波士頓物產 (BXP) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Boston Properties' fourth quarter 2006 conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Wednesday, the 31st of January 2007. I would now like to turn the conference over to Ms. Kathleen DiChiara of the Financial Relations Board. Please go ahead.

Good morning everyone, and welcome to Boston Properties' fourth quarter 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 our 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, please contact Investor Relations 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 can give 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 the 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 CEO; Doug Linde, Executive Vice President and Chief Financial Officer. During the Q&A portion of the call Ray Ritchey, Mitch Norville and our regional management team will also be available to answer questions.

With that I would like to turn the call over to Doug.

Good morning everybody and thanks for joining us for our fourth quarter call. 2006 was a very good year for the office building business, and it was particularly rewarding for Boston Properties, as the supply constrained markets that are located on the East and West Coasts of United States continued to have strong demand, rising rents, and most importantly, increasing values.

Capital flows into the office buildings continued to be robust and constant. In addition to the recent headlines about public to private conversions, private, large single asset sales and large multi-market portfolio sales, many of which are the result of some of these recaps that occurred during '06, were already in the works for '07, demonstrate the continued, maybe even accelerating, strong investor demand for office buildings located in the markets where we operate.

Forward-looking 12 month NOI cap rates on high-quality, and even some not so high-quality, office buildings have been firmly in the 3% to 5y% range in Midtown Manhattan, and are consistently between 4 and 6% in the other central business districts where Boston Properties operate.

As replacement costs have increased to levels approaching, and in some cases in excess, of $600 a square foot in Boston, Washington DC, and San Francisco, and to over $1,000 a square foot in Midtown Manhattan, investors have accepted the rising cost per square foot, noting that current pricing is still below replacement cost. I'm not sure we agree in all cases, but that seems to be the market wisdom.

One of the main drivers of the capital into our business has been the sustained, dramatic improvement in operating fundamentals over the past two years, and the strong held belief that the coastal markets will continue to show strong fundamentals for some time.

Investors are accepting low initial returns in relation to historical figures. And you can define this how you want, NOI returns, cash flow returns, leverage returns, when they see the opportunity to capture significantly higher future payments and returns.

As we have said time and time again, Boston Properties' strategy has always been to operate in supply constrained markets. So combining strong demand, increasing replacement cost, and scarcity of supply, we expect our assets to continue to appreciate over time, sometimes very dramatically, when existing rents are below market on space rolling over in the relatively near term. This is what has benefited the shareholders of Boston Properties over the past 12 months. We are pleased that we have been able to deliver to our shareholders a total return of approximately 62% in 2006.

We have taken a hard look at a number of the major acquisition opportunities, but in most cases have declined to meet market pricing in an auction environment. Nonetheless, in May we completed $100 million buyout of our partner's 35% interest in Citigroup Center, bringing our cost basis to $590 per square foot on that 1.6 million square foot asset.

We recently closed on a $186 million purchase in Cambridge at a cost of $368 per square foot -- that is adjusting for the garage -- with an expected 2008 un-leveraged funds from operations yield of about 7.2%.

And we also purchased two assets in San Jose for $164 million that we spoke about earlier this year. In our press release we outlined an agreement to purchase $136 million mixed-use project in Springfield, Virginia, with an expected initial un-leveraged NOI GAAP yield of 7.3%. This is a transaction that our Washington DC team sourced before it came to market.

Given the underwriting assumptions necessary to justify prevailing pricing on fully marketed transactions, we know our investment capital is best deployed in development transactions where the stabilized cash yield is a minimum of 200 and up to 500 basis points greater than the NOI yield on acquisitions. Remember, newly constructed and leased assets only require minimal capital expenditures over the first 10 or more years of their lives. That is why we are particularly excited about our recent purchase of land in New York City where we intend to build an 885,000 square foot office building with an expected investment in excess of $800 million.

As you all know, assembling development sites in Midtown Manhattan is incredibly difficult, but we're working on a second similarly sized site.

As outlined in the earnings release, this quarter we closed on the first portion of a land assemblage in Greater Washington, DC that can support up to 800,000 square feet. This development located approximate to a major military base is one component of our strategy to respond to the changes that will occur from the Base Realignment Enclosure Act, otherwise know as BRAC.

In addition, we have continued to resemble land in Waltham, Massachusetts, acquiring one parcel and signing a contract on a second, that when combined with our other adjacent land holdings, provide us with the opportunity to build in excess of 1.2 million square feet at arguably the best interchange on Route 128. This does not include the 210,000 square foot building that is currently under construction today.

For reasons of confidentiality, or because final project dimensions are still in flex, it becomes a challenge to provide details on all of the potential developments we're pursuing. It is easier to list, as we have in our supplemental package, the $452 million of projects now under construction. And for assemblages and entitled sites, like the land in Midtown Manhattan, or the 800,000 square foot Washington DC project, the scope is readily defined.

What is much harder to quantify are projects like Zanker Road in North San Jose, where we purchased four existing buildings totaling 543,000 square feet, but are also working with the local planning authorities to develop an additional 450,000 square feet. Or in Greater Washington, DC where we're working with a landowner on an additional BRAC-related development that will start with a 120,000 square foot building, but has the potential for in excess of 2 million square feet over the decade.

My point is that while it may be hard to be precise about all of the opportunities we're pursuing, the bottom line is this is a very robust platform for future higher yielding investments that Boston Properties has created.

We have also capitalized on the exceptionally strong demand for our type of assets by selectively selling certain properties. While we know that the NOI from those assets are going to grow over time, we also think that the underwriting expectations that are embedded in the current market pricing justifies harvesting to the significant value we have created in some of those properties, even at the expense of moderately reducing our portfolio size.

With the closing of 5 Times Square, which is expected during this first quarter, we will have sold just under $3.5 billion of our assets over the last two years. Our sales activity is going to continue into 2007. The Long Wharf Marriott is currently on the market, and we may sell in excess of $500 million of additional assets in 2007, including the Long Wharf Marriott.

As a REIT with a requirement to pay out what effectively amounts to 100% of our taxable income, sales can lead to special distributions equal to the gains produced to the extent we're not able to redeploy the full proceeds in tax-free exchanges. With the $5.40 distribution that occurred on Tuesday, we will have made special distributions totaling $7.90 over the past fifteen months.

Now let me shift from strategy to the nitty-gritty of our operating metric and the fourth quarter earnings results. We ended the year at an occupancy level of 94.2%, slightly better than last quarter. The portfolio occupancy was negatively impacted by the acquisition of 4 and 5 Cambridge Center, which are currently 64% leased. Excluding this acquisition, our occupancy would have increased by over 80 basis points to 94.5% in this quarter. Our average remaining lease length continues to remain pretty darn long at 7.8 years.

Strong rental rate growth has translated to a portfolio weighted average rent of $42.67, and a mark-to-market of positive $6.20 versus a positive $0.39 one year ago. Our same-store portfolio average market rent stands at $50, which is a 17% increase versus last year, just to give you a perspective. And our same-store results were up 2.6% on a GAAP basis.

Average expiring rents, excluding our retail portfolio, during 2007 are now equivalent to current market rent. In the aggregate it appears we have moved past the issue of portfolio rent rolldown, although of course it doesn't apply to certain specific individual leases.

The rollover in 2007 is spread evenly over all of our regions, except in New York City, where we have relatively small amounts of rollover. The largest exposure being in Princeton where we have 370,000 square feet expiring. The total 2007 office lease expirations comprised about 5.3% of the portfolios in total square footage, and 4.4% of the gross rental revenues.

Fourth quarter funds from operations was $1.18, giving us full year 2006 funds from operations of $4.47. FFO was up 5% year-over-year, even after our $350 million special distribution in October of 2005. We finished the quarter just over $0.03 per share above our prior guidance.

Let me give you a quick explanation of where we think that came from. Rental revenues exceeded budget by less than 0.5%. But we did have positive variances in real estate taxes in both Boston and New York City, which were less expected -- less than we expected due to either lower assessments or lower tax rates. This is a direct benefit on any lease which had a 2006 base year, or on those assets, like our garages, where we don't have through operating expenses. We picked up about $1 million from lower taxes.

Our hotels beat the estimates that we're given by Marriott, by $600,000. Parking revenue is up almost $700,000. And our other property income and third-party income was up about $2.2 million ahead of our budget. Now remember that this is sometimes a matter of timing, so two-thirds of that $2.2 million was really just an acceleration of income that we had expected in '07, but where we completed the jobs in '06 ahead of schedule.

The income from the Cambridge acquisition was offset by a commensurate reduction of interest income, so there was really no pickup from that. We continued to earn somewhere between 5 and 5.25% on our short-term balances. And our capital expenditures were slightly lower than we expected during the quarter, which basically translated into about $400,000 of additional interest income versus what we had budgeted.

Offsetting these increases were the write-off of pursuit costs from some transactions that we now don't expect to close, as well as higher compensation accruals, which together totaled about $2.5 million. And that accounts for the increase in the fourth quarter G&A that you would have noted last night.

We completed 843,000 square feet of leasing in the fourth quarter, and ending the year with just over 4.4 million square feet. Quarterly activity was led by Boston with 358,000 square feet, followed by DC with 193,000, New York City with 176,000, San Francisco with 89,000 and Princeton with 25,000 square feet.

Some of the more noteworthy transactions included the very attractive leasing of just under 100,000 square feet of space at 111 Huntington Avenue, a building was no vacancy. As we have done in New York City and elsewhere, our Boston leasing team this quarter created space where there was none by relocating tenants to the Prudential Tower. Boston Properties was one of the tenants that was persuaded to cooperate, and we will be moving to the Pru Tower this summer.

The average rent on the new leases is $63.70, and they were all completed with no tenant improvement costs. The average current rent at 111 Huntington Avenue is $56.36 as a point of comparison.

In New York City we completed a 60,000 square foot renewal at over $110 a square foot. And at 599 Lexington Avenue we released one of the floors we took back from Sherman and Sterling at over $90 per square foot. We have completed the final lease up of the prebuilt suits at Times Square Tower. In 2004, when we were doing our prebuilt suite program, we were achieving rents between $45 and $55 per square foot. The most recent transactions were done between $84 and $85 per square foot. Again, a point of comparison.

Our press release outlined one significant financing transaction that we expect to complete by March 1. We have locked in interest rates on a $750 million secured financing on 599 Lexington Avenue. The rate, after applying the value of our hedging program which we entered into last year, is 5.36%. The proceeds will be used to refinance the loan on -- of $225 million which currently encumbers 599, and repaid the financing on Times Square Tower, which is currently a floating-rate loan.

As we look forward to 2007, here are the critical assumptions we have used to project our forward funds from operations. Our projections assume that upon the closing of 5 Times Square the proceeds remain on the balance sheet for the remainder of 2007, earning somewhere between 5 and 5.25%. That will result in slight modest accretion. As has been our practice, our forward-looking guidance does not include any acquisitions, dispositions or financings, other than those outlined in our press release.

Our budget assume flat occupancy over the year. Comparing our same-store portfolio from 2006 to 2007 we will have sold $1.3 billion of properties, with an annualized 2006 funds from operations contribution after adjusting for interest impacts of approximately $47 million.

Even without any increase in our portfolio occupancy, we expect portfolio NOI, after adjusting for the sales, new developments and termination income, which was about $8 million in 2006, to grow between 2% and 4% in 2007 on a GAAP basis, and between 4% and 6% on a cash basis. Now if we include the developments in the same-store where we get the full effect of full year contribution, than those numbers change a little bit. The numbers would be 3% to 5% on a GAAP basis, and 5.5 to 7% on a cash basis. Included in the GAAP number are straight line rents of approximately 65% of where we were in 2006. We're assuming about $1 million per quarter of termination income as part of the revenues.

We expect the hotels to contribute somewhere between $24 million and $25 million, which is about a 13% increase over 2006. And remember that the Cambridge Marriott was out of service for a significant portion of the first and second quarters with a rooms renovation. The projected financial contribution from the Cambridge Center acquisition is outlined in the press release and included in this guidance.

The only development that comes online in 2007 is our 50% joint venture interest in 505 9th Street. It is expected to open in October. The project, what has been permanently financed with $130 million fixed-rate mortgage at 5.73% will have a GAAP NOI yield of 12 to 13%, and generate about $4.4 million on an annual basis. I would note that we will have no equity in this investment once the mortgage has been funded. I think you can appreciate why we like development so much.

Interest expense for 2007, after adjusting for the repayment of $361 million of mortgages during '06, a full year of our 2006 exchangeable debt issue, increases from placing the new developments in service, the anticipated refinancing of 599, and an increase in capitalized interest as we invest in our growing development activities, will be reduced to between $274 million and $280 million for the year.

Our interest income is expected to be somewhere between $45 million and $50 million for 2007, based on the assumptions around the proceeds from the sale of 5 Times Square, and the details around the funding of our additional development, land which -- some of which will not be capitalized -- and construction starts where we start capitalization, as well as the acquisitions outlined in our release.

Our G&A expense is anticipated to run between $66 million and $67 million for the year. A portion of the increase stems from the final ramp up of vesting on our long-term equity compensation program. 2007 will be the fifth year of granting restricted equity. Going forward we have shortened our vesting period to four years, and have made long-term equity a more significant portion of management compensation.

Cap wages are expected to be between $8 million and $10 million in '07, increasing along with our increasing development efforts. And the G&A expense that I gave you is net of cap wages. Third-party management and development fee will run at a level of between $14 million and $15 million.

Our decision in '06 to sell assets is to make a significant special dividend and shrink the Company's asset base had the inevitable short-term impact of dampening our year-to-year earnings growth. If the capital returned to shareholders have been retained at yields as low as 5.5%, our '07 estimates would have ranged from $4.75 to $4.85, a 7% increase year-to-year. After consolidating the assumptions outlined over the last few minutes, if you include the effect of the $5.40 special dividend, we have raised the bottom end of our guidance to $4.45 with the range are running to $4.55 per share.

The first quarter 2007 number is between $1.04 and $1.05. When you compare the fourth quarter results to the first quarter of '07, keep in mind that yesterday we paid the special dividend totaling about $750 million, and no longer hold a large cash balance. Also remember that the first quarter of each calendar year includes a lower contribution from the hotels due to seasonality -- 6% of the NOI versus 35% in the fourth quarter for the hotels. We're budgeting $1 million of lower termination income. And the first quarter G&A is typically $1 million or so dollars higher, given the front end loading of payroll taxes.

Our strategy remains constant and consistent as we move into '07. We have and will continue to focus on development, selective asset sales, and acquisitions that create meaningful value. And with that, I will turn the call over to Ed.

Good morning everyone. I am going to spend some time talking a little bit more about the markets. But before I do that, I want to make a comment on replacement cost. Since, as Doug said, there is a lot of discussion that perhaps replacement cost has risen to the point where it is the same as the acquisition costs for some of these high-priced office buildings that have sold recently at very dramatic prices per square foot.

I just would ask you to remember that when you compare the cost of a development to the cost of an acquisition that there are certain other factors that you have to consider. First of all, the initial returns that are provided after an acquisition is made are generally insufficient, or certainly a lot lower than one would like them to be and what they might increase to as rents rollover.

So that if in fact an acquisition is acquired at a 3% yield, and the seller is really looking to achieve a 5 or 7% yield, that differences ought to really, for as long as it lasts, ought to really be added to the acquisition cost. Similarly, the transaction costs associated with releasing rollover space have to be added to the acquisition cost.

Thirdly, the capital expenditures that are generally associated with -- in addition to the transaction cost -- the capital expenditures which are generally associated with an acquisition have to be added to the acquisition cost.

When you're talking about a new development, of course, all of the cost of that new development -- or the cost of that new development includes all of the cost of leasing the new building. Capital expenditures, as Doug mentioned, generally are very small for the initial years, and perhaps as long as ten years or longer of the life on that development.

Finally, if you're renting 100% of the space into the current market, you are achieving better than 3 or 4% yield immediately once that asset is placed in service. So in fact, if you do that analysis carefully, I think we still believe that the replacement cost for new development, even in this higher priced environment as Midtown Manhattan, where land prices have certainly risen, is going to be less than what people are paying for acquisitions. And once again, it is why if we can capture the opportunity, we believe that we can produce much greater returns through development than through acquisitions in an auction environment.

Now let me turn to the markets. I think a lot of what I will say is going to be somewhat repetitious of what you are all hearing in the marketplace or out in the general environment. The markets remain quite strong. And I think one of the things actually that has fueled the acquisition market is the fact that underwriting assumptions take into account the strength of the market, as well of course, as lower interest rates and the availability of capital, which continues to flood into our industry.

It is interesting actually, a little anecdotally here, that perhaps those of us, or I hope Boston Properties isn't really included in this, those of us who have been marketing space in our buildings have not been aggressive enough in terms of what we are demanding from the market. Blackstone, when -- this is all rumors of course and I can't attest to this -- but certainly the brokerage community in Boston and New York have said that when Blackstone made their offer for EOP, they immediately sent out a notice to all of the brokers working on existing EOP assets and said, raise your rents by $10 a square foot.

Now I think if you looked at it carefully, that is probably something of an exaggeration as to what happened. But in fact -- and by the way we applauded this -- in fact it did change in Boston and in New York. You probably heard rumors about the Met Life deal at the Verizon Building changed the environment almost immediately when it came to being aggressive about achieving higher rents. So that is something that is going on. It is something I think that all of us who own quality buildings in, as Doug said, the coastal markets, are going to take advantage of.

Let me just touch on some of our markets specifically region by region. Looking first at Boston, we end 2006 with a vacancy in the CBD of about 6%, and in the suburbs of about 14%. I caution you, as my partner is fond of saying, that a man can die trying to cross a lake with an average water depth of four feet. I caution you that when we talk about a 14% vacancy in the suburbs that there is a wide range of vacancies, depending upon which location you're talking about. Our own experiences in both the suburbs and in the CBD has been quite strong, as I'm sure you realize listening to Doug.

At the Pru we calculate that our increased rents over the last year were as much as 18%. We have space -- Gillette occupies about 480,000 square feet of space at the Prudential Tower. We know they're going to be leaving at the end of '09. We are in very serious discussions with a tenant who might take the lion's share of that space. We are also in discussions with backup tenants, none of whom are that large, but who are very interested in space at the Pru Tower, where rental increases could be quite dramatic.

As we look to the future, and look at our office building -- remaining office building sites at 888 Boylston Street, and I think I may have said this in a previous call, we are coming to the point where going forward with that building may be very well justified.

In the suburbs, rents probably have increased by as much as 20% in Waltham in 2006. We have a building under construction, as you know, at 77 Fourth Avenue, roughly 200,000 square feet. Activity on that building is good, but I think it is worth pointing out that the number of large tenants in the marketplace is still not as great as we would like. We are seeing tremendous activity in the smaller tenants, but not as many larger tenants out there who might take a big portion of that building in one fell swoop. We feel that we're roughly 25% committed, although not all of those have been translated into leases. And the ballgame is not over until the fat lady sings to mix some metaphors.

I mentioned before that vacancies market demand is not universal across all markets. My associates here at Boston Properties have heard me say over repeatedly, probably to the point of them getting tired of hearing it, that I have never got in trouble by betting on the Waltham market. And we are very excited by the fact that we have over 1 million square feet of new development opportunities in that market. There are not all obviously going to be built in the same year, but it positions us very well going into the future.

Moving to New York, what can I say other than to repeat what you have all heard before. Midtown remains incredibly hot as a market. The large blocks of space are few and far between. When even floors, or two floors, turnover there is great demand. Rents have gone up in 2006 by somewhere between 20 and 30%. Doug already mentioned our prebuilt suits at Times Square Tower, where rents have gone up 60% over two years. And of course, that is why we're so excited about the site assembly that we're doing there.

Site assembly is an incredibly difficult, frustrating, and at times a process where you want to throw up your hands and say, this is never going to happen. So that when you complete a site assembly, as we have at 8th Avenue and 55th Street, where we can put up an 850,000 square foot new office building, that is terrific news. And we are well along on a second site, also on 8th Avenue, but once again until we have everything signed, sealed and delivered we don't bank it. In Washington, CBD vacancy is roughly 7%, if you read the brokers' reports. In the higher quality buildings it is lower than that.

In Northern Virginia the vacancy is probably in the high single digits, maybe in the low double digits. But once again, in a quality well-located product like Reston Town Center, where our experience and the project that we have under construction has been very strong rental demand, the vacancy rate is really -- the average overall vacancy rate as measured by the brokers is probably irrelevant.

We have, as our supplemental points out, over 1 million square feet of potential development in Reston, of which a couple hundred thousand square feet of that is in addition to the project that we have underway. And once again, we are very excited about that. Not because of the absolute numbers, but because of where, in fact, we control those sites. Controlling a site in the wrong location is worse than not controlling it. Controlling a site in the right location is extremely favorable news.

Similarly, we're moving forward with our Wisconsin Place development in Bethesda. There too market demand is strong. Our frustration is not being able to deliver that site immediately because of there are other elements of the project that have to go forward before we can begin. But sometime in 2007 we will be beginning, and we will be delivering that office building in about two years.

At 505 9th Street where we're under construction, we are essentially fully leased. Another example actually of how Boston Properties is so cooperative when its own leasing people ask it to move is that Boston Properties is probably going to be relocating to its -- it is going to be relocating -- to 505 9th Street out of our 901 New York Avenue Building because of demand for expansion by our existing tenants in 901 New York Avenue.

We are hard at work entitling a site that we call, for lack of a more romantic name at this point, Square 54, which is a site next to George Washington University, on which we will be putting up 450,000 square feet of office space, we hope. It is still going through the entitlements. And retail and residential space as well, with the residential space being built by a partner.

In San Francisco the CBD vacancy rates continues to fall, now in the low teens. Average rents in the CBD have climbed into the low 50s. We have climbed above $70 a square foot in certain instances at Embarcadero Center. We leased in that region about 600,000 square feet this year. As we go down into the peninsula in Silicon Valley there also is great strengthening in the demand for space. Once again, location and quality specific, and we are quite -- continue to be quite heartened by the fact that people demand quality, and that is what we deliver.

You may hear about, so I will mention it here, that we're also engaged in a competition in San Francisco for the development rights to the redevelopments of the Transbay Bus Terminal. That will involve a new terminal and a new development, including a tower that could be as tall as 1,200 feet. Santiago Calatrava, whose name I'm sure will be familiar to most of you, is our architect on that property -- on that project. It is a competition. There are five competitors. We hope that at the end of the day we emerge as the victor in that competition.

In Princeton we're working on several build-to-suit opportunities, one of which would be 100,000 square feet to 150,000 square feet, and that is well along. And hopefully we will be able to talk about a firm deal in the relatively near term. And secondly, another build-to-suit proposal of roughly 500,000 square feet.

So Princeton remains a place that is a very desirable location. Rents have not risen as dramatically there, but in fact, as we have said before, it has been a market that has been reliable and where we have been able to control the vacancy rate in our own product very well, even in the face of what has been a little bit surprising to us, which is the construction of spec buildings, many of which have not found any tenants.

Having said what I said about the market, the question of course is, well, if the market is so good isn't there going to be a flood of new construction? I would point to everybody that that new construction is difficult to achieve. You know, as I said a moment ago about the difficulties in assembling sites in certain marketplaces. And location is the key and therefore just building another building someplace where it is easy to get the site may in fact be much worse than not doing anything at all. Entitlements are difficult in the markets where you want to be. And being able to come up and build a project of the appropriate size is also difficult.

So I think that is really why you haven't seen a flood of new investment -- a flood of new development. And it still requires a skill set which, without experience and without the kind of staff that we have demonstrated can pull these projects off successfully, it is still a much more difficult job and a much more difficult business than the acquisition business.

With that, I will stop. And I would just ask Mort if he will like to add anything to these comments. And then we will thrown it open to Q&A.

No, I think you all covered it pretty well. I think we are in one of those remarkable phases in the office building construction and development world and ownership world. And we're very happy to be in it. And we look forward to it continuing for quite a period of time. That is all I really will say.

Operator, we're going to open it up for Q&A. I would just ask people to be considerate. If you have a question or two and you need a follow-up, that is fine, but try not to ask a series of questions so that we can get everybody through. Thank you. Go ahead, operator.

(OPERATOR INSTRUCTIONS). Michael Bilerman, Citigroup.

This is Jon Litt and Michael Bilerman. Doug, you had made a comment that you expect to sell over $500 million in '07. And I guess, maybe it is semantics, I don't know if $500 million is kind of the ballpark, or if you could see $1 billion or $1.5 billion in sales?

I'm excluding 5 Times Square first. That is out of the mix. Our perspective is that I think $500 million is a number that we are -- at the moment have identified for assets that are either on the market today or are assets that we're going to be looking to put on the market sometime between now and the end of the first quarter. And it is possible that it could be more than that. I don't think it is going to be $1.5 billion. But it certainly could be more than $500 million, although that is not what our current plan is.

Can you just review in terms of 5 Times Square, in terms of when you anticipate getting the cash in, how long your expectation is of holding that cash? And what that GAAP and the cash yield is on the sale that is embedded in your guidance?

Sure. I will try and answer as many of those questions as I can. We anticipate the closing to occur before the end of March. In fact, we expect it to occur hopefully by the beginning of March. The assumption would be that the cash would come in on or about March 1.

The guidance assumes that we retain the cash for all of 2007. Now it is possible that the Board will have the perspective that we -- should I try and identify some properties and do some like kind of changes? If we're not able to do that, the Board may have the perspective that we should consider paying out that money earlier. The guidance that I have given we have assumed that the money is on the balance sheet for all of 2007.

With regards to the rate, I think that the rates that I gave you in terms of where NOI cap rates were for Midtown Manhattan, between 3 and 5%, is a good sense of where this building will trade. Remembering that the building has a flat lease with $5 bumps, without any rollover until 2022, and so the cap rate is not going to be quite as low as the cap rate was for 280 Park Avenue. Nonetheless, there will be some accretions, although it will not be as dramatic as the accretion that we had from 280 Park Avenue.

Ross Nussbaum, Banc of America Securities.

Two questions. First on Princeton, it sounds like you're a little cooler on the fundamentals there than your other markets. Is that one of the cities where you're targeting dispositions for?

And I didn't mean to give you the impression that we were cooler about Princeton. I think it is just a different kind of market, and we have always recognized that. I think the -- it is interesting because when rents have gone down more dramatically in other markets, they have not gone down as dramatically in Princeton. And when they have come back, they haven't come back as dramatically, but it is a very solid market with good demand fundamentals. We don't see quite the same upside. On the other hand, we see things like these build-to-suit opportunities where we have not seen those in other regions. I think it has both strength and weaknesses.

It is not -- Princeton is by no means on the market. It is assets that we enjoy holding and intend to continue to hold. Having said that, anything is for sale at any time if the environment appears to be correct for it, as I think we have demonstrated in the sales that we have done over the last 18 months.

Doug, a question on the 8th Avenue and 55th Street development. I think you threw out a number of around $800 million, or above $800 million dollars for a cost. I guess the question would be, how much above $800 million, and what does that potentially equate to in terms of yield?

Let me answer the question in the following way. We closed down the site. We're designing a building. The building may have different shapes depending upon the kind of users that we're talking to. A building that has a financial services kind of requirement that is looking for a larger base building. Base building floors may have a higher cost based upon the TIs associated with it than a building that is more traditional for law firms and financial services firms that are of a smaller nature.

We have not pegged down the cost yet. That is why I say $800 million. I also -- we also said $1,000 a square foot was sort of where replacement costs was. It is going to be in that ballpark. I can't tell you if it is going to be $925 or $1,002, but it is going to be in that general area.

With regards to yields, traditionally we have assumed that our development yields were somewhere between 9 and 11%. For a CBD New York City asset the number is going to be lower than that. Based upon current market rents, and our perspective on where rents would be today, for a building that would open for presumably in 2010, we anticipate that the yield is somewhere between 7 and 8%. Now if market rents continue to appreciate the way they have appreciated, and the demand continues to be where it is, we don't know if those numbers are overly conservative, but our sense is they probably are.

Anthony Paolone, JP Morgan.

If the opportunity arose to enter new markets, whether it is via an EOP or another large transaction, which ones would be on your short list?

I think that we have been pretty consistent in this, which is that the one market that it would be wonderful if we had a beach hold in would be Greater Los Angeles. And to the extent that a portfolio of properties, or a company, or there was a way for us to become involved in that market, because we quite frankly we see -- particularly not downtown L.A., but particularly the West Side -- has the same kind of supply constraints and demand characteristics as some of the other markets we operate in. That would be a market that we would be interested in.

Obviously, there's a lot of overlap with existing assets from the equity office properties portfolio in the markets that we're currently in. And to the extent that those assets are available, and one of the acquirers of that organization chooses to sell those kinds of assets, those are assets that we would also be very interested in taking a look at.

What is your sense -- you outlined some cap rates in your various markets for deals. What is your best sense as to what types of IRRs are being underwritten in these trades?

That is a really, really hard number to pin down. I will tell you that for a core deal my expectation would be that if someone got to something north of 7.5 on an unlevered basis, they are really doing well in terms of what they are underwriting. Because my guess is, based upon the pricing -- unless they are assuming super hyper growth -- that they're going to be probably lower than that.

David Cohen, Morgan Stanley.

Doug, you had mentioned that you disagreed that you can always buy below low replacement cost, especially in some markets. Can you discuss which markets you think that you can and can't buy below replacement cost?

I think that the point is that, as Ed I thought did a great job describing, when someone says that they're buying below replacement cost, they are giving you -- they are assuming a number that doesn't necessarily include all of the costs that you really need to attribute to a particular asset to get you to what replacement cost would be.

For example, if you were to buy a CBD building in downtown Boston for $500 a square foot, and all the leases were 30% below market. And so you're buying at 3 to 4% yield, and we could build the building for $500 -- $550 a square foot, and we could have a going-in yield on that new building of 8%, the assumption is that in order to get the $500 a square foot building up to 8%, you're going to have to roll those leases. You're losing -- you have a loss of X hundred basis points that you sort of have to attribute into either a cost per square foot, or some other sort of valuation metric, and you're going to retenant the building and pay a brokerage commission and pay for a tenant improvement cost.

So at the end of the day if you sort of -- if you did a comparison on a "new developed" building to a new developed building in terms of actually getting to the same yield, your cost on the acquisition would be higher than what the cost is to build a new building today.

It is Matt Ostrower. Are there any markets where you can generalize and say you think that that gap between those expectations and the reality are getting more out of control from an acquisitions perspective?

Ray, you may want to comment on Washington DC, because I think that is the market that is probably seeing the most activity.

It is interesting, we are seeing the acquisition prices pushing $600, $700, $008, now even rumors of $900 a square foot. I think the best analogy is, as talked about earlier, we're completing 505 9th Street at something in the $400 a square foot range. Now, can we find another site like 9th and 8th anytime soon? Probably not. But when you look at that kind of differential between replacement costs at $400, $425, $500 a foot, and the sales price is $800, $900, $1,000 a square foot, there is a lot of room to go out and even buy buildings and knock them down and replace those costs.

Does that make you more likely to sell in DC?

I will answer that. I'm sure the answer is absolutely not. We believe, especially the CBD area, that the uptick in rents are going to be forthcoming. That the scarcity of sites -- we can't build 1 million square foot here in Washington like we're doing in midtown. Both the physical limitations and zoning really limit the amount of new opportunities. We think there's tremendous upside in the rents here in Washington, and we believe in the core market.

Steve Sakwa, Merrill Lynch.

Maybe this question is for Mort. I guess on a couple of the developments that you've got going, there's no preleasing. And I guess historically you and Ed have been proponents of the preleasing a fair amount of space. Has your philosophy changed at all about how much space you want to prelease? And is that dictated by the fact there is just more land and more developers out there? I guess has your thought changed on that?

Not really. Just because there's no releasing announced at this point does not mean that we're not talking to tenants.

No, I understand. But I guess historically you have started buildings where you had a major tenant kicking off a project, and been 40, 50, 60% leased. I guess maybe these are just two coincidences, but I just didn't know if there was any sort of change, or whether you're getting more aggressive, or because you feel more comfortable about the market.

We certainly feel comfortable about the New York market. I can tell you that we are being approached by major tenants for major blocks of space. We're not in a position at this point to really advance the negotiations with them, but we all know how strong the market is for large blocks of space.

Let me just give you a little bit of color commentary on the developments we have going. The largest one would be the building in Reston. And we announced that we were starting the building, and I would say before we started going down, while we were just clearing the asphalt off the existing parking lot, we have signed a couple of leases. At this point we are, I think, basically 50% preleased on that building. And the building is going to open up in the second or third quarter of 2008.

There's a building that we started called Tower Oaks outside of Maryland -- in Bethesda, or it is actually in Rockville -- and there we started the building basically because we had a commitment from a tenant to take a portion of the space. The lease isn't signed, but we're moving forward with the negotiation of the lease, and we're moving forward with the development of the building.

In Wisconsin Place, again, we have been negotiating with a couple of tenants for almost a year. The timing of the building is such that we haven't had there time pressure associated with getting the building started and getting the lease signed, but the anticipation is that we start the building there will be a pretty significant amount of preleasing.

The two assets that we're talking about in Princeton, given the marketplace, are going to be fully leased before we start those buildings, assuming we're fortunate enough to get those build-to-suits. There is a similar situation out in California that Bob Pester is working on with the tenant in the Peninsula marketplace.

In Boston, which has traditionally been, and truthfully I can't think of a time when, at least as a public company, where we have started a building in Waltham that hasn't been basically speculative to begin with, because it is a show me kind of a marketplace. Where we have started the building. We are going down and up right now, and we're been negotiating leases.

I think that where the market is and the specific issues surrounding the various developments we have also indicate where we are in terms of our leasing. But nobody here is in any time, place or way is sort of looking at this from a cowboy mentality of, well, we will build it and they will just come, and we will just sort of keep building these buildings. There is a strong business objective and plan that has been in place for each of these developments before we have gotten going.

Just to add something. Historically whether we go forward with or without tenants really is an individual both market and location question. We have gone ahead with -- in the past we have gone ahead with buildings without preleasing when we thought that the market was such that we would have no trouble leasing the building, just because there was a lack of space and the market was hot. Or, as Doug just said, it was a market that really demanded you to start, and that the traditional rate tenants didn't commit until they saw something underway. It is really a project by project, time by time, location by location decision.

Because of, in fact, when we calculated when 599 Lexington Avenue in New York would come on the market and the competitive set that would be there for that period of time, we actually started 599 Lexington Avenue without a tenant.

If I could just maybe ask a follow-up on the 8th Avenue and 55th Street. Doug, I guess your land parcel assemblage takes you to almost $300 a foot. I guess what are the incremental land costs? I guess I'm trying to get a full sense for what may be fully improved land costs would be in New York for development today.

I think that if you were to try and go out and buy a site today, or you hadn't been working on assemblages for the past X years, that you would be in excess of $400 a square foot. Mort, do you agree with that?

I would agree. But of course everything depends on the location.

I don't know if this is what you were driving at or not, but I don't think there's anything extraordinary about that site that is going to add cost, other than your normal foundations that are consistent across Manhattan.

I guess I was trying to get a sense for if you had demolition costs or site preparation costs, what would your all-in cost be on that land before you go vertical?

Not very much higher than the acquisition cost.

David Toti, Lehman Brothers.

I have a couple of questions about tenant concessions, tenant improvements. Do you believe there's any correlation in the strong markets between the rising rents and elevated tenant concessions costs? It seems in low vacancy scenarios that these numbers should be coming down, but they aren't from what we're hearing. So I was just wondering if you have any comment on that?

This is an interesting question, and I think we tried to touch unit in times past, which is that on a marginal basis they are coming down. But I think you have to appreciate that there are other sort of conflicting trends, with the most important being the total cost of actually building out a space, and how much inflation there has been in that, and what the tenants are ultimately having to put on their own balance sheets.

I would say that TI costs in a city like New York have basically gone from $80 to $90 a square foot for a law firm three or four years ago to $120 to $140 a square foot today. Our concession package has basically stayed pretty consistent. It has been somewhere between a maximum of $50 a square foot, and I would say as low as $35 a square foot on a new transaction.

I think the other component that you don't see, and unfortunately it's sort of gets hidden in the revenue numbers on a GAAP basis, is the amount of free rent that we're giving. In New York City as you recall, you give a tenant a "free ride". Which really means that they sign a lease and they have to build their space out. And the question is can they actually get their space built out before they have to start paying rent. And those numbers have come down from seven or eight months a year or two years ago to as little as three months today. That is all part of -- it is sort of a moving around of pieces.

In our other markets I think the transaction costs that we are seeing, our new transactions for new buildings, have been pretty consistent. There were times when -- Ray can probably remember as high as over $100 a square foot in Greater Washington, DC. And I think those numbers today are in the $65 to $70 a square foot for a CBD building.

In Boston numbers have been generally between $50 and $60 a square foot. In San Francisco between $45 and $55 a square foot. And again, rents have been going up, concessions have been basically staying where they are. Remember when you're looking at our numbers in our supplemental, that also includes brokerage commissions. In New York City when rents go from $70 a square foot to $100 a square foot, the brokerage commission goes up on a proportionate basis. And so the total transaction costs are in fact getting higher, but you're getting a much higher rent, and a little of that is actually going to the tenant.

Without giving any specifics, can you tell us -- provide a range of what you're underwriting for some of the New York City developments in terms of concessions?

Robert, are you on the phone?

I'm pretty sure that the tenant improvement package that is in our current underwriting is somewhere between $45 and $50 a square foot. And my guess is that we probably have somewhere between five and eight months of free rent, depending upon where it is in the building. And we probably have a lease up that is -- on a building that is 885,000 square feet, my guess is 18 months plus or minus.

James Feldman, UBS.

I was hoping to get a little bit more detail on the JV structure for the New York development. And then also do you think it is the next development site, if you in fact get it, would be also in a JV?

Just a comment on the first one. For all intents and purposes, we have a partner in the deal from an economic basis. We are in the vast majority of the economics. Our partner has been very instrumental in helping and assisting, and quite frankly, starting out the assemblage. And we have valued his contribution greatly. We are -- at the end of the day we will probably be 90% plus ownership of that total project, and he will be in a minority interest that is 10% or less.

The other site assembly we're working on it is more a 50-50 JV, and very different than the first one.

Jordan Sadler, KeyBanc Capital.

Could you just give us some color on your return hurdle on a going in basis -- maybe even a stabilized basis -- on acquisitions? And maybe discuss what the impact of the ability to 1031 let's 5 Times Square proceeds would have on that hurdle?

It is easy to answer the second question first, which is it is 0. We have not been prepared to buy assets and bulk up simply because we don't have to make a distribution. In theory our earnings would be "be higher" if we had additional capital invested. As an organization we have not gone down the road.

Our hurdle rate is really very dependent on the leasing profile of the building, the costs that we're buying the building at, and what we see as the upside. For example, the buildings that we were purchasing in Springfield, Virginia the going in, un-leveraged return is somewhere around 7%. And we're buying those buildings I would say at a modest discount to replacement cost. They happened to be buildings that were built two years ago and four years ago so they are basically new buildings. And they have 100% -- almost 100% structured parking, which obviously means that there's even a higher potential replacement cost on a going forward basis.

The buildings that we purchased in Cambridge, the going in yield was almost irrelevant. And as Ed described, you probably get a sense of how we looked at it, which was at the end of the day if we have to carry the building in an insufficient return, with insufficient being below 7% for all intents and purposes, how much additional costs are we going to have in that building when we get to stabilization? That is sort of how we looked at a building like that.

Where it also gives us the opportunity to reduce our operating expenses in some of our other buildings, because we have synergies with property management. We have other assets with leasing maturities that are in a similar profile to where those other buildings are and it allows us to control the marketplace in a more meaningful way. And not have one landlord beating up another landlord who may have a building that has got a very similar competitive profile. There are lots of I guess touchy feely thought processes that go into what those returns are.

Just as a follow-up, could you give us a sense of your appetite for life science type assets and any progress you have made in that direction?

We would have a very strong appetite for a life science asset in marketplaces like Cambridge, Massachusetts, perhaps in a market like South San Francisco where Genentech is such a strong proponent. I don't think we in general are saying, we just want to be a life science business and have buildings that may be in Gaithersburg, Maryland or Princeton, New Jersey where there is not necessarily a nucleus of life science kinds of companies that are in a formation and growth business.

We have not been prepared to accept the kinds of returns on a long-term basis that we have seen -- quite frankly, two companies, BioMed and Alexandria, are prepared to accept in markets like Boston, where both in the Longwood medical Center area and in Cambridge, they have been very, very aggressive acquirers of those kind of assets.

Michael Knott, Green Street Advisors.

Can you just talk about your strategy and timing for the Springfield land parcels, and how that may fit into what you already own there.

Ray, do you want to take that?

Sure. I know this will come a shock to you, but we're extremely excited about both the acquisitions we did in Springfield. We have been down there now for 25 years and it has been a very solid, steady growth. It is characterized by really strong barriers to entry.

When we started getting phone calls from some of the defense contractors asking about knocking down our existing buildings in Springfield, we figured it is time to get more -- we are really more serious about it. So we acquired the Springfield Metro site. It is three buildings -- three sites, two of which were improved by buildings, which candidly we bought with really solid cash flow that holds them to the ready for development.

We put together a composite of about 800,000 square feet. It is atop the Springfield Metro, which is really important for a number of reasons. First of all, a direct way to the Pentagon. Number two, really good access to the employee base down in Quantico in Fredericksburg, which is characterized by strong military presence. And last, but probably most important, it allows us to reduce the parking count by about 1 space per 1,000, which is about $25 a foot. So at a $55 land value all-in reducement the $25 for parking, we're down to an effective land value of about $30 a foot, which is extremely competitive.

We have already had several major defense contractors, and candidly the federal government come to approach us about the preleasing well in advance of BRAC, which happens in 2010, 2011. We are extremely excited about this site.

And the key thing here that differentiates this from let's say Fort Meade is where in Fort Meade you would have 10 or 15 million square feet of potential competition, we are almost effectively the only game in town in Springfield. It is really going to be, we think, a really strategic acquisition for us.

Lastly, can you just talk about your appetite for potentially going spec with Boston development?

Are you talking about the downtown Boston development, the Back Bay development?

Yes, the Back Bay, sorry.

888 Boylston. At this point we would not go spec with that development. But if, as I said earlier in this call, as we continue to see the market improve, and as we continue to see the amount of available space in the Back Bay shrink to next to nothing, up we will revisit that decision. But at the moment it is not something we would on spec.

Kristin Brown, Deutsche Bank.

I was hoping you could give us some color on the rollup in San Francisco this quarter? And also where you think rents are in your San Francisco portfolio now versus relative to the market?

With regards to where rents are, I can start with that. We think rents are as high as $75 a square foot for the best space that we have at the top portions of our buildings, and as low as $40 a square foot for the space that, while we don't think it is commodity space, but the market sort of characterizes as ordinary space because it doesn't have a spectacular height and its views are somewhat constrained by what it may be looking into, which is really, call it, the bottom seven or eight floors of the building. Bob, do you agree with that?

Yes, that would be correct. The space that we have vacant right now for the most part in Embarcadero Center is the upper floors in EC 2. And then some of the lower floors in EC 4, which are a little bit different from the vacant space that we have historically on the lower floors because it has water views as well.

With regard to the rollup, I don't have the information on a space by space basis in front of me, but basically we have gone through the vast majority of the $100 plus rents that were done in the 1999 range, other than two, which were done in 2001 and will rollover in 2010, 2011, which are both in EC 4. But net net most of the rents that we're rolling over now are in the $35 to $45 range. And so we anticipate having rollups in rents on a going forward basis in Embarcadero Center.

Michael Bilerman.

Just in terms of Waltham, you mentioned 1.2 million square feet. Does that include the potential rezoning of Waltham Center?

Yes, it does.

David Cohen --.

I just wanted to follow-up. It does not include the 300,000 plus square feet we have one interchange down in Weston. So there is another 300,000 plus square feet.

David Cohen.

My questions have been answered. Thank you.

Anything else, operator?

Not at this moment.

I think we appreciate everybody's patience and attention. And we look forward to announcing more developments and more leasing. And we will speak you again, I guess, at one of these industry conferences that is coming up and/or on our next call. So thank you very much.

Ladies and gentlemen, this does conclude the Boston Properties' fourth quarter 2006 conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 or 800-405-2236. For either number you may input the access code, 11080783. (OPERATOR INSTRUCTIONS).

ACT would like to thank you very much for your participation today. You may now disconnect. And have a very pleasant day.