波士頓物產 (BXP) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Boston Properties' 2Q '06 conference call. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded, Thursday, July 27, 2006. I would now like to turn the conference over to your host, Ms. Kathleen DiChiara, head of Investor Relations. Please go ahead, ma'am.

Good morning everyone and welcome to Boston Properties' second quarter conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are 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 in the Investor Relations section of our website. To be added to our quarterly distribution list, please contact the Investor Relations department at 617-236-3322.

At this time 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 can give no assurance that its expectations will be obtained. Factors and risks that cause actual results to differ materially from some 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 today, 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.

Good morning everyone. I hope everyone is having a good summer. And thanks for taking the time to join us this morning for our second quarter review. We had a very strong quarter, as measured by a number of criteria. First, we have seen continued improvement in the market leasing conditions in our markets, highlighted by accelerating growth trends. And midtown Manhattan, as we will talk about, really was a superstar this quarter.

Second, asset valuations remain strong. And that is evidenced by the property sale that we completed in New York City, although there are other properties that are on the market, or being sold, that I think support those same valuations. Third, our reported Funds from Operations were greater than we previously expected. All good news.

We remain in a period of sustained job growth, with little overhang of shadow space, and a shrinking direct vacancy in our markets. High-quality space alternatives of any significant size are quickly disappearing. Rents and lease transaction economics are improving. And in most instances, although not all, we have been able to increase rents in response to improving demand. Rents have recovered faster than many, including us, had predicted.

In some markets rents are approaching or have climbed to the level necessary to support new construction. While to date we have at Boston Properties have not yet commenced 100% speculative development, others have in markets like Northern Virginia, Montgomery County Maryland, suburban Boston, Princeton and the District of Columbia.

In our new developments in Northern Virginia and Montgomery County Maryland, tenants will be paying replacement cost rents in order to satisfy high-quality real estate requirements, even though existing inventory is available and can still produce lower cost options. Superior product quality and location trump price.

Strong rental growth throughout our markets is led by midtown Manhattan. We have a hard time pinpointing what current rents are in New York City in midtown, since every deal has been significantly greater than the last. But we can certainly say that rents have increased at least 10% during the last 90 days.

Since last October our starting rent at Citigroup Center, where we have had some full floors for lease, have moved from $75 to $90. And we have reduced tenant improvement contributions and free rent periods for buildouts. Rents continue to grow in San Francisco, in South San Francisco, in greater Washington D.C., in Boston, in Northern Virginia, and the Boston suburbs, and are slowly picking up in Montgomery County Maryland, albeit at a more measured pace.

Our portfolio mark-to-market has increased from $0.99 last quarter to $1.68 this quarter. That is a 70% increase quarter to quarter. Average expiring rents during 2006, excluding retail, are just under $40.50. The portfolio rolldown, and we still have one although it is getting smaller, assuming we released all vacant space at market would be about 6% for 2006 and 2007. 84% of our 2006 rollover that remains is in Boston and in San Francisco.

In Boston the space is concentrated in our suburban portfolio, within an average expiring rent of $30.50 and a market rent of about $27.50. In San Francisco the expiring rents is about $52 a square foot, is mostly Embarcadero Center. And we have a market rent of about $49 per square foot on that space. As I said, we still have a slight rolldown in Boston and San Francisco, but it is getting smaller and smaller and smaller.

The operating fundamentals in our markets, exemplified by the continued rental rate growth and accelerated leasing activity, we define as sort of the velocity of tenant showings, are stronger than our trailing quarterly leasing statistics might actually indicate. The transactions behind our quarterly numbers are highly dependent on the actual timing of when those deals were put in place and the specific lease commencement dates. This quarter our second generation stats show about a 14.7% decline in rents on a gross basis, and about 23.7% on a net basis. New York City, again, was a shining start where rents increased on average about 57% on a net basis.

Included in the numbers are about 300,000 square feet of leases that were done in San Francisco and Boston in early 2005 that are just now hitting the statistics since those leases commenced during the second quarter. The average expiring rent on that space was $46 in Boston and $58 in San Francisco.

Now as a point of comparison, in the second quarter we did about 1.1 million square feet of new transactions. Again, these aren't transactions that started, but where we have signed deals. That included about 84 new leases. The activity was pretty much spread throughout the portfolio. The average starting rent in Boston and San Francisco on the deals signed during this quarter was about 10% higher than the numbers that are in those same second generation statistics that I just went through. Again, it is illustrating the continued improvement in rental rates.

Our in-service portfolio occupancy was 94.4 as of the end of the quarter, and that was flat. Adjusting for the quarterly sale, acquisition and new development deliveries, we had about 10 basis points of positive growth in occupancy during the quarter. Our average remaining lease still remains at about 7.7 years.

Our second generation leasing costs were higher than our historical average at about $34 per square foot. And our average new lease length was almost eight years. Many of the transactions are in San Francisco and Boston CBDs, where we are replacing tenants and spending about $50 a square foot on tenant improvements for 10 to 15 year leases.

Equally important in New York City where we are leasing commissions are up, because leasing commissions are proportional to rent. So as rent increase so do commissions. Based on the leases that we are currently negotiating we expect average transaction costs to be in the low 30s for all of 2006, and our average lease length to be somewhere between 8 and 10 years.

Our dividend/FAD payout ratio for the second quarter was again pretty low at 83.4%. This includes about $1.6 million for the completion of the Cambridge Center Marriott room renovation. That was about a $6.7 million project that finished up during the second quarter. And excluding the hotel, we still expect capital expenditures for the portfolio to be somewhere between $0.75 and $1 for the total year.

Actual results, as we reported last night, show second quarter Funds from Operations of $1.10 per share, after adjusting for the prepayment penalties associated with the quarter's asset sale of 280 Park Avenue. This is about $0.07 per share above the midpoint of our prior guidance, calculated the same way.

As we have explained in previous quarters, and I apologize for the commercial, we believe that reporting that Funds from Operations after the supplemental adjustment is a lot more useful because it appropriately reflects the results of our operations, exclusive of the impact of the sales transaction. To us it would be illogical to deduct the sales' related prepayment expenses from Funds from Operations, while at the same time excluding the gains from the various sales. However, I want to reiterate that we only adjust Funds from Operations for prepayment penalties included solely as a result of sales.

The quarterly variance this quarter is attributable to five components. The first relate to the sale of 280 Park Avenue, which was not previously budgeted to occur in our second quarter guidance. The property level information that we included in the 8-K that we filed on June 6 illustrates a quarterly contribution of about $5.6 million, which is net of interest expense.

So on an annual basis, 280 Park Avenue, after debt, would contribute about $22.3 million to our bottom line. Given the very low cap rate on the sale, there is a significant positive impact on earnings by investing the proceeds in short-term securities. Earning 5% on the approximately $850 million of proceeds would add about $42.5 million on an annual basis. So for the 23 days of the second quarter we had a positive variance of about $1.7 million. As you think about the remainder of the year, this trade would be accretive by about $0.07 per share to our full year guidance.

Second, higher than anticipated short-term investment rates on our previously estimated available cash added about $1.5 million to our results for the quarter. And we do continue to anticipate holding a sizable cash balance for the remainder of the year.

Third, the hotels had a really great second quarter, much better than we had budgeted. RevPAR was up 16.7%, and the year-over-year contribution to NOI was up over 36% during the quarter. This resulted in a positive variance of almost $2 million. Citywide conventions were clearly the driver and are the driver of rate in Boston. And the remainder of the year, while it is still going to be good, is not going to be as good as the second quarter. And we're budgeting about a 10 to 15% year to year gain on our hotels' net operating income.

Fourth, we had a couple of positive onetime items that totaled about $3.3 million, mostly in the form of expense savings from real estate tax abatements, lower than expected startup costs on our new development properties where we have base years, and recoveries from prior period billings on operating expenses, which totaled almost $1.7 million.

We had some deferrals of some R&M from the second to the third and fourth quarters, and that basically from an accounting perspective reduced expenses by $700,000. And we earned leasing fees on our third party joint ventures totaling almost $0.5 million, and we had budgeted that for the third quarter.

Finally, and most importantly, we had a number of new leases commence sooner than anticipated and at higher rents, adding about $1.4 million, with the bulk of that activity stemming from New York City. Parking also is pretty good for the quarter and beat our budget by about $350,000.

Our same-store results and the short-term overall portfolio net operating income growth are not getting as much of the immediate benefit from current market conditions as you might like, because of the modest turnover within our portfolio, as well as the timing of future rent commencements on recently negotiated leases.

Excluding our hotels, same-store NOI was still up 1.8% on a GAAP basis, and 6.1 on a cash basis. The increase in the cash number was primarily due to the reduction of free rent at Times Square Tower, or known as 7 Times Square, during the prior year period from the second quarter of 2005.

With relatively little rollover, and rent commencements deferred until 2007 for much of our current vacant space, we don't expect much more than modest sequential increases in our same-store portfolio NOI during 2006. Sale of 280 will skew the in-service quarter to quarter comparison for the remainder of the year, as the contribution from the property is quite a show up in greater interest income/lower expense.

We did not identify an exchange property for 280 Park Avenue. REIT tax requirements necessitate a distribution equivalent to our taxable income including gains on sale. The taxable gain from the sale is approximately $750 million. Our distributions for the 2006 tax year will include a special dividend to meet this requirement.

We continue to look at additional asset sales as a way to monetize the strong valuations in the market, and by reducing our base accelerate our future growth rate. Let me take a minute to illustrate the impact of this strategy.

Let's assume our Funds from Operations in year one, as an example, were going to be $4.40, but by selling some assets and distributing the gain, the number drops to $4. Then assume we invest $500 million into developments which yield 9% on an NOI basis, but after interest expense contributed $30 million or $0.21 per share to the bottom line. The growth impact from that $0.21 is 5.3% on a base of $4, while it would have been only 4.7% on a base of 4.40. So we have increased by growth rate by 13%. We think this makes a lot of sense.

Our press release outlines the convertible debt transaction that we completed at the time of our inclusion into the S&P 500 at the end of March. You might note that the shoe was exercised and we ultimately issued $450 million of this security instrument.

Reviewing our near-term debt maturities, we have approximately 235 million of freely prepayable mortgages coming due between August and October of this year after paying off about $18 million this quarter. In the meantime, we expect to earn over 5% investing the proceeds in an investment-grade liquid short-term investments versus the 3.7% -- 3.75% interest expense we had on that security.

We expected to deploy the remaining capital in our development program, which continues to grow each quarter. As you review our debt maturities, keep in mind we have $500 million of future long-term financing hedged at an average treasury of about 4.34%. Our current floating-rate debt is at an average of Libor plus 55. And LIBOR today is somewhere around 5.25. With LIBOR expected to rise during the remainder of 2006, we expect our 2007 interest expense will decline as a result of our hedging program.

One final note on our 2007 maturities, we are in the process of extending/amending our $605 million revolving line of credit, which should result in a four-year term with slightly better pricing.

We closed on one acquisition during the quarter, a 157,000 square foot 11 story office building in San Jose adjacent to our Almaden Land holdings. The 100% leased building has relatively little short-term rollover. But we believe that Silicon Valley -- the market has become much more bifurcated during the past few years between newer high-quality multistory office space and the older single or two-story R&D assets. Users are becoming much more discriminating in their choices for space, and are no longer prepared to lease just any available space, with a result that rents for newer office products are beginning to rise sharply and users are considering new construction. You might have read that Yahoo! is in fact thinking of building a significant amount of square footage near their campus in Santa Clara.

In Manhattan we continue to make progress on several land assemblages. We look forward to giving you more specifics on these valuable development sites later this year. In Reston we signed our second lease on our 650,000 square foot office and retail development. The office space being about 567,000 square feet of that development. And we continue to be able to achieve asking rents in the low 40s on the office space and retail rents in the low 50s triple net.

We're completing negotiations with a residential joint venture partner to codevelop our 200,000 square foot 22 story residential tower in Cambridge Center. And we anticipate being under construction around the beginning of 2007. And in Chevy Chase, Maryland we're making strong progress leasing our Wisconsin Place Development, and expect to be under construction in the second quarter of '07 with our 295,000 square foot building, partially preleased.

As we look towards '07 and '08 we will continue to focus significant energy and capital on our current and future development pipeline. We have identified a number of additional potential projects in addition to the things in Manhattan that we're working on, which we expect to be able to discuss over the coming quarters.

The sale of 280 Park Avenue and the accretion resulting from the reinvestment in cash and marketable securities for the remainder '06, along with the stronger performance from the portfolio -- and I emphasize the portfolio is in fact performing much stronger than it was a quarter ago -- has caused us to raise our third quarter and our annual 2006 guidance. As we outlined in our press release, we have increased our 2006 diluted Funds from Operations guidance to $4.30 to $4.34. And the third quarter we estimate to between $1.07 and $1.09 per share.

There have been no significant changes to our modeling assumptions from previous quarters, so let me conclude my remarks by giving you some of the more critical assumptions that we've talked about before. When you look at our guidance, remember as I said last quarter, on the one hand we're covering much of our current vacancy and our '06 rollover, while on the other leases involving much of that space won't provide significant revenue contribution in 2006.

As of today in the aggregate, we have identified almost 500,000 square feet of vacant or 2006 rollover, which are now subject either signed leases or leases we expect to get signed for the anticipated leases that won't commence until sometime in '07. The foregone rent from this forecasted downtime is about $6 million for the second half of '06 on that space. The impact from the same-store portfolio occupancy gains in 2006 will therefore be modest. But the stage is set for pretty meaningful revenue increases in '07.

When looking at our second quarter NOI, excluding the hotels, keep in mind that the onetime items and the deferred expenses mentioned earlier, and the traditional higher third quarter operating expenses which results from higher energy usage in buildings that are leased to the GSA, as well as leases with 2006 base years will have an impact, a slight impact, on our quarterly runrate.

Included in our guidance is an assumption that straight line rents will be approximately $50 million. That is up $5 million from last quarter. And it is due primarily to additional new leasing we have done in New York City. In addition, we're budgeting termination income of about $1 million per quarter for the remainder of the year. We expect the hotels to contribute somewhere between 12 and $13 million to NOI for the remainder of the year.

All of our current developments that will come online in 2006 are. 7 Cambridge Center came online in January. Capital Gallery opened in April and will be 83% occupied by November 1. And 1220 Sunrise Valley was fully placed in service in April, 100% leased. We expect a whole annual runrate from these assets starting in February of '07. For modeling purposes assume an unleveraged GAAP NOI yield of somewhere between 11 and 12%, as well as the cessation of the corresponding interest capitalization.

Given the yields that we're generating on these kinds of developments it is pretty obvious that this is where we should be spending our time and our energy and our capital. And it is why are we are executing and looking to execute corporate development, and it is such an important part of Boston Properties.

Interest expense for 2006, after adjusting for the expected repayment of debt with the proceeds from our convertible debt issue, increases in LIBOR, and the increases from placing new development in service will be somewhere between 297 and $300 million for the year. Remember it is going to be lower next year. Our interest income is now expected to be between 37 and $38 million for '06, a significant increase from our projections last quarter, given the additional cash we're now carrying.

Our G&A expense is anticipated to be somewhere around $61 million for the full year. And our third-party property management and development fee income will be somewhere between 15 and $16 million. With that I will stop and I will turn the call over to Ed.

Good morning everybody. Let me add my thanks to those of Doug's for your joining us today. I'm going to be fairly brief. And I hope you will apologize, but I'm going to lead off by being a bit redundant because Doug has talked about the strength in the midtown Manhattan market, but there is sort of an anecdote that describes the impact of that continuing strength that brings such pleasure to a landlord that I just have to repeat it.

In December 2005, we were congratulating ourselves in completing a two story deal here at Citigroup Tower with a tenant that was prepared to pay 75 and $80 a foot over a ten year lease, although they did have a five-year cancellation right. And we were really chagrined when at the last minute the tenant walked from that deal.

In June of 2006 the same tenant found that they still needed the space. And we entered into a two floor deal lower in the building, with lower TIs, with no cancellation rights, and at rents that will be $90 per square foot for the first five years and $100 a square foot for the second five years, and no cancellation rights.

So if I'm -- I apologize for using that to emphasize what Doug was talking about, but clearly midtown Manhattan is, for the quality buildings, is very, very hot. And for good reason, because of the position of this city as the financial capital of the world.

We have been told by the brokers that in Manhattan there are only six blocks of space available for people wanting more than 200,000 square feet. And of those six blocks, four are in negotiation today. Now of course there is a frustration for us in that, because we would love to be under construction with a new office building in Manhattan, but hopefully we can do something about that in the not too distant future.

You know, when you emphasize Manhattan, and I don't want to make it sound like Manhattan is -- it clearly is better, but it is not atypical in terms of what we are experiencing in Washington, and for that matter in Boston and in San Francisco and in Princeton. Our markets have increased in strength pretty dramatically.

When Doug talked about that fact that we're still having rolldown in Boston and San Francisco that sort of masks the fact that, if you look at it on a quarter to quarter basis, rental increases in those markets have climbed tremendously. Clearly they went down further than some of the other markets, so it takes them longer to come back. But they have certainly -- the movement is certainly positive.

In Boston, in downtown we are seeing mid-50s rents. I suspect it won't be too long before we are going to hit some $60 rents in the higher floors in the better buildings. Suburban rents are approaching $40 a foot. And I would predict once again that they're going to increase at a rate that will take them over $40 in the not too distant future.

And similarly we are seeing deal velocity, and people looking at space, people needing space at ever accelerating rates. And similarly, as I think I mentioned last time we spoke a quarter ago about breaking the $60 ceiling in San Francisco. And for the better space, some new space in quality buildings, those kinds of numbers are now becoming more commonplace. The fact of the matter is even down in South San Francisco where the market had been quite weak, we expect that we could approach 98% occupancy in our South San Francisco properties by year-end.

Enough said on the markets, but I just don't want you to feel that all we're talking about is midtown Manhattan as the only place there has been improvement, but because that is simply not the case.

I want to respond to something that I read earlier this morning. And one, or perhaps more than one of the analysts' quick reviews of what our quarter looked like. And a couple of comments indicated the feeling that we were -- because we had sold 280 Park, and because we're looking to do some additional asset sales, and had not acquired any properties of the Trophy variety, that we somehow were calling the top of the market. And that we therefore are going to take advantage of "the top" in order to sell assets.

I wish I were smart enough to be able to tell you that I know exactly when the top of the market has been reached. For that matter, I wish I had been smart enough to know when the bottom of the market had been reached. But we simply aren't.

And everything of course is subject to external factors too like world events, and interest rate movement, although I think to a lesser extent. But the fact of the matter is we do not believe that the buyers of properties at these very high rates are making bad decisions. The long-term value of assets like 280 Park is going to be very, very significant. And for an investor who is looking to put money to work over the long-term at attractive IRRs compared to other investment opportunities and at a relatively low risk premium, buying a property like 280 Park, even a prize of above $1000 a square foot, is a good decision. We know rents are going to up and down, as they always have, but over the long term if you look at it rents have gone up and have gone up very steadily over a long period time. And these assets will be worth increasing amounts of money in future years.

Of course we're selling doesn't mean that we think buyers are making foolish investments. You that to remember what the perspective is that is being applied to that. For us to redeploy capital which was earning in the short-term, or over the next four or five or six years, less than 5% and either return it to our investors in the form of a special dividend to cover the capital gains, or in fact to recycle the net above that into the kind of developments that Doug just described where we can, frankly, exceed double-digits or certainly be in the high single digits, is a good thing for us as a public company to do. But it is not because we think we're calling the top of the market. And I just don't want that impression to exist.

With that and to leave plenty of time for Q&A, I am just going to ask Mort if he would like to add anything, and we will move on from there.

I think both Doug and Ed have reiterated -- I think we're in very good fundamentals for the real estate business, certainly in the markets that we ran, primarily because there is limited supply -- limited supply that has been as a characteristic of what has been going on in these markets for the last five years since the .com bust. There has been very little relatively in the way of new office space being built.

And we have now had -- we're in our fifth or sixth year of double-digit growth in corporate profits. Corporate cash flow is at record heights. And companies are clearly now feeling the pinch in terms of space. So there has been just a dramatic surge -- in demand surge for space in virtually all the markets. And we think that we're in as good a period of the real estate business as I can recall.

If you had to pick 15 minutes to be in the office market business -- in the commercial office business at the levels of quality buildings that we're at this is the time. And we do not see this diminishing for several years at the very least. We are looking not only to anticipate higher rates of rent growth as the space rolls over, but we also are working very hard to dramatically increase our development program. Because obviously this is the core competency of this Company. It is our central DNA.

And we have a number of projects that we believe will get underway next year that will absorb a lot of time, equity and will offer us what we believe to be attractive yields compared to anything else that we can do in the way of acquisitions. Not that we're opposed to acquisitions, far from it. But we do believe that if we have to choose between how we invest our funds between acquisition and development, and we have those development opportunities. That is what we're going to be focused on.

With that I will end my comments, and we will continue with the quarterly report.

We're available for Q&A. Mort, do you want to --?

One other thing that I am sure did not escape your attention, but I will just reiterate it. We did acquire the last piece of the Citigroup Center recently. It was a 34.5% of that equity. And we believe that the transaction we made will be very beneficial to Boston Properties as it was to the seller.

I would also point out we did not -- we acquired that because we thought it was a very good investment prize for us to make to have 100% of that asset. But it is not meant to signal, as I think somebody speculated, an impending sale of that asset.

No, absolutely not.

Operator, you can open up the lines for Q&A.

(OPERATOR INSTRUCTIONS). Michael Bilerman from Citigroup.

Jon Litt is on the phone as well. Maybe you can just walk through the process of evaluating acquisitions following the sale of 280 Park, and how you valuated them, and then deciding to pass and pay the special dividend to shareholders.

You understand there that are special tax reasons that apply to REITs that sort of effect these decisions. We would've had to have come up with the right kind of an acquisition within a certain defined period of time to identify it, if we were retain the properties without having to pay taxes within the REIT.

And so this was something we worked on to try and acquire properties at the right levels in terms of yield and price per square foot. We have not been able to do this on the basis that we felt comfortable. And so we then obviously came to the obvious conclusion that to avoid a double tax that we would distribute the funds to the shareholders.

Let me just add something to that. No, 280 Park sold at an extremely attractive price from our point of view. As I said before, I think an attractive price from the buyer's point of view considering the buyer's investment needs and investment profile. For us to sell 280 Park at a below 5% yield and then to reinvest that -- in fact if you look at the cash yields -- and actually actually not even cash yields -- NOI yields on 280 Park it is closer to 4% then 5%.

But the kind of assets that we want to acquire will deliver that kind of -- will only deliver that kind of a yield at least for the short-term. And the short-term, I don't mean a year of two years but probably four or five or six or seven years. Therefore, we think that given what we believe our investors want from us in the way of performance and return on invested capital that we would simply have been running hard to stay in the same place.

Unless we could have found an asset that had great upside potential in a relatively short period of time, or was selling for yields which quite frankly are available in today's market, it didn't make sense for us just to do it for the sake of avoiding the dividend payout.

Was there a certain breakpoint on yield that you just weren't willing to go to?

There is never any magical number or magical hurdle. We look at the -- when we underwrite we look at lots of things. Current yield of course is important. Yield over the first few years is important. As I say it was -- sub 5% and closer to 4% is certainly not to going to be terribly attractive in the short-term. But we also look at where we can expect to see that yield increasing over time because of rollover, etc. And we just unfortunately couldn't find anything that met that criteria.

Can you talk a little bit more broadly about future asset sales in terms of magnitude of size, and whether you'll be able to roll those into development rather than paying an additional special dividend?

I can talk -- it is very hard to speculate in terms of the timing of additional asset sales and whether that you would just roll those into development. It is hard to roll assets to development because, as you understand, capital needed for development doesn't go in at a single moment in time. It does in over time. It becomes a complicated process.

How much do you have on the market today that you're marketing in terms of sale?

As we have discussed before, and has been talked about before, the 5 Times Square Building is an asset that we have been considering selling. And I think that is still something that we are seriously pursuing. In terms -- we will see what that asset might be able to derive in the marketplace.

Is there other major assets that you're considering selling?

I would rather not speculate at this point.

Last question just in terms of guidance are you assuming you're holding the cash through year-end or earlier in terms of payment of special dividend?

I think Doug pointed out his assumption is that we hold it through year-end.

Ian Weissman with Merrill Lynch.

Just a bit on development. You have about 7 million square feet of available land on your books. With fundamentals improving across the market how soon do you anticipate putting those properties into service?

You mean starting development on them?

Yes.

I think we have talked about that before. We have land in various markets where we are right now contemplating and doing the design and initial feasibility work and pre-marketing for number of developments. Some in the Washington area, some in our other markets as well.

How much of that 7 million is included in that?

You know, off the top of my head I would say that we -- actively of the 7 million probably are talking about -- and this all won't happen in a moment in time either, but somewhere in the order of 1.5 million square feet.

And your appetite for additional land and new markets?

Unlimited.

And markets?

Not new markets necessarily, but in the markets that we're in, anytime we see a property that we think we can develop, we're going to be in the market to acquire it. And we are in those markets, believe me. And we are -- that is a constant process. We do think that we have, as I indicated before, a unique capacity to do development work, not only of the land that we currently have in inventory, but we are constantly looking for additional land. We certainly are making serious progress on that in a number of our markets, frankly including New York City.

In addition to what we currently have, "in the ground", which is really today the Reston Building and the building at 505 9th Street. I think that we -- while I am not suggesting that all these things may happen, it would not be surprising if we had another $0.5 billion of development under construction in 2007. Obviously it will get placed in service in 2008 and 2009. But that is the magnitude of the dollars that -- and that excludes anything that we might do in Manhattan.

And a question about new markets. You made this investment in San Jose. You talked a little bit about the market. Can we anticipate this being a bigger push into San Jose with the purchase of this asset?

As Doug pointed out, we own the asset directly adjacent to it as a development site. And so strategically it made great sense for us to acquire that asset.

But additional acquisitions in that market?

We have plenty of development potential in that market, and so at the moment we're not looking at any additional acquisitions.

There are no land acquisitions. We are looking at some other property acquisitions. And Bob Pester, if you are on the line, you may just want to give your prospective on what is going on there, and why it is we think the higher quality office space is potentially got a pretty big improvement coming on.

I think your commented, Doug, that it has become a bifurcation market there. That the older single and two story concrete tilt up R&D space has become functionally obsolescent. And you're seeing wholesale parks either being torn down or redeveloped as high density residential. And people are gravitating -- and most of the large user is gravitating towards four to six story vertical type Class A space. That is where the market is right now. That is where the activity is.

And if you look at the large users in the market like the Yahoo!s and the Googles, that is the type of space that they are taking right now and will want to take the future. We clearly will continue to look for development sites or acquisition opportunities that would allow us to do something like that.

Finally on rents, or at least on a mark-to-market, Doug, I think you said that on a portfolio wide bases if you had to mark-to-market today it would be down 6%. If you had to strip New York City out of that and just include Boston, San Francisco, and Princeton, where would you be?

I believe that we would still be a positive mark-to-market. In fact, I know we would be a positive mark-to-market. On total portfolio that 6% is just for the next two years. And so as San Francisco burns off the last of the 95 to $105 deals with escalations that we have, San Francisco and Boston will both be positive in a significant way.

Frankly, this is all based on the extrapolations that sort of steady-state kind of growth. We're not seeing steady-state growth. We are seeing a level of remarkable growth that is just not atypical. It is doesn't go -- it averages out, but I think we are in for a much higher growth rate over the next several years than most people have anticipated.

David Toti with Lehman Brothers.

Ray, if you are on the phone, could you provide us with a little bit more color on the current dynamics in the Washington D.C. market?

We have to confess to you Ray is in South Africa (multiple speakers).

His looking for development opportunities in South Africa.

That's the new market. Does anybody care to comment on that?

Somebody else can comment on that. Peter, are you on the phone?

Yes, I am. It is again --.

Peter Johnston who runs the [DCV].

There're obviously three markets here, northern Virginia, suburban Maryland, which is really Montgomery County, and then downtown Washington. There is still a fair amount of activity -- development activity in downtown Washington. But in terms of the vacancy and the rental rates, our 505 project we're in negotiations with a law firm for about 30,000 feet at the top of that building at a number that on a full-service basis is probably going to be in the mid $60 range. So very, very strong still downtown.

And again, as was discussed with some of the other reasons just struggling and looking for sites as we can find them. Northern Virginia there is a fair amount of building activity going on, but we're continuing to see -- and just did a deal -- I think Doug mentioned it -- with Rolls-Royce at our project in Reston for a couple of floors. And a number again in the low $40 range. The markets continue to perform very well in Montgomery County. The vacancy there is now below 9%, and we're starting to see again development up there as well.

Do you have any overriding supply concerns in any of those markets? I know there's a lot of speculative development going on.

I have supply concerns for those people who are building spec buildings in less than the best locations. The secret of our success, and it is a credit to Ray and to Peter in identifying sites, is to pick those sites where in fact there is a scarcity of supply, and where there is something more than simply building along a highway.

That is what Reston Town Center is all about. And it has been demonstrated to ourselves and to the marketplace that those buildings will rent out, have lower vacancies, higher rents, greater velocity than the spec buildings that are built all over the place.

And so if I were a spec builder out there in just another me too location I would be concerned. Now some spec builders are basically sort of in the for sale -- they are merchant builders, building to sell, and they do very well. But I think we will knock them dead time and time again.

John Guinee with Stifel Nicolaus.

Clearly what your investment strategy is indicating is that dispositions are accretive to your cost of capital and acquisitions per dilutive to your cost of capital. To what extent do prices or values have to change, and to what extent does your cost of capital have to change for you to have a different perspective than you have now?

Your assumption to the question are assumptions that I would have to question -- that I would have to comment upon. We would not be hesitant to acquire a property at fairly low yields, if within some reasonable period time we can imagine, given the leasing structure and the cost per square foot, that we get establish an accretion of value to that property.

There is no sort of absolute line on this thing. We look at each property. We look at what the leasing structure is. We look at what the cost per square foot is. and we try and calculate what we think would be an attractive IRR for us compared to other options. And that is what we do. Sometimes we will be buying properties with low yields, and sometimes will not, because we look at it and we see when can we improve this building in terms of its income flow to have it make sense.

We have not -- I'm not saying -- frankly the market moved beyond where we thought they would be, even though we were fairly bullish, as you know, over the last year or so. And there probably are acquisitions that in retrospect we wish we would have made. But that is the name of the game.

What we have decided to do and have really focused on is to really build up a much bigger development pipeline, which we are in the process of doing. And it will be a very substantial development pipeline. Not all of which we can discuss at this point, given the nature of the way land assemblies and land acquisitions go. But we think we are going to have a very, very plate on development where we will do much better than the kinds of acquisitions that we have looked at that -- when we compare those to our development opportunities. And that has sort of been our history, as you probably have known.

And as Ed points out, we still believe that we should focus on the best locations that we can acquire that we think are very good locations, and build the best buildings on them. We found those buildings do better in good markets and much better in bad markets. That has been our strategy all along to limit ourselves to markets, to limit ourselves to locations within those markets to build the best buildings in each of those locations, and go for the long haul. That is what we have done, and that is what we going to do. And it is going to be I think a very, very dynamic period for this Company over the next several years.

The other thing, you suggest at least -- you probably recognize it, which is that when we quote our returns on development yields, we're talking about initial cash on cash returns. Typically those numbers are going up. In Washington D.C. area, for example, they are 2.5 back 3% rent increases per year. And if you're starting at the high 8s, the low 9s, the 10s leverages is obviously accretive.

If you're purchasing assets with NOI yields of 3, 4, 5% and cash flow yields of 150 to 200 basis points less than that, where current debt rates are somewhere between the low 5s at the best and 6.5ish if you're putting more leverage on, the ability to in an IRR or a yield on cost or yields on equity have any kind of an accretive return is diminimus at best. The power of development is very, very strong. And it would take a pretty significant change for that to change our thinking from going back to acquisitions as opposed to doing development.

You're preaching to the choir. Thank you.

Ross Nussbaum with Banc of America Securities.

It is John Kim with Ross. I had a question on relative valuations. Based on your comments about potentially selling 5 Times Square Tower, in addition to your recent sales of 280 Park Avenue, are you implying New York asset pricing is more expensive today relative to suburban Boston, south San Francisco and some of your other markets?

I don't know. Again, the New York market is -- it is the best I have ever seen the New York market since I've been in the New York market. And by this I mean we think we're going to see much larger jumps in rent now as we go forward for the next several years and we had previously anticipated, to be honest with you.

But you can't compare New York to almost any other market, simply because of the rate of rental growth that we think is going to take place. It is just no space in this market. I think in all of our buildings now that we have left we have I think 5,000 vacant square feet. It is unprecedented. And believe me, if we had a site that we were happy with, we would literally do what we did when we built 599 Lexington Avenue. We would start a million square foot building on (technical difficulty). That is how strong the market is. We wouldn't have to do that, by the way, because there are major tenants around looking for space.

We are working to do that, literally to acquire those kinds of sites in New York. We're more selective in other markets because we just do not see the demand pressure. The demand pressure in New York, amongst other things, is coming from firms like the Banc of America, which as you may remember, took a big chunk of space on 42nd Street, and then took another big chunk of space. And now the last chunk of space in that building went for over $100 a foot for 200,000 square feet. So that is where the market is going.

You guys made a great rental deal going in, but I can tell you that today you wouldn't be able to get anything close to what you are paying in the way of rent. This is the good news. It is just an unprecedented period of time, which I think is going to extend, because New York is on a trajectory partly because of excellent leadership in the city, and partly because of the fundamentals of the financial world, which is just growing dramatically here.

So there is tremendous demand. There is demand growing in our other markets, in San Francisco, in Boston, and Washington of course never really had a dip. It had a little bit of a dip in the suburbs, but really not in Washington itself. That market remains very strong. I don't think it is going to grow at quite the rate of New York. But it is still going to grow very strongly.

We have a number of sites that we're nurturing to be able to begin construction on them in Washington. We are always on the lookout for acquisitions of either land or buildings, if we can get them at reasonable numbers. But this is -- really this is not triage in the worst sense. It is in the best sense.

It is really a question of finding the best site and the best buildings. And since the best buildings are going at extraordinary prices, I don't think anybody believes that we would be able to sell the buildings we did at over $1,000 a foot. And I don't think anybody looking at the NAV of this Company thought that we would be selling buildings at $1,000 a foot. And I can tell you that price point is going to up dramatically over the next several years in terms of the sale of buildings. You're going to see buildings going at well above $1,000 a foot because of what the prospects are for rent growth.

I guess I'm trying to tie in your comments -- your positive comments about Manhattan with your decision to sell. Why not sell in some of your other markets instead?

That is not something that we are ignoring. I will put it that way. We are looking very carefully at -- we sold, if you recall, a buildings in Richmond Virginia and in Baltimore. We sold some of our long-term fixed leases in Washington as well. We sold a building in New York when we bought 399 Park Avenue, when everybody thought, God, we are paying $600 a foot for that building. And look where it is today. That building would go for well above $1,000 a foot, I believe, if we were to put it on the market, which we will not do, by the way. There you are.

And bear in mind, if we look at some of our other markets -- San Francisco, our holdings in the city are concentrated in Embarcadero Center. Well, Embarcadero Center has tremendous upside potential with it. And similarly the Prudential Center in Boston. Those actually fit the description of what it is we would like to buy, which is assets well located, centrally located, high-quality assets where our own management and leasing skills can

We would buy Prudential Center and Embarcadero Center all over again.

For the same amount, by the way, and so we would really make a lot of money.

I also had a follow up, on your earlier comments on buyer's rationale. Were you surprised that the buyer of 280 Park financed it with debt, even though the initial cash yield will be negative? And do you think there are other buyers out there like that who are willing to take that kind of initial hit?

The answer is yes. I don't think the buyer has a particular interest in current income. What he has is an interest in the long-term residual value of that building. And in those terms it really makes a lot of sense for him. The buyer doesn't need a current income, but he does an IRR based on what he thinks the residual value it, it is damn good investment. That is what Ed was referring to before.

So there are -- buyers have different objectives. And we're going to in effect arbitrage those issues to what we think -- to our benefit. Otherwise we wouldn't have done it.

Also, I had a question now on the naming rights of Citigroup Center. What is your ability to actually change the name of the building, and do you actually envision selling those rights?

We do have the ability to name the building -- rename the building. It is something that we talk about a lot, but we haven't -- right now we, frankly, have no vacancy in that building. So one of the things that we would do to name the building would be to work with the tenants on that naming of the building. Although we may -- it is known as Citigroup Center and it is something that we're rather proud of on many levels. And we have a very good relationship with Citigroup. For the moment we're leaving it as is. But there will be a time where that will translate into enormous value for us.

A signage potential there?

You mean actually putting signs on the building?

Yes.

I think that is somewhat restricted.

Jim Sullivan with Green Street Advisors.

You talked at length about the incredible strength of the midtown market. The "bad news" for your portfolio is, one, it is full. And two, you have virtually no rollover in the second half of '06. You had a diminimus amount of rollover in '07. Anything you can do proactively, lease buyouts for example, to create some inventory in your portfolio to take advantage of the current leasing conditions?

I'm going to just sort of, if I may, amend your question or to reframe it. The problems we have are the problems of success, not the problems of failure. My colleagues have heard me say that many times. Sure, and we have had that situation. We are in fact in a situation like that now, which is exactly what we're going to be doing in at least two of our buildings that I know of. And there are always opportunities to do that. And we're absolutely going to take advantage of them.

The nice thing about strong markets is that strong markets are fueled by strong tenants, and strong tenant need to expand. And so it gives us those kinds of opportunities. Now I would love to tell you that that amounts to 1 million square feet a year. We know it doesn't, but we are very opportunistic in that regard.

If you guys looked out say 24, 36 months with respect to midtown Manhattan, what issues or events cause you some concern in terms of something happening that would prevent some of the optimistic scenarios that you have outlined from actually happening?

To be candid, I can't think of a single one that deals with the fundamentals of the market. There is one which is sort of the negative issue, which we always keep in mind, which is the possibility of another terrorist attack. That certainly would have an effect on, not just this city. It doesn't even matter where it takes place. That will have an effect on these real estate markets.

But we are -- it is like anything else. You live with this kind of low probability situation, but it is something that is out there, and nobody quite knows how to quantify that or how to measure it. The good news about New York, frankly, is it has the best police force in my judgment in the country. And they have a 1,200 person team that essentially is just an anti-terrorist unit. And they are fabulous in the way they protect the city and protect the buildings in the city.

I think if there were to be an attack it would probably be like the one that was broken in the New York Daily News, which I know you were all dying to read. Which was there was an attempt at a terrorist attack to blow up the Holland Tunnel. What the hell do you do about something like that? It was very, very good police work and intelligence work. That was an attack that was interrupted.

But who knows what is out there. We just don't know the answer to that. Nobody does and it is going to affect -- it affects our thinking on some level, but it also means -- it doesn't mean that you stop living. And it doesn't mean that you stop doing business. As you may have seen in New York city now headquarters are moving back into the city. After 9/11 a number of them moved out. Now they are all moving back, because they find that there is something here that you cannot get out out in Westchester. Which is a quality of life that attracts and holds the kind of talented people whom these companies want to be able to keep in their employment, because that intellectual capital is the key to growth.

I thought you were going to say crabgrass.

Anthony Paolone with JP Morgan.

Can you talk about what is going on on the West Side of New York, I guess Custom Yard where the stadium was going to go, as it relates to office construction and maybe what your interest might be in that area?

There are a number of major properties on the West Side. The whole West Side is being transformed. You saw the Hearst building in particular, but that whole West Side, the New York Times building -- the building -- the site in front of the New York Times building which has now been sold at an extraordinary price. A number of developments, and we are involved in that side, and very, very aggressively and actively.

And we think that is a great, burgeoning side of the city. It has become a much more attractive location, both for office buildings and residential. It is going to boom. And that is going to be long-term boom. The part around where the stadium was going to go, the new stadium for the Olympics, and neither of which will come to New York. As you may know, the city and the state have both proposed that the city buy the rail yards from the Transit Authority. And the Transit Authority seems to be looking positively on that. And that is clearly going to open additional major sites for large blocks of space.

And I might add, they will build a subway -- as a part of that the number seven line, which will dramatically improve that whole side of New York City. And I hope they do it in time. By that I mean I hope they do it after we have done all of our leasing.

What do you think -- what is your estimation as to when those large blocks of potential office buildings could be started?

I don't think anything will start for five years.

The subway -- this is Robert Selsam -- the subway isn't going to open until between 2011 and 13. And that kind of high-density office development really requires subway access.

Jamie Feldman with UBS.

I gather from your comments that a lot of your enthusiasm for San Jose, comes from a flight to quality. The first question I have it is how long a time frame do you think before you can start to develop there? And then secondly, if I did not characterize that right, what are you seeing in terms of corporate expansion there? Corporate -- I guess job growth there.

Bob, do you want to answer that?

Sure. From a standpoint of when I think we would be developing the site, if you look at some of the other sites in the market that have the potential for developments in the near-term, such as the [J. Paul] site, they are actually talking about going speculative in the next year at rents close to $3 triple net.

Our site in downtown, because of the parking situation where we have to build a parking structure would require a bit more than that. But conceivably I think you could see in the next two years to three years that that could be the potential for development. We have had recent activity. [Largers], they are taking a look of it, not seriously, but considering it as an option. And again I mentioned Yahoo! and Google as two of the largest users that are in the marketplace. Sobrato does have a potential deal pending on his 380,000 square foot building across the street from our site right now as well.

I would say in a general way that had you asked that question six months go I think our answer would have been much less buoyant. So we think that market is moving and moving strongly in the right direction.

What kind of rent do you think you would need to justify construction there?

As Bob said, over $3 a foot.

And then in terms of job growth?

What specifically is your question on job growth?

How much of the demand do you think is flight to quality, and how much do you think is actually those companies still looking to expand their workforce dramatically?

When you look at Yahoo! taking 1 million square feet more than they occupy right now, I would think that is substantial job growth going on. If you look at the largest users in the marketplace like NVIDIA, Google, Yahoo!, eBay all of them are expanding right now.

And then the same question for Boston?

We can speak to Waltham, which is actually seeing again -- we talked about this floor with San Francisco and Boston. Sometime there is complete correlation. We have the same thing taking place with the age of buildings.

If you look at Waltham as an example where it is 9 million square foot market, only 800,000 feet has been built new over the last decade. And when you take those properties, they only have a 2.8% vacancy. So we really look at that and we think there is a product opportunity as well.

Then as Bob mentioned for his part of the world, the same thing is taking place here for the height of the buildings. There is only three buildings in the Waltham market that are six stories, two of which we own. So we think there is a good opportunity for product differentiation there as well.

Let me just add another thing about Boston too, and although it doesn't translate into the kind of -- immediately into office space. But the health sciences area has just taken off in Boston. And that does produce ancillary demand, as well as demand from some of the health science firms as well. All of that bodes for the future of that area.

We are also seeing those users spread out their needs. From the past it was traditionally just the Cambridge market or the medical district, and now we're seeing it out in the suburbs as well.

I think Mort suggested that the market is probably a little low on where they think internal growth could be for 2007 and 2008. Would you care to give a low number of what you guys are seeing?

I don't understand the question I'm afraid.

If you are to say at the low end of where you think internal growth could be in 2007 right now, based on leases you have signed that will commence in '07 and market rents --?

I'm going to ask Doug -- he has the number-- if the question can be answered, he is the guy.

If you were to assume that we retained the value in either property and/or cash from the sales of 280 Park Avenue, I think we would anticipate that our growth at this point would be somewhere between 4 and 6%, without any additional activities.

This is FFO growth or same-store growth?

Internal portfolio growth. That is what you asked, right?

Right. Okay, thank you very much.

[Sloan Boland] with Goldman Sachs.

I'm here with Jay. Just briefly if you could say from the time you had started marketing 280 Park and then through now, if you could just comment about the appetite for those types of buildings, whether as interest rates have rised that appetite has waned or not?

It seems to be sustaining itself at a very high level.

Absolutely. It is just extraordinary. The demand for those buildings is -- in the first place it is worldwide, and in the second place it is just extraordinary because the people who are prepared to sit for a while and just basically hold on for a long-term residual value is just -- there is a worldwide market for that. And the demand is extraordinarily strong, extraordinarily strong.

And we have looked at some of the buildings that are being sold. They are being sold at phenomenal prices and for good reason. As I say, I think there are some good sellers feel this is a good time to sell. And they are very happy with the price and the gains they have made. Look on 280 Park, as you may know, we paid $321 million for that roughly six years ago, and we sold it for $1,200,000,000. That is an example of what has happened to values in the city and what people think is going to happen to values in the city.

This is an aside, you might find it interesting. The IRR and the equity in that, that transaction was 27% over eight years.

That is all my questions.

I guess that what the last question, operator?

Yes, gentlemen, that was the last question.

Let me just thank you all for joining us once again. And we hope to be able to continue to have these kinds of reports in the quarters to come. And have a great rest of your summers. Bye-bye.

Ladies and gentlemen, this concludes the Boston Properties' 2Q '06 teleconference call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000 or 1-800-405=3326. You'll need to enter pass code 11065141. (OPERATOR INSTRUCTIONS). This will be available through Thursday, August 3, 2006 midnight Eastern time.

Once again we would like to thank you for your participation. You may now disconnect.