波士頓物產 (BXP) 2009 Q2 法說會逐字稿

Good morning and welcome to the Boston Properties second quarter earnings conference call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of today's presentation during the question-and-answer session. At this time, I would like to turn the call over to the Investor Relations Manager for Boston Properties. Please go ahead.

Good morning and welcome to Boston Properties second quarter earnings conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements.

If you did not receive a copy, these documents are available in the investor relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the investor relations section of our website.

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 were detailed in Tuesday's press release and from time to time in the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statement.

Having said that, I would like to welcome Mort Zuckerman, Chairman of the Board; Ed Linde, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. Also during the question-and-answer portion of our call, our regional management team will be available to answer questions as well. I would now like to turn the call over to Doug Linde for his formal remarks.

Good morning everybody. We really apologize for the delayed start. The conference call company was unable to dial out to us. So for that, they should be apologizing.

Also, the regional managers that are on the phone, could you please mute your lines? Because I have a suspected feeling that you are on live and if you rattle or type or do anything like that, it's going to get bled through the call.

So make sure that you guys have put everything on mute or be very quiet while we are all talking here in Boston and Mort makes his remarks. So with that, I'm going to get started.

Thanks for joining us. I guess we are the first company to report this quarter which for us is pretty extraordinary because generally we are in the middle or the last portion of the filing. So hopefully we will have some interesting things to tell you and get the REIT season off to a good start.

You have heard us speaking about the dependence of the office market at least in general on job growth before. And we're going to take you through in a few minutes the importance of looking at specific markets, locations and building characteristics in addition to simply the jobs themselves.

Mort put an editorial out there in the Wall Street Journal last week which I suspect many of you saw and he discussed his views on the state of the overall economy. The employment picture continues to be pretty challenging and as office owners dependent on job growth by knowledge-based companies primarily in the service sector, we recognize that the employment rate has not peaked and that we broadly speaking will not see growth in the office business. And by growth what I'm talking about is growth in rental rates until the later stages of a job recovery.

A major contributor to increases in unemployment has been the magnitude and the speed of the cost-cutting that has occurred in the businesses across this country. Yet as we enter the second-quarter earnings season, what we are reading and hearing is that cost-cutting is translating into margin improvements, better than expected results across a broad spectrum of non-financial businesses and to date, Alcoa and IBM and Intel and Family Dollar and Lockheed Martin and Quest Diagnostics and Pepsi Bottling and a host of others have all reported higher earnings expectations predicated on only a modest improvement in top line revenues.

The inventory restocking and production balance appears to be gaining some traction as companies like Acellor-Mittel announce plans to start up dormant steel plants. And the financial firms seem to have resurrected at least the revenue side of their businesses.

And while the charge-off from bad loans are going to continue to have a very significant impact on earnings, the mood in the financial sector has clearly changed. Taken together, this is a pretty positive development if it translates into greater business confidence.

As senior management teams become more confident in their recalibrated business models, they can become more comfortable making decisions on matters like real estate and will be tempted to explore longer-term commitments, taking advantage of the adjusted rental rate market and things have adjusted. At the same time, there are still a whole host of businesses that will continue to face uncertainty and prefer to postpone any real estate decisions and we are going to do our best to accommodate all of these customers in our portfolio.

It's important to reiterate that leasing transactions originate from events other than national or even regional job growth; namely lease expirations, mergers and acquisitions, and new business formation. Even in an economy with increasing unemployment, there are still tenants that have expansion or growth plans which require incremental real estate and you're going to hear some evidence of this in my remarks over the course of the morning.

Our strategy has been to own and operate the highest-quality assets in our selective markets, to design buildings and tenant spaces suited to customers' needs and to continue to invest and upgrade these assets. In an environment where tenants and landlords are all underwriting counterparty risk now both ways; tenants will bet on well-capitalized landlords, proven track record to retain and operate assets for the long haul rather than landlords with questionable resources subject to enhanced financing risk.

When we spoke to you at our last call in April, we suggested the leasing activity seemed to be picking up and that the spread between landlords asking rents and tenants proposed rents had begun to narrow to levels where we felt deals would start to be made. The momentum in activity continues.

We have completed some deals, we are immersed in a series of negotiation through our portfolio on our current vacancy and we are actively engaged in a whole host of early renewal discussions that are going to reduce our rollover exposure in 2010 and 2011. Transaction activity in the second quarter defined as signed leases was 600,000 square feet versus 250,000 square feet in the first quarter. And during the last two weeks, we signed four more leases, totaling 152,000 square feet which covered 132,000 square feet of vacancy and a 20,000 square foot pending lease expiration in November.

So net net, we are up three times from the first quarter. Most of this square footage won't hit our revenue and occupancy statistics until late in 2009 and early 2010. But it's a pretty encouraging trend.

Three months ago, we discussed the significant change in the level of activity in New York City, primarily Midtown Manhattan. There have been a number of independent articles and analyst pieces sort of confirming our experience of the pickup in Midtown leasing activity.

In the last 30 days, we have completed a 35,000 square foot renewal which included 9,000 square feet of expansion at 599 Lexington Ave. We negotiated a lease termination and immediate re-let of a floor at 601 Lexington which is the former Citigroup Center building, now called 601, and it's the only way we will refer to it, I hope; a 30,000 square foot lease with no intended improvements to a group that was a spinoff from a UBS company 12 months ago; and we leased the final floor of availability at Seven Times Square to a UK-based law firm.

Not just to refresh your memory, Heller Ehrman vacated hundred a 125,000 square feet in Seven Times Square in November of 2008 and we collected a termination payment of $7.5 million. We have now leased the entire premises to three separate law firms at rates in excess of Heller's $64 per square foot.

We are incurring some downtime. There will be some modest tenant improvements and, yes, we are going to be paying brokerage commissions but we re-leased the entire space in the less than nine months. Again, it speaks to the desirability of our assets and the advantage that high-quality buildings where tenants have made substantial investments in the installations have in a weak market.

Lease negotiations are underway on two of the Lehman floors at 399 Park Ave. Those are 100,000 square foot floors. Current tenant interest for this space is coming from a growing niche investment banking firm, two insurance companies, a broker-dealer and real estate brokers company.

Leases at that base of the building are going to have starting rents in the low $60s while rents at the top of the building on some pre-built spaces are in the high $80s. Now not all the news is positive in New York City as General Motors rejected its lease at 601 Lexington Ave. of 120,000 square feet. We're just simply going to have to lease that space again.

We are also coming to the end of our stabilization activities at the W. 55th St. site and Mike is going to discuss the earnings impact in his remarks. Evidence of the increased activity, though not universal, has also appeared in our other markets.

In the San Francisco region, we completed a 74,000 square foot lease with Genentech at 601 Gateway which is going to cover all of our vacant space and near-term rollover in that building. Rents in South San Francisco are in the mid-$30s.

We signed four deals in our Mountainview project totaling 68,000 square feet and are negotiating leases or are in discussions with four additional tenants for another 54,000 square feet. I would note that the Silicon Valley has probably some of the highest availability rates in the country and has seen very dramatic rental rate declines.

While there's been a noticeable falloff in general market activity, the R&D products on the west side of 101 which is really Palo Alto and Mountainview, continues to have pretty good activity and we have a constant showing of tenants in those properties. Turning to the city of San Francisco, we signed a full-floor deal on a space that would've been available in November, which I referred to before.

We're in lease negotiations on two full-floor renewals and we are negotiating a two-floor transaction with a law firm that is expanding from one floor elsewhere in the complex. In an interesting side note, that firm was having a very difficult time consummating a sublease since they could only offer 4.5 years and the firms that were looking at that space wanted much longer lease terms.

This by the way is indicative of why subleased space does not always pose a threat to direct availability from landlords. We responded to two proposals on that space within a week of having a verbal agreement to relocate this tenant.

Rents at Embarcadero Center range from the high $30s to the low $60s. Activity in Cambridge in the western suburbs of Boston still continues to be pretty okay. But we're seeing a consistent flow of small, medium and large requirements, with large being over 30,000 square feet.

At the risk of being repetitive, there continues to be a handful of expanding technology and biotech tenants that are taking advantage of the recent pullback in the market to upgrade and expand their premises. This quarter, we completed a transaction in Waltham with a technology firm that expanded from 80,000 square feet to 130,000 square feet and extended its lease for five years.

Rents in Waltham are in the low 30s for the desk spaces. In addition, we're working on three large early renewals with minimal tenant improvement in exchange for some short-term rent resets.

In Cambridge, we're negotiating with an expanding life sciences company for all of our availability at Three Cambridge Center, 62,000 square feet, as well as an immediate occupancy in a 20,000 square foot plug-and-play space at One Cambridge center. Cambridge rents are currently in the mid-$40s for office space. The Boston CBD has been less active with limited lease expiration during transactions anticipated over the next few quarters.

Our immediate activity Washington DC has really been focused on early renewal negotiations. In total, we have over 1.2 million square feet of leases with either the GSA, defense contractors in high tech companies in Reston and the city that are under negotiation.

If I had to make a generalization about these deals, it would be that they are all being completed with minimal if any tenant improvements. In some cases, rents will be lower than contractual rents and in other cases they're going to be higher.

Rents in Reston still range from the low $30s to the low $40s. In the district where our portfolio is 99% leased, once again our focus is on a lease rollover in 2010 and 2011 and we are in advanced stages on renewal discussions with four tenants, including a 76,000 square foot law firm that's considering a 22,000 square-foot expansion along with a 15 year renewal.

Now there is significant new construction underway or recently completed in the DC market. These buildings however are in secondary locations near the ballpark and north of Massachusetts but they can be acceptable locations to meet government user requirements.

So they will take the edge off of that type of space requirement. Overall, the Class A East End and CBD rents are still in the $45 to $60 triple net range. We continue to have active discussions on the remaining space at 2200 Pennsylvania Ave. but we haven't yet signed any additional leases.

Now as you review the leasing data that we provide in the supplemental, it's pretty clear that the releasing spreads for this quarter were again very healthy. The overall increase of 18% for the portfolio probably seems counterintuitive given the perspective that people have on what's happening to market rents.

Now while these leases will translate into contractual rental revenue, they have less predictive value when the market changes as rapidly as we have seen. We tried to separate the deals into leases that were signed before and after December of 2008 just to give you a perspective on where rents are.

Looking at the data in this way, the overall increase for the earlier deals is over 26% and includes about 650,000 square feet of that space while the more recent deals on the balance of the space actually have a net decline of about 2%. So that's probably certainly much more consistent with what your intuition would've been.

When we calculated our marked to market last quarter, we had a much better picture on the current level of rents in our portfolios because we really were in the midst of a number of live transactions, particularly in New York City, and we just don't see any data out there to suggest any further downturn and revisions this quarter. While we may not have hit bottom, particularly in some of our markets, rents have reached a level where the bid-ask spread is close enough for transactions to be happening in a pretty consistent manner.

Now once again, when you're thinking about our mark to market, you have to remember it's a point in time comparison on our lease spaces. It includes currently leased space that won't vacate in the near term as well as leases that don't expire until times like 2019 with very high rents in them as well as rents like the deal we did in New York City last year at $140 a square foot where the spot rent might be $85 today, but we don't have any impact for another 10 years.

It does not include any currently vacant space. So changes in our portfolio vacancy will have a very significant impact on our income. At an average portfolio rent adjusted for our JVs of about $49 a square foot, each 1% of occupancy translates into about $16 million.

Now currently, the overall portfolio marked to market is pretty flat, it's about $0.10 positive. And I guess the real point is what's going on in the next few years.

The mark to market for space coming available in 2010 is positive $1.88 and that same calculation for 2011 is negative $2.47. The reason for the 2011 rent rolldown is that we have about 200,000 square feet of space at Embarcadero Center Four where the current rent is over $62 a square foot and the actual rents probably today closer to $92 a square foot and the actual rent is closer to probably $60 to $65 a square foot. So pretty big rolldown.

We are still in the midst of the deleveraging process that is occurring across the financial sector and in the real estate industry. Since the end of the 2008, we have taken significant actions to add to our liquidity and/or reduce our capital commitments.

Just to review, we have halted construction on 250 W. 55th St. which resulted in a $500 million reduction of capital commitments. We formally established a dividend level of $0.50 per share, increasing our retained capital by $17 million per quarter. And most recently, we raised equity through a secondary offering of 17.25 million shares, netting $842 million after transaction costs.

We have retired some near-term secured maturities but we retain a very significant cash balance. And while the leasing markets have achieved this level of equilibrium where deals can be completed, the same really can't be said of the sales market. The secured debt markets continue to be in a state of disarray with previously considered conventional leverage levels simply unattainable today.

And while there may be life insurance company bids available at levels of up to $150 million and at rates between 7% and 8%, reasonable rates, the level of equity required for any new acquisition is probably 50% or more of a purchase price. The daily headlines of commercial real estate debt troubles are only going to increase the caution of potential lenders.

The unsecured markets are functioning relatively normally and Mike is going to touch on that in his remarks in a few minutes. Given these economics, bidders are making offers at levels that are considered lower than the levels which where sellers at the moment are prepared to transact. If an owner does not have to do something today, they are hoping for a better tomorrow.

Now at some point, this state of affairs is going to change. While maturities are certainly an obvious friction point, leasing transactions may force earlier action.

As I suggested earlier, tenants are starting to consider long-term commitments and in many cases these decisions require action on the part of landlords in the form of either rent concessions or capital investments. Until there is recognition of current valuations by all parties in a particular building's capital structure, the owners of overleveraged assets are going to be paralyzed to act.

In the meantime, we are working to differentiate ourselves in the way we operate, the way we invest, and the way we lease our buildings and we are taking the appropriate actions to put ourselves in the best position to participate in the recapitalization of assets in our core markets. And with that, I will turn the call over to Mike to talk about our results this quarter.

Thanks Doug, good morning everybody. Just want to add a couple of comments to Doug's discussion on the leasing. We are very encouraged with the increased level of activity as is evidenced in our statistics and also in tour traffic on our available space.

While we are completing a number of deals with minimal tenant improvements, in some cases the concessions have increased. And depending upon the quarter, we may see large variability in our concession costs.

This quarter, our average transaction costs were approximately $38 a foot. To give you a little more detail, our activity included a handful of larger new and expansion leases with average transaction costs of close to $60 a foot while the remaining leasing was a diverse pool of both new and renewals that were under $20 a foot on average.

Looking forward, we will actively pursue the use of pre built spaces and use our construction management capabilities to manage installation costs by offering turnkey buildout services where appropriate to best meet market demand. On larger deals, the tenants who have options are pressing for larger contributions.

That said, we continue to see a high level of renewals and shorter term deals with low transaction costs. Overall, we expect our leasing strategies will result in increasing our hit ratio but new transactions will be evidenced by higher than historical transaction costs.

Getting to our first quarter results, last night we reported FFO of $1.32 per share. Excluding the impact of the additional share count from our equity offering, we exceeded the midpoint of our guidance for the quarter by approximately $12 million or $0.08 per share. If you pull out a couple of significant one-time items such as termination income and an impairment charge, we still exceeded our guidance by about $0.04 per share.

The first major one-time item was termination income of $14.9 million. The vast majority of this came from two tenants in New York City. One is a 30,000 square foot tenant at 601 Lexington Avenue that Doug mentioned where we have already backfilled the space.

Although the rent from the new tenant is lower than the prior deal, inclusive of the termination payment, it was a good economic deal for us. We have also terminated a 15,000 square foot lease at our Two Grand Central asset and we have activity and a proposal out where we could see a rent rollup of roughly $5 a foot or 10%.

$5.2 million of our termination income is non-cash and consists of the value of furniture and fixtures that two of our tenants have agreed to leave behind plus the acceleration of $1.5 million of FASB 141 income. On the negative side, we are taking a $7.4 million non-cash impairment charge related to our joint venture interest in our Value Fund.

This is solely related to three properties located in the Silicon Valley where we have witnessed downward pressure on rents to the tune of 20% plus in the last quarter. Our ownership position in these buildings ranges from 25% to 40%.

Because they are held in an unconsolidated joint venture, GAAP requires quarterly impairment testing to Fair Market Value. The rent decline is reflected in our leasing assumptions and the discounted cash flow driven valuations resulting at a lower fair market value this quarter.

Our interest expense came in about $2 million below budget due to the combination of the early repayment of a couple of loans and the decision to postpone a few other financings. The remaining $4 million variance from our guidance was due to portfolio performance, including about $2.5 million of operating cost savings. These savings related to the deferral of repairs and maintenance items, savings in utilities due to the cool spring and also to some more permanent cost-cutting measures that we have been implementing.

We are focused on the expense side of the ledger and as we discussed last quarter, we reduced our G&A projections last quarter for the full year 2009. We have also undertaken an extensive review of our property operating expenses.

We are holding discussions with many of our key vendors, from cleaning to security to elevator maintenance to utilities providers and expect to achieve meaningful savings in the rebidding of contracts. We are also analyzing our staffing needs and have made adjustments where appropriate.

Overall, we anticipate that we can reduce our expenses by between $10 and $15 million per year. Now most of this does not drop to the bottom line due to the fact that the majority of our tenants have base years, but over time it should manifest itself in improved operating margins.

Looking at the rest of 2009, we continue to be very cautious about the leasing markets. As Doug discussed, we are seeing an uptick in activity on much of our space but we do not expect it to have an impact on 2009 due to lease commencements that would not occur until late in the year or even in 2010.

As we forecasted last quarter, our occupancy declined by 200 basis points this quarter with Lehman Brothers vacating 399 Park Avenue, General Motors failing to perform on its lease obligation at 601 Lexington Avenue and One Preserve Parkway coming online in suburban Maryland at just 20% occupancy. At One Preserve, we are in negotiation on another 50,000 square feet that may grow to 75,000 square feet which would increase the occupancy to 60% but with lease start dates in 2010. We expect to lose about 100 basis points of additional occupancy by the end of 2009 mostly due to uncovered rollover primarily in suburban Boston.

The vast majority of our vacancy is high-quality and well-positioned space that is attracting the current market's demand. In the current environment, deals are simply taking longer to complete.

We consider approximately 675,000 square feet of our vacancy, just 2% of the total portfolio, to be space that is much tougher to lease due to being in older buildings, many where we are planning future redevelopments, and therefore will have extended vacancy. This structural vacancy has potential rental income of only about $10 per square foot net. So its economic impact to us is really minor.

We project leasing 850,000 square feet for the rest of 2009 and nearly 85% of that number is currently in negotiation. A big piece of the remaining leasing is several large renewals where the tenants really have no option but to renew and we are simply negotiating the rental rate.

We continue to project our same store growth for 2009 to be flat to slightly negative with cash same-store NOI projected to be down by 1% to 2% and GAAP same-store NOI to be flat to up 1%. We expect straight line revenue excluding our new development deliveries of 35 to $36 million for the full year and termination income of $1 million per quarter.

Our 2009 development deliveries will have a positive impact with Wisconsin Place, which just delivered this past month at 91% leased; our Democracy Tower building that is 100% leased delivering in the third quarter and our build-to-suit for Princeton University also delivering in the third quarter. The FFO yield on these developments is just north of 10%.

We have budgeted and continue to experience tenant bankruptcies. This quarter General Motors, who was expected to commence rent payment on 120,000 square feet at 601 Lexington Avenue in June, rejected its lease. We also had a full-floor tenant in Embarcadero Center file for bankruptcy. For the rest of the year, our guidance includes $5 million of lost revenue due to defaulting tenants.

We expect our joint venture properties to be fairly stable the rest of the year with a full year contribution of 135 to $140 million. This is down from our guidance last quarter solely due to the $7.4 million non-cash impairment we are recognizing this quarter.

The hotel market nationwide and also in the Boston area, where we have the Cambridge Marriott, is experiencing continued downward trends with constant pressure on rates. Our average daily room rates have declined from $237 last year to $196 today, and although our occupancy at 78% remains pretty strong, our RevPAR is off by over 20%.

In response to the worsening conditions, we are reducing the projections for our hotel by $1.5 million and now expect its contribution to be between 5.5 and $6.5 million in 2009. We expect our development and management services fee income will run between $30 and $32 million for the year.

Last quarter, we went through in detail our projections for our G&A, including a decline of approximately $5 million in cash G&A expenses and these continue to hold. Our 2009 G&A estimate is $72 to $74 million.

Interest expense will come down as we have elected to postpone several planned financings including our $225 million term financing of Two Embarcadero Center. We project that our interest expense will be between 300 and $305 million for the year, including $38 million of non-cash interest expense associated with our Exchangeable Debt in accordance with APB 14-1.

Capitalized interest is projected to be between $45 and $50 million for 2009 and includes the capitalization of our 250 West 55th Street project. 250 West is responsible for $25 million of our 2009 capitalized interest and we expect to stop capitalizing it in the fourth quarter.

As we start to think about 2010, there are several important items to consider that will have an impact on our results. The first is our ability to lease up our vacancy, including the Lehman Brothers space in New York City.

We ended 2008 at 94.5% occupancy and expect to be at roughly 91% by year end 2009 assuming no additional leasing at 399 Park. This vacancy creates an opportunity but it also represents between $35 and $40 million of rent that we received in 2009 that is not currently on the books for 2010. The Lehman space alone contributed $17.7 million in 2009.

We are seeing activity but given the overall outlook for the economy and particularly the job sector for the next 18 months, we are projecting that our occupancy will hover between 91% and 93% during 2010. The fact that we have less than 9% of the portfolio subject to natural lease expirations in 2010 with over 40% of it in the fourth quarter is a positive and mitigates some of our exposure.

We have experienced a substantial amount of termination income in 2009 at $16 million through the first half which we do not expect to recur in 2010. We also will start to experience the natural burn off of a portion of non-cash FASB 141 income as leases expire in our New York City joint ventures.

As you recall, FASB 141 requires us to recognize non-cash rental income for these buildings as if the entire building were leased at market rents at the time of the acquisition in mid 2008. Market rents have come down significantly in New York City since the acquisition, so as these leases roll, we will be reporting a rolldown in GAAP rent, which includes the FASB 141 component, even though in actuality many of these leases may experience cash rent rollups.

This is all non-cash but unfortunately runs through our numbers and our FASB 141 income is expected to be $15 million lower in 2010. Also, we have a couple of meaningful development fee assignments that are coming to a close in 2009 including our work on Wisconsin Place and 20 F Street. These two projects are expected to contribute an aggregate of $7.9 million to 2009. We are actively looking for new fee services opportunities.

As I mentioned earlier, we will complete the vast majority of work on 250 West 55th Street in New York City and expect to stop capitalizing interest in the fourth quarter. This project will have $480 million invested where we have been capitalizing interest at our average borrowing cost, resulting in capitalized interest of approximately $25 million for the full year.

Ceasing capitalization on this project will result in an increase in our GAAP interest expense in 2010. Ofsetting this slightly will be an increase in our investment in the remaining development pipeline. We will continue to spend money on Atlantic Wharf and the Biogen headquarters in the Boston market and our 2200 Pennsylvania project in Washington DC, which will partially offset the decline in capitalized interest at 250 West.

We also will see incremental income in 2010 of $20 to $25 million from the impact of our 2009 and 2010 development deliveries. Lastly, there were a couple of one-time expenses incurred in 2009 that should not recur. This includes the $27 million charge taken on 250 West 55th Street last quarter and this quarter's $7.4 million impairment charge.

I would like to turn to our balance sheet and capital markets activity. In early June, we completed a secondary equity offering, raising net proceeds of $842 million and significantly strengthening our liquidity position. At quarter end, we had $820 million in cash and virtually our entire $1 billion line of credit available.

On the financing front, we have taken care of all of our 2009 maturities. We have qualified for and plan to exercise a one year extension on our construction loan at South of Market which has $185 million outstanding.

We will pay off a small mortgage we have expiring on one of our Washington DC assets next month. Finally, we are completing a $50 million financing of one of our suburban Boston buildings that should close later this summer. It is a floating rate, five year bank loan where we will likely fix the rate in the 7% range using the swap market.

We are now focusing on our 2010 exposure where we have some secured mortgages coming due totaling about $800 million. Five of these mortgages relate to joint venture properties and our share of the total exposure is just over $500 million.

We have underwritten the refinancing of each of these mortgages to current market underwriting standards and are comfortable that we can refinance the current debt amount on each with the exception of two loans where we project that we will make a paydown of approximately $100 million which represents our share.

As I touched on before, we elected to cancel our financing for Two Embarcadero Center after raising liquidity in the equity market. The impetus for financing Two EC was to raise liquidity to fund our development pipeline at a time when the bond and equity markets were unattractive. After raising equity, we determined that increasing our leverage with this financing simply to put additional cash on the books was not necessary.

We are pleased with the return of stability to the bond market. Over the past quarter, our bond spreads have traded in a relatively tight 50 basis point band and we believe we could raise unsecured debt in size at 7% to 8% for terms ranging from 5 to 10 years. Convertible debt investors are also actively looking for investment opportunities with pricing for us at coupons of 4.5% to 5% and a conversion premium of 20% to 25%.

The secured market is more challenged with tight underwriting standards that is pushing leverage down and instituting structural elements to financings. Pricing for 10 year mortgages is stable in the mid 7% area but our discussions with lenders find that they are not investing their full allocations due to a lack of quality product at their targeted leverage points.

Lenders are proving to be very selective about the assets and sponsors they intend to finance even if it means they do not meet their new production volume goals. The good news for us is that the insurance companies remain active and are seeking opportunities to put out capital for high quality assets such as ours.

Our objective is to maintain consistent access to all of the debt markets, providing us with the flexibility to pick and choose the most attractive market to raise capital. Access to the public debt markets provides us with a competitive advantage in the marketplace and as a large well-capitalized company, we can quickly raise capital in meaningful size to fund investment opportunities.

I would like to conclude by updating our 2009 guidance. Our guidance is affected by the additional shares in our share count from our equity offering and FFO is projected to be $4.55 to $4.63 per share for 2009.

The increase in our average share count has resulted in a $0.31 reduction in our guidance range. By simply removing the impact of the equity offering, the midpoint of our range would have increased by $0.18 per share. This is primarily due to our second quarter outperformance, a reduction in our tenant default projection to $5 million and our expectation for lower interest expense during the second half of the year. For the third quarter, we are projecting FFO of between $1.08 and $1.11 per share which is calculated using our new diluted total of 160.7 million shares outstanding.

I now would like to turn the call over to Mort for his comments.

Hi everybody. Well I think we are in a transitional period and the interesting thing is going to be of course which way the economy goes.

I am -- I did write this article for the Wall Street Journal last week and it really got a remarkable reaction I think because it expressed in some detail what a lot of people were concerned about with respect to the economy. And if you saw Bernanke's testimony to Congress just yesterday, what he was talking about was pretty much the same thing which was his concern with the unemployment numbers and what that might do to the economy in terms of additional foreclosures, additional savings, that would reduce consumption, additional not just home foreclosure but foreclosures or defaults on credit cards and what that would do to bank lending etc. and that is one of the key issues that we face.

I think what has happened in terms of the world of finance which is a part of the world that feeds a good part of our own office activities is that the world of finance has -- in part reflecting what's happening in Corporate America. Corporate America is cutting costs dramatically and widening profit margins and therefore their earnings are doing a little bit better than a lot of people anticipated and the stock market is having a very nice rise to reflect that.

It was overfilled at some point and it's now perhaps being overbought, but it's certainly heading in the right direction in part because of the fact that the earnings I think are going to be better than a lot of people expected. That frankly is going to have a fairly good impact on the kind of space that we have.

Because what has always been the case, not just in this downturn but in several other downturns that we and I have been through, is that when you have buildings that are sort of the best buildings in a particular market which is the only buildings that we have basically, what happens when rents go down in a downturn, it's (inaudible) tenants who wanted to be in the first-rate buildings or the top buildings of the city or of a market, they now feel well I can afford to go into that building and so we generally tend to fill up whatever vacant space we have and I think we're going to have that same experience. There's a lot of activity for the space, for example, that we have in New York and I suspect that within the next several months, a good chunk of it, and perhaps the vast bulk of it, will be off the market because of tenant commitments.

The real question it seems to me is just what is going to happen now in terms of the downward pressures on the overall economy. And on that count, there are -- everybody has their own view. Nobody's view is totally 100% because we are in an unprecedented kind of economic downturn and therefore it being unprecedented, it is still unpredictable.

The unprecedented part comes from the fact that we are trying to work through just a mountain of debt on households, on businesses, on the financial world, on state and local governments. And just to look at state and local governments, the estimate is that they -- the 50 states will have in the next year, in the year 2010, a combined cumulative deficit of $166 billion and another $190 billion in 2011.

This is bound to have an effect on the economy and those individual states and you saw what happened in California which just reached an agreement. There's going to be a substantial cutback on a lot of programs. There will be a reduction in the number of state workers.

The estimate is that as many as 50,000 or 60,000 workers will have to be let go who are presently employed by the state. Frankly I think the Obama administration stimulus program was a whimper compared to what -- to the shout that it needed to be because of the way it was structured and put together by the Congress.

Turning it over to the Congress in my judgment was a fundamental strategic political mistake of the administration and they got a very, very limited program which they are now saying -- after saying it was going to really change things around immediately and now saying well, it's a two-year program. Well if it's a two-year program, by the time they get through the depth of the first year, they're going to have a much tougher situation to come out of than I think they should've had.

But, the natural animal spirits and optimism of the American sort of market is I think going to come through and I think the one thing that worries me about it is the unemployment numbers. Those unemployment numbers have always been considered to be lagging numbers and therefore they represent decisions that were made a while ago.

Nevertheless they are also I think coincident numbers and may even be predictive numbers because I think it's happened so fast and it's continuing to happen so fast. And it's not just the 9.5% unemployment number.

That unemployment number really understates the real condition of the market. There's both unemployment and underemployment of people who are working part-time who want to work full-time or if you add to that people who have left the labor force because they haven't been in it for a year.

The people who have been in it for a year but who haven't applied for the last four weeks are not considered -- for a job in the last four weeks are not considered in the unemployment number. That's 1,400,000 people.

So the numbers really understate the real problem. If you take the unemployment and underemployment number, it comes to a total of 16.8%, if my memory serves. And there's at least another 1 million people who should be on that unemployment number.

We have to work through that and it's really going to be an unprecedented downturn in that sense. But we also have unprecedented amounts of monetary stimulus and I think that Bernanke has made it clear that the low interest rates are going to be sustained now for quite a period of time. So we have had in a sense -- by and large, we have avoided the kind of possibility of a real financial collapse.

I think the financial world is slowly beginning to revive itself. Certainly there's much more optimism in the financial world about the profitability of American business. That profitability as I mentioned is because they've really got their costs under control. They have really slashed their costs in many, many ways. So their margins are up even if the volume is not as high as everybody expected.

And therefore I think within the next couple of years, we have a very good chance to turn it around. We are in a basically a long-term business, not a short-term business. We do have some rollover as we indicated.

But basically what we look for is long-term values. And I think the kind of real estate that we have and the kind of markets we are in will continue to reflect that. I think we will do better than a lot of people expected in terms of leasing up the space and getting it done.

Yes, the rates will be down from where they were but we will still do well at those rates. Doug made reference to the Heller Ehrman space and our building in Times Square. We were able not only to lease it, but we were able to lease it at above the rental rates that we had with Heller Ehrman.

I mean a lot of the leases when you have problems with some of these leases, these leases were done five, six, seven, eight, nine, ten years ago when rents for considered were considerably lower. So even though we're not going to be able to get the amount of appreciation that we had once thought we were going to have, we will still get appreciation in many of these cases.

So by and large, I think we are in a strong position. We're certainly in a strong position financially. We are in a strong position in terms of our credibility in the individual markets.

We do have the opportunity now I think to be opportunistic in terms of looking for additional acquisitions or additional sites for longer-term development because of the strength of our finances. And frankly, we will continue to look for ways to further enhance our liquidity and the opportunities for taking advantage of what we think will be further opportunities.

So, that's sort of where we are. This is not a bullish market by any means, but I do think we have a unique position in the markets we are in which are all supply constrained markets.

We have the unique position in that we are exclusively at the upper end of those markets and I think we are still in a position. There are always tenants that are moving and growing and I think we are in a position to be credible with those tenants and if necessary to do a lot of the financing from our own internal resources.

So I think the downward sort of concerns for a company like ours should be mitigated by these fundamental facts and I think we are just going to get through this next period of a year or two and we'll be back in I think a much stronger market than the markets we are in. That is about all I have to say.

Operator, could you please open it up to questions and answers please?

(Operator Instructions) Michael Bilerman, Citigroup.

First question just for Mort. You obviously painted a little bit more of a bleaker picture for the economy on the employment side. And clearly from Boston Properties point of view, things appear to be probably a little bit better than expectations. While they are difficult, there seems to be momentum.

I guess, how do you factor in some of the positives you are seeing in this business relative to your views on the broader economy and whether there are sort of things that you are seeing on the ground within Boston Properties that potentially could paint a maybe brighter picture for the economy and the employment situation?

That's a very good question. That's a very difficult thing to correlate, I have to confess. Because I do think that the broader economy and the consumer economy is going to be much tougher than the government is portraying.

You know, I do think there's a sense of that they are focusing in on confidence. In the attempt to retain and even to build confidence, I think they're going to in some ways lose their credibility as a result of that because I think it's going to be worse than they ever expected. In fact, it is worse than they expected.

It's not only that they predicted that there would be an 8% unemployment rate, but now they are saying it's going to be above 10% and I think it's going to be closer to 11%. Nobody knows what these exact numbers are. As I said, it's unprecedented.

But again, let me just say to you, we have always in these situations -- when you you sort of invest and develop for the long-term, you sort of have to anticipate that there are going to be downturns. And in terms of this sort of developing a business strategy, we try to come into sort of a construct that in a sense where we think we're going to do fairly well.

Anybody who has heard me on these talks in the past would remember that I keep on saying we do better in downturns relatively because of the fact -- A, we are in a supply constrained markets; B, we are in the upper end of the office building market so that when there is a decline in rents, a lot of tenants who want to be in the higher-quality buildings now feel well I can afford this space and I'm going to move in. It may be a little bit more expensive than I would like, but I'm prepared to move in and that's exactly what we're seeing now.

And we are also in markets where frankly the availability of supply -- take in Washington DC, we are building a building there, 520,000 square foot building, it's the last site on Pennsylvania Avenue that is available and it's a great site. And we're very comfortable with that market. You know again, I'm not saying that the market is going to be as buoyant as it has been.

But I'm staying in the markets that we are in and in the portion of the markets we're in where there is a supply constraint -- in Washington, the supply constraint is caused by the height limitations on the buildings. So you have to go it horizontally. You can't go up vertically and that's a very difficult thing to do in Washington DC. It's very difficult to find sites in the central business district for example.

The same thing is true in New York. Now in New York frankly, we are -- again if you look at the buildings that we own or have purchased; they're really, really the highest-quality buildings in this market. Not every one is the absolute peak but -- and we continue to improve these buildings. Citigroup Center for example where we've done some very good leasing has spent probably close to $20 million.

We completely redid the lobby and the entrance. We opened up a completely new entrance. It separates out the retail area from the office area. It helps the office area and the retail area.

We have just managed to put together a great sports facility and athletic facility that is great for the entire building etc., etc. This really makes a difference over time in the sense that when tenants -- and there's always movement in the market no matter what. There are always leases coming up in other buildings as there are in ours, although we generally tend to have the longest sort of average lease.

But we I think will always do better in the down markets compared to the overall market simply because of the quality of our buildings and the supply constraints in the market we are in. Now I have to tell you, what we are in now I think in a way is unprecedented. I don't think anybody has ever lived through -- certainly I haven't -- this kind of -- the accelerated, this (technical difficulty) with which everything happens, the way it is spread not just across this country's financial world and economy, but around the world.

It's unprecedented. Nobody has ever seen anything like that. And it's all because there was so much of the world of finance was interconnected. Now they have at least I think staunched the major problems there.

There is going to be a slow buildup and you're going to see a number of these financial institutions beginning to do very well in this world. They have gotten their costs under control to a large degree. But I think they're going to begin to -- some of them are going to begin to grow again and they're going to be (inaudible) look at New York.

In New York where you have the dissolution of a number of major firms, but a lot of the talent in those firms have spun out and they're forming smaller investment banks or boutique financial firms and what have you and they're beginning to take space. Some of them are going to do well and some of them won't do well.

But that will be the seeds of growth in this market. I do think that New York, as I have said before, will be the first financial center to recover. The world of global finance is not going to go to London, in my judgment, after the debacle in London which is much worse than what happened in the United States and New York.

They're going to come back to the United States and to -- particularly to New York and Washington. So I do think we're going to recover and that particular phase of the real estate economy will recover more quickly and we will do relatively well.

I don't want to make any predictions because the part that I really -- I just can't give you a handle on -- if we get -- I just, I will put it this way. The major financial institutions have huge amounts of credit card debt on their books and both for the small businesses and for individuals. And that credit card debt is in terrible shape. The default rate I think is going to go through the roof.

You have already seen that in the various reports of some of the banks. And I think that is just inevitable. I don't know what that means. One of the things it does mean is I think there's going to be a continued constraint on credit.

So if you have higher unemployment, you have continued decline in housing prices and you have a continued constraint on credit in general, I'm not optimistic about the economy. I'm not as optimistic as most.

But as I said, I don't think our particular business here -- I'll give you another -- I'm in another business. I'm in the publishing business.

The publishing business is much worse than the general economy. They are being dramatically affected by the the decline of advertising. So I think our -- when you ask me, how do I reconcile the two with our real estate business? Because we are in a unique place in the real estate business and I think that will continue as it has in the past to show that we will do better in down markets by far than a lot of our compatriots in the business.

Thanks for that. Doug, just one quick question just on leasing. You talked about your mark to market essentially being flat. You talked about doing a lot of early renewal deals and pending (inaudible) in DC.

One thing is just related to the deals that you are doing. Could you talk a little bit about your trends on TI CapEx. I think Mike talked a little bit about that being higher, maybe the length of the deals, whether you are moving towards shorter term, either renewals or leases and in terms of free rent or other concessions that you're giving so that headline flat mark to market in the reality may be a little bit more negative given the additional capital that you are putting in, higher free rent and things like that.

Sure, this is going to sound like a copout answer, so I apologize in advance for that. But I would say it's everything that you just described. In general in the district, the types of deals we are doing are long-term deals.

You know, long being one of more than five years and the suburban transactions we are doing are generally involving no tenant improvement, no tenant improvement allowances. They are involving brokerage commissions and brokerage commissions are on a percentage basis.

And in the most part, they are a reflection of what the current rent is. And if for example we have a lease that is expiring in 2010 and the current rent for that space is $37 a square foot and the existing rent is $41 a square foot, we are acknowledging and allowing for a short-term rent reduction on an as-is basis and with an escalator. So by the time you -- from a GAAP perspective you get to look at where the rent is on a mark to market basis, it's basically flat to slightly positive.

On vacant space, there are sort of two broad extremes. The first is space that we are basically pre-building and those pre-build suites are generally the smaller tenant spaces. That vacancy is -- those spaces, depending upon the marketplace, are costing us somewhere between $65 and $85 a square foot.

And those are then being done on an as-is basis and our hope and I guess at least our past evidence has borne this out because we did it at Seven Times Square when we did that buildup. These spaces generally don't need much in the way of retrofitting when these tenants move out. So while we may be signing three, five, six year leases, they generally have a life that's probably 10 plus years. And so the second time around, you don't have to put any additional capital in.

On larger spaces that are vacant, depending upon the configuration of the space, we are not giving much in the way of tenant improvements but we are giving some free rent depending upon the market. So a market like New York City, the Lehman Brothers space quite frankly, the TI's are relatively limited. In some cases, they are as is. In some cases, it's 35 or $40 a square foot.

But because the market is what the market is, we may be giving seven, eight, nine, 10 months of free rent associated with that transaction as part of the economics. So I think that unfortunately there isn't really a specific generalization I can make about all of the markets.

I can only sort of make it on the types of spaces and the various installations. I will say that the better installations are getting more activity and they are allowing us to capture vacancy at a much more rapid rate than space that really is a gut rehab where you're going to have to start over from scratch.

Let me add one thing to what Doug said which is that when you're talking about forward leasing of roll that may exist that may come about over the next six months to a couple of years, we are taking advantage of the fact that in a lot of these spaces not only did we put in TI investment, but the tenant put in major TI investment. So there is a real incentive on the part of the tenant if the space was done correctly, which many of these were for the tenant's use, for them to stay there which gives us an advantage in discussing what the appropriate rental rate should be and what the appropriate term should be going forward.

Mark Biffert, Oppenheimer.

Good morning everyone. I guess my question is more related to the use of cash, and you have a significant amount of cash available as well as your line completely available. And I'm just wondering if you are trying to keep their powder dry for acquisition opportunities as well as are you seeing opportunities for acquisitions or development opportunities? Or would you use some of that to pay down some debt if you could attractively go back and pay it off early?

This is Doug speaking. The answer to your question is unfortunately not a simple one. I would say overall we are not uncomfortable with our current capital structure. That does not mean that to the extent that we were able to negotiate a discounted payoff of some debt or relatively speaking a high yield on the investment,that we wouldn't consider doing some of that work and you know, even improving our capital structure.

With regards to acquisitions, I would love to tell you that I thought we were going to be doing acquisitions that would have an impact on our use of capital in the short term. I think that it's going to be a bit of time before that happens.

As I think I sort of suggested, there seems to be a very wide disparity between bid and ask rates on the sales side. A lot of it has to do with the availability of third-party secured debt and a lot of it quite frankly has to do with a -- seems to be an inability for the various participants in the capital structures on certain assets to figure out what direction they want to go in and/or for some group of parties to recognize that the valuations have changed and it's time to move on and they need to sort of look at what is right for the asset, not necessarily what's right for their own particular balance sheet on whatever they are -- a bank, insurance company, pension fund advisor that runs an open-ended account etc.

I think that stuff is going to take a little bit of time. But as I suggested, I think maturities are not going to be the driver. I think it's going to be frictional transactional activity that's going to get that stuff unglued sooner rather than later because as assets have capital requirements or leasing requirements that are necessary, those parties are going to have no choice but to get together and start to realize what situation they might be in and that's going to cause an action and hopefully that's when these types of assets that we are interested in will be moving in a direction where we can use our capital in a very accretive and value creation positive manner.

You asked about development as well. Clearly it's very early in the cycle to be thinking about development because of the imbalance between costs and rental rates. That being said, we are looking at and have done, as the Princeton experience illustrates, build-to-suits and there may be situations we are pursuing them as they come along were build -to-suit is possible even though the normal market might not be ready for development and where we can lease at 100% or close to 100% in advance.

I guess added to that, I mean are you seeing from a -- I see what you're saying on the development side. But from a land perspective, have the opportunities -- I think Ray had mentioned previously that you guys were looking at some opportunities in the DC metro and I was just wondering if any of those had progressed along. As well if you can talk a little bit about if you have changed your return hurdle that you are looking for either for acquisitions or that land opportunity?

I would say there's nothing that has percolated to the point where there's much in the way of commentary that we can make to the investor world on asset land purchases or other types of endeavors that we would want to make. To answer the last question on our return levels, clearly return levels have gone up.

When there was an expectation that cash was plentiful and you could do financings at 4%, 3%, 5%, 6% and you could get 90% financing; that obviously had an impact on overall returns. And when you are on a secured basis maybe able to get 50% financing maybe and that financing has got a coupon of somewhere between 7% and 8%, that clearly affects overall return levels.

In addition, the growth of rents had a pretty meaningful impact on what you thought return levels might be in a short-term versus the overall long-term. And if you don't think rents are going to be appreciating at 30% or 40% over a period of time, probably has a pretty significant impact again on what your overall return threshold expectation is for the next three to four plus years.

So the answer is clearly our return levels have gone up. I don't have a number I can give you. It depends on the investment.

It depends on the profile of the asset. It depends on the replacement costs and it depends on the submarket.

And the return we might be prepared to take on a building on Park Avenue that we could buy for $700 a square foot may be very different than what we would be prepared to take for a building in Reston, Virginia that is vacant and we might only be able to buy for $200 a square foot. And again, it's very, very different depending upon the particular opportunity.

And then next to GM -- the GM lease that you have on the GM building, I'm just wondering, has their intent changed there? Or would there be an opportunity to renew that lease? Is their expectation still to exit that space next spring?

We can't speak for the tenant. All we can say is that General Motors unfortunately put themselves where they have the ability through bankruptcy to reject the lease at 601 and they have a lease that goes through the beginning of 2010 and we'll see what happens with them. We really don't have anything we can say about that.

Jay Haberman, Goldman Sachs.

Hey, good morning. I'm here with Sloan as well. Back to the question on capital structure, maybe for Doug. As you think about leverage and perhaps even further reducing leverage, are you factoring in cost of capital such that obviously looking at opportunities either with the converts or your line of credit, maybe even out to 2011, that with a lower leverage profile you can maintain an obviously lower borrowing cost as you think about revenues remaining challenged for the next couple of years?

Well if you're asking do I think that my overall leverage is going to affect my cost of capital from an unsecured bond or a convertible bond perspective, I am not really sure that overall the market is thinking about it that way. I think that relative to where we are today in our quite frankly our coverage ratios and our overall unencumbered asset base which is really how they think about the world, that is primarily what drives I think the ratings outlook for these bond investors.

And whether we are where we are today or where we have $1 billion less of debt, I'm not sure materially would impact our access to the markets and the coupons that we would have. I guess if we went -- if you look at the various types of issuers out there, there are issuers who have ratings levels and debt levels that are significantly lower than ours that are having much more receptivity by -- from the market because of the business lines they are in.

So I'm not sure that there would be a meaningful change unless we had a total change in our capital structure and basically paid off the vast majority of our debt and then we're (inaudible) issue. So I don't think that would have a major impact.

Okay and then can you speak a bit more about the Lehman spaces? You mentioned obviously the 200,000 square foot sort of potentials there. Can you give us a sense of how far those discussions are coming along giving that you talked about them a couple of months ago at NAREIT as well?

Yes, so as I said before, there are sort of three levels there. We are negotiating leases and when you negotiate a lease, that means there are legal documents going back and forth and as I think Mike described, things are just taking longer today because people don't feel the oppressing need to do something.

But there are certain companies that really wan space and they're aggressively trying to get leases done. There are we are at the proposal stage which is people have come to us and said we are interested in your space but we're not ready to make a decision as to which particular space we want or which building we want.

And then there are the we're in the market and we're looking for space. I would say we have all three of those types of situations at 399 with regards to the Lehman Brothers space and quite frankly, I wouldn't be surprised if we get some leases signed in the short term. But you know, we never say something is done until it's done unfortunately in this business.

Sloan has a question too.

Doug, just real quickly back to the leasing question. You guys spoke about the different buckets for TI spend. Do you have a sense or just kind of maybe a budgeted amount of capital you would spend for leasing over the next year or two? How should we think about that?

We don't allocate as a company, well we're going to spend $35 million on leasing in Manhattan and $40 million of leasing in Boston. Because it's obviously based upon what the lease rollover that we have.

We obviously -- we think pretty analytically about the world and we look at net effect of rents and we look at return on invested capital and we look on the various opportunities we have and we -- at certain times we choose not to do a transaction because we don't think it makes sense from a capital investment perspective. That being said, we think one of our advantages is our ability to adequately put capital to work and get on an incremental basis, a pretty good return on that money to depending upon the tenant credit and quality and the location of the buildings that we're putting it in.

So I would -- if you said to me okay, I need a number to figure out my cash available for distribution, what's the right number to be using for tenant improvements overall in the portfolio? I would say it's going to be in the high $30s, I'm guessing.

But like I said, there are going to be quarters when we have a 500,000 square foot lease that we are renewing and there's no tenant improvements and we do 600,000 square feet of leases and you're going to see a $5 or $10 average TI cost because of the quarterly impact of those big skewings. And there are some, as we described in Washington DC, some very significant transactions that we're working on that are going to have very limited if any tenant improvement dollars.

That's helpful, thank you. Thanks guys.

Jordan Sadler, KeyBanc.

Quickly, just coming back to the opportunity that may be in front of us, you mentioned just types of assets that you would be interested in maybe by market or just asset class. Would it be the same quality as the existing portfolio and would you pursue other markets?

I will start and, Mort, if you want to comment, please feel free. I would say that if there's one thing we are going to do it's that we are going to be very clear in our strategy which is that we believe that our advantage in our operating perspective is best suited to the high quality buildings in the existing markets that we are in.

And while there may be some real attractive opportunity from a return perspective that might at least elicit an interest level to do something outside of that, I think that by and far what you see us do is participate in the recapitalization of assets in our core markets that have a similar quality and a similar at least opportunity from a market perspective to be high-quality Class A suburban and urban buildings within the very distinct submarkets we are in i.e. Midtown Manhattan, not lower Manhattan; and Reston, Virginia; not the Dulles corridor and Tyson's; 128, not 495 in Metro Boston; things like that.

I don't think you are going to see us sort of going askew and trying to become an opportunity fund that is looking to take advantage of the gross reduction in values and hope that the momentum goes in the other direction so that we can sell these things and sort of not have an expectation that we're going to be long-term holders of assets.

I'll add just a further refinement. We will be on the East Side of New York, the Upper East Side of New York, not on the West Side of New York. I mean just again, it all goes to the same idea and that we believe we have been able to do this in good markets and bad markets.

There will be opportunities to develop properties and opportunities to purchase properties and that's what we're going to focus on in those particular markets and in the highest quality of those particular markets. Otherwise we will not go forward with acquisitions.

That's helpful. And then, Mike, maybe just a clarification on the occupancy guidance. I think you're still guiding to 91% occupancy by the end of the year which is what you said last quarter. But you said last quarter that you needed to do about 1,000,000 square feet of leasing for the rest of the year to get there. Now you're talking about 850,000 square feet of leasing and you did 600,000 this quarter. So the numbers seem to be skewed up maybe 100 basis points plus just by the math that I'm looking at. I'm just curious if you could reconcile that.

Well the 600,000 square feet of leasing doesn't all start this quarter. So there's rollover that's occurring in the portfolio as well.

So we can try to go through it in more detail with you off-line, but there's not a significant change in what our leasing projections have been. We still, as I said, we still believe we will be in roughly the same occupancy place that we thought we were last quarter.

What do you have for a placeholder within the 850 for the Lehman space?

We are not assuming that we lease any of the Lehman space.

Ross Nussbaum, UBS.

Hi, good morning everyone. I'm here with Rob Salisbury. Doug, you just used a phrase to answer Jordan's question. You talked about participating potentially in the recapitalization of assets and that lingo would suggest to me that you're looking at opportunities not necessarily at the equity level of the capital stack but up higher. So does that imply that you think the opportunities over the next 12 to 36 months are going to be Boston Properties inheriting existing distressed mezz and first mortgage positions and/or writing new loans to recap those assets?

I think you make me sound more sophisticated than I am. When I say the word -- when I describe recapitalization, I mean that you have buildings that have more capital stack in them than they're worth. And the participants of that capital stack are theoretically today equity owners, mezzanine debt owners, sometimes subordinated debt and then first mortgage debt.

There has to be a 'come to Jesus' session, a capitulation, whatever you want to call it on that value because not all of those players have any value in their particular positions. Now that doesn't mean that we wouldn't consider depending upon the asset and the particular situation, participating in one of those -- at the appropriate place in that capital stack.

But I wouldn't suggest that we are going to be active buyers of tranches of debt with an expectation that we are going to be become the party that is pushing forward for the recapitalization effort. We will get in the right place at the right time in the right situation if we think there is ultimately going to be an opportunity for us to become the overall equity owners of the building.

I want to make one amendment to what you said, Doug. I wouldn't say come to Jesus. Come to Moses is more likely, I would say.

What kind of unlevered IRRs are you thinking about in terms of getting the Company excited about putting capital to work in the current environment?

You know, I tried to answer that question without answering the question when it was asked before, so I'll do it again which is, Ross, it really depends on the opportunity. As I said, if an asset on Park Avenue became available at $700 a square foot and the cash-on-cash returns were 8.5% and the leases were stable for the next few years and they were all written between $50 and $75 a square foot, we might think that the IRR in that was significant enough in terms of what the upside would be to jump at that.

On the other hand, if there was a vacant building in a suburban market and we thought it was going to take us two years to lease up that property but we thought it was a great asset, it has a different risk-adjusted profile and it will probably have a higher overall return expectation. So I wish I could -- I wish I was smart enough to be able to give you a specific number, but I can't.

The only thing I can tell you is that people are going to be doing this on a weighted average cost of capital basis that is accretive after debt. So if you think your cost of debt is whatever it is, the IRR is going to need to be higher than that.

And one quick question for Mike. Can you talk about your strategy on real estate taxes? I would assume you are aggressively fighting every bill that comes in the door. How successful have you been on that? What kind of reductions are you seeing versus the original tax bills that you're getting?

I really can't quote on specific reductions. I can tell you that we systematically review our tax bills and tax exposure in each of our markets individually every year and we go to the taxing authorities and seek to get reductions.

We have been successful and we have been successful this year in gaining reductions in a couple of our markets and some of our markets we haven't. But it is something that we do constantly in each of our markets.

Jacob Strumwasser, BCC.

Hi guys, I appreciate the time. Mort, you gave a pretty straight shooter view on your feelings on the economy and you often have or are considered to have a lot of street credit when it comes to talking about these things. So on that vein, I wanted to ask two specific questions. What do you see going forward for LTVs and do you think that AFFO for you guys is going to trend lower?

Mort, are you going to answer those questions?

Well, I think -- why don't you deal with the FFO question, Doug, and then I will deal with the LTVs.

You know, on the FFO side, we've already provided what we expect our guidance to be.

We are conservative in those estimates going forward, I would say.

So we expect to achieve that guidance. For 2010, we have given you certainly some information to utilize to assess what our results will be in terms of what we expect our occupancy to be and where we expect to be impacting with our development pipeline coming online.

In those numbers, we have made certain assumptions with respect to space that is currently vacant staying vacant rather than assuming any of our lease negotiations are going to be consummated. So I think that is sort of a standard practice of ours but we always try and realize the -- shall we say, the leasing opportunities we have and we still intend to do that.

LTV matter, I mean I think we are in an overall corporate sense going to continue to try and stay in the (inaudible). It's a very interesting question now as to what is the best capital structure for a publicly traded REIT and a lot depends in terms of what our sort of availability of credit lines would be that we could have.

But there -- I think the equitization that took place already where we raised in effect over $840 million is a step in a direction that may be the predominant sort of structure for publicly held companies. The problem we have with all of that is the capital markets at this stage of the game are so fluid and they are intimidating at this point in terms of both rate and availability and terms.

But that may change and there are two ways it may change. It may change on the basis of securitized financing but it also may change in corporate terms in terms of rate. And if that becomes a more attractive option, I'm sure we'll do some of that as well as other more conventional forms of financing. I think in our own minds we're going to stay as an overall -- as a Company in the range of 50% loan to value.

Alexander Goldfarb, Sandler O'Neill.

Good morning, just a question on the impairment. It sounded like rent was the -- the rent conditions were the driver of the impairment on the value added front. If we think about the GM building, how would rent impact that? Is it signing new deals in the market or is it just constantly assessing the marks in the building versus where the property -- where brokers think the space would lease for today?

Just to refresh what I said earlier, our view is when we did our impairment analysis end of last year, which really wasn't the end of last year. It was just prior to the end of March, beginning of March when we filed. We sort of had a view on where rents were in the various markets and particularly in Manhattan we really haven't seen much evidence or reason to change our perspective on those rents.

Number two is our perspective on rents for a building like the General Motors building is one with a very, very long duration. Our expectation of where rents are on a building like Circle Star in the North Peninsula market of San Francisco is a very different one.

And so when you are doing your valuations which are purely academic exercises unfortunately, the length of your period of hold and your view on where rent is going to be over that period of hold makes a very significant difference in how those valuations occur. So we really didn't have any reason to make changes to our input assumptions on our New York City portfolio.

And then to Mort's comment on New York, acquiring in New York, it almost -- it sounded like you are thinking about acquiring on the Upper East side is where you would focused on acquisition. So does that mean the West Side is only for development or would you consider also properties along Sixth Avenue etc. corridor?

I think we would consider properties on the Sixth Avenue corridor. I guess I am -- somehow or other I have always (inaudible) Sixth Avenue was on the East Side. So you're absolutely right (inaudible) that. The West Side, I'm talking 9th, 10th, those kinds of further -- where there are frankly the opportunity for blocks of space to be assembled. I just don't know that that would be where we would focus our investment.

Just the final question is with all the news out of Washington and focus on taxes etc., from your tenants especially tenants who've been around for a while, is there any sense that they may alter their decision-making or is their view that Washington constantly goes through these cycles and they just roll with the punches and continue on with their businesses?

I don't know that we have any sense of any -- well nobody is happy with what's going on in Washington in the business world, for sure. By and large I think there's a real dismay in terms of A, the ineffectiveness of the stimulus program, the fact that it was turned over to Congress and now you have a health bill going through that is being rushed through with most people not even having read the legislation which is like over 1,000 pages of each version and then the House proposing dramatic increases in taxes.

I don't know whether that's going to come out. I don't think that's going to help anything myself so I think we are in for an administration that is going to be taking a shall we say in general not a pro-business attitude and not a pro-investment attitude and not a pro-entrepreneurial attitude. Whatever they say the substance of their programs, I think is going in a very different direction.

Whether they get the health bill through or not, I don't know. I think they are thinking in popularity and I think that popularity is going to continue to go down primarily because I think the unemployment rate as I indicated before I think is going to go up and stay up certainly through next year. So there -- and come the Congressional election next year, that administration is going to be in a very different place politically to be able to get some of this legislation through which is part of the reason why they are trying to jam it down now.

But they are -- and I've said this before -- they are in effect -- they're trying to boil the ocean. They are trying to do way too much and I think there's a very real apprehension in the business community about what is going on and a justified one. Frankly, I supported Obama in the general election but I must say, I am very dismayed by the approach they are taking to legislation.

Michael Knott, Green Street Advisors.

Doug, you mentioned the possibility or the hope to acquire on Park Avenue at 8.5 cap on sort of a stable rent roll. Do you think the odds are good that you'll have the opportunity to do something in that range over the next one to two to three years or do you feel like that is not likely to happen and therefore you'll have to either pass on adding to Midtown or have to lower those hurdles a little bit?

I don't know, Michael. I know for example that there is a condominium interest on Park Avenue that is trying to be recapitalized right now and the equity press on the thing is going to be somewhere between 8.5% and 9%. So there is sort of a deal brewing right now in that range but I honestly -- it's going to depend on individual assets and individual capital structure and if somebody had a big mortgage on an asset and the mortgages is clearly the vast majority of the capital structure and it has a refinancing date impending and there is a recognition that the mortgage is going to have to be cut in half and it was a $700 or $800 million mortgage or a $400 or $500 million mortgage, I think those [who are aware] those types of opportunities are going to avail themselves.

So look, we're optimistic. We believe that the capital structure for private owners of real estate in large markets like Midtown Manhattan are going to change and there's going to be a significantly enhanced requirement for equity and there are going to be relatively few organizations that have the ability to raise that equity and the ability to operate those buildings and we believe we are one of them. So we are -- I think we are hopeful that we're going to find those types of opportunities.

Let me add one other thing to that. There are now a number of major pools of capital that are looking to invest in some of these markets, not on their own but in partnership. They have certainly approached us to see if they could in a sense joint venture with us on acquisitions and that will I think further enhance the opportunity that we will have in those very special situations, as Doug said, which are going to be particularly crystallized by the possibility of financing that's going to be coming due and I think that is what everybody is worried about in terms of the commercial markets which is that there's going to be a lot of CMBS has paper that's going to come due and people are not going to be able to refinance because the financial markets, the credit markets are much worse than the equity markets.

So those people who have the equity and particularly if those people contract additional equity, which we can, I think are going to be in a position to have the best opportunity to make those purchases. The question will be is that we don't even know what all the financial structures are but one of the things that we are doing of course in the various markets we are in since we are one of the people who are relatively well capitalized is we're trying to sort of look around each one of these markets to see which properties might become available and to see if we can sort of get prepared for that possibility or even to shall we say be proactive in those particular situations.

So that's I think the general makeup. But this is all under -- most of this is just happening in our heads at this point. There's been very few situations that we know are literally either in the market or on the verge of going into the market.

Okay and then the JV comment tied into my last question which is as you contemplate how to finance future external growth, I would guess in a significant way over the next two or three years, are you more inclined to use asset-specific joint ventures like you did with the Macklowe purchase last year rather than sort of an opportunity fund as it's been reported that some of your peers are considering?

I don't think we're going to do an opportunity fund. We don't want to have a conflict between the opportunity fund and what we are doing and we just think we ought to keep things simple and clear and clean. I think there's a real issue in those opportunity funds as to who you are serving. We have shareholders and that is our principal concern and we don't want to be in a position where we have the possibility of a conflict of interest.

Jeff Spector, Bank of America.

Thank you. This is actually Jamie Feldman. Good morning. Doug, can you just walk us through the largest blocks of space that are in your June 30 occupancy percentage number but are either vacant or underutilized or on your credit watchlist?

Not quickly just because I don't have the information sitting at my fingertips here. But we can get on the phone and we're happy to do that for you.

I would say that for the most part, occupied space as of June 30 has limited, if any, major blocks of 'shadow space' or unused space. Even -- and we've talked about this all the time. Even an organization like Citibank that has significant space in our portfolio in 399 Park Ave. and at Citigroup Center is still utilizing the vast majority of that space.

Sorry -- 601 Lex. They're utilizing the vast majority that space. That doesn't mean that if someone came along and said we would like 300,000 square feet at 601, they wouldn't be able to get out of it in six months because they probably have external space in other parts of their portfolio that they could move people into. But as we go through our portfolio, there really, that I'm aware of, is very little 'non-used space' that's 'occupied' today.

Okay, so as we think about kind of pending big blocks, it's really -- for New York, it's really the GM building that's the big question mark?

It's not the General Motors building that's the question mark. It's 601. 601 is where unfortunately General Motors had a lease for 120,000 square feet and we no longer have a 120,000 square-foot lease.

But their March expiration?

Oh, you mean in terms of what the future expirations are?

Yes, in terms of what's to come; exactly.

Well I mean I don't know -- you asked a question about what was not being used as of June 30 and I can tell you right now that General Motors Corp. is fully engaged in those three floors at the General Motors building. They're chock all over each other there. So there's no vacancy in that space.

And then secondly to follow up on your comments on the unsecured market, I guess what gives you comfort that it will stay open at the prices you quoted?

I think that you never know what is going to happen to that marketplace. You know, the volatility that it experienced from mid-last year until kind of April of this year was pretty unprecedented volatility, if you kind of look back historically. There is -- we don't have a crystal ball to know if that is going to happen again and if spreads are going to widen out again.

What we attempt to do is, as I mentioned, maintain access to all of the capital markets so that if one is unattractive to us or unavailable to us, we have other places to raise capital. My sense is that the winds are blowing in the right direction for the unsecured debt market right now and it has moved in over the last six to eight weeks which I think is a positive thing.

And if you talk with those investors, they take great comfort in the credit characteristics of companies like ours where we have a significant unencumbered pool of assets, where the quality of those assets, the occupancy of those assets and the rollover criteria of those assets give them great comfort that they have some -- that they can look out for relatively long-term and have comfort with what they have as their collateral effectively. Even though they are unsecured, they see that as their collateral.

I also answer the question in the sort of negative way which is it's the lesser of all evils. Relative to all the other markets, I see more hope that the unsecured market will remain open than I do that the secured debt markets in the form of securitization or the bank market in the form of large syndicated loans is going to be open and accessible over the next period time to defined as nine months, 12 months, 18 months.

So relatively speaking, that market seems to be because of its breadth and the constituents of who those bondholders are and the relative covenant type protection that they have in terms of how those companies are structured that are borrowers in that marketplace, I think it has the best chance of all the markets of functioning more normally than everything over the long haul.

I also think that that market has taken great comfort in the re-equitization that has occurred in the REIT market and all the equity's that's been able to be raised and that's part of the reason that that market has improved significantly.

Okay, then just finally, the numbers you quoted for 399 Park in terms of asking rents, the $60s and I think you said high $80s.

Yes.

Where would you put that on a net effective basis?

You mean, what are our operating expenses? Operating expenses and (multiple speakers)

Operating and then (inaudible) TIs and free rent.

When we do a deal, we do a deal on an as-is basis. There are no TI's. So it's a question of what the rent is and how long the lease is for a brokerage commission perspective. So it's very variable.

All I can tell you is operating expenses in Midtown Manhattan are generally in the high $20s. So you can do your own calculation as to what you think our various level of transaction cost might be. But as I said, where depending upon the deal there is between $0 and $40 plus or minus of TIs that are sort of on the better leased space and free rents are a really interesting way to think about it. Because if there's no tenant leasing this space, I'm not sure your free rent calculation is -- should or shouldn't be depending upon your perspective part of your NER calculation if you don't think you have another alternative to lease that space.

On the other hand, if you do think you have another alternative or you think rents are going to be moving up or down, you have to factor that into how you think about it. So it's not an easy analytic, one number type of a decision analysis that you can come up with.

Nick Pirsos, Macquarie Securities.

Mort, the government's bank stress testing earlier this year assumed considerably lower unemployment rate levels than there are today. Couple that with your more dire assessment of the job picture, are you concerned that commercial bank stress testing needs to be revisited which could potentially offset some of the gains we're seeing and financing conditions for commercial real estate?

I don't know what gains you are seeing in financial conditions for financing commercial real estate. I think they're very, very limited to date. So I think part of it is that the commercial banks have a huge amount of credit card loans outstanding.

Fortune Magazine did this article on the four major banks. They have $3.6 trillion in credit card loans, both business and individual, student loans and whachamacallit, student loans and auto loans and some home equity loans etc. and they are going to be faced with a soaring default rate on those credit card loans.

I think that's going to affect the credit availability across the board. They're just going to have to hoard cash in order to deal with that. You saw that in the reports of several of those banks that just came out within the last few days where they made all made comments on their soaring losses in credit cards. I think it's just beginning.

So I think the commercial banks are by and large, especially the large ones, are in serious troubles with that. The number of business credit cards went from $5 million in 2000 rather to like $29 million last year and they're defaulting at a rate -- mostly for small business. So they're defaulting at a rate even more rapidly than the individual holders of credit cards.

I think that's a huge exposure to the banking world and I think they all know it and I think it's going to constrain their lending. So I'm not, as I said, I'm not looking -- I can't imagine that there's going to be much in the way of commercial bank financing of commercial real estate.

Bank financing of commercial real estate is I think very, very limited and will continue to be very, very limited. And I think particularly as we say on a secured basis, I think that financing is very, very difficult to come by on terms that our -- in our judgment, reasonable. I think we are going to have the resources -- if it's true for -- on an individual basis, then the REITs frankly who have been able to raise equity money will -- and who are in good financial shape who are going to be able to have frankly opportunities that would come up over the next period of time. So I -- the banks themselves I think are going to be out of the market in terms of commercial real estate for at least as far as I can see. I think we're looking at not months, but years.

That's helpful. And second, just given just the overall absence of job growth, how would you characterize the leasing activity in the recent quarter? Is it increased market share, is it just thawing of pent-up demand?

It's a very good question and I'm not quite sure how to do it. As I say, the market is different for different buildings and different locations.

I frankly wouldn't want to be downtown today in terms of having to lease space or indeed some of the West Side of the city of New York, just to pick an example. Sure we could go through our individual market, but where you have the best buildings in the best locations, there will be people when these rents go down and they have gone down who are saying hey I would just as soon be at 399 Park and there are people moving up from downtown into our buildings -- or least we're talking to them very seriously -- into moving into those buildings.

That's why I think the more conventional space is not going to do as well as the quality space in this kind of a downturn. It may sound counterintuitive but it's what has always been the case in the past and is clearly happening again this time around.

So I think that is sort of the way I read the market and I think the way I think I can characterize what has happened to us and I think it's going to continue. There are always tenants moving around. It's just in the nature of the beast.

Leases come up, some tenants are doing well, some tenants are doing better. Law firms which have a big bankruptcy practice are a lot busier than those which have a big corporate practice.

So you will always find tenants and some of those tenants are going to be in the zone where they can say we would rather be in one of the more prestigious buildings and pay a little bit more for it. We don't have to do a huge amount more and I think that's just going to be the way the market is going to look for the next year or two.

And I think we are going to be one of the beneficiaries of that. On the financing side, as I say, that is also going to provide an opportunity for us and that's one of the reasons why we did that major equity offering. Because we think those opportunities will be available and we want to be prepared for them. Nobody can promise them.

We're going to be in the hunt, so to speak, on that and we'll just have to see how it goes. But we are kind of well positioned I think to take advantage of whatever may come up. We don't know exactly what's going to come up and that's sort of the unpredictable part of all of this.

Things may get a lot worse for everybody. That's also a real possibility. I don't want to dismiss this that possibility because frankly as I say, I think for the so-called stimulus program to be effective, you have to have gotten the money out early. Once this downturn begins to feed on itself, it's much tougher to turn around.

That's the big opportunity that they have lost. And anybody from the government who tells you that they really expect this stimulus money to affect it in the second year is giving (expletive) to what it really is all about. Room temperature IQ and economics will tell you you have got to stop it early, not in the second year.

So I don't know what they were thinking about (technical difficulty) very frustrating (technical difficulty) But anyways, there we are. We are what it is. It's both an opportunity and a risk.

There are no additional questions at this time. Mr. Linde, I'll turn things back to you for any additional or closing remarks.

Thanks everybody. We apologize for the length of the call but obviously people wanted to hear what Mort had to say about his views on the economy and we didn't want to cut him off.

So given that there was nobody else after us at least on the REIT side, we appreciate your indulgence on sticking it out, if you stuck it out. So we will talk to you soon. Thanks. Have a good summer. Bye.

And that does conclude today's conference call. Thank you for your participation.