波士頓物產 (BXP) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Boston Properties third-quarter 2007 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS)

As a reminder this conference is being recorded today Thursday October 25, 2007. I would now like to turn the conference over to Miss Claire Koeneman. Please go ahead, ma'am.

Thanks; good morning everyone. 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 sections of our website at www.bostonproperties.com.

Following this live call an auto webcast will be available for twelve months in that same section. To be added to the 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. Finally, the Company does not undertake a duty to update these statements.

With all that, with us today I would like to welcome Mort Zuckerman, Chairman of the Board; Ed Linde, Chief Executive Officer; Doug Linde, President and Chief Financial Officer; Ray Ritchey, Executive Vice President and National Director of Acquisitions and Development; and then also during the Q&A session section, Mitch Norville and all of the regional management team will be available. So without further ado, I'll turn the call over to Doug Linde for his opening comments. Doug?

Thank you, Claire. Good morning, everybody. I thank everyone for the congratulations on the Red Sox win last night. We appreciate all the calls we have gotten this morning. As is traditional this time of the year we're going to start talking about 2008 and try and give you some baseline earnings assumptions and some general guidance. We will also provide you an analysis of the third quarter, give you some sense of the operating trends we're seeing in our markets, talk about our investment activities and our development.

Mort is going to spend a few minutes talking about the economy and our perspective on what's going on in particular in New York City. But before I get into the details, I thought I would begin with some perspective on the current state of the credit market and the impact it is having on our business.

Itseems like we can't have a conversation with anyone today without getting quickly to the question of debt availability and its impact on property valuations. To put the current state of the financing markets in perspective, when we completed our major large asset acquisition from 1997 to 2001 -- that's when we purchased the Embarcadero Center, and the Prudential Center and a number of our buildings in Manhattan. We financed 60 to 70% of the purchase price with club loans which were really provided by insurance companies and pension funds. Those were secured mortgages.

Each of the acquisition financings was sized to support positive debt service coverage including amortization even though each of the properties had below market leases with near to medium-term rollover which I think is often the characteristics of the properties that were being sold in 2005, 2006 and 2007. During the last few years, the real estate debt markets and in particular those for the large assets, migrated from those traditional lenders and became highly dependent on the CMBS market.

As operating fundamentals demonstrated continued improvement, leverage levels increased, credit spreads narrowed and underwriters accepted prospective cash flows assuming increased future market rents in place of actual cash flows at that time. Lending got to the point where current cash flow no longer needed to cover debt service which more recently has excluded any amortization.

It appears, at least for the moment, we have jumped back to 1999. The phones of the traditional insurance and pension fund lenders are ringing off the hook in the face of CMBS market where loans are now sized with the minimum current debt service coverage of 1.15, significantly wider spreads, daily repricing, and amortization as a prerequisite. Investment-grade CMBS proceeds if you can get a bid are probably 60 to 65% of the levels available a year ago.

If a major asset were to be financed today, the CMBS investment-grade market would make up a much smaller and more expensive piece of the capital structure even in the face of the treasury rally. The mezzanine capital, which got as cheap as LIBOR plus 250 in some cases, would probably be priced at between 10 and 15%, is likely structured as an accruing or cash flow loan and total debt might only get you to 80% of the purchase price.

There is a universal recognition that impending maturities on recent acquisitions where 90% or more of the financing came from the CMBS debt and the mezzanine financing markets are facing a significant refunding gap. Does this mean that well capitalized potential buyers like Boston Properties will be swamped with attractive acquisition opportunities?

The quandary as we see it is that even if you believe the cash flow from a property might double in ten years, the debt service and other capital costs necessary to get to that higher cash flow nirvana coupled with the accrual on the mezzanine financing means that any equity probably becomes a Zero Coupon Bond. Borrowers, brokers, bankers and other interested parties are feverishly looking for that patient long-term capital. Maybe it's the petro dollars, or the foreign buyers taking advantage of a weak dollar to fill that capital gap.

If the existing financing, however, is nonrecourse, current owners may have little incentive to infuse their own equity or sell the assets for less than the current debt. It may even be the case that currently some of the properties are not worth quite what was paid for them over the past few years.

To date, no one has been prepared to recognize any losses but we are just beginning to see these events play out. If debt is more expensive and more equity is required to complete deals, then Boston Properties which has very low leverage and access to multiple sources of capital is very well-positioned to take advantage of these new opportunities as they arise. But we're not going to be in the market for properties which can't be underwritten rationally and are still priced at inadequate yields.

The turbulence in the credit market, which has resulted in some layoffs in financial services firms has had little direct impact on the operating fundamentals in our markets. In fact, from a leasing perspective, the last few months have been some of the most active and successful in the Company's history.

Now let's start with New York City. One might expect that in New York with its strong reliance on the financial services sector that we would have seen some drop off in activity. We know that a moderate headcount reduction from the Wall Street firms has already occurred. As we've seen in the newspaper today it will continue as the year comes to a close.

However, when you consider that space requirements in excess of 150,000 square feet are typically two to three years ahead of the actual need and in the case of larger organizations can be three to five years in advance, you can understand the continued strength of demand in Manhattan. The availability rate in midtown which includes space that will be available in the next twelve months is 7%, the lowest level in over seven years.

And while it's fair to say that the overall growth in market rent has certainly moderated,and this is in a context where market rents have increased in excess of 50% over the last two years. This is the reason that activity at our 250 West 55th Street continues to be very strong. We are in lease negotiations or later stage letter-of-intent discussions with a number of tenants ranging from 150,000 square feet to 450,000 feet; that is per tenant. Demolition is underway. We have awarded our curtain wall and excavation contracts and we expect to begin digging in December with an anticipated first delivery of space at the very late portion of 2009 or early 2010 with occupancy by the end of 2010.

Going to Boston. To date, the impact there from the credit crisis has been limited to the hedge fund industry where we have a handful of funds occupying very little space and some have had major losses or exited the business with little impact on the market and where other funds continue to report good results. It may be cold comfort but over the past decade the loss of financial services jobs in Boston from the consolidation there has really muted the impact of a major slowdown in the financial services industry.

In fact, our Boston team has had an exceptionally busy quarter. Since our last conference call, we executed a 413,000 square foot lease with Ropes & Gray who is going to occupy 85% of the Prudential Tower Gillette space when it's vacated at the end of 2009. We completed two leases totaling over 250,000 square feet with Akamai covering about 200,000 square feet of our 2009 rollover in Cambridge. And we recently signed a 61,000 square feet lease with Google for their Boston regional operation.

We are in active discussions with tenants for Russia Wharf where we have begun staging for demolition and we expect to begin active construction by the end of the first quarter of2008 with delivery of that building by the first quarter of 2011.

The activity in San Francisco over the last 90 days seems more reminiscent of 1999. We completed 22 deals including two leases that totaled in excess of 225,000 square feet. The largest tenant in that group will absorb all our significant vacancies in the EC2 in the middle of 2008 and has agreed to two additional floors when those leases on those floors expire in 2010.

Much has been written about the strength of the technology sector and we continue to see very strong growth in rents on the peninsula. And as described in our press release we're actually negotiating to purchase a redevelopment site in North San Jose that will support 1.4 million square feet of new high quality office space.

Over the past few quarters we have described the hard-nosed approach of the new owners in our market and the attitudinal change with which they are conducting lease negotiations. Tenants are now being quoted rents in excess of $140 a square foot for high-quality space in midtown Manhattan, $80 or more for space in the Back Bay in downtown Boston, $70 for space in DC, $50 for space in Reston Town Center and over $100 for the top of buildings in San Francisco.

And it continues to be true that net effective rent calculations, which account for the transaction costs have taken a back seat to high space rents. Everyone is putting pressure on base rents today.

On the portfolio level, we continue to see an improvement in market rents. At the end of the third quarter, our mark to market had moved from $8.46 to $8.80. While the growth continues, it has slowed and we expected this from about 25% during the first portion of the year to just over 4% this quarter. Our imbedded growth works out to about $1.63 per share.

Our average portfolio market rent today stands at about $53.16 which is up about 9% from the beginning of the year. Now keep in mind when you think about the mark to markets and the rollovers that we have to get to that space before we can actually achieve the increase in rents.

In 2008, we have office rollover about 1.4 million square feet and the average expiring rents on that space is about $38. We estimate our mark to market on this space is about $10 more or approximately 27% higher than the expiring rents.

Our leasing statistics this quarter probably deserve a little bit of explanation. The number for Boston obviously pops out. The reason for that is that in it includeds 60,000 square feet plus of space that Boston Properties currently had occupied and is currently occupied by a new tenant at 111 Huntington Avenue.

We obviously didn't pay ourselves rent and therefore there is a 0 in the number for the previous tenants in that space. If you exclude that space, the total portfolio increase is still 22% on a gross basis and 33% on a net basis.

Now if you look at the New York City statistics, I think it really does illustrate the dramatic rent increases we've seen over the past few years. 150,000 square feet of those leases were either with new or expanding tenants and the bulk of those leases were negotiated during 2007.

And if you look at San Francisco, things do appear to be little light. And that's because a number of those leases were signed back in 2000 which was again the height of the market and where we have done renewals with the same tenants but with virtually no tenant improvement costs.

So again we look at both tenant improvement costs, base rents, free rent, and put it all into the mixing bowl when we determine what we think is an appropriate deal. We're not just looking at face rents because you've got to think about those statistics in that way.

We are currently just a hair under 94% leased across the portfolio. A little more than two years ago, we made a strategic decision to sell individual assets and to focus our investment energy on development, a core strength of the Company. This quarter we closed on the sale of our 685,000 square foot Democracy Center asset for $281 million which is just over $410 per square foot.

And we are negotiating a sale agreement on one additional portfolio of DC suburbanproperties, which we actually expect to get signed this morning for approximately $125 million and that sale is expected to close before Thanksgiving. With the addition of this sale, we will have sold over $4.25 billion of assets over the last two plus years.

We entered 2008 with a very active development program of approximately $2.1 billion. This includes only those projects where we are either under construction or have signed leases and will be commencing construction shortly. We would point you to Page 49 of our supplemental where we summarize all of those activities.

Some of these projects will have yields in excess of 10% while we anticipate the larger CBD projects like Manhattan and Boston to have yields of closer to 8%. We don't want to go into the specifics of each project on a call, but we would suggest the following in terms of our in-service investment deliveries by the end of each calendar year so you can have some perspective on how this is going to hit the bottom line.

In 2008 by the end of the year we will probably have delivered $300 million of development. And these are all incremental numbers on top of the previous year; in 2009, another $225 million. In 2010 when 250 West 55th Street comes online, $1 billion and 2011 another $525 million. We would suggest if you are trying to rough out a contribution from these properties that you use a 9.5% yield for the 2008 and 2009 deliveries and an 8% yield for the 2010 and 2011 at this point in your modeling.

Now let me get into the specifics of the third quarter. Our third quarter FFO was $1.15, $0.01 above our guidance. However, if you back off the $4.5 million expense in our G&A for the abandonment of a development pursuit cost we would have had FFO of $1.18 or $6 million more or $0.04 more on a per-share basis than what our guidance was.

The positive variances for the quarter included $1 million of higher fee income which is due to a leasing commission we earned at 280 Park Avenue as well as some greater work order profit in New York City. Our Cambridge Center Hotel was $400,000 higher than our budget. The combination of higher interest income from slightly higher rates on our cash balances which is due in no small part to the liquidity issue surrounding the financial markets in the middle of summer and lower interest expense from the early prepayment of $130 million at Embarcadero Center at 6.79% contributed about $550,000 of positive variances.

We earned $1.25 million of unbudgeted rental income, the largest portion of which stemmed from a $400,000 holdover payment from a tenant in Princeton. We also had $310,000 of percentage rent from the portfolio and early rent commencement of about $425,000.

Finally we had operating expense savings from a lower energy cost and deferred R&M expenses of about $1.3 million net of reimbursements. So when you net all those positive results against the charge we ended up about a penny above our guidance.

Looking forward, if we start with the fourth quarter, our property level NOI will be increased by the contribution from 505 9th Street which is the first of those development projects that were in that supplemental which was placed in service on October 1. We placed 75% of the building in-service with an initial GAAP NOI yield of 11.5%. Property level to debt will be a $130 million loan which was prefunded and bears interest at 5.73%.

We expect a 1% increase in our same-store fourth quarter over third quarter and a 2.5% increase if you look fourth quarter of '06 to fourth quarter of '07. Our straight-line and FASB 141 adjustment is going to be about $9 million for the fourth quarter, similar to what it was this quarter.

The other changes in the portfolio for 2007 include the $125 million property sale which is expected to close at the end of November. This sale netted interest earned on the proceeds will be dilutive by about $0.02 per share on an annual basis. But the fourth quarter impact is pretty negligible.

The Cambridge Marriott is expected to contribute between 3.5 and $4 million in the fourth quarter and third-party fee income is going to be somewhere between 3.5 and $4 million. The decrease again between the third and fourth quarter there is again due to that leasing commission that we received at 280 Park Avenue this quarter.

Interest income is going to be between 23 and $24 million, slightly lower than the third quarter due to the repayment of that $195 million mortgage debt and the offset from proceeds from asset sales. Interest expense is expected to decrease to between 67 million and $68 million.

Our G&A for the fourth quarter should run between 17 and 18. And if you throw all that stuff into the mix we expect fourth quarter funds from operations to be somewhere between $1.18 and $1.19 bringing full year '07 to $4.61 to $4.62.

Now talking about 2008. This time each year, we are in the midst of our property level business plan. Just so you have a perspective on what that means we create space by space revenue projections for our vacant space and our 2008 rollover and we use that as our base for our 2008 forecasts.

When we review the granular property level information, it becomes clear that the location of our existing vacancy today and the rollover is concentrated in our least desirable lower margin space, which has a much reduced potential impact on our 2008 results. It's really a question of where the rollover is and what it contributes.

So let me give you an example of that. If you think about New York City, the only rollover we have in New York City where rents are over $100 a square foot in all of our property in each one of our assets is only 60,000 square feet and it doesn't expire until August.

Contrast that with 265,000 square feet of vacancy in our Bedford/Billerica properties in the north of Boston where rents today are only $18 gross and 240,000 square feet of vacancy at our Tower Center property in Brunswick where tenants are kind of hard to come by and rents are only $29 gross. So when you think about that you could have a perspective on the same-store numbers that we're going to talk about in a few minutes.

Our only significant CBD rollover is at Embarcadero Center where we are relocating a tenant from 100,000 square feet in Embarcadero Center 3 to 85,000 square feet in Embarcadero Center 4 in March. So that really will explain the same-store numbers when we get them as I said.

Comparing our same-store portfolio from '07 to '08, we will have sold over $1.9 billion of properties with 2007 Funds From Operation contribution before interest expense of approximately $26.5 million, with $1.5 million of that is coming from the hotel. So that's what you need to backout of your numbers as you look forward into 2008.

Without any increase in our portfolio occupancy, we expect portfolio results after adjusting for sales to grow between 2.5 and 3.5% in '08 on a GAAP basis and between 5.5 and 6.5% on a cash basis. Included in the GAAP number are straight-line rents of about 30 to $35 million including the delivery of South of Market. We are budgeting $1 million dollars per quarter of termination income as we had done this year.

Our 50% joint venture interest in 505 9th Street came online on October 1. In April of 2008, we will get to a full run rate on that development. We should begin seeing contributions from 77 CityPoint, South Of Market in Reston and our One Preserve Parkway in Rockville starting in the second quarter. We estimate $150 million will be placed in service by the end of the second quarter and another $150 million by the end of the year of 2008.

Interest expense for '08 after adjusting for the repayment of debt during '07, the full year of our convertible debt, the increases from placing new developments in service, anticipated the refinancings and an increase in capitalized interest as we ramp up our development will be between $257 and $262 million. Now one accounting minutia point to bring up.

In our press release, we highlighted the potential effect of APB 14-a which affects the calculation of interest expense from our convertible debt offering. This is a non-cash accounting adjustment which we will call out in our supplemental earnings package should it be adopted. We expect it will be adopted sometime at the end of this year effective for 2008 and our net interest expense will be increased by $0.13 to $0.14 in 2008 and therefore the guidance we're giving you today will be lowered by that same amount.

We anticipate making a special distribution equal to the gains from our property sales in combination with our ordinary distribution in January. The Board has not yet declared the exact amount or timing of the dividend but for modeling purposes, I would assume about $810 million or $5.70 per share.

This will reduce our interest income by $37 million in '08 since we will not maintain cash balances comparable to this year's past January. After the special distributions, the $125 million property sale and the acquisition of the North First Business Park land we expect to have a cash balance of about $840 million at the end of January.

Our G&A expense is anticipated to run between 70 and $72 million. A significant portion of the increase stems from the ramp up of that being on our long-term equity comp program. Capitalized wages in that number as a deduct are between 10 and $11 million in '08.

Our third-party property management and development fee for '07 is expected to be between $415 and $416 million and we assume our contribution from our hotels will be about $10 million.

We will have distributed $13.60 in the form of special dividends from gains on sales over the past three years.

Our decision to sell assets, make these distributions and shrink the Company's asset base has the effect of dampening our year-to-year earnings growth in the short-term. We have made the decision to return capital to the shareholders with the result of lowering our earnings by positioning our development pipeline to have a much more significant impact on the future growth of this Company.

Had we completed 1031 exchanges in connection with the property sales into property that yielded as little as 5% on a GAAP basis, we would be reporting an incremental funds from operation of $0.68 per share for '08. Instead when we consolidate the assumptions outlined over the last few minutes and include an assumption of the dividend, in January of '08 our funds from operations guidance for 2008 is between $4.62 and $4.72.

While our 2007 to 2008 funds from operations appears flat, remember we're making a sizable distribution in January. Had we reinvested this at only 5% without any leverage on those dollars our midpoint earnings growth would be 7.6%.

Our development activities continue to grow and we will continue to focus on development though perhaps with the strength of our balance sheet we will be able to take advantage of some of the situations that arise from the changes in the credit markets to make selective acquisitions that create meaningful value. Our current development activities will have a modest contribution in '08 but in 2011 when we have $2 billion plus in service, the development pipeline will have a much more powerful contribution to our growth.

I just want to finish my comments with a couple of remarks on our CFO search and the management changes announced in the press release. After consultation with our Board, we decided to hire a search firm to uncover the best available external candidates with REIT experience as well as candidates with finance and/or accounting backgrounds. Our goal was to determine if there was an external candidate that might bring a unique skillset and perspective to our existing management team which already includes two eminently talented and capable internal candidates with the highest professional capabilities and ethical standards, Mike Labelle and Mike Walsh.

The search confirmed the suitability of both for increased responsibilities at Boston Properties. Mike and Mike -- the two Mike as I call them -- have been working together with me for almost eight years and the difficulty I face at the end of the day was that I couldn't appoint two CFOs. Many of you know and appreciate Mike Walsh in his capacity as the primary contact with the investor and analysts community. He will retain those responsibilities and also take on managerial oversight of our financial reporting and accounting.

Mike Labelle, who many of you started to meet over the past few years at our NAREIT and other investor events has been the Company's primary contract in the lending world and with the rating agencies. He will become our CFO in November. Mike has been executing our day-to-day capital raising for sometime and we know he will quickly establish a strong relationship with the Street. With that, I'm going to pass the call along to Mort.

Good morning. I'm just going to comment in general about our own assessment of the economy and in particular our own assessment of the real estate economy and the office real estate economy. Obviously, we all know what's going on in the economy with the decline of housing prices, with the rise in oil prices and with the [stability] of economic consequences of the liquidity and credit freeze up that took place within the last several months.

The interesting thing is that this has not had as you have seen much effect if at all on the office building market that we are in. There are as many office building markets as there are residential markets. We are in the upper end, the very very upper end of the office building market in that we have the most prime properties in virtually every market that we are in.

We are seeing the results of that in terms of the extraordinary leasing that we have already signed up and the continued strength in the marketplaces that we are in. New York of course is the market that is perhaps the most vulnerable to the consequences of the financial markets and the freeze up in those markets, the unknown extent to which this liquidity and credit crisis will be hurt and how long it will continue.

Nevertheless, there is virtually no new space coming on the market over the next several years. In Midtown we have one building. There is one other building in a much inferior location. The demand as Doug was trying to articulate to you for that space is really been extraordinary and I believe that we will have a substantial amount of that space leased before we even break ground in any serious way.

In fact, as we look around our various markets we continue to see rather stunning performance either in terms of leasing or in terms of the business terms of leasing. In Reston, Virginia where we have some 850,000 square feet under development, we are over 80% committed and at rents that are significantly above the Dulles corridor where there is a much different kind of occupancy situation.

We are in a much different kind of location and a much better market environment with many more tenant services available within walking distance. And we're literally leasing that space for 8 to $10 a foot above what is being asked for along the Dulles corridor.

I could say to you that, that kind of experience is what we have been able to realize in virtually all of our markets. In Washington itself, in New York City where we have I think have 7,000 vacant square feet as a practical matter and of over 5.5 million feet. And we are in Boston where we have done so well with Prudential Center and really turned that into the midtown of Boston.

Evidence of course is the movement of the longtime sort of establishment law firm Ropes & Gray from downtown Boston to Prudential Center. And in Cambridge where we bought several buildings and have developed many buildings where the market again has really surpassed our own expectations. I think we are averaging something around 27 to or 28% above the estimates we made a year ago and this again demonstrates our sense of the markets and of the quality of the buildings that we have.

So my own general feel for the economy I have to say is one in which it is unknown. The reason why I say unknown is because nobody knows how bad the financial consequences and economic consequences will be of the credit freeze up. There is no doubt but that markets are now financing a lot less for corporate America. And I will give you as an example.

I think in June, if I get this right, June -- July rather companies sold $120 billion of fairly good credit bonds in the market and $22.5 billion of high yield bonds or junk bonds (inaudible). The next month it was down to about $21 or $22 billion for the reasonably good credit bonds and the junk bonds dropped to $2.5 billion.

So there clearly is a drop in the availability of financing. The markets have begun to ease up a little bit. But when you pick up a newspaper, you see what happened to Merrill Lynch and you realize that some of the major financial firms still do not know how deep the damage is it's hard really to predict where this is all going to go.

But I will also say this. The fact is that while the financial firms are experiencing this -- and the ones that have been in the spotlight have been the hedge funds. The amount of money managed by the hedge funds in the New York City market I saw recently has gone up by $45 billion, almost 30% in one year from year to year so that the management of the funds that they are taking care of have still gone up dramatically. Some of the funds have really taken a hit but a lot of the funds have done well. And same thing is true of the investment banks.

And the fact is that there is virtually no inventory of space in New York and won't be for the next several years. It is possible of course that there is shadow space, that some of the space that was going to be occupied will not be occupied. But I believe that's really quite insignificant.

And what we are finding is that as tenants have no choice but to plan three and four years ahead, they see virtually no vacancy in terms of large blocks of space. And that is what we are bringing on to the market through the new buildings that we expect to build in New York.

For those reasons, I think we are still quite optimistic even though I think it is not possible to be totally bullish about the economy. Let me just say that the most important thing in the economy is going to be sustainability of consumer expenditures.

In this regard, the performance of the stock market is really kind of interesting. We are -- what I'm going to suggest here is the following. The top 20% or the top quintile of the American consumer spends as much money as the bottom 60%. They are the ones, the top quintile are the ones who own the vast bulk of the securities and those securities have done fairly well.

Now, the reason why that is important is because if you look at the increase in wealth in this country over the last five years, only 22% of it of the $18.5 trillion is in real estate. The other 78% is through stocks and bonds and pension funds and things of that sort. So that has a much greater effect on the financial worth and the sense of finance of the most important consumers who have a disproportionate effect on the economy.

We are therefore frankly relatively bullish about the economy. I do believe there will be another -- and I predicted this on television -- there will be another major step by the Federal Reserve which again I think will help sustain the financial markets. It will not necessarily sustain the credit markets. That's much more the area of exposure and nobody as I say quite knows how bad it is.

But at least in the markets that we are in not only find the demand strong today but the forward commitments are strong. That is why we're going ahead with the building of 250 West 55th and that is why we will be going ahead with other developments in our pipeline such as the one on Pennsylvania Avenue,in Washington that's a 540,000 square foot development and that is the last site on Pennsylvania Avenue. It's a superb site. We know how strong that market is and we will definitely be going ahead with that building. We are under construction at Chevy Chase. I have mentioned Reston Virginia. I could go on and on.

But basically what we are finding at this point is not is there strong current demand there's strong forward demand for the buildings that we are building. So we remain quite bullish about our prospects without yet being able to totally quantify where the credit markets and the crisis of liquidity will take this overall economy. But certainly in terms of the absolute -- the AAA buildings that we own, we do not see any diminution of demand. That's my comment.

Operator, we will open it up to questions now, please.

(OPERATOR INSTRUCTIONS) Jordan Sadler, KeyBanc Capital Markets.

Good morning. I appreciate the commentary on the outlook and the ramping development pipeline. In that vein, I had a question about how much further you would expect the development pipeline to ramp as you look out into 2008 and into 2009 sort of given what seems to be a more moderate outlook overall for the economy. Should we expect you to add projects over the course of the next year or two?

Yes, I think we will add projects. If our anticipated leasing moves as we believe it will I do think that for example we will -- if we are in a position to do what we think we will do with the building we're doing in Boston at Russia Wharf; we are looking to build another building in Prudential Center.

If we are going to do as we think we will do on our 250W 55th Street building, then we will look seriously to start another building in New York. We just do see strength in our market. Certainly in Reston, Virginia as I mentioned we are just doing extraordinarily well and we have the opportunity next year to continue to develop there. We will have a lot of additional capacity to develop further space there.

We are virtually 100% leased there in terms of our existing space and as I mentioned over 80% committed for the new space. And that new space will not be completed until well into next year. So we are very bullish about that. We are also I think going to look seriously at some of the development of some of the land that we have in the Bay Area and San Francisco.

So in our markets we're really quite pleased with the way it's going. In Princeton, New Jersey we're having some resurgence of demand including for new buildings. That we will not really be doing on spec but I think we do expect that we will be continuing to develop there. We are in one of those phases in the development business where which we think is quite positive.

Mort, has the change in repricing of risk affected your underwriting at all?

Well you know, that's a very good question. As you know, we are maybe the only REIT that I know of at least that sort of looks at the valuation that were (inaudible) in the markets and decided that we were perfectly comfortable in the selling assets. Doug outlined them to you.

What we see in the development side of the business frankly is that the kinds of unleveraged yields make it attractive within any kind of foreseeable range of financing that we can imagine. In other words, we will still have very positive yields above. There will be a big spread between the yields and on which we can bring the buildings in unleveraged and whatever we can finance again.

So therefore this makes sense for us to continue. I don't want to predict what rates are going to be. But obviously we have had a repricing of mortgage rates per se. The spreads have widened even though the tenure has come down and the amount of money that you could borrow on a specific property has gone down. Frankly, this also presents for us an opportunity to buy some assets and we are looking at that as well.

In that same vein, should we expect that the asset sales will moderate?

Yes, although I think we had -- we sort of had a whole program of what we decided we wanted to sell. We sold virtually all of it except for one asset. For various reasons, we're holding that asset off the market at this point and I think we're going to look and see where the market is at the beginning of the year before we decide what to do with it.

But its a property that have a fairly attractive yield on a continuing basis. And so we are comfortable to hold it because there's a lot of activity in it and we were not anticipating selling the entire asset in any event because we wanted to continue with the management and development of it.

Michael Bilerman, Citigroup.

Thank you. Good morning, Jonathan Litt is with me as well. I know being a development oriented company, write-offs are not a deal but they're a normal part of the business. I was wondering if you can just give us little bit more clarity on the write-off on the suburban project you took?

Sure. It was basically -- it's a property that we have been working on for a number of years where basically the timing of getting going on it and the cost of getting going on it has gotten to the point where we have concluded that the feasibility is dramatically less than when we started.

I wish we had made the decision two years ago and had spent $2 million on plans and auction payments and permitting and lawyers and things like that but you know we were hoping the market would continue to be robust and that the permitting would work its way out and it just hasn't. We basically said it is what it is.

This relates to the stuff in Waltham? Or which specific development was it?

We haven't disclosed and we're not going to disclose -- you know, it's for competitive reasons we're keeping that to ourselves.

And then Doug, you laid out on the developments for the next few years in terms of the amount that comes online and the expected yields. Is there a big difference between initial stabilization -- initial yields and eventual stabilization and sort of the lag between that? And the yields that you were quoting, are those cash or GAAP? And then if you can provide the other one.

Those were cash yields, not GAAP yields. It depends on the development. Some of them will have a larger FASB 13 adjustment than others. Until leases are signed we don't like to get into the business of predicting or over promising what we can deliver. So I don't feel comfortable sort of stating what it would be.

I will tell you previously on assets the difference has been somewhere between 60 and 100 basis points of improvement depending upon the marketplace. You know, in Boston where the increases between starting rents and the rent over a ten-year lease are not significant so the number is lower.

In a market like Washington DC where you might have 2.5 or 3% (technical difficulty) year. Obviously, you have a pretty significant number. And in Manhattan were you could have a $10 bump potentially from the start of a project to the first month and obviously the FASB 13 effect is larger.

That's helpful. And can you talk a little bit about Russia Wharf? I guess 2011 seems a little bit later. I know you're dealing with some existing facade and some existing building. But what is pushing that project out to be sort of a three-year build?

Part of it is that we are going down and going up at the same time. There is either a five or a six level parking structure. We haven't decided yet what it's going to be which will take some time. So we are going to be in the hole, if you will, for an extended period of time.

And because of that and because of the rehab nature of the existing facade that has to remain, it's basically a three-plus year construction project assuming we get going today. The Manhattan project -- and the other thing is the way projects are done in Boston we are basically delivering the entire project finished.

In Manhattan we deliver the space to our tenants while we still may be in the position of completing our curtainwall for example. On top of the building, for example, we have a tenant who is in the lowrise of the building who can start their tenant improvements. The way New York City works, you gave somebody a delivery and then they have a certain amount of time to build out their space and then the building -- the rent commences.

And so there's a little bit of the difference there in terms of what the timing is. But net-net both of those buildings will be fully stabilized about the same time which is toward the end of 2010, beginning of 2011.

Do you think on the Boston project you are in any way of -- now in more competition with the other potential developments that are upon on the wall?

I think that in Boston, the other potential developments have less superior qualities about them that I think do not necessarily mean that we will compete with them. I think that any kind of space that is the marketplace is competitive space from a marketing perspective.

We feel really really good right now about the leasing activity that we have at Russia Wharf. We're convinced that the tenants that we're talking to will ultimately choose to move into the building when the building is open in -- at the end of 2010, early 2011.

There is only one of the projects that have been talked about that's actually theoretically anyway under construction simultaneously that will be on a schedule that approximates Russia Wharf schedule. The others have not yet started and we have some question as to whether they will start without some serious precommitments. And we don't believe those serious precommitments are out there for those other buildings.

David Cohen, Morgan Stanley.

Good morning. Doug, you talked obviously about that you expect some acquisition opportunities I guess over the next year or so. But can you just put a finer point in terms of on average how big of an increase in cap rates do you need to become a bigger buyer?

Can I just comment on that? Because I don't think -- you know it's just more complicated than an increase in cap rates. Because it's also a question of what the underwriting is and both sides of the equation have to work. We have to believe in the rents, we have to believe in the projected rents upon rollover or to fill existing vacancies.

And so to say cap rates moved up 100 basis points or moved up 200 basis points all of a sudden these properties would look attractive is not necessarily the case. At the same time a property could look attractive if we really felt that there was upside on the rent side of the equation even if cap rates only moved up 50 or 75 basis points.

Okay, you didn't talk about the suburban markets. You alluded to it a little bit in terms of the '08 guidance. But can you give a little bit more color on what you see is happening in your suburban markets right now?

Sure, I will discuss some what's going on in suburban Boston and in suburban San Francisco as I'm not sure Bob's on the phone and I will let Ray handle the DC market. In suburban Boston, the activity is -- I would not call it robust from the perspective of the tenants are coming out of the woodwork but is very constant and consistent and rents are going up.

We are in discussions for all of the space at 77 CityPoint which is our 210,000 square foot building in Waltham. And we're making proposals to tenants for the next building in that location which is 10 and 20 CityPoint which is a 400,000 plus square foot building which we don't have our plans completed yet on and probably wouldn't get started to the middle of 2008 if we had some pre- leasing commitments.

We have continued to see tenants slowly but surely migrate on at least in terms of how they're looking from the CBDs of Cambridge and the CBD of Boston to the suburbs largely because of the pricing issues associated with the downtown marketplace with the new ownership there.

And there are a number of larger tenants and the typical tenant in suburban Boston is probably 15 to 20,000 square feet who have expansion requirements in the marketplace. So we feel very good about the market. In our portfolio, rents have gone from you know at the beginning of the year $34 to $35 to $36 range to for our new product $39, $40, $41 a square foot. And those are rents that allow the support of new construction.

There are a couple of competitive buildings that up right now but there are also a number of as I said larger requirements and we're looking at those buildings. In Waltham in particular which is where all of our development activity will be we feel very positive about our ability to get some additional buildings going over the next year or so.

In San Francisco, we have -- and it's the one area where we haven't announced anything, we are aggressively permitting and looking at sites mostly around the North San Jose area. We are (technical difficulty) development. We're in discussions with the city about this new North San Jose assemblage opportunity that is described in our press release where we have 1.4 million square feet.

Both of those sites are probably a year or so away from us actually starting the development of a new building. Then we also have our downtown San Jose site which again we're sort of brushing off the plans on. And given the demand from the larger users it may be viable much earlier than we had expected.

So the market is good. We see market rent increasing at a pretty rapid rate for space in that market as well. With that, I will turn things over to Ray.

Thanks, Doug. I tell you we have gone to great lengths to talk about suburban Northern Virginia specifically Reston. All I can say is there is we have 3 million square feet without a single square foot vacant. And as Mort has talked about, we are 85% pre-leased on all of our new development. Having said that we're moving aggressively in the last 15% because we look around the toll road and we see others who are not as fortunate as we are. So that with a little better slowdown in defense spending and some corporate cutbacks, we're really focusing on finishing up that last 15%.

And the rest of the toll road market is really facing some challenges. There's been a lot of buildings built strictly to satisfy capital demand and not space demand date and they're feeling the effects of that.

In suburban Maryland again the tale of two cities. Our Wisconsin Place at Chevy Chase is doing exceedingly well. We signed the prelease we talked about with Capital Source for approximately 60, 65% of that building. We just got a letter of intent from another group for the -- effectively the balance of that building. So that's going exceedingly well.

And our One Preserve building which is a more traditional suburban building in Rockville we signed a prerelease there for about 20, 25% of the building. Good activity in smaller bits, but it's a more challenging market because there's more supply and less barriers to entry than we see in the traditional urban markets.

Ian Weissman, Merrill Lynch.

Yes, good morning. A specific question on New York. Are there any parallels that you see can be drawn to today's market and the environment today to say past cycles, call it 2000 when we saw similar vacancy in New York at about 4%? Obviously we saw a subsequent decline in rents about 20%. What's different today in your opinion?

Well I do think it's not comparable at all in some ways. The impact of the dot com bust I think was a different kind of shock to the system. I don't think that we are seeing the availability of prime space in New York that we saw then. Not only do I not see any decline in rents at all but the rents have gone -- there isn't anything in New York today that is of any good quality in midtown New York for example, that's going to be leasing for under $100 a foot.

And the space that we are talking about frankly is going for well above that. And we have a lot of demand for it and its forward commitments. The amount of available space in large blocks in really good buildings is very very limited. And a lot of firms have to look forward three and four years when their leases might be up and they say where we going to handle the expansion and they are making commitments to new buildings.

So at this stage of the game I really don't see that. In fact, I think the rents are going to stay pretty strong. There are a couple of hedge funds that are cutting back. I think some of the big investment banks may be cutting back some of their new employment and maybe even some of their existing employment.

But I do not see a lot of space coming on the market. There isn't a lot of shadow space or vacant space that people are just holding in this market today, certainly not in the prime buildings. We just don't see it anywhere. The market remains very very strong.

In fact, we have had a stronger year this year as we have ever had in the real estate business and it's not just a question as I said before of existing tenants but of forward commitments. Now it is possible that there will be some major decline in space demand. I must say to you at this point we don't see it and we don't see it going forward. We know there are a lot of tenants in the market who need space and who are looking for space and there is very little new space availability.

We have heard other real estate executives in New York City talk about a 5 or 10% decline in rents potentially. Is that just off the top end of the market, say guys or hedge funds or private equity shops or whatever aimed to 150 or do you think that implies a cut across the whole market?

Generally speaking if you see a cut at the top end it will sort of trickle its way down through most of the market. Maybe there will be that kind of drop. I must say to you at this point we don't see it. It is possible. We are leasing space three years out and four years out -- boy I tell you the demand is extraordinary.

In terms of current space we have virtually no vacancy and when we have subleased space, which we occasionally have, again we're doing extraordinarily well on our subleased space. We're raising the net income by fairly dramatic numbers. I mean we are talking 30 to $40 a foot from where we are and it's virtually undiminished.

So maybe it is because of the quality of the buildings we have. I think that may be a part of it but this is been our experience. We have always said when you get into the top end of the market you will do better in good markets and much better in bad markets. And if this is a bad market then we're definitely doing much better than a lot of our competitors.

Kristin Brown, Deutsche Bank.

Good morning, I just wanted to to ask about what kind of tenants you are seeing activity from on the 55th Street project and also if you've noticed any changes in the decision-making process with your tenants that takes longer?

The tenants we're seeing primarily on the 55th Street project at this stage are law firms and financial firms. I would say two-thirds are law firms, one-third are financial firms or even 75% law firms and one-third financial firms. I must say we designed this building with great great focus on the efficiency that the space would provide to law firms. It is a hugely successful building in that sense.

Each one of the law firms that we have talked to has literally responded very positively and by that I mean really expressing a serious interest in moving into the building. So in that sense the buildings are extraordinarily efficient on the interior. It's a beautiful design and I think the combination of the two really has made a difference in terms of outlining the attractiveness to the law firms where they can move lawyers into the space much more efficiently than competitive space in older buildings.

It's really a remarkable how much the efficiency and the quality of this building compares to almost any other building that I know of. So maybe that's a part of the reason why there's such a strong interest amongst law firms.

As I think we've described this -- virtually every one of these tenants that we're in discussions with -- this is a lease expiration driven requirement. These tenants have to do something. They either have to renew if they can find the space in their existing building which by the way in most cases is very problematic because of the tightness of the marketplace or they have to move.

And if they're going to move, their choices are hoping that there's going to be a block of space that frees up someplace and traditionally tenants don't have the obligation to let their existing landlords know that they're leaving for generally 18 months prior to the lease. And that may be too late in many cases or they have to look at new construction. As Mort described, there's not a lot of new construction out in midtown Manhattan. So something is going to happen with these tenants.

Sloan Bohlen, Goldman Sachs.

Hi guys, I am here with Jay as well. Just to sort of refine Kristin's question. Of the leasing potential out there, are you seeing more expansion type tenants or more people trying to relocate?

It's a combination of the two. I suppose one of the problems that a number of the tenants have -- we're just -- to give you an example. I won't mention any names. But we're talking to a law firm that has a 15 or 20 year horizon and wants to know that not only can they can handle the expansion, they really don't have enough space where they are now. They can't imagine that they will be able to grow that space within their existing building.

But more than that they also can't imagine they can get the kind of options that we would be in a position to provide them over a longer period of time to handle future growth. So in this sense it's really a combination of lease exploration and anticipation of growth.

These firms are now taking a longer view and not just a short-term view because they can't move out in the short-term and they know what is available in the longer term. And as Doug says, they can't predict whether additional space will be available in their buildings because tenants do not have to inform the landlords whether they are going to renew or not for quite a -- for a much shorter period of time than they can afford to wait.

So they're making commitments. And by the way when you talk to the landlords now, if you want to find a way to renew year lease in say three or four years, you're getting quotes well above $100 foot. So we don't see that kind of weakness in the market that others may be suggesting. It doesn't mean that it doesn't exist in some of the markets and it doesn't mean that we won't experience it.

But right now I have to say we haven't seen it. And so we are very comfortable with the way it is going -- extremely comfortable with the way it is going. I must say to you we haven't broken ground yet and we really have a tremendous amount of tenants interest.

And then Mort, particularly in New York have you seen those discussions change at all just given that's been some more turmoil with particularly financial tenants in New York?

We have had only one experience with a financial tenant and that was on a subleased space in 399 Park. They were going to take the floor, we virtually had done the deal. We were doing the lease and they called and said look, given all that's going on, we're not going to go forward with the space. But I have to tell you, we have backup demand for those floors in those buildings. That space is basically all gone.

And the same thing is true at 599 Lexington and Citigroup Center. We wish we had more sublease space to be honest with you because as Doug pointed out we're way way below the market now and you pick up 30 and $40 of foot, it's a very very good thing to be able to do.

And that's what is happening when we have subleased space. We have virtually no vacancy; literally no vacancy. As I said I think we have 7000 square feet -- 7500 square feet vacant in our entire portfolio; and we have 5.5 million feet of space. I have never seen anything like this in my experience in the real estate business.

And the demand is there for subleased space and it's all kinds of -- a whole variety of firms who want to be in these absolutely top-quality buildings. And a lot of them are -- well anyway it's a whole variety of top-level firms and when we sign some of these leases you will understand why I'm saying that.

Thank you, that's helpful. One quick question on San Jose. Have you guys specifically been in talks with large corporate users or do you think that San Jose is a longer-term market for you guys to be in?

We have not started speaking with tenants yet. We're getting all of our permits and our entitlements and our plans done and then we'll start talking to tenants. Obviously Zanker Road where Lockheed is the only tenant and if we build new buildings we're going to have to change the parking configuration there.

We have had conversations with them and they're clearly a tenant that may have interest. But we've not started a broad marketing plan for Zanker Road or for the North First building and/or for the Almaden property that we have.

Michael Knott, Green Street Advisors.

Hey guys, could you tell us about the sale in DC that you're about to close? Did we hear that right?

Well we did close Democracy as you know early this quarter. We are under contract to a suburban asset. I just received word that the contract is signed. But I still don't think it's comfortable enough to go into great detail. But it is a property that is well located; a very attractive property but one that really didn't fit our criteria for focusing on the best of class. So, we put that up for market, got a very aggressive bid on it and very aggressive competition for the property still and we're proceeding with due diligence toward the sale.

And Doug you mentioned in your comments some additional space being able to lease as-is and that showed up in lower TIs. Do you expect that to continue going forward?

I think that this organization doesn't try and construct cash flows so that we can maximize the immediate sale potential of our buildings. And which I think is quite frankly what is driving many of these sort of high space rent deals that are out there. If somebody wants to give somebody twelve months of free rent and have that amortize into a higher rent I guess you can do but that that's not necessarily a typical market deal. We have I guess a longer-term perspective and we're looking for maximizing the net effect of rent calculation and that includes all the criteria that go into a cashflow which is the downtime, the tenant improvement allowances and the rent and the steps in the rent.

And that's how we think about things. And so you know if someone is prepared to renew on an as-is basis and that means that they enjoy the benefit of the current configuration in their space and some other landlord is prepared to give them a lot of TIs but a much higher face rate, they may in fact prefer to have a lower going forward rental expense.

And that I think is the strategic advantage that we have quite frankly and an approach that we take to our tenants which we don't try and fit everybody into a box. We try and be fluid and solve their problems for them in the most effective way for them and for us.

My last question. There's some buildings on the market in New York and those price -- that might give us some indication as to where the valuations have gone in the private market in New York and then also a recent sale in Boston. Can you comment on those potential deals as well as the Boston deal and what that means for the value of your portfolio?

It's hard to comment on what's going on in New York City because all of the buildings that are sort of being (inaudible) around in New York City are -- again I think other than the Paramount building on 1166 Avenue of America's, are buildings where there's a debt maturity issue that is driving that conversation.

I'm not sure that those deals are going to be the kind of deals that you would look to and be able to sort of look at what the valuation of that building is compared to where the market is -- be it too high or too low. The sale in Boston I think you are referring to One Financial Center, I assume, which is a building that is -- an interest of which is being sold by MetLife and [The Rose Organization] to Beacon Capital. We don't know enough about the structure of that transaction but our sense is that there was some structure associated with how that investment was being made.

That being said -- and I guess this is important -- while the cost of new buildings is going up, we have always said that if you can get market rents on a newly constructed building and you can get an acceptable yield, that's one thing. You can't necessarily use the valuation of a building and look at the dollars per square foot and say well, if it costs $1000 a square foot to build a building I should be able to buy a building for $1000 a square foot and I should be comfortable with that.

There is a question of what the return on that asset is and for how long to have to wait before you can get those market rents. And that is the quandary that we as an organization have always been frustrated with because there are lots of organizations in the world who sort of ignore the economic impact of having a much lower yield on an asset for an extended period of time.

As a prudent owner, operator and developer and one who also is a public shareholder, has a public shareholder base, we just haven't to been able to rationalize to ourselves the way property valuations have necessarily occurred over the past few years and therefore we have been a seller and not a buyer. So it's very hard to know how all of this is going to play itself out and whether or not it's going to allow us to have the opportunity to really do smart things.

We are not necessarily concerned about the initial yield on an asset if we can justify to ourselves that there is significant upside and that we can achieve that upside in a short enough term where we can rationalize the total overall return on an IRR basis or an average yield over a shorter duration of ownership is adequate for what our incremental cost of capital is.

Do you think buyers will continue accepting unsatisfactory IRRs or do you think that cap rates and return requirements will increase?

Remember, you know those IRRs that they look at were leveraged IRRs. That formula is changed because of the difference in the capital markets and the debt markets.

I will tell you to this point Michael we haven't seen anybody prepared to take a loss and I don't know when that will happen. You would expect that at some point if the investment banks are taking the losses they are taking at some point they're -- and they are in control to some degree or another with the financing that underlies many of these assets, that something is going to give.

I just have to mention does this. We had a rather hilarious call with a nameless sales agent for an owner that ought to be in distress and as we had this conversation -- and I will use a fictitious number but as we had -- well I will use percentages -- as we had this conversation we said to the sales broker that we think the property is worth one. And he said you know you are absolutely right. If you look at it on a current cash flow and expected cash flow you're absolute right.

But the seller paid 120% of 1. And by the way, he thinks it's worth 140% of 1. And the reason he thinks that is because ten years from now the yield is going to be [a y. We were sort of rolling on the floor there. But in fact that is still the attitude at this particular point in time. We have not seen things move to the point where what we consider to be the real value, namely 1, is not well exceeded by seller expectations. So it's all going to play out.

We haven't seen it at least as expressed by a selling broker. I don't know what's going to happen to the seller himself who's going to have his -- the sellers are going to be under pressure the sellers who have short-term financing. That is they have financing that's doing in the short-term. One way or another they're going to be under great pressure to do something and they certainly can't do it the way they used to do it which is through the financing markets or through the resale.

And we will see what happens because on one level for a firm like us we have a buying opportunity not that it's -- nobody's going to be able to buy anything on the cheap. But it will not be at the ludicrous levels that it was which is one of the reasons why we were sellers and not buyers. Now we think we can be buyers on numbers that will give us over since we are basically long-term players over a period of time that we are comfortable with so we will get an appropriate rate of return for our shareholders.

John Guinee, Stifel Nicolaus.

Thank you. Well Mike and Mike congratulations. Hey, real quick, what is your disposition plan and special dividend thoughts going forward after the 4.2 that got done in the last two or three years?

Well, I think as you may have seen, we are buyers under certain conditions and sellers under other conditions. We will not hesitate to do either depending on what the conditions are in the market. We are very happy with what we have been able to sell and there may be another period in the market where we think we should sell assets and we will not hesitate to do that.

There are some assets I suspect that we would not sell no matter what the conditions are. But I think we sold 5 Times Square because it had a seventeen year lease on virtually the entire building that was fairly fixed with only modest bumps and we were very happy with what we were able to do there. And so there will be situations where we would be prepared to sell into the right market. Right now at this point frankly we are buyers rather than sellers if we can buy them at the prices that we are putting on the table.

Second quick question. Can you elaborate on your Pennsylvania Avenue development and also your Back Bay site, one of which I think might be on Page 50 of your supplemental but the Pennsylvania Avenue one I can't identify.

The Pennsylvania Avenue one is not on there yet because, just so you understand we have a contract to enter into a ground lease and the ground lease I don't believe, Ray, you correct me if I'm wrong, commences until February.

That's correct.

Ray, if you want to describe the --

We talked about the forwards. As Mort mentioned previously we consider it to be one of the best if not the best site left in the city of Washington. It's at the confluence of Pennsylvania Avenue and Kay Street on Washington Circle. It's a freestanding site with extraordinary views on all four sides.

It's 442,000 square feet of gross office space and about 84,000 square feet of retail and atop the metro panoramic views. But we're also seeing this great access to where the decision maker lives which is on the west and north part of town. So we are extremely optimistic about the long-term leasing success of this project.

Are you implying that the decision maker might make a decision that was in the interest of his commute?

Absolutely not; of course.

Pennsylvania Kay and what cross street, what numbered street?

It's between 22nd and 23rd right above the Foggy Bottom metro stop.

What about Back Bay? I think you're trying to re-up your entitlements there. Is that correct?

In the Back Bay, we have one additional development site at the Prudential Center for office space. And we are in the process of discussing with the community groups our ideas about expanding the envelope of that building to include another eight to ten floors which would bring that building to just over 410,000 square feet I believe if we are successful at achieving additional density.

As part of that we are also -- we have another site that we are trying to get a permit for a residential program project. We have an agreement to enter into a ground lease with a residential developer who may choose to operate that as an apartment building or as a for-sale condominium. But that development in itself will only hit the bottom line with a ground lease payment that that owner will give us.

Jamie Feldman, UBS. Mitchell Germain, Banc America Securities.

Good morning, guys. Doug, is the second site in Manhattan -- is that still a 2009 event?

My prediction is that that building will take us until the end of 2008 to get permitted and then when we choose to start construction I think we will be evaluated based upon the market at that time. As Mort said, you know if we have leased up all of 250 West 55th Street and the market is feeling as good as it is today, I think it would not be surprising for us to say that we're moving forward with that building as well. But the good news is that we have 12 plus months to make that call.

And just shifting over to acquisitions. Your strategy -- are you going to be looking pretty much on your targeted markets or possibly using this as a chance to expand?

No, I think the likelihood is that we will stay within those markets. We still think those are the best markets to be in and we will also only try and acquire properties that are consistent with the quality of the properties we have which we believe are the best holds.

Michael Bilerman, Citigroup.

Doug, you talked about the 2008 roll the 1.4 million square feet having 27% potential uptick in rent. Then you talked about the space in Bedford and Brunswick I guess being more difficult to backfill or maybe lower rent spreads. I'm just wondering what does that mean for the rest of the roll having -- what sort of bumps do you foresee?

Remember the space that I described in Bedford and Billerica and others that's all vacant. So that does not -- it's a different pool, if you will. We are as I said, the two places where we have an opportunity for the most significant rollup are at Embarcadero Center where we have 100,000 square feet and Embarcadero Center 2 and -- excuse me Embarcadero Center 3. And then we have 60,000 square feet in Manhattan at Citigroup Center.

And again those -- the EC rollover this and until the end of March, beginning of April and rollover at New York City isn't until August unfortunately. Everything else I think is going to be the typical rollover in our suburban Boston portfolio as well as a little bit of rollover in our greater Washington DC portfolio. But it doesn't have nearly the same impact as those other assets do.

You have another 190,000 I guess it's late in '08 in New York. What's -- when is the deal?

12-31-2008 and it's as Mort alluded to, there are tenants who are aggressively looking for space in 2009 and it's very possible that that space will be committed well before we get to next year.

And when you look at your '09 roll, the 2.1 million, I guess a chunk of that was the Pru space or that he Gillette space that Ropes & Gray is taking. What is your sort of estimate of the marked to market potential when you look to '09?

I will apologize because I just -- I was focusing on 2008 for the past two days and I haven't looked. I'm happy to get back to you though.

Jamie Feldman, UBS.

Okay, all right. I can try it again. Doug, what are you assuming for occupancy for year end '08 in the guidance?

It's basically flat to 2007.

And what about SG&A?

I think I said 70 to $72 million.

Okay, I guess I missed that. I just wanted to make sure I heard it right. You said same-store on a GAAP basis 2.5 to 3.5?

Yes.

And then 5.5 to 6.5 cash?

Correct.

Finally, are you guys thinking at all about revisiting the opportunity fund given your comments on acquisitions?

The opportunity fund is an entity that is very much desirable from the perspective of the investors. We are considering a couple of opportunities with it. Our issue has been we didn't want to bring deals to the opportunity fund in quite frankly in 2006 and 2007 that we weren't uncomfortable with. Now that there may be some more distressed situations, particularly smaller properties, it is certainly something that we are looking at in both of these fund participants which are [Teachers (TIAA) in ABP] at this point have been very supportive of extending the term and the dollars associated with that should we find the opportunity.

How large do you think it could grow?

Honestly, I think it doesn't have much limitation to it. The issue is that the deal size is supposed to be somewhere between 25 and I think $80 million. So we have to do a lot of deals to really grow it significantly.

And is it limited to equity only are can you [manage] any kind of debt?

They are -- as they said bring us an opportunity to make money and we will consider it. I think we have been hesitant to get into the [Mez] business but it's something we continually evaluate.

So is it safe to assume that the acquisition discussion earlier in the call is more kind of noncore and really finding stuff that would fit with the long-term hold?

Yes.

Great; thank you.

Thank you so much. At this time I would like to turn the call back to management for any additional remarks.

We appreciate your patience listening to us and going through all these questions and we look forward to talking to you again at the beginning of the year and hopefully seeing that the markets that we're in are as robust as we believe they will be. So thank you very much and we will talk to you soon.

Thank you, sir. Ladies and gentlemen, this concludes the Boston Properties third-quarter 2007 conference call. If you'd like to listen to a replay of today's conference please dial 1-800-405-2236 or internationally at 303 590-3000 with access number 11098531 followed by the pound sign. Once again if you'd like to listen to a replay of today's conference please dial 1-800-405-2236 or 303-590-3000 with access number 11098531 followed by the pound sign. Thank you so much for your participation and have a pleasant day. You may now disconnect.