波士頓物產 (BXP) 2007 Q1 法說會逐字稿

Welcome to the Boston Properties conference call. During today's presentation all parties will be in a listen-only mode. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Wednesday, April 25th of 2007. I would now like to turn the conference over to Kathleen DiChiara of Boston Properties. Please go ahead ma'am.

Good morning, everyone, and welcome to Boston Properties' first-quarter conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg. G requirements. If you did not receive a copy, these documents are available in the investor relations section of our Web site at www.BostonProperties.com. Following this live call an audio Webcast will be available for 12 months in the investor relations section of our Web site. To be added to our quarterly distribution list, please contact the investor relations department at 617-236-3322.

At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, 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 a duty to update any forward-looking statements.

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. And during our question-and-answer portion of the call, members of our regional management team will also be available. Now I will turn the call over to Doug Linde for his formal remarks.

Thanks, Kathleen. Good morning, everybody. I'm going to begin today with a few comments on the sale of these various major office portfolios, including Equity Office's portfolio, because clearly it was not sold as a company; it was sold as a collection of assets; the repackaging and the resale of these smaller portfolios or individual assets, which all flowed from those transactions; and the mammoth value creation that has stemmed from the process.

Clearly, capital continues to demonstrate a very robust appetite for office building acquisitions. But now it seems the assumptions regarding cap rate compression are taking a back seat to expectations of significant, sustained rental rate increases, translating into much higher future cash flows. Investors are much more focused on the dynamics of the leasing markets, looking for confirmation that the expectations embedded in the recent valuations are on target.

Now let's keep in mind that to date, the new owners have concentrated on financing and closing those transactions, and have had very little time to implement changes to the business plans or the operations of the properties. While information on specific leasing transactions under the new ownership is anecdotal at best, there clearly has been an attitudinal shift in the way they are approaching the market in dealing with both renewing and new tenants. Occupancy is no longer king, and at least until lower cash flow begins to pinch or become a psychological burden, the new owners seem to be satisfied holding space empty until higher rents are achieved.

In the supply-constrained markets located on the East and West Coast of the United States we operate, Blackstone, Broadway, Beacon, Morgan Stanley and others, have begun to reprice their inventory in a significant way. Even before we take into account the effects on rental rates of the more hard-nosed approach of these new owners in our markets, which by the way we applaud for obvious reasons, we've seen sustained, dramatic improvement in operating fundamentals over the past two years in Boston, New York, Washington D.C. and San Francisco.

And we expect to show strong fundamentals for some time. Our portfolio mark-to-market has moved from a negative $0.80 per square foot in the first quarter of 2005, to about $6.75 today. And this is after the removal of over 2 million square feet of our New York City inventory in that figure. On our current inventory of about 30 million square feet, the embedded growth works out to about $1.28 per share.

Let's not forget the substantial disparity that still exists in rents within buildings and among competing buildings in our markets. For some time we've been discussing the large gaps in rents in San Francisco between view space and what we refer to as commodity space. Today at Embarcadero Center, for example, we are achieving rents in the low 40s at the base of EC 1 and 3, and in excess of $75 a square foot for the top of the buildings. In the Back Bay submarket in Boston, the range is narrower, with the low to mid-40s at the Prudential Tower at the low-rise, compared to the mid 60s at the top of the building, and at 111 Huntington Avenue, rents are in the low 60s at the bottom of the building and the low 80s at the top of the building.

In Washington, D.C. CBD, the bifurcation is really not necessarily on a leveling basis but really between what we refer to as Class A buildings and Premier Class A buildings. So while we might achieve rents of $55 a square foot for renewal at Market Square North, a building that was built less than seven years ago, we are looking at rents between $65 and $70 a square foot for our available space at the soon-to-be completed 505 9th Street, which is directly across the street.

In Reston Towne Center, we're achieving gross rents in the mid-40s on the new South of Market development, which we'll deliver in early '08, while over 1.8 million square feet of space is going to be delivered in the next 12 months in the Reston/Herndon corridor, with asking rents in the mid-30s. Now, these differences may quickly narrow or even disappear, but my point in providing the data is to highlight the challenges in making broad-brush assumptions about rental rates and rental growth on a floor, in a building, or a submarket, let alone the marketplace.

Now, forward-looking 12-month NOI cap rates on high-quality, and even not so high-quality buildings, continue to be in the 3% to 5% range in Midtown Manhattan and the other CBDs where we operate. I would just note the significant amount of sales activity in San Francisco over the past 90 days, and the giddiness that the city of San Francisco has had with the amount of transfer tax it has been able to earn over the last year. Replacement costs have increased to levels approaching, and in some cases in excess, of $700 a square foot in Boston, Washington, D.C. and San Francisco, and over 1000 square foot in Manhattan.

We have not participated in these portfolio purchases. As Ed described during our last call, when we analyze a property purchase, we include in our basis the cash costs required to get us to an acceptable stabilized return. This includes tenant improvements, leasing commissions, base building improvements, and most importantly, the capital cost equal to the deficiency in the return until stabilization. In fact, Ed and Mort reminded me on more than one occasion that in the olden days, back in the mid '80s when I was a young lad working as an analyst at Salomon Brothers, real estate investors had never actually heard of net operating income, or NOI, and actually analyzed real estate properties on the basis of cash flow, which is clearly an outdated concept. Although I must admit that some buyers do in fact calculate cash-based IRR still today.

Viewed in this light, we believe that new development in strong markets may in fact have a cost basis advantage and can be more attractive use of capital for us than acquisitions. Given the underwriting assumptions necessary to justify prevailing pricing on fully marketed transactions, we know our investment capital is best deployed in developments where stabilized yields of 2 to 500 basis points greater than NOI yields can occur. And remember, newly constructed and leased assets only require minimal capital expenditures over the first 10 or more years of their lives. As we will review, we have been able to put under control new, exciting development opportunities in our markets.

Let me go right there. We purchased a development site in downtown Boston currently known as Russia Wharf from Blackstone, which was acquired in the EOP transaction. Situated on Boston Harbor, with unobstructed views from three sides, this 775,000 square foot development is permitted for a 520,000 square foot office building, 230,000 square feet of residential space, and 25,000 square feet of retail space. The office tower will begin on the 9th floor and top out at floor 31. We can be under construction as early as the third quarter of this year.

We now control what we believe to be the two best development sites in Boston, the second being 880 Boylston Street at the Prudential Center. In addition, we've continued to assemble (inaudible) Waltham, closing on a site 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 traditionally the best interchange on 128. This does not include the 210,000 square foot building that's currently under construction, or the 350,000 square foot development in Weston, which many consider the strongest site in Suburban Boston today.

As outlined in the earnings release, this quarter we closed on the final portion of a land assemblage in Springfield, Virginia that can support up to 800,000 square feet. This development, located approximate to Fort Belvoir, is part of our strategy to respond to the changes that will occur from the Base Realignment Enclosure Act. We have also recently completed a $134 million off-market purchase of a mixed-use project near Springfield called Kingstowne, which consists of 395,000 square feet of office space, which is primarily leased to contractors associated with Fort Belvoir, the user for our next development. We purchased the buildings for $340 a square foot, 96% leased, with an initial unleveraged NOI GAAP yield of 7.9%. Again, this was an off-market deal. This is a transaction we sourced before it came to market, and along with our VA 95 campus, which also is in Springfield, gives us 1.2 million square feet of existing inventory in this submarket, along with our 800,000 square foot development space.

In the District, we've gained preliminary zoning approval for our 850,000 square foot mixed-use George Washington University site on Pennsylvania Avenue, which includes 439,000 square feet of office space; 84,000 square feet of retail space. The remainder of the space is residential and will be developed by another developer. We signed an agreement with a user for a 165,000 square foot build-to-suit and purchase on our F Street project, which again is in the District, and we hope to begin development there in 2008.

And up in Anne Arundel County, Maryland, in close proximity to Fort Mead, we're working with a landowner on an additional BRAC-related development where construction of a 120,000 square foot building has commenced with the potential for in excess of 2 million square feet over the next decade.

We continue to make great progress in New York City on our 250 West 55th Street site, where we have been able to procure additional FAR and can now build close to 1 million square feet over 37 floors. The project is going to have a budget of approximately $900 million. We have awarded the demolition contract and will be underway with those activities this quarter. We're making good progress with our 46th Street development, on which construction is probably projected to be somewhere between 12 and 18 months behind 250 West 55th Street.

Along with our development activities and the off-market acquisition I talked about, we've continued to selectively sell certain assets. We continued to dispose of our hotel assets with the sale of the Long Wharf Marriott for $231 million. The 2006 EBITDA was 14.2 million. That's a 16.3 multiple. And the 2006 NOI after all the reserves was $12.1 million, which in the hotel world looks like a 5.2 cap rate. We still own the Cambridge Center Marriott, which is at a central position on the plaza serving 760,000 square feet of our office and retail space at Cambridge Center, where we are now looking at improvements and repositioning. Control of the Cambridge Center Hotel while that is underway continues to make sense. The other sales that we've made are discussed in our press release, and we'll be happy to answer questions regarding those after our formal remarks.

With the closing of 5 Times Square on February 15, we have sold just under $3.8 billion of assets over the past two years. Excluding 5 Times Square, we have sold or have under contract for sale in 2007 $300 million against our stated 2007 expectation of a minimum of $500 million of asset sales. Our asset sale activity will continue during the year.

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 of a sale in a tax-free exchange. We did not complete a 1031 with the proceeds from 5 Times Square, but we were able to complete a reverse like-kind with the Long Wharf Marriott. The taxable gain associated with 5 Times Square is approximately $750 million.

Now let me turn to the operating metrics and the first-quarter earning results. We ended the quarter with an occupancy of 93.8%. The occupancy was impacted with the sale of 5 Times Square, which at 1.1 million square feet and 100% leased, had it been added, would have made our occupancy 94% for the quarter. Our average remaining lease still remains pretty high at 7.4 years.

Our same-store portfolio average market rent today stands at $50 a square foot, which is a 16% increase over last year. Average expiring rents in 2007, excluding retail, are about $31.25, which is 10% below the current market on that same space. The remaining rollover in '07 is spread evenly over the regions, excluding New York City, which has virtually none. Our largest exposure still remains in Princeton, where we have about 325,000 square feet expiring in '07.

Our first-quarter funds from operations was $1.10. Our convertible offering on February 6, which was not included in our prior guidance, contributed about $2.5 million to our first-quarter earnings. We're earning about 5.1 to 5.2% on our cash balances, and our GAAP coupon on the convert is 3.44%.

Adjusted for the effect of the offering, we finished the quarter just over $0.03 per share above our prior guidance. The explanations for the out-performance are really straightforward this quarter. We had termination income of $2.6 million, which is $1.6 million above our budget. Again, we budget about $1 million for termination income. The bulk occurred at Carnegie Center, where we were paid $1.8 million, or 14 months of rent, on a net remaining obligation of $2.1 million. The Cambridge Hotel had a positive impact of about $500,000 above our budgeting, and we had parking operations give us additional contribution of about $500,000 -- again, ahead of our budgets.

The rest of the upside this quarter was in operating expense savings, which resulted from two things. One was vastly lower energy consumption, given the relative lack of cold weather in the Northeast, and the second was the deferral of some repair and maintenance items. Those items will be likely completed during the second, third and fourth quarters. So that's really just a catch-up expense over the remainder of the year.

We completed about 750,000 square feet of leasing in the first quarter. I want to point out that in the second-generation leasing statistics in San Francisco, we show about 237,000 square feet of leases with a 26% increase in net rents. Now, timing is everything here. Those leases were negotiated in the late 2005, early 2006 time period. If they were completed today, those rents would likely be, at a minimum, $10 a square foot higher, and the net increase on those same 237,000 square feet would be about 75% versus the 26% that we're showing. The markets, clearly, have moved.

As we look forward, we thought the clearest way to look at our 2007 funds from operations would be to first consider the incremental effects of our transactions. Let's start with the portfolio changes.

Our projections assume that the net proceeds from 5 Times Square, the Long Wharf Marriott and the Newport Office Park all remain on the balance sheet for the remainder of 2007, earning about 5.1%. The 2007 annualized GAAP contribution from 5 Times Square would have been about $60.3 million, or $0.42 per share. The Long Wharf Marriott contributed $1.5 million in the first quarter and had $14.2 million in 2006. Our prior projections assumed about a 10% growth in our hotel contribution in '07, so the Long Wharf Marriott's theoretical projection in our last numbers was $15.6 million.

The Newport Office Park provided about $620,000 in the first quarter, and it was 100% leased. The projected financial contribution from the Kingstowne acquisition is outlined in the press release, so you can get the numbers right from there.

Adding the impact from our convertible offering, the incremental contribution, assuming the proceeds are invested again at 5.1 and are netted against our GAAP interest expense, is about $10 million for the remainder of 2007.

Consistent with our prior guidance, we're assuming flat occupancy over the remainder of the year. Even without any increases in our portfolio occupancy, we expect portfolio net operating income after adjusting for sales, new developments and termination income, which was $8 million in '06, to grow somewhere between 2 and 4% on a GAAP basis and between 4 and 6% on a cash basis over full-year 2006. Including the development properties in the same store -- and again, we have full contribution from many of our development properties from 2006 to 2007 -- the ranges go from 2.2 to 4% up to 3.5% -- 3 to 5% on a GAAP basis, and 5.5 to 7% on a cash basis. We anticipate straight-line rents of approximately 35 to $40 million, which is a drop from about $55 million in 2006, and again, termination income of about $1 million a quarter.

The only development expected to come online during '07 is our 50% joint venture interest in 505 9th. The project will open in October, it's been permanently financed with a $130 million mortgage at 5.73%, and will have a GAAP NOI yield of somewhere between 12 and 13, generating $4.4 million on an annual basis. In the middle of '08, we will get a full run rate on this development and should begin to see contributions from 77 City Point -- formerly 77 4th Avenue in Waltham, our new branding -- South of Market in Reston and Tower Oaks in Rockville.

Interest expense, after adjusting for the convertible notes, the other financing transactions outlined in our press release, and the repayment of our 250 West 55th Street land loan, as well as an increase in capitalized interest due to the acquisition of Russia Wharf, will be between 282 and $287 million for the year. Our interest income is budgeted at between 83 and $87 million, based on the assumption that the proceeds from the sale of 5 Times Square remain on the balance sheet for the remainder of the year.

Our G&A expense is anticipated to run at approximately $16.5 million per quarter. Capitalized wages should run between 2 and $2.5 million per quarter for the remainder of the year, increasing along with our increasing development. The G&A expense, again, is net of all capitalized wages. Third-party property management and development will still run at an annual level of between 14 and $15 million. And we expect the Cambridge Hotel to contribute somewhere between 8.5 and $9.5 million to NOI, an increase of about 13% over 2006.

As has been our practice, the forward guidance does not include any additional acquisitions, dispositions or financings, other than those outlined in the press release or in these remarks. After consolidating the assumptions over the last few minutes, if you remember that there was some short-term dilutive impact from the Long Wharf Marriott sale and the Newport Office Park sale, which was offset by the addition of the net interest income generated from the convertible offering, the 5 Times Square sale and our Kingstowne acquisitions, we have increased our 2007 guidance to $4.54 to $4.62. And our second quarter 2007 FFO is somewhere between $1.12 and $1.13.

Our strategy remains consistent as we continue operating in '07. We're going to continue to sell assets, we're going to continue to make significant special dividends when appropriate, and we're going to continue to balance the Company's asset base with new projects replacing property dispositions. This has the impact of dampening our year-to-year earnings growth, but enhancing over time our return on equity. This is not to say that we will not continue to study acquisitions, and if we find transactions that fit our operating platform, have acceptable returns and that can create meaningful value, we will complete deals. We have a very strong balance sheet and significant capacity to grow if and when opportunities arise.

With that, I will turn the call over to Ed.

Good morning. Thanks for being with us. I'm going to be very selective in my remarks to allow time -- more time for Q&A. But I did want to comment on some of the speculation that now has entered the market as to whether the rental increases that have already occurred or are projected to occur in the future will be sustainable. And to answer the question as to whether tenants facing extremely, on relative terms, increases in rents will try and seek, for example, in the Midtown Manhattan area -- try and seek places where they can operate just as efficiently but for less money. Whether that means Downtown or New Jersey, or Brooklyn or wherever, is that going to be a phenomenon that will start to dampen rent increases?

And before I start using numbers, I have to apologize for the fact that I'm using averages that I got. I'm sure the information isn't perfect, but I think it's still illustrative, very dependent upon the type of buildings that are included in the database. And finally, and probably most importantly, I am not a statistician.

However, with those qualifiers, we took a look at what's happened in Midtown Manhattan, Downtown Manhattan, and then as a point of comparison, Boston, over some period of time. Because everybody says, gosh, rents are rising at 15% a year. And that's true. But if you look back, and we looked back to 1990 -- it wasn't an arbitrary number; we sort of looked at the curve and sort of where was the last point. Actually, that was actually a high point at that time. And then said, what's happened in the intervening years?

From 1990 to 2000, when there was a big spike in rents, the annualized increase was about 3.3%. From 2000 to 2004 it was about -- excuse me, from 1990 to 2004, when rents dropped back down, starting in 1990 the average rent, market rent was $44. And by 2000 it got up to 61. In 2004 it dropped back down to 50. The annualized rate of return over that period of time is less than 1%. Then of course there was the spike in 2006. The statistics shows $68 a foot. 2007, the statistics showed $75 a foot. But if, once again, you go back to 1990 and you look at the annualized rate of increase, that represents 3.2% over that 17-year period. I suspect that -- and I didn't look at what the other costs were of doing business in places like Midtown Manhattan -- but I suspect that it was much greater over a 17-year period than 3.2%.

Another way to look at -- we also looked at Downtown. And of course there, the differences are much more -- or the rate of increase is much, much lower. In Downtown, according to the statistics that we've been using, the 1990 average market rent was $36. It grew to $44 in 2000, dropped back down to as low as $39 in 2006, and is projected to be $40 in 2007.

Now let me throw a note of caution in there, too. It may be projected to be $40 a foot in 2007, but you have to look at the availability of inventory there. Because while maybe that will be the average, I suspect, as I understand it, Larry Silverstein at 7 World Trade Center is looking for $70 or more per square foot for the remaining space in that building.

However, let's look of the difference between Midtown and Downtown in a different way. Let's call that difference $35 a foot. When you look at a law firm, where I think it's fair to assign $500 per square foot as the average space per lawyer. $500 a square foot, times that $35 gap, comes out to $17,500 a year. On an absolute basis, that seems to be a lot of money. But, I think, as a percentage of what partners in major law firm take home every year, it's really not enough to push them to make a locational decision that increases the inconvenience or inefficiency of their operations. That doesn't, of course, apply to all firms. I'm sure it applies to financial services firms. We know it applies to hedge funds, just because they voted with their feet already and are paying much more than that gap to stay in Midtown. But does it apply to ad agencies? Does it apply to publishing firms? Maybe not. Because if you look at 100,000 square feet and there's a $35 per square foot gap, you're talking about $3.5 million a year.

On the other hand, you have to look at that as a percentage of the total cost of doing business. And I don't have access to those numbers for publishers or for ad agencies, but I'm sure that that is a number that they have to be very concerned about. At the same time, there are other options open to them in places like Manhattan, because of the desirability of operating out of that particular location. And it's not only for lawyers and it's not only for money -- for private equity dealers, etcetera. That efficiency, and the ability to bring people together and have all the services together and all the talent together in relatively close proximity to each other, is extremely important to the effectiveness of which businesses can operate.

We looked, by the way -- and I'll just throw out one more statistic, because it was interesting to me. We looked, by the way, at those same numbers for Boston, where 1990 statistics show an average market rent of $30, roughly. And assuming that that projects up for 2007 to $50, you're still only talking about an annualized increase of 3%. So on an absolute basis those numbers sound like a lot. I think if you look at them on a relative basis, they are not as dramatic as you might think.

That's really the only thing I wanted to comment on, because I think Doug has covered the waterfront very well. And we'll leave time both for Mort Zuckerman, who may have some additional things to add, and then open it up to Q&A. Thanks again for being with us. Mort?

Thanks, Ed, and thanks, everybody, for joining us this morning. I think Ed gave you a lot of the basic factors that we think argue well for the continuation of the kind of demand that we have seen in the major markets that we are in, particularly where we are in markets that are supply constrained.

There is very little evidence of any major slowdown. I don't think pricing is the issue, as long as the degree of optimism exists with respect to the economy and with respect to inflation and interest rates. And by and large we just see this market continuing for several years, certainly in New York. And we believe with our sites in Boston, for example, and our suburban sites, we just feel that we are continuing to do what we have done in the past, which is to get control of very good sites in markets that are basically supply constrained. The general macroeconomic environment, it seems to me, is going to be very positive for the next number of years. So we remain very bullish about our development pipeline and about our ability to release our buildings in this kind of environment.

I think I'll just stop there and leave more time for Q&A. Thanks.

Operator, you can open up the line.

(OPERATOR INSTRUCTIONS). Michael Bilerman, Citigroup.

Doug, you shared with us the spread in San Francisco would have been upwards of 76% versus, I think you said, about 25, which represents leases that were signed 12 months ago. Can you just walk through where you think that spread is by market today, and sort of looking out to your 2008 lease roll, how big those bumps potentially could be driving same-store growth in '08?

The problem with, as I said, doing these sort of broad-brush -- giving you a broad-brush answer is it's so dependent upon the actual square footage that is expiring in each one of those marketplaces. But I can tell you that, for example, in Midtown Manhattan the rents that we have expiring in -- it's really not until the end of '08, because we only have one major block at Citigroup Center. And I think those rents are in the mid 60s, low 70s a square foot. And that space could -- and Mort will tell me I'm being conservative -- lease for 105, $110 a square foot in today's marketplace. Again, you're not going to see that until 2009, because the lease doesn't expire until the end of 2008.

Same thing in our major properties in Boston, where unfortunately the lease expirations that we have at the Prudential Tower are not until the end of 2009. I think it's fairly well known that we are actively negotiating some strong leases today. But those leases will not roll until the end of 2009, so we won't see the effect of those until 2010.

And in Washington, D.C., where Ray and Peter Johnston have done a fabulous job of maintaining occupancy, and being two and three years out ahead because that's sort of what the tenant requires, we have virtually no space rolling over. But I think it's fair to say that the rents that we are getting at 505 9th Street, and the rents that we anticipate being able to achieve in the building that we are doing on the George Washington site on Pennsylvania Avenue, we're talking about in excess of $75 a square foot on a gross basis, where today the market rent for second-generation space is in the $55 a square foot range. And there the issue is one of there is a premium for new versus, I guess, some amount of discount for old, even though the old is only five or six years old.

Could I just add a comment to that answer? And that is, you might say, gee, why did you do this pre-leasing? Why didn't you wait? You knew rents were going up. And I have to confess that - and this has been a tradition -- traditionally our strategy, if we see a deal that makes sense economically, we don't go way far in advance of when the leases terminate. But if we see a deal that makes sense economically, we're going to take that deal. And we're not going to look back and feel badly that we didn't wait to because the rents might have gone up another 5, 10, 15, $20 a foot. At times that turns out to be the wrong strategy; at times it turns out to be the very right strategy. And it's the one that we're comfortable with.

It also, I think, speaks -- this is really a different point -- but speaks to the point Doug just made about development. We've said before and we'll say again; we're not in the business to grow for the sake of growth. And so culling our portfolio and replacing it with new buildings is another way which we think -- especially, as Mort pointed out, in a supply constrained market where we can capture sites -- another way of overcoming maybe that conservatism when it comes to leasing space in advance of expirations.

Just to add onto that, if you think about New York City, where I said we don't really have any lease exposure, we are anticipating getting going on this 1 million square foot building. And as I think I've said in previous calls when people have asked the question, what are your return expectations and how are you projecting it, we said that we think that at rents in sort of the low 90s, that -- on average, for the building -- that this is in the low sevens to a mid-sevens kind of return. Do we think that the market today is in the low 90s? No, we don't. And if in fact the market goes to 110 or 120 or $140 a square foot, clearly, we're going to be able to capture the upside over 1 million square feet of space in Midtown Manhattan in that way. Again, unfortunately it's a development property, and you have to be patient in terms of seeing the earnings effect on our income statement, because the building won't be delivered until sometime in late 2010, 2011.

What's going to be your strategy in terms of timing in terms of the full development cycle? How much will you start building before you have a certain amount of pre-leasing? Or are you just effectively now going, and it will come as it goes?

We'll make that decision moment to moment. I think that we are optimistic that we will have commitments before construction commences, in general. If we don't, we will make the decision at that time as to whether we go on a speculative basis or not. And it depends on the individual market conditions.

Have you thought -- I appreciate your comments on the pricing in the market in terms of buying assets and focusing on the development pipeline. Have you given thought and sort of evaluating being a mezz lender or going preferred equity into some of these acquisitions, where maybe you get a higher return, and if there's a default you can come into a position?

We have given thought to that. We've given serious thought to that. And our board has given serious thought to that. And our board has said, do what you know how to do, and let other people do what they know how to do.

Last question on same-store NOI. It was 1.5% relative to 4 to 6 for the year. I recognize last year was a 6.1% comp. Was there anything else holding back 1Q relative to the expectation for the full year?

It's just going to take time, and we still fully expect to get to the 2 to 4%. It's all a question of timing. Quite frankly, we think we'll get a little bit of an enhancement on a going-forward basis from the reduction of the effect of 5 Times Square, because it was a flat number. And it will be out of our same-store going forward.

Jordan Sadler, KeyBanc Capital Markets.

Could you discuss the continued appetite for assets? I know, Doug, in your comments you discuss sort of the EOP portfolio getting a portion to several different buyers. Are you still seeing the same appetite for one-off assets? And maybe just talk about the assets that remain for sale.

Let me just sort of give you -- put something in context, which is just another building -- a site that -- a property that was presented to us as sort of a deal that would -- somebody was looking for some of that clinical preferred equity for, just to sort of answer two questions at once.

We were offered a smaller pre-war Midtown Manhattan building, a building located in the heart of the Midtown market close to Park Avenue, recently. It was a building where the assumption was that you're going to buy the building for $650, plus or minus, a square foot. Current rents in the building are in the 35 to $45 a square foot range. Again, this is a pre-war building. There is an anticipated growth in rents in the projections that the buyer is looking for -- seller, and the buyer who is looking for the capital to provide financing for -- of rents going from -- today, even though the last deal they did was at $45 a square foot, of $60 today, up to about $90 a square foot in seven years. And assuming cap rates remain at 3%, that the building would be sold in 10 years for $1900 a square foot.

The cash flow from that building going to the equity is zero for the first seven years of the deal, because the mortgage is greater and the mortgage rate is greater than the cash flow. That is what we are seeing time and time again in Midtown Manhattan. And if you think about some of the sales that continue to be on the market in a place like San Francisco, it is very reminiscent of those same fact patterns -- somewhere below a 3 or below a 4, certainly, on a current NOI basis, probably zero cash flow and; clearly, below replacement cost, depending upon how you define replacement cost. And we've had that conversation before. And the appetite continues to be pretty significant.

Now, there are fewer and fewer portfolios being sold, because most of the buyers have been breaking them up into smaller and smaller pieces. We have not seen anything come out of the Equity Office Boston portfolio, and we have not seen anything come out of the Equity Office, I guess, Greater West LA portfolio. But presumably those are two major portfolios that will still be on the market at some point in the next year or so.

Let me add one thing to that EOP comment. I think most of you probably know this, but there are some pieces -- correct me if I'm wrong, anybody here. There are some pieces of the Blackstone purchase that have now traded to Blackstone and to two other buyers as part of that transaction. Each one, of course, at a -- as you can sort of parse it out -- at a greater price.

That transaction really repriced a lot of the kinds of assets that we have. Because in fact, most of their New York assets, for example, are not in the same league as ours. Yet the cap rates at which they sold were probably the lowest that we have seen. And I think that is going to work its way through to the valuation of assets such as the ones that we have.

Thank you. In terms of acquisitions, Doug, I think you mentioned that you are 1031-ing the Long Wharf Marriott proceeds. Was that into Kingstowne or something else?

It was actually -- part of it was into the Cambridge property that we bought in, I guess, November, December of 2006.

Lastly, can you give us the most current expectations for the upcoming roll in Princeton?

The largest block of that 275,000 square feet is 130,000 square feet which rolls in August of 2007. It's the Washington group that is not actually occupying the space. They have (technical difficulty) space. We anticipate that the subtenants will be moving out, and we assume that the building will go dark. And we do not have any current leasing prospects for that asset.

Lou Taylor, Deutsche Bank.

Doug, you mentioned that you don't have acquisitions in your guidance. But just as you look at your pipeline and your landscape over the next six to nine months, what's your best guess in terms of redeploying the Times Square Tower, 5 Times Square -- 5 Times Square proceeds?

Honestly, I think we are going to be very hard pressed to be able to identify significant acquisitions for that capital over the next six to 12 months. If the market continues to perform the way it's performing, that's the case. If there is a major event and there's a change in liquidity, this company has some fantastic opportunities to take advantage of its balance sheet and its ability to borrow money, and take advantage of those opportunities if they bear some [disintermediation]. Without that happening, I think, we're going to be the (inaudible) buyers from a return perspective.

So, when do you think you will decide on a special dividend? Will you just basically wait until the very end of the year to make that call?

Our board has not discussed that as yet, except in very general terms. So I don't want to speculate.

Last question. In terms of just some debt maturities, Doug, that you have in '08, do you have any plans to do anything early on those in '07?

We are looking at those right now. There's only one of significance that we might be able to do something with. It's the Embarcadero Center 4 property. But we just haven't worked through what all the various issues associated with being able to prepay that and remove it from the encumbered portfolio.

John Guinee, Stifel Nicolaus.

Can you reconcile your $501 million construction in progress on your balance sheet to pages 49 and 50?

It's Mike Walsh. That includes both of our land acquisitions at 250 West 55th and Russia Wharf, which aren't fully in development at this point in time. So they're not in the back of the supplemental.

Great. Okay. Second question. This may be for Ray or Frank [Hyre] in your D.C. office. Expanding a little bit on how tenants operate, how they think, can you give us any comment on square footage per employee? Also, the greater degree of efficiency in the state-of-the-art 2008 building versus the mid-'90s building. And then the third point would be how tenants are reacting and how you're able to price in excess TI dollars above building standard.

I'll let -- I think Peter Johnston, who is running our Washington, D.C. office, and has been building buildings for us for many, many years, is probably the best person to answer that question on the efficiency. So why don't we start with that.

As to the efficiencies, there's no question that the tenants are looking to squeeze more employees into less space. Really going back to something Doug said earlier about you have to drill down into who the user is. If it's a law firm, they're still operating fixed partition offices. It's about how many lawyers can I get around the perimeter. And the basics are that you can't really put an associate or even a partner in something that's smaller than a 10 by 15 space.

So in terms of generating more efficiencies there, it is user specific. But for instance, in the 505 project, where we've got two law firms, they've gotten it down about as tight as it's absolutely going to go. The older-generation buildings, at least in this market, were all done on, for instance, a 20 by 20 column grid. Developers, ourselves and others have all gone to longer-span construction when we know we're going to be marketing to users with systems furniture. So it's really specific to who the user is; is it a suburban building, is it a downtown building.

With regard to the comment on, or the question about above-market TIs, we are -- depending upon the credit of the tenant and the amount of security that we are comfortable requiring, we will agree to amortize some amount of improvement dollars into a lease. As an example, if the standard work letter in a building in Boston is $55 a square foot, and we have a law firm that's prepared to provide us with 100% security and pay us 8%-plus for amortization of another 15 or $20 a square foot into that asset, we will do that. There is a point where we are not necessarily a bank. And so, as long as it's sort of within the context of a market deal, we're prepared to do that. But we're not in the business of making secured loans to technology companies that potentially could be as much as 30 or 40 or $50 above a standard market package.

Last question. Where does the Fort Meade site and the George Washington site show up in the

Land held under -- I guess it's on our second-to-last page?

On page 50.

Page 50.

You must have fallen asleep before you got to page 50. I can't understand that.

We don't see the Washington D.C. site. That's the problem. Or the NYC 46th Street.

That's because they're contracts. They're not necessarily land, so they're not on our balance sheet. It's hard to put an option or a contract on our balance sheet.

Ross Nussbaum, Banc of America Securities.

I'm just sort of curious. Has the Board sat back and considered looking at doing a levered recap, given how low leverage is right now? Is that an option?

It's an option. I don't think we've really considered it, but it's always an option. On some level we are ourselves surprised at the level to which we are sort of underfinanced. But we have a huge development program, and we are sort of focused on that. We have not really thought seriously about the concept that you are asking about.

And part of that, although it's not the whole answer, is that, as Doug said, we don't mind having availability to do things on our balance sheet at this particular point in time.

Second question -- Ed, I appreciated the comments you made on the affordability issue, because that was actually going to be my question. I guess as you may have heard, Sam Zell was out late last week at a conference telling -- I think he actually directed these comments to Mike Fascitelli -- that he thought 40% of New York office users couldn't afford paying $100-plus rents. And obviously, your data would refute that. I'm just wondering, where do you think Sam is coming from when he states that?

Sam is a brilliant guy. Sometimes, though, his statements are expectations that come to him in the night. So I'd rather not comment on that.

I left out his colorful language. The last question I have is, any thoughts on 280 Park with Istithmar's decision to flip it so soon after they bought it from you?

I do think it probably justifies the price that we sold it to them at. And I guess we made a pretty good sale.

I'm just curious, if you've got a relationship there, what would have run through their head to cause them to flip it so quickly after (multiple speakers)

They were selling a number of their assets under the guidance of Andrew Farkas, who, I think, it is fair to say was not totally invested in this building. He had nothing much to gain or to lose. So, as I understand it, it was he who guided them to the sale. And who can make those -- who has those insights? Somebody put it that way. But we were very happy to sell the building to them at the price we got. We, as Ed says, I think, are comfortable with the price we got, to put it mildly. And I'm sure they are too. It's a nice way of saying we have no idea what they're doing or why, and we're very happy that they bought it from us. And I'm sure they're very happy they bought it from us.

David Cohen, Morgan Stanley.

On the guidance, Doug, you reviewed some of your assumptions for '07. Can you just -- is the higher guidance strictly from -- mostly from the convert, or can you outline in the pennies where the increase is coming from?

Really, really big picture, you take the guidance we had previously, you add the convert in, and you reduce by the dilution of -- the short-term dilution from the Long Wharf Marriott and the Newport asset sale, you add in a little bit for the Kingstowne acquisition, and I think you get there.

And you have a $2 billion cash balance; obviously, a lot of that will be for special dividend. But what are you going to do with the rest? Is that just going to be a slow draw from development, or is there something else that we should look out for?

I think that the Company's, I guess, perspective today is that the money is being invested in high-quality, short-term securities that we hope we have the opportunity to deploy the capital as soon as we can. But we're not going to use the money to purchase a long-term asset on unsatisfactory return, or something that hampers our growth rate.

Are you guys going to participate in the residential component of Russia Wharf?

We are participating as of today, because we do not have a partner, or do not have any current expectation of bringing somebody in in the short-term. I think we will determine whether or not the climate is best for us to execute that, if the execution of that may get changed in terms of our review of the plans, or there's somebody who comes in and says they want to do something that may require -- be more in the form of an ownership/condominium type of a transaction, where maybe it's not that suited for us to execute. But we haven't made that decision.

Last question. With CMBS spreads widening, do you think that will in any way impact cap rates over the next couple of quarters? Are you seeing any of that?

I will tell you that I am the first to be shocked at the amount of financing that is being able to be provided for both the portfolio sales as well as the individual sales that are (inaudible). I remember back six years ago when we did our CMBS transaction for 280 Park Avenue, and we were getting pushback from the rating agencies about a loan per square foot of more than $225 a square foot. And today, CMBS transactions, including the various subordination levels going all the way up to the mezz, are in excess of 900 to $1000 a square foot. And relatively speaking, those spreads are still very, very tight. And given that the short-term rates are higher than the long-term rates, to the extent that you can lock in a treasury rate, you can still get financing with a pretty high coupon on it in terms of a spread for under 6.5%. So I don't -- it doesn't appear to date that it has really affected the significant larger asset sales. I'm sure for the marginal $50 million suburban office building, where the buyer is looking to finance as much as possible because they don't want to put the equity in, maybe it's affecting things. But it's not affecting the major assets that sort of we play with on a day-to-day basis.

I just came back from a conference in Los Angeles, which had a lot of international investment groups represented. And the appetite for U.S. real estate is just beyond anything I've ever seen, including what we have experienced over the last several years. So I will say to you that in that sense, I still think there's a huge demand for high-quality American real estate. A lot of people want to get their money out of places where they have their main assets below ground where they can't get them out. So they're trying to get their financial assets. I've never seen anything like it, to be honest with you.

James Feldman, UBS.

Can you comment a little further on market conditions in D.C. and the suburbs there, I guess, versus your expectations?

I'll say a couple of words, and then I'll let Peter chime in. Our expectations in Market Square at South of Market, which is where our only real Northern Virginia inventory is -- and we don't have any other suburban assets that have any vacancy in them right now, which is the new development site -- we have exceeded our expectations. When we started that project we were looking for rents in the low 40 to $41 a square foot range. And we are achieving rents that are in the mid-40s and with higher bumps on an annual basis than we expected. I'll let Peter comment on how other people are doing and what's going on in the Northern Virginia market, because there is a lot of construction underway.

There is. And again, it goes back to the actual specifics. Of the six or seven additional suburban buildings that Doug mentioned earlier in his remarks, they're located outside of Reston Towne Center. And they may be as close as a third of a mile, and they may be as far away as two miles. And the rent differential is about probably between 8 and $10. The bulk of those buildings have essentially no leasing. There is one completed building that's done a two-floor deal. The other five, six buildings, there are no deals that I am aware of that have been done. It just shows again the premium that people are prepared to pay for the amenity base that is in Reston Towne Center and the established nature of that development.

We have -- one of the deals we did in the complex we're building, Rolls-Royce, the lease is signed. They were a tenant in Phase I of Reston Towne Center. They were one of the original tenants. They moved out to a suburban park, probably a mile or so South of Dulles Airport, probably five miles, six miles from the Towne Center. And they moved back and still have a couple years left on that lease, because the competition for employees is so great with the unemployment that exists out in that region that they just felt like they had to make that decision.

TIs and LCs are lower this quarter than they were in '06 on average. Is that sustainable, this [2560]?

It's very, very dependent upon the market. So, you see 100,000 square feet of leasing in New York City, and you're going to see numbers that are significantly higher. Not because the TIs are any higher but because the rents are higher and the brokerage commissions are significantly higher. I've always said that I think a good run rate on average, if someone is trying to sort of calculate an AFFO number for us, is somewhere in the high 20s, low $30 square foot range on average for the portfolio.

Kind of bigger picture, can you talk about the opportunity set in BRAC and even in life sciences, and kind of what the relative returns are and what the competitive landscape looks like over the next several years, what your appetite is for it?

We have a strong, strong appetite for the BRAC-related things. Peter can describe the sites that we picked up in Springfield as well as the stuff in Anne Arundel County. We have been searching and scouring the earth for land with which we can build quality office space for contractors associated with the forts for many, many years, even earlier than the BRAC Realignment Closure Act being enacted, and have been struggling to find them. And have finally after some perseverance found these two opportunities, one in Virginia and one in Maryland. And they have some pretty significant upside from them.

From an economics perspective, it's a question of what you're building. If you're building a -- I guess it's defined as a skiff. And a skiff is one of these -- and I'll let Peter describe what's in there in a minute -- you're talking about rents that are in excess of $100 a square foot, where your costs, hopefully, are going to be somewhere between 8 and $900 a square foot. We'll explain what that means. If you're building traditional office space, you do have to be cautious about the security issues associated with that office space. So that has some added costs associated with it. But the land positions that we are purchasing are for developments that we hope, if we're successful in leasing them at the kind of rates and the kind of times it typically takes us to do one of these buildings, or to do it on a prebuilt basis -- given the lack of available other alternatives, given that we haven't been able to find the land -- that we expect returns that are in double digits.

Peter, you may want to explain the skiff idea.

The skiff idea is simply the deal that we're looking at at Annapolis Junction. Fort Meade is home to the NSA. And the NSA, in the pre-9/11 world, was host to a whole lot of the government contractors inside the actual confines of that base. Under the BRAC, and because of the absolute explosion in growth in those defense contractors and, more importantly, in the need for NSA to have their own government employees, they're forcing these guys off the base. And through a relationship that we developed with a local developer down here that has a lot of land holdings, they controlled a site immediately across the Baltimore Washington Parkway from the base that we are venturing with them on initial takedown of about 430,000 feet of developable land. And the part that Doug referred to, we think, has the capacity long-term to be upwards of 2 million feet in total.

In Springfield, it's not just the supply-constrained nature of that market. The true advantage, or another true advantage of that site, apart from its proximity to Fort Belvoir and the proving ground down there, is the fact it quite literally abuts the last stop on the metro, and also shares on the Virginia rail express line. And for anybody who has had the pleasure of driving up 95 south of Washington, they know that there's an enormous commuting pattern there. So from a transportation perspective, it's equally strong if not better than -- the fact that it sits abutting the base.

Quick comment on the life sciences question. We have looked at, especially in the Boston area -- because it's become such a significant factor in our economy, we've looked at a number of life sciences possibilities, laboratories -- to build laboratory space, etcetera. To date, both Alexandria and BioMed have been much more aggressive about that in terms of pricing, and probably because they have a certain comfort level with that specific kind of user that we don't have. But we still are very interested in that.

One thing I will point out, however, is that the office space generation from life sciences is much smaller, obviously, than somebody who is probably 100% office space, even a high-tech firm. And so, a lot of that space is owned by the companies themselves. Novartis, for example, has made a mammoth commitment in Cambridge. And fortunately it's been very helpful in general terms. But they are building stuff for their -- by themselves and will continue to own that. And so we haven't really broken into that market as yet.

We have participated on a build-to-suit basis with the Broad Institute. And on a preference basis, that is the route to go versus the speculative route, which is a very different game. But as Ed mentioned, there just is a very limited amount of sites in the places that we would like to be in to do the life sciences in Cambridge.

And then your development there still gets you to your double-digit returns also?

It would. The Broad certainly did. Yes.

Ian Weissman, Merrill Lynch.

When you think about your New York City developments, would those be green-lighted as spec developments?

As I said before, we like to make those decisions when we have to. And so -- and we don't have to today, and we are working with a possibility of pre-leasing. And so, if we get significant pre-leasing, we'll never have to make that decision.

In light of your comments about non-financial firms shying away from triple-digit rents in Midtown Manhattan, what do you foresee that being as far as a typical tenant for that building? Are you targeting the financial firms?

We don't expect that the profile of tenants in that building will be significantly different than the profile of tenants that have already occupied high-quality office towers in Manhattan. And that includes financial firms. And when you say financial firms, there are a whole bunch of different kinds of firms that are involved. Lawyers, other service providers. But then, look at what we did at 5 Times -- at Times Square Tower where Ann Taylor is a major tenant. Clearly, that's a different kind of a firm, and they decided that -- now, the rent was somewhat lower than it would be today, obviously, or maybe significantly lower. But nevertheless, they decided that being in that building at the heart of Midtown made sense for them. And you never know who else might make that same decision. We still think that there's a great advantage to tenants to be in a location in Midtown Manhattan, even if they're not financial service firms or lawyers, etcetera.

Including land costs, what are projected development costs?

Right now our official word is somewhere around $900 million for that building.

For 1 million square feet.

David Harris, Lehman Brothers.

Mort, I wonder if I could just go back on a point you raised about the level of overseas investor interest being unprecedented. Do you have any sense in your conference or from your other conversations how currency-sensitive that is?

With -- that was a big part of the conversations, I might add, that when they see the value of the dollar going down, or having gone down to where it is, it really enhances the attractiveness for their investments here. It certainly does from people for the people at least that we spoke to. The general feeling, I have to tell you, is that in terms of appreciation, political environment, economic environment, just general sort of freedom of the market to go in and out, their preferred location for their international investment funds remains in the United States, remains exactly in the major cities, and particularly in the cities that we are involved with. I was inundated at this session. I didn't even know what to say sometimes, although I often figured out something I could say. It's just extraordinary, the level of demand; it has not abated at all.

Is this coming from new countries, or are we talking about existing entities or countries that have shown interest in the past, such as European pension funds? Are we seeing more interest out of Middle East, more interest out of Asia?

The interest out of the Middle East is -- it's just -- I think it's insatiable, basically, at this point. It's not just that they have so much money; it's just that they anticipate they will continue to have huge flows of funds. And they want to get the assets invested out of the country, for all kinds of reasons. And it's not their only investment, but they are looking for long-term value creation. And they understand real estate. It is something that is tangible. And as I said, I was just overwhelmed with the level of interest, and the willingness to be, shall we say, very competitive in terms of buying assets. And I will tell you that I would say two-thirds of them said to me, we would like to have the first crack at it before you go on the market. We'll be very aggressive if we can do it quietly.

It's a terrific hedge to filling up your SUV, isn't it, Mort?

That's the way I look at it.

Michael Bilerman, Citigroup.

Doug, just on cap interest and the construction in progress, you're at about $500 million today, 4.3 million in cap interest. Where does that spend track during the year, and then the effect onto cap interest?

I don't think there's a significant ramp-up in calendar year 2007. I think when you get into 2008, assuming we are under construction with Russia Wharf and/or the 250 West 55th Street building, that number will ramp up very significantly.

It's fair to say, then, at that point, given that your cost of debt is higher than where you're carrying the interest income, that as you spend that capital [it] will be accretive to the bottom line.

That is a true statement.

Just on the secured debt, do you have a desire to unsecure more assets, or the big maturities that come up in '08 you'll look to refi and try to pull out as much proceeds as possible, going a leverage route versus a potential sale route?

I guess I would answer the question the following way. Hopefully we'll have a use for the money. But if we're going to use secured debt, we're going to use -- we're going to finance in a more aggressive way those assets. That being said, because we are so underleveraged from a current secure debt perspective, we could dramatically increase our total leverage and still unencumber additional assets.

I would now like to turn the conference back over to management for any closing remarks.

We thank you all for your participation, and hope to have as positive a response for you when we speak again in 90 days. Thanks a lot.

Thank you, sir. Ladies and gentlemen, this concludes the Boston Properties conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000, or 800-405-2236, with access code 11087179 followed by the #. We would like to thank you for your participation. You may now disconnect.