pricing that the residential developers have been prepared to commit to.

I think we only have one more question in the queue, so let's take that one.

Jay Habermann, Goldman Sachs.

Just a quick question, actually. As you look out over the next few years -- I know you have mentioned some asset sales -- do you see the mix changing between 75% CBD versus 25% suburban?

Not necessarily. I don't think so. The asset sales, Mort mentioned and he's quite right -- the asset sales that we were looking at are going to be those that command a premium. So clearly, the possibility, for example, of selling assets in New York City, where the price that will be paid is above what we think is reflected in our stock price, might be very attractive. But overall, even if we sold some of those New York City buildings, the mix I don't think will change that much, because we going to try very hard to replace them with other CBD buildings and other CBD projects. We believe in the CBD, believe me. I think I said "believe" four times in that sentence.

Well, Ed, I believe you.

Ladies and gentlemen, this does conclude the Boston Properties fourth-quarter 2005 conference call. If you would like to listen to a replay of this call, one will be available and you may dial into it by dialing 800-405-2236 or internationally at 303-590-3000 and use passcode 11049648. (OPERATOR INSTRUCTIONS). You may now disconnect and thank you for using AT&T Teleconferencing.