波士頓物產 (BXP) 2010 Q1 法說會逐字稿

Good morning, and welcome to Boston Properties' first-quarter earnings 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 the presentation during the question-and-answer session. At this time I would like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Good morning, and welcome to Boston Properties' first-quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplement 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 statements.

Having said that, I'd like to welcome Mort Zuckerman, Chairman of the Board and 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.

Mort, I think you're going to start today; right?

Yes I am. Thank you.

Go ahead.

Well, we are I think continuing to do fairly well as a company in what has been a very, very difficult environment but one which I must say I think is getting somewhat moderated and easier and improving. The economy in general, as we all know, has been through a very, very difficult patch. And the recovery I suspect will be slower than a typical recovery from a differing kind of recession, this being a recession that was obviously provoked by a financial crisis that came about as a result of the collapse of the housing market and what it all did to the securitization, the world of securitization and through that, the world of finance.

And as all of the serious studies of these kinds of recessions that are provoked by a financial crisis indicate, recoveries from this kind of a recession is longer and slower than the typical recovery from the kind of recessions we have had since the end of World War II. So in one -- that's I guess one reason why this is going to be called The Great Recession, and let's hope it is just a recession, I still think it will just be a recession.

We are certainly in an area of the economy that has been affected by it in this sense, in that a lot of activities, office building activities of the American business world, the corporate life of America, has been under the cost controls and the concerns about over-expansion that I think was spread throughout the business economy.

Nevertheless, I think, as I'm sure you've heard from us before and probably have heard from other people who are in this world of commercial office space before, we are in the same markets that we have underscored before, namely, supply constrained markets, supply constrained for different reasons. In Washington it's because of a height limit. In New York, because of the lack of available sites. In Boston, because of an unbelievably complicated approval process. In Cambridge, because there no sites, etc. (technical difficulty) was a lot less difficult to deal with.

And the demand situation has been affected by the fact that there has been a drop in rents, and when these buildings, the better buildings, become available at somewhat lower prices, there are a lot of tenants who say, well, I couldn't afford it before, but I can afford it now.

And I think this is particularly true in our New York activities, where we are really in the range of 98% occupancy and -- in terms of either lease space or space that we are just drawing leases on. So we are in very, very good shape in that market, in part because the buildings that we have -- and if we had more space of that kind, I suspect we would continue to do very well with it, if we could add a couple of hundred thousand square feet to any number of our buildings in New York, we could lease that space within a matter of a few months.

So in that sense I think we are faring quite well. We are also trying to position ourselves to take advantage of what opportunities we think will be coming down the pike over the next year or 18 months. Amongst other things, to do this we have been very diligent in terms of trying to take advantage of where we think the financial markets provide very good financing opportunities for us.

As you all may know, we raised $700 million several weeks ago on what we thought were very, very good terms. It was just shy of 11 years at maturity, and I think the basic rate was somewhere around 5.66% to 5.70%.

Now, the reason why this is valuable for us is I'm sure obvious to all of you. But I'll just repeat it. It does give us the opportunity to be in the market for certain opportunities that will be coming forth that give us a cost of money that makes it possible for us to get some decent leverage or positive leverage when we can finance them at the kinds of yields that we were able to do on a corporate financing.

We really have really close to $3 billion in effect in one form or another of available equity to use for activities. And we hope that we will be able to put a good chunk of that money to work over the next year. And I think this will be advantageous to the company's growth over the medium term and over the longer term.

So we are I think not in the strongest market we've ever been -- to put that mildly. There are certain markets, as you will hear some subsequent reports, which are not as good as, say, the New York area or the Washington area. But frankly, we believe that these markets are steadily firming up.

One of the things that is going to contribute to that is that there is very, very, very much reduced new supply coming on the market over the next several years. I would say that the new construction of the kind of office space that is competitive with us has probably jumped at least 80%, if not more. And I think it will be very difficult for a lot of companies to finance new construction.

And so I think we are going to be in an improving market as demand slowly, slowly begins to increase relative to the amount of available space, and the supply is just going to be virtually nonexistent. So we are fairly comfortable, and maybe even modestly optimistic about the next several years and what it will mean for us in terms of occupancy and rentals.

With that, I will turn this over to Doug, who will give you a specific report on the company, and then we can have a Q&A afterwards when we have given you the detailed reports on the company.

Thank you all very much for listening.

Thanks Mort. Good morning everybody, and thanks for joining us.

We sit here I guess in sort of the middle of earnings season for corporate America, and it's clear that the story is no longer about margin improvement through aggressive cost cutting, which we think of as another way of just describing job cuts. People aren't even talking about inventory restocking anymore.

I think there are clearly signs that there is topline revenue growth across a pretty broad spectrum of the economy. And everybody's commentary, including Mort's this morning I think, is really -- it's a much more positive tone. And we are actually seeing some isolated announcements of renewed hiring.

Now, a year ago I think everybody was just keeping everything in check because there were so many job reductions and we had rising unemployment and we were having lots of personal and corporate financial distress. And while I think Mort would clearly say, look, unemployment still is a pretty high number and we do still have this foreclosure issue, it feels like business sentiment and consumer confidence is really starting to look through these negatives.

While we are not yet seeing any consistent hiring trends from our customers, our tenants, there is clearly a change in psychology, and velocity is starting to pick up.

If I bring you back to last year in the first quarter of 2009, Boston Properties completed 250,000 square feet of leasing transactions. In the first quarter of 2010, we completed over 1.8 million square feet in 71 separate transactions -- 730,000 of it in Washington, 212,000 in Boston, 437,000 in New York City, and another 400,000 in San Francisco. It is by far the most active quarter we've had in the last few years. If we even adjust for --- there's one large 500,000 square-foot transaction, which was really a set of short-term extensions with Lockheed Martin in Reston, we are still more than 50% greater than our average first-quarter activity.

Our second-generation leasing statistics felt, at least when you looked at them, more like 2006 than 2009, and we showed double-digit increases in net rents. Now, I have to say that's a little bit of an anomaly, and it's largely because of the aggregate numbers -- really are more of a historical representation than an actual representation, and I do want to clarify what's going on there.

This quarter you have to adjust for three things. One is that the Ropes & Gray lease at the Prudential Center, that's the replacement of Gillette -- that's 480,000 square feet, that kicked in this quarter. Remember that was completed in '07.

We had about 91,000 square feet that we did in 2008 in New York City, where a tenant took additional space, and again, that clicked in this quarter.

And then we did a short-term deal with Lockheed Martin for a 264,000 square-foot, one of the leases of that 500,000 square feet that I referred to a moment ago, and if you exclude those, second-generation statistics are pretty similar to where they were last quarter. We are down about 9% on a gross basis and about 15% on a net basis, which feels right for where we are today.

Even with the headwinds from significant available space and all of the markets, we really are seeing velocity continue to build though. Tenants are more confident, they are seeing availability of the best space declining, and there is clearly growing consensus that overall rental levels have bottomed out and that there is really not much in the way of value in delaying a leasing decision. It's time to sort of move on because things are not going to get much lower.

It doesn't mean that the lease negotiation leverage has suddenly shifted to the landlords or that we are even predicting strong rental rate growth and declining concessions. But there are a few green shoots in the portfolio. Let me give you a couple examples of some encouraging signs.

In the Boston suburbs -- and that includes Cambridge -- which are dominated by technology, health care, and biotech life sciences companies, we are seeing expansion, actual expansion, from tenants such as Shire Pharmaceuticals, Cubist Pharmaceuticals, Google, Microsoft, I Robot, Dessault Systems, Constant Contact, Lincoln Labs, and A123.

Now, the optimism has to be tempered by the fact that there is overall availability in Central 128 in Cambridge in excess of 20%, and there are some tenants that are actually still going to be reducing their headcount because they have reduced jobs over the past few years and they're going to be resizing their facilities. And while we don't expect the markets to make a quick recovery, there is clearly visibility on growth, which is something we have not really been able to see up to this date.

In New York City, which Mort was describing, where again we derive almost 42% of our net operating income, the best space in the best buildings that was in moving conditions is really rapidly shrinking. Leasing velocity in the first three months was at 94% of the historical levels over the last five years, the quarterly volume of signed leases in Midtown of 3.4 million square feet, against a five-year average of 3.6 million. Clearly the velocity continues at a very strong clip.

While many of the larger financial institutions are still rationalizing their space needs, the recovery and the changing landscape of the financial services industry has led to the formation or growth of smaller organizations, and we are seeing this firsthand in our leasing transactions.

We've now completed the leasing of all of the remaining office space at 399 Park. We've completed two renewal expansions at the General Motors Building, and availability in that asset is now limited to two 9,000 square-foot suites that expire later this year. We completed a 175,000 square-foot renewal at 125 West 55th Street, and we are in discussions with tenants on all of the remaining 2012 rollover in that building.

Our overall availability in top buildings in Midtown Manhattan, which we sort of characterize as about 34 buildings and about 40 million square feet, dropped this quarter by 100 basis points. It's about 12%. Our portfolio is just over 96% leased right now at the end of the quarter. With existing leasing transactions that are completed, it will be a little bit higher than that in just the -- at the end of the next quarter.

Tenants in all of our markets have begun to act on the new level of lease economics and clearly appear much less constrained about investing capital in their premises.

Now, clearly one obstacle to growth that we have -- and I think this is important to think about -- is that in the CBD markets we are -- do have a predominance of legal industry participants, and the legal industry has in fact contracted over the last couple of years. And as law firms today look at their premises, they do have excess space. So as law firms renew over the next few years, we expect there will be an accompanying reduction in the amount of leased area that they take. But they will continue to be a very important part of the CBD office markets, and their demand will be a driver of rental rate appreciation, but we are going to have to adjust to a smaller base in the short term.

In DC the two primary drivers are the law firms and the GSA -- the government. We have clearly begun to see the GSA growth, predominantly from the financial services side of the government. The Treasury and the SEC are actively hiring and searching for additional office space. And the law firms are actually hiring lawyers to staff their government regulatory practice groups, which is no surprise.

The government is actually using recovery money from the last act that was passed by Congress to refurbish buildings, and this is actually translating into additional leasing activity because they are moving tenants out of GSA buildings into swing space for the next few years. When the government moves someone into another building, it's not for six months or nine months, it's generally from 2 to 3 to 5 years at a time.

The short-term challenge in the District will continue to be the availability of space in the secondary markets in the North Capitol, Southwest, and Ball Park/Waterfront areas. Practically speaking, the only tenants for those buildings are the GSA or other government associated users, and there is pretty significant availability still, probably close to 4 million square feet, and rents on those buildings are going in the high 30s with CPI escalations and full tenant improvement allowances. So we expect that's where the GSA is going to focus.

They're not going to focus on the primary locations in the East End and the CBD, although certain specific users, for example Treasury, is going to want to locate their people closer to Treasury's headquarters, and so there may be some additional expansion in the GSA's use in the East End and the CBD from them.

Our DC portfolio is 98% leased. We have about 225,000 square feet expiring in 2010 and 2011. We've completed another lease at 2200 Pennsylvania, and we have pretty strong interest in the remainder of that space.

I want to mention the 500,000 square-foot holdover renewal that we completed with Lockheed Martin. Lockheed's contract with NGA is being relocated as part of BRAC. We will be getting back these buildings plus another 180,000 square feet in 2012. The good news is that we are actively competing for another government user to back-fill the space. We are also actively working on our 2011 rollover in Reston, which totals 445,000 square feet, and we are in lease negotiations with a 180,000 square-foot user for a late 2011 lease expiration and active dialogue with two other tenants, one about 105,000 square feet and the other 90,000, to take the predominant amount of that square footage that's rolling over.

While the Toll Road market continues to struggle, we are clearly the beneficiaries of tenants that are upgrading both their location and the quality of their premises to Reston Town Center. Highly marketable space in the highest quality buildings has the best chance to be successful in a difficult market, and once again we are seeing that first, loud and clear.

In San Francisco leasing activity was pretty modest, but tour activity has truly started to pick up in the last few months, and we completed another two full-floor transactions.

In the Peninsula on the Silicon Valley, those are tough, tough markets still. Genentech has continued to expand in our Gateway Project in South San Francisco, and our occupancy there has reached 97%. Unfortunately in the Silicon Valley, Lockheed Martin renewed on only half of 270,000 square feet of our Zanker Road Business Park in North San Jose, so we are going to be stuck with about 270,000 square feet of additional vacancy there. The good news is, the rents in those buildings are about $1 a square foot per month, so the economic impact is not terribly significant.

Leasing activity is picking up in the Valley, but again, remember that there is a lot of availability. There's just that overhang that's in the market, probably 15 million square feet of class A space, a lot of it which was developed and delivered in 2009 that is remaining vacant. So it's going to be challenging for a while, but we are seeing again additional demand.

Google and Intel have both announced hiring objectives, and we are seeing expansion from some of our smaller startup tenants that occupy our Mountain View Research Park.

Overall our mark to market, as you probably would expect, remains negative. It's actually improved slightly, about 5% from last quarter, down to $1.65 from $1.74. Remember that the rents we are providing are starting rents, so there's always an increase during the term, but those aren't reflected in the mark to market.

We actually have raised our rents modestly in New York City over the past few months, in concert with what Mort was talking about in terms of the demand there. It's literally largely due to the fact that we just don't have any meaningful inventory. In New York City our gross rents range from the high $60s to the high $80s, with the exception of Two Grand Central, where they start a little bit lower, in the low $50s, and at the General Motors Building, where rents start in the low $90s now and probably reach over $140 a square foot. The rents and the rest of our markets really remain pretty stable.

In 2010 the average expiring office rent is about $42.75. It's about 9% higher than the overall market, and in '11 it's $49.14, about 14% higher. And again -- we've talked about this in the past -- we have a lot of rollover of very high rents in Embarcadero Center that are impacting our 2011 numbers.

The highlights in our press release this quarter were clearly dominated by capital raising activity. While it's certainly possible that interest rates and credit spreads may continue to tighten, we've looked at the absolute level of borrowing costs and the potential of dilution that comes from holding large capital balances and made the judgment it was an appropriate time to borrow.

We have opportunistically repaid or purchased a portion of our near-term maturities, and we might continue to consider these activities as well. But as we look forward, we believe the environment to create value through acquisitions is improving. In the last 60 days the transactional opportunities have clearly started to accelerate. We've seen broadly marketed fee interest in some CBD office buildings in San Francisco, 303 2nd Ave. and 333 Market, and in New York City with 600 Lex, 340 Madison, and 125 Park, and potentially controlling debt positions that are actively being marketed at 1 Federal St. in Boston and 885 Third Avenue in New York City.

The point is that the financial institutions that hold controlling debt in many instances are recovering, debt and equity capital is very available, and the various participants in these overleveraged real estate assets and portfolios are beginning to push for resolutions. The participants in the capital stack are getting more realistic about the current level of lease economics, tenant demand, and the significant capital necessary to operate office properties. At the same time, potential buyers are getting more aggressive about expectations for recovery. So there's a meeting of the minds that's starting to come through.

In some cases Mort -- in some cases we are actually seeing things slowly but surely making their way down the capital stacks through the various tranches, with each successive participant passing on the opportunity to invest additional capital. In other cases borrowers are ceasing to make interest payments, pushing assets into special servicing. And in other situations, lenders are simply saying, we are done, we're moving on, let's just throw this out into -- as a discounted debt sale.

In the more complicated transactions, the one constant -- and this is important for us -- is that the potential deterioration in the value of assets over time continues. Without capital, tenants are making decisions to move on or in the best case being offered discounted rental agreements in exchange for forgoing those capital improvements. And any capital expenditures on the base building side, other than emergency repairs, are being deferred.

Tenant brokers are advising clients of the issues surrounding the ownership of these assets, which is affecting demand, so the tenants and the buildings which have challenged capital situations are in fact feeling the impact of that environment.

During the last cycle of appreciation, investors were able to make money through cap rate compression and rapidly rising rental rate expectations. We believe we are in an era in the office building business where investors are going to have to operate, not trade assets. Identifying the opportunities and challenges inherent in the individual assets and developing the right plan to position them in the marketplace, including making speculative capital investments and then executing, is going to be challenging, and it's going to be management intensive.

But with -- and while the plethora of capital available today may reduce the potential returns we can earn, we are optimistic that Boston Properties is going to be able to use its operational and its financial strength to create a lot of value for our shareholders as we move forward.

With that, I'm going to turn it over to Mike to talk about the results for the quarter.

Thanks Doug. Good morning everybody. I want to just start by giving a quick update of the capital market. As you can see from our press release, we had a productive couple of months in the debt markets. We successfully closed three major secured financings on our joint venture properties, including a $207 million loan at 125 W. 55th, a $180 million loan at Two Grand Central Tower, and a $175 million loan on Metropolitan Square.

As we look back on how we expected these financings to go earlier this year, it's clear how far the secured markets have progressed. Last summer we anticipated that these loans would've been sized at only 75% of what we ultimately achieved and at rates between 7% and 8%. Today we are able to place reasonable leverage with secured financings at debt yields of 10% to 11%, and pricing on new 10-year loans is in the high 5% range.

The life insurance companies and banks are offering very aggressive pricing for high-quality buildings. And in addition the CMBS originators are in the market offering slightly higher leverage and pricing, although we haven't seen evidence that they've actually originated a material amount of new loans yet.

We have covered the majority of our 2010 debt maturities and expect to pay off a couple of smaller loans coming due later this year at maturity, one in Cambridge and a portfolio within Carnegie Center in Princeton, which combined total $80 million. We are also preparing to enter the market to refinance our Market Square North joint venture mortgage that matures in December and are still evaluating our low floating-rate bank loans on our Reston development and on Annapolis Junction, each of which has an extension option.

Our $1 billion line of credit expires in August, and we anticipate exercising a one-year extension, moving its maturity to August of 2011.

We are also looking at our medium-term debt maturities, and to date we've repurchased approximately $150 million of our exchangeable debt that is redeemable in 2012 at a slight discount to par.

As Mort mentioned, we accessed the unsecured bond market this month with a successful $700 million debt issuance for 10.5 years at an effective yield of 5.64%. As you'll see in our guidance, this capital, in addition to the cash we raised last October, will be dilutive to our earnings in the short term until it is deployed. We believe taking advantage of the current low interest rate environment and positioning our balance sheet with a long-term, low-cost debt capital will benefit us over the next couple of years.

Last week we announced the institution of an aftermarket equity program of $400 million. Given our cash position of nearly $1.8 billion today, we have no immediate plans to use this program. However it could be a useful tool to raise moderate amounts of equity in a price efficient manner down the road.

Now I want to talk about our first-quarter earnings performance. We announced first-quarter funds from operation of $1.07 per share. This exceeded our guidance by $0.04 per share or approximately $6.5 million at our guidance midpoint and would have been even greater if not for the impact of a $2.2 million, $0.015 per share charge associated with our debt buyback activity.

The performance of our portfolio beat our expectations by approximately $3.5 million. About $1.5 million of this was on the expense side as we continue to aggressively pursue expense savings. Portfolio revenue was modestly higher due to stronger percentage rent from 2009 sales at the Prudential Center, and a variety of leasing successes throughout the portfolio, plus some holdover rent from a vacating tenant in Boston.

Our hotel continued to earn market share, with occupancy up 8.5% compared to the same period last year, and exceeded its budget by $400,000. Unfortunately room rates remained stagnant at recession period levels, so RevPAR is not improving significantly.

Our joint venture properties outperformed by about $1.4 million, the result of expense savings, higher work order income, and approximately $800,000 of unbudgeted termination income. The termination fees primarily related two tenants, one in the GM Building and one at 540 Madison, where in both cases we have re-leased the space.

We generated fee income of approximately $2 million in excess of our budget, the largest piece coming from our joint venture portfolio, where we completed an early renewal of a 175,000 square-foot tenant at the base of 125 West 55th Street and earned a significant leasing commission.

We also generated $400,000 in cost savings at our 20F St. development job in Washington, DC, and the remaining out-performance is from work order income and incentive management fees in New York City.

We had interest expense savings of $1.3 million in the quarter. This is due to the combination of lower than projected LIBOR rates on our floating-rate debt, our use of cash in lieu of funding our construction loans at Atlantic Wharf and Wisconsin Place, and the impact of the smaller principal balance outstanding on our exchangeable notes given our debt buybacks.

Offsetting a portion of the positive performance is a $2.2 million non-cash charge associated with the buyback of $53 million of our exchangeable debt during the quarter. At inception the debt was bifurcated into a debt and equity component pursuant to GAAP based upon market conditions at issuance. Upon early retirement, GAAP requires us to allocate the purchase price based on current market conditions, and given the relative near-term maturity and an exchange price of $142 per share, the security is deemed to have no equity value today, so we've allocated the purchase price solely to the debt component. With the debt on our books at below its par value, at roughly $0.95, we end up taking a non-cash GAAP loss.

Just a couple of other items I want to cover for the quarter. At our 250 West 55th Street site, we completed all of the remaining work for the suspension of development, and this quarter we expensed $350,000 of suspension costs. We anticipate future expenses for taxes, insurance and security at the site of approximately $2 million a year.

In addition, and as we disclosed in our press release, we settled a lease termination obligation related to the project for $12.8 million. We had previously recorded an obligation of $20 million, so this resulted in a $7.2 million positive adjustment this quarter. This was included in our prior guidance and is not a variance.

Also you'll see our G&A is higher than in prior quarters due to the one-time acceleration of vesting of the long-term compensation for Ed Linde. This cost was also budgeted in our prior guidance, and going forward the run rate will be lower, as I will discuss in a minute.

I do want to go through our FAD for the quarter because it has been significantly impacted by the strength of our leasing activity.

This quarter we have over 2 million square feet of leases commencing, more than double our normal activity, and due to the location and length of the lease terms, our transaction costs are higher than typical. The cost per lease year of $4.27 per square foot is actually lower than our 2009 average, so the lease term length is really the driver.

Some key examples include the 480,000 square-foot lease with Ropes & Gray at the Prudential Tower. This is a 20-year lease for virtually all of the space that had been leased to Gillette since the building was built, thus requiring a relatively high TI work letter.

Also we have over 400,000 square feet of leases in New York City including two leases totaling 210,000 square feet at 601 Lex, and a 15-year, 175,000 square-foot lease at 125 W. 55th. With tenant improvement costs running $40 to $60 per square foot, and leasing commissions for 10- to 15-year leases of $35 to $45 per square foot in New York City, these deals meaningfully impact our reported lease transaction costs for the quarter.

If you strip these four deals out of the statistics, the average transaction costs for the remaining 1.1 million square feet of leasing was only $25.75 per square foot, more in-line with our historical average.

Our straight-line rent also affects our FAD, and it is higher than normal due to many of the same leases plus the other new leasing that we did in the third and fourth quarter of 2009 at 399 Park. As we mentioned before, the Ropes & Gray lease has a 12-month free rent period to complete the buildout of the space, and it's going to impact our straight-line rent for all of 2010. The free rent on other deals starts to turn off in the second-half of the year.

Turning to our projections for 2010, the biggest change to our previously provided guidance will be the near-term dilution associated with our bond offering this month. The interest cost of this debt, net of anticipated interest earnings, is projected to be approximately $0.16 per share in 2010. We are not assuming any new acquisitions in our projections for the year, so this cash is assumed to remain dilutive for the full year.

In the same store portfolio we anticipate flat to moderate decline in year-over-year GAAP NOI with the negative mark to market that Doug discussed. We've had some terrific leasing successes in the past six months, and our occupancy climbed nominally this quarter. But much of that leasing was projected, and we continue to anticipate occupancy for the rest of the year averaging in the 92% area.

In New York City in particular, we've increased occupancy by nearly 100 basis points this quarter. At quarter end we had over -- just over 300,000 square feet of vacancy and another 350,000 square feet of space expiring later this year. We expect positive absorption for the remainder of the year in 601 Lex and at 399 Park Ave., where as Doug mentioned, we've recently signed an additional lease, bringing it to near full occupancy.

However, in our joint venture portfolio we have the GSA rolling out of 80,000 square feet at Two Grand Central Tower, which will mute our absorption for the region.

In Washington we expect occupancy to remain relatively stable this year, as nearly all of our 1 million square feet of 2010 expiries are projected to renew.

In San Francisco, Embarcadero Center has about 300,000 square feet of current vacancy and 140,000 square feet of leases expiring this year. As Doug mentioned, San Francisco has shown an uptick in activity, but overall leasing velocity remains slow and competition is tough. We are projecting our occupancy at Embarcadero Center to remain in the 90% area throughout the year.

In our suburban portfolio the only significant new exposure we have is Zanker Road Business Park in San Jose, where we signed an extension with the existing tenant for 270,000 square feet this quarter but have an additional 270,000 square feet expiring on December 31 of 2010. This space is leased to the mid teens per square foot, so its impact on the bottom line is less, and it has no affect on 2010.

Our largest leasing exposure is in Boston, with 900,000 square feet of vacancy and nearly 600,000 square feet of leases expiring this year. This 1.5 million square feet is comprised of 200,000 square feet of the Prudential Center, 275,000 square feet in Cambridge, and just over 1 million square feet in the suburbs.

We are seeing a pickup in activity in both the suburban and Cambridge markets, as Doug detailed, and much of our space is very high quality. However, excluding our fully leased new development and Weston that comes online midyear, we still expect to lose between 250 and 350 basis points of occupancy in 2010.

With this backdrop, we expect our 2010 GAAP same-store NOI to be approximately 100 basis points above our prior estimates at flat to down 1% from 2009, and negative 3% to negative 4% on a cash basis. Again, our cash NOI is impacted by the free rent associated with the Ropes & Gray lease and the new leases in New York City.

Taking a look at our quarter-over-quarter projections for the remainder of 2010, the first-quarter NOI, after adjusting for $1 million of nonrecurring items, is a good run rate for the remainder of the year with growth of zero to 1%.

We've excluded termination income from our same-store comparison, as in 2009 we had an unusually large $17.5 million of termination income. We are projecting $3.2 million of termination income for the rest of the year, and that includes $1.2 million of fees already received in the second quarter from a small retail tenant in New York City, where we have already got another tenant committed for the space.

We are projecting straight-line rents of $75 million to $80 million for the full year. This is up from last quarter due to the new leases signed in New York. Additionally we signed an amendment of a lease with a 180,000 square-foot government related tenant in Reston, Virginia that triggered a restoration payment provision in the lease, increasing our straight-line rent by $3.5 million per year through the lease expiration in May 2012. This is part of the 700,000 square foot, three-building complex that Doug mentioned, where we expect the tenant to vacate in 2012.

We will deliver our Weston Corporate Center development this summer. The project is 100% leased to Biogen for its corporate headquarters, and we expect it to have roughly a 10% unleveraged GAAP NOI return.

We should also benefit from the full year impact of our 2009 development deliveries, which are virtually fully leased. This includes our 120,000 square-foot Princeton University build-to-suit, our Democracy Tower project in Reston Town Center, which is 100% leased, and our Wisconsin Place Building in Chevy Chase, Maryland, now 96% leased with the signing of another 16,000 square feet this month.

In total our development is projected to add an incremental $18 million to $20 million to our 2010 NOI.

We expect the contribution to FFO from joint ventures to be slightly better than our guidance last quarter at $135 million to $140 million in 2010. It's important to note that our first-quarter results contain over $4 million of non-cash FASB 141 income that has now burned off.

Our hotel has exceeded its budget the last couple of quarters due to occupancy improvements, but we continue to be conservative regarding the prospects for any near term meaningful turnaround. We are projecting the hotel's contribution to FFO to be approximately $6.0 million to $6.5 million in 2010.

Development and services fee income is expected to be $25 million to $30 million, up from last quarter due to the out-performance in the first quarter.

We have no change in our G&A projections for 2010 and expect the full year G&A to be approximately $81 million to $83 million.

Our net interest expense projection is impacted by the interest expense from our bond offering this month, net of interest earned on our increased cash balances. Offsetting this is the reduced interest expense owing to our bond buyback activity. In the first and second quarters we repurchased approximately $150 million of debt that was incurring a GAAP interest expense of 5.6%. We now expect net interest expense of between $380 million and $390 million for 2010, an increase of approximately $25 million from last quarter. This number includes the non-cash charges of $2.2 million and $4.7 million in the first and second quarters related to our buyback activity. Our projections do not assume any additional debt repurchases in 2010.

Combining all of these assumptions results in a revised 2010 guidance range for our funds from operations of $4.06 to $4.16 per share. Our recent capital markets activities have a short-term dilutive impact on our earnings guidance. Stripping out all of the projected net interest expense changes from our new debt offering and the repurchases, we're actually increasing our range by about $0.13 per share at the low end, reflecting the improvement in our operating portfolio projections.

For the second quarter we are projecting funds from operation of $0.97 to $0.99 per share. As I mentioned, our second quarter guidance includes a $0.03 per share or $4.7 million non-cash charge on our debt repurchases, a partial quarter of interest expense associated with our recent bond offering, and lower contribution from our joint ventures with the burn-off of non-cash FASB 141 income.

Overall our portfolio continues to perform well in the current environment, our occupancy is stable, and as evidenced by the 1.8 million square feet of leases we signed this the quarter, our portfolio is attracting its share of the available tenant community.

The success of our development program continues to be a difference maker, enabling us to demonstrate modestly positive portfolio NOI growth year-over-year, despite the difficult fundamentals in the leasing markets. In early 2011 we expect to deliver both our Atlantic Wharf and 2200 Pennsylvania Ave. developments, representing nearly $1 billion of invested capital.

Our balance sheet is in terrific shape, with $1.8 billion of cash, and we're poised to make smart investments. Until we invest, however, our cash will be dilutive, and it's currently costing us roughly $0.60 per share annually. We believe the short-term cost of holding this capital is well worth the benefits it can deliver over the longer term.

That completes our formal remarks, so operator, you may open the line up for questions.

(Operator Instructions). Michael Bilerman, Citi.

Either Doug or Mort, just in terms of putting capital to work, it sounds like you have a little bit more confidence of using some of the $3 billion of excess capacity that you have over the next 12 to 18 months. I'm just wondering if you are able to contrast I guess your positioning and your competitiveness in terms of transactions, given your comments of there's a plethora of capital available in the marketplace, a lot of people chasing assets, but also what it sounds like is, you believe in a more slower type of recovery, and so maybe it's hard to stretch on deals if you're not forecasting in a faster rise. I'm just wondering how you sort of put everything together) giving you confidence to put out the money.

Let me just tie together two things that I said. One of them is, we do foresee a slower sort of economic recovery than many, but again as we have said many times, there are -- you have to disaggregate the markets.

The upper end of the market, the higher-quality space we believe will do a lot better. Just look in New York. There with -- there's virtually no space available in our buildings. And as we now go into further renewals or whatever limited space we have left, we are continuing to step up the rents.

Now, this will reflect itself even more strongly I believe when there is a stronger economic recovery. So I think in terms of making acquisitions, we are still comfortable with taking a longer-term view, and we do believe that three, four, five years out we are going to be very happy that we had the cash today to buy the kind of high-quality assets or invest in the type of high-quality assets that has been our basic strategic space since we started the business.

So we are really, as always frankly, really looking to a longer-term perspective in the types of investments or developments that we will undertake. And we still think that those kinds of developments will do well. It may not do extremely well in the shorter term, but in the medium term and the longer term, we think they will do very well. So that's still our basic sort of analytic structure as we look at investments and -- whether they be acquisitions or developments.

And we do think that, yes, there is capital, but as Doug pointed out, there is a combination that is needed. It's not just capital, it's also operational ability. Here is where we think we have a competitive advantage in terms of understanding what we can and what we cannot do. So we obviously are at this point modestly bullish.

I don't want to overstate anything until we actually can announce some things, but I do think we are modestly bullish about what we can do with the additional capital. And again, we are not trying to pretend this is going to have a huge uptick from day one, although we will have the uptick in the sense of the alternative investment of capital, we are clearly going to do better than what we are currently able to invest the capital in. So we'll have that short-term benefit. But in terms of the longer term investment on the assets that we either buy or begin to develop, we think that will work out very well for us.

Is there an element that you can talk about? You look at the recent deals, you've talked about the activity, the buildings in San Francisco, the buildings that have closed in New York -- the Tishman and the Carr portfolio in DC, where were you in those processes relative to final pricing?

I don't want to sort of -- we don't want to -- I don't want to disparage other people's transactions, so I'll -- obviously the pricing that we had was lower than the pricing where they ultimately -- the deal's ultimately priced. We have underwritten every one of those deals pretty hard. And in certain cases we've just looked at ourselves in the mirror and said, does it really make sense to stretch on this deal given what we believe the other opportunities that will present themselves are and what our return expectations are? To date we just haven't been prepared to do it.

My second question, just on 250 W. 55th. We talk about the activity that's happening in New York, and certainly the larger -- the tenants in terms of space requirements in New York. Where are those discussions (technical difficulty) about (technical difficulty) I realize it just got wound down this quarter, but are there discussions at this point of potentially restarting that? And at what level of commitments would you need? And how far will rents need to move to be able to start that project?

Well, we are having discussions with potential tenants for that space. As I mentioned -- or as Doug mentioned, as we both observed, we really are virtually leased up in all of our other space. So yes, we are looking at this building, and yes, we are talking to -- seriously with at least one tenant, maybe with two. And we -- let me just put it this way, I don't want to be specific about the amount of space that we are talking about, but we believe it's not just a function of how much space, it's where in the building the tenant would take the space. And I think if we decided to go ahead, it would be with the understanding that we would be comfortable with the leasing prospects and the return prospects and the overall transaction.

Thank you.

John Guinee, Stifel.

Doug, I thought you said something very interesting regarding Lockheed Martin and that NGA contract. Can you elaborate a little bit on that as it pertains to your overall thinking about the GSA demand and the defense contractor industry in Northern Virginia? Maybe Ray is on the call. He could talk about it also.

I'll let the guy on the ground start.

Well first of all, as you know, the NGA campus is relocating to Springfield. And as many times is the case, they're a little bit behind schedule and have to extend the leases to maintain occupancy in our core buildings out there, and we were the beneficiary of the very nice holdover.

However, they are looking to relocate down to Springfield. That will free up upwards of 700,000 square feet in Reston. And we are already in an intensely competitive process right now to try to secure another defense contracting government agency to back-fill the 520,000 square feet which is the core of the campus.

We think that's extremely important, besides the obvious of replacing that income, but also restoring another major demand generator to that Dulles corridor. So we are going after it aggressively. We are very optimistic of success, but obviously there's no guarantees.

If they take the 520, the remaining 180, which is a brand-new, fully compatible building relative to defense and intelligence standards, will be available for either additional government leasing or private sector camp followers wishing to be right next to that agency.

But more importantly, we've also taken a very aggressive position down in Springfield where the NGA is going. We have, as you may remember, secured a campus of upwards of 1 million square feet atop the Springfield metro, and not only does it have metro but hard rail access down to Quantico, it's got direct access to the Pentagon via public transportation and is the closest owned major office campus to the new NGA facility.

In addition to that we have VI 95 Park, which we've owned for nearly 30 years, where we have upwards of 800,000 square feet of very competitive space that's literally within walking distance of the NGA campus.

So we think while we are facing a short-term challenge to back-fill the NGA campus in Reston, that our strategy is fully formed and in-place to be very responsive to this changing BRAC situation.

Great. The second question, Doug -- I don't know if you have anything to add -- is can you walk through the capital stack at 885 Third and how that's being marketed?

I don't want to go through sort of -- because of the confidentiality agreements in the sense that are out there. But big picture, there's a ground lease and then there's a first mortgage and then there's some additional debt on top of that. And a portion of that capital stack is currently being marketed for sale.

Do you know who the ground lessor is?

I do, but again, I don't feel comfortable talking about -- quote, unquote -- a confidentiality agreement that's bound me.

Great, thank you.

Steve Sakwa, ISI Group.

First question I guess is for Mort. I realize that all of this financial regulation discussion is very much up in the air. But as you kind of peel the onion back here on things like the Volcker Rule and other things that the House and Senate are trying to pass, how do you think about the impact on the financial services industry, prop trading, hedge funds, and its impact on New York?

Well, we all at this point can't be totally sure about how it's going to come out, and it's been held up by two different votes in the Senate because all 41 Republicans are basically saying that Democratic proposals are not going to pass muster as far as we're -- they're concerned.

So I do think it's going to have some effect in terms of the kind of leverage in particular that has been available for a number of these funds, particularly the hedge funds, the very large hedge funds. I really don't think it's going to affect -- if this doesn't get into a real sort of a very, very nasty political fight, what has been going on -- and I've been very critical of this publicly on television and writing -- it is an attempt really to demagogue the financial industry as far as I am concerned and make it look as if it's the financial world that is responsible for the great recession that we are in.

That is just unfair. The financial world is responding primarily to the collapse of the housing market and what that meant for the securitization market. There were some excesses in terms of lending, without question, and maybe even in terms of investing. But it was fundamentally these programs, which were initiated I might add by the Congress in mandating Fannie Mae and Freddie Mac and the FHA to really do a lot of things that I think they would regret. And frankly, a lot of banks made a lot of credit card loans that -- or lines available that have been cut back dramatically.

So we are in a transition period in that regard. I suspect again in the short run it's going to have some effect. But I'll say this about New York, and I've said it -- I said it after 9-11, and I've said it many times before -- the great strength of New York is that it has the most talented people in the world of finance working here. I don't mean this to disparage anybody in any other city, but if you want to take it not just pound for pound but just in terms of both quantity and quality, this is a city that attracts talent because it nourishes talent, welcomes talent, celebrates talent, and rewards talent. That's the key to the future of these businesses.

You can get the most talented people in so many different industries -- I was just at a conference that involved 50 or 60 CEOs from major Chinese businesses. This is their first destination, and it's not just finance, it's finance-related businesses and other businesses. So I do think that frankly whatever the short-term bump may be, and it will be something -- I don't know a serious it will be, but it will be something -- I do think that New York's major assets really are vested in the people that these kinds of firms can hire when they have their offices here in New York.

So I am really -- of all the markets that we are in, I have to say I think we have seen how well New York City has performed, and I think it's going to continue to perform very, very well over the intermediate term and then certainly over the long-term.

As I say, the one thing that is remarkable about New York at this stage of the game, there is virtually no new construction going on with any kind of available space. So this has been typical of the kind of roller coaster issues of supply and demand. But it's also typical of a market that is really constrained in terms of the availability of sites.

So I find myself feeling quite bullish about New York. And I do think that New York therefore will frankly do as well as any other market over any kind of reasonable length of time in the real estate business.

Well Mort, your comment about supply just leads into question two. I guess there's been discussion or rumors that you guys are interested in maybe participating in the -- I guess the Freedom Tower or One World Trade in sort of a Port Authority recap or investment. Can you just talk about your interest downtown? I guess historically that's just not been a market that you have shown much interest in. And --

That's correct.

-- just wondering if (multiple speakers) the papers have it wrong, or maybe (multiple speakers) your world (multiple speakers)

Well we (multiple speakers) no, no (multiple speakers) let me -- I will explain. There have been no decisions made about that.

But I will tell you this. We have a unique structure. This is a $3 trillion development at this stage of the game it is going to be the dominant building downtown, both for the city but particularly for international tenants. We will have a very, very limited investment that will be less than 5% of that total cost -- less than 4% of that total cost in fact. And it will be in a preferred position.

Frankly, we will -- there are some projects that you do not just to maximize the financial return but also to establish another layer of the credibility of this firm. We will be very happy to do that transaction under the circumstances that we have proposed to the various public authorities. It is not an accident that four of the major firms in this city entered into that competition. I can understand why they are doing it, and I certainly understand why we are doing it.

Again, because of confidentiality, I really can't talk too much about it. But I think all be very comfortable about all the different elements that go into being involved in a transaction like that.

What I don't want you to come away with is the feeling that we are putting -- treating this as a normal development. We are not -- and nobody can. It is a project of incredible cost and will be an incredible icon for the City of New York. But the vast, vast bulk of all of the funding and financing is going to be put up by the public authorities.

May I say, I think -- and Mort may have said trillion, and I think he meant billion -- that --

Did I say trillion? Oh, my goodness.

Yes. (laughter) It's 3 -- well, $3 billion still seems like a trillion to me.

Right. But the fact of the matter is, we do have an operational expertise that we can bring to the table here to really hopefully help the Port Authority manage its way through what's going to be a very complicated and long road to successful completion of that building and the marketing of that building. And to the extent we can do it in a way where our capital is thoughtfully invested, we will do that. And we have an organization that can bring something to bear that would be a good thing for both the city and for us.

And Doug, do you just have any sense of the timing? I realize these things are fairly unpredictable, but where do you kind of get the sense you are in the process?

Well, we're -- I guess we are in round three of God knows how many. Hopefully it's just four rounds. We continue to cooperatively engage with the representatives of the Port Authority on answering their questions and providing them with additional information. We hope they are going to make a decision sooner rather than later.

[Chris Caton], Morgan Stanley.

I was hoping you could give me a little more color on kind of some of the forward-looking leasing activity. What are tenants thinking in terms of downsizing or expanding at this point in the economy, now that we are kind of three months forward in say the recovery, I suppose? And second is, what type of options are the tenants looking for in terms of expansion or contraction? How does that in any way kind of encumber vacant space in the portfolio?

I'm going to try to answer this very succinctly, and I apologize if it doesn't give you a full answer. But if I answered it fully, I would be talking for the next 25 minutes.

Big picture -- professional services firms went through a downsizing in people, and they are now going through a sort of a rationalization/realignment of their new premises on a going-forward basis. Most of them are going to be getting smaller marginally, 10%, 15%.

Technology companies and corporate America, in our portfolio in our cities, we think are on the margin going to stay where they are from an overall platform perspective but not grow as quickly as they were growing in 2006, 2007, 2008.

From an overall concession perspective, the tenants that are in the market today are looking to try and achieve savings in rents that they are currently paying, lock in as long a term a cost basis as they possibly can, and for the most part are really not looking for much in the way of options that are driving those transactions. As opposed in 2007, expansion space in getting must-take or option space in three and five and seven years were probably the predominant drivers of many transactions. Now it's -- if we can reduce our rent and we can lock in that number for a long period of time, we'll figure out how we're going to grow, if we grow, later on.

That's how I would answer the question.

Ross Nussbaum, UBS.

On yesterday's SL Green call, Marc Holliday was talking about how he is underwriting 25% rent growth in Manhattan over the next three years. I know that there are some brokers out there who claim that prospective buyers are underwriting as much as 50% rent growth in Manhattan over five years. I'm curious what your take on those numbers are and how you're approaching the underwriting of assets, not just in New York but in all of your major markets in terms of the rent growth process.

I would say that that is the reason why we have been outbid on each of these three properties that Doug referred to. I don't think we are looking to that kind of increase. I think we will see increases, I just don't think they are going to be in the next three years at the level of that kind of double digit level. We think they will be in double digits perhaps, but not nearly at the 25% level.

I think what he is talking about is the fact that we do see that the financial world is frankly picking up steam in a lot of different ways. And associated people who service the financial world will be doing the same. And we also of course -- there's very little vacancy, and I believe not just in our buildings but in all of the first-class or A or A- buildings. I think this is the rationale for what they are seeing.

We are frankly more cautious and more conservative in our estimates. And I think that is what explains why people have outbid us on a number of these properties, and I -- frankly I hope they are right.

So what changes the dynamic in terms of your ability to put upwards of $3 billion of equity to work in the next year or two if there are others who are continuously underwriting stronger rent growth?

Well, we are in a competitive market. And we are still going to maintain whatever our sort of standards are for how we invest the funds.

Bear in mind we have not just a financial ability, but we have an operational ability that we think will make a difference. And in particular we have the opportunity to do some major developments where we think we will do very well, and there are unique situations that might come up that provide us with those opportunities. And we are working on some of them. And we are comfortable with that sort of mix of opportunities.

We have performed well, if I may say so, in good markets and in bad markets for now over four decades. And we think we will continue to be able to do that. And you will have the opportunity to review what we do, and I think we will be able to produce as we have in the past.

It's hard for me to just sort of speak in more than generalities because there are things that are going on we just simply aren't in a position to talk about it until they are finalized. And as we hope they come into clearer sight, you will understand the rationale for what we are saying.

The other thing is that all space is not the same, even if it is in the same market and it's in two buildings next to each other. And I guess one of the postulates that we make is that some of these buildings are going to languish and other buildings are going to perform in a much stronger capacity. And knowing which of those buildings to put your money into is probably more important than necessarily picking the market. And so those are decisions that we have to make on an asset by asset basis.

But big picture, the tenants' demand in various markets is changing as time goes on, and buildings that might have been suitable for certain types of institutions at certain times over the last 20 years may not be the same on a going-forward basis. And we have to think about those issues when we are making our investments.

Jordan Sadler, KeyBanc Capital.

Mort, it's good to hear you optimistic despite the ongoing sovereign debt crisis across the pond. Maybe in that context -- what is your current view of long-term interest rates in the US? And how is this factoring into the view of cap rates or values as you guys go through your underwriting?

Let me just deal with the first reference. I must say that this situation in Greece is really critical for Europe, and in a sense because it leeches into the banking systems since the European banks hold so much of the Greek sovereign debt, you want to talk about a too big to fail situation, in a way they are too big to fail -- too small as a country and too big as a debtor to fail.

So I do think sooner or later they're going to work something out, but it is a standoff between Germany and the countries it represents and the Greek government, which of course doesn't want to introduce the kind of tax increases or costs of government, reductions in various government programs. They've got to work something out, and they both know it, and they are playing chicken at this stage of the game. I just hope nobody plays that game for that one step too late.

And I doubt if they will because it's just impossible to let this whole thing go under. It would be terrible for Greece and terrible for Europe. And they both know it. But it would have international consequences, there's no doubt about that, and I think it's a scary situation.

As far as we are concerned here in this country, I really do not think that we are going to -- let me put it this way, I don't think there are any inflationary pressures in this economy, and there will not be inflationary pressures of anything significant for several years to come. And therefore I think the Feds have no choice but to be very careful about how -- what they do with interest rates. I mean, nobody quite knows what is going to happen going forward. We have been -- and I'm happy to say that we were much more pessimistic than most people several years ago, and acted on it.

And we are still, if not pessimistic, cautious. The reason for that is fairly simple. We are in an unprecedented situation, and it being unprecedented, it is unbreakable. Everybody can make different judgments about how it's going to go. We have taken a more cautious view of it, and I am frankly very happy that we did.

I will also tell you that I think we have done better than one would've thought, even given how serious the recession was. But I will remind you that the Queen of England, when this whole thing exploded, addressed a group of economists gathered body The Economist Magazine and famously said to them, how come none of you saw this was coming?

Well, the reason why most of them did not is because it is unprecedented and therefore unpredictable. And as we work through it, it is still unbreakable. There are still a lot of problems. There could be another serious drop in housing prices. State and local governments are under terrible, terrible pressures -- financial and fiscal pressures -- and there's going to be a continuing erosion of employment in that sector. There is I think a large drop in investment spending, capital spending overall, though in some sectors it is beginning to show some forms of life. You could go through a whole list of things where you could say it could go in either direction.

I am worried about the fact that a lot of companies have realized that they can operate quite successfully with fewer employees and to migrate this May with less advertising. And this is something that is going to come back, but it's going to come back quite slowly.

So I do think though that we are on a positive trend now. I do think it's not just that we avoided -- thanks frankly to Ben Bernanke rather than to the government's stimulus program, although that helped -- we avoided a major financial crisis. And I think we are pretty much beyond that concern, although there are still a lot of issues that still have to be resolved, and it's going to keep the financial world in a fairly cautious posture.

But having said that, I still think we are now on a positive up trend. I may not be as bullish as others, but I still think it's positive and frankly I am open. So I do think interest rates are going to stay fairly low for quite a period of time. They are certainly going to be low by historical standards, they may be up a little bit from where they are now, but I still think those are very, very attractive financial markets for people like us who are borrowers.

I think the more difficult thing is in this kind of an economy as we estimate it, are we going to be able to find the kind of investments that make this kind of funding appropriate? We think we will have a competitive advantage and not an overwhelming one, but a good enough one so that we will be able to do fairly well with, and given the levels of interest rates that we think we are looking at and looking forward to.

Thanks for the perspective.

Jamie Feldman, Bank of America.

Mike, I was hoping you could give a little bit more color on the CMBS market and kind of what you're seeing and how fast things have changed and maybe your outlook from here.

Well, I guess I've been surprised at how fast things have changed, to be honest with you, because we are certainly being marketed by multiple different banks who have started up programs. And the debt yields that they have been talking about have moved pretty quickly.

Now, I would say the debt yields in the overall secured market have moved pretty quickly as well. I think that they believe that they -- that their competitive advantage seems to be that they will provide 75% leverage, where the traditional home loan lenders are still kind of holding onto a little bit lower leverage than that. And they are trying to get a little bit more rate, and they are out there marketing these programs.

I think that one of the institutions has made some loans. Another institution we spoke with said that they had a significant number of applications that they had signed, but they hadn't made any loans yet. But all of them are out there marketing, clearly.

And where size with a constraint before, I would say size is less of a constraint now. Six months ago when we first started talking about the CMBS market coming back, it was they'll see $50 million to $75 million loans, really looking for a lot of diversity. Now they are asking us if they can bid on our Market Square North financing that we are coming out with, for example. They seem to be willing to size loans that are $150 million, $200 million, $250 million, maybe even higher. So I think it's improved pretty significantly from that point.

Then I'm sorry if I missed it, but did you give a CapEx assumption for the year? Based on the $90 million in the first quarter, I'm just curious what your thought is to get the rest of the leasing done this year.

Well, from a leasing perspective, based upon where we think our occupancy is going to be, we think we are going to lease about 2 million square feet, give or take, for the rest of the year. A lot of that is renewals, as we talked about, and I mentioned the DC market where we have almost 1 million square feet of renewals coming. So I think our transaction costs associated with that 2 million square feet of leasing is going to be significantly less than our transaction costs were in the first quarter. So I would expect that to be more in line with kind of what our typical is, which is $25 to $35 a foot on that space for TI costs.

And then for traditional CapEx and maintenance CapEx, we also had a pretty low first quarter where we only I think had $1 million or so of CapEx. And that was really related to two things. One, we came off some pretty big jobs last year, like the 601 Lex lobby, and we haven't restarted some of the 2010 jobs yet. We still expect somewhere between $25 million and $30 million of that type of CapEx for the year.

Jay Habermann, Goldman Sachs.

Good morning I'm here with Sloan as well. Just touching on development for a second, Atlantic Wharf in Boston and 2200 Penn in DC -- it sounds like you're close with the DC project and that could be close to fully leased in the near term. I'm just wondering, as you look at sort of the acquisition market, it's obviously very competitive. Would you seek to eventually -- or does your appetite seek to increase here for development now that you've put out $1.1 billion of projects that are close to fully leased?

I think the answer is, if it makes economic sense, the answer is absolutely yes. Economic sense means rental rates get to a point where they justify new construction. And starting with a project where you have to buy land from somebody and then build a building, the question is whether or not those lines will cross sooner rather than later.

If you said, predict where you would start a building which might have some speculative leasing associated with it, there are clearly three places where that could happen in my mind. New York City is obviously one of them.

The second would be the District of Columbia, not in 2010 or 2011, but in 2013 or 2014, because there is literally nothing of quality being built right now, and as buildings in DC are limited by their size, as tenants have to grow and look overall at their footprints out three or four years, they're going to run out a few options to have big continuous blocks of space. So I think there is an opportunity potentially there, and we happen to have this building that we purchased from NPR, which is a development site that we're going to start drawing probably sometime later this year or next year so that we are in a position to accommodate those tenants.

And then there's an interesting phenomenon going on in some of our suburban markets, and particularly Boston, where there are tenants who are looking at the available inventory and saying, the stuff that's out there is not the stuff that we really want, and we may be prepared to pay a premium to go into a new building that is constructed with more of an amenity base, with a better floor plate, with a better window line, with better materials that may have a more energy-efficient, sustainable quality to it.

So those are sort of the -- I would say the three areas where I would say there is a chance for a building to be built, other than the build to suit in a Princeton or a Northern Virginia when the GSA tenancy or some corporate user comes along and says, we want a building for ourselves.

Just touching on acquisitions now, I know some of your competitors have been putting together some funds. But are you talking to joint venture partners or potential partners as you seek to make these acquisitions, just given your more conservative underwriting of rent growth and perhaps cautious views on the economy?

I wouldn't say there isn't a week that goes by that we don't get in a room with some institution and/or foreign investor who is interested in doing an acquisition or a group of acquisitions with us. And at the moment we have really not seen eye to eye on either pricing or cost of capital or opportunities. But it's certainly something we would consider. Obviously when you have the kind of capital that we have sitting on our balance sheet, you're a little less apt to be -- if you find a great deal, putting that deal into joint venture with the amount of cash that we have sitting on our books.

Just lastly for Ray, with the rollover in DC for the next few years -- I know rents are in the low $40s -- can you give us a sense there, do you have any concerns, do you expect the law firms to pull back? Or is it really just the expansion you talked about, the Treasury and other government agencies that continue to expand?

Well, I think the tightness of the space market, especially the class A -- Doug made a reference to the NoMa market in the Ball Park district, and clearly those are challenged markets. But the CBD is still very tight, and we do have some rollovers, some relocations and what we are really competing in is the space that's being vacated by tenants moving to new space. As Doug mentioned, we are 65% preleased at 2210 Penn, and really strong activity on the balance. And believe it or not, we are starting to get some inquiries about the NPR site, just because there's so many limited -- so limited appeals for a new development sites that the larger tenants are looking '13, '14, '15 and out.

So we are still very optimistic about DC. We are still seeing rents in the -- when you say mid-$40s, we are looking mid $40s triple net and plus at 2210 Penn, and we just did a renewal at 401 9th St. with -- Peter, what, $50 triple net I think? It was just a terrific renewal there too.

Great. Thank you.

Alexander Goldfarb, Sandler O'Neill.

Just going to the transaction market, I think historically you guys have said that you're not apt to invest in debt, you'd rather own title. Just given how some of these portfolios seem to get worked out and not come to market, is it your view that maybe it's better to start preemptively trying to buy parts of the capital stack to try and encourage the process along? Or is it better to just wait until the assets actually come to market and the books start going around to then get involved?

I think what we've said in the past is that we have never looked at being a lender as a sort of business model. We are realistic about the fact that much of these -- the projects that are going to be -- quote, unquote -- available are projects where the debt capital is really in control from a financial perspective of the ownership. And so where it makes sense to be participating with the debt market executions as opposed to with waiting for a -- quote, unquote -- a book to come out, we are aggressively looking at those opportunities, and I would not be surprised to think we would actually take advantage of those types of transactions more opportunistically than we would with simply a -- quote, unquote -- fee interest.

In many cases we would like to partner with the -- quote, unquote -- ownership or that lender, because I think we prefer not to get into a year and a half litigation bankruptcy battle, but if we thought that the control position was firm enough, I think we would be very aggressive about purchasing a piece of debt.

Michael Knott, Green Street Advisors.

You mentioned the legal lack of demand or contraction over the next couple of years. What do you think picks up that slack? Or is that maybe a reason why you're a little less optimistic than some others?

I guess I think that once the law firms have sort of reestablished their new base, they will start to grow again. I just think that we are in that readjustment phase. I don't believe that a national law firm that has reduced its headcount by 7% to 10% and then reduced its footprint by 10% to 15% is never going to grow again. I just think that you have to reestablish the base before that occurs.

And clearly transactional activity is -- has started to pick up, but it's nowhere near what the pace was in 2006 or 2007. I think as that occurs you will start to see law firms hiring again.

It's an interesting predicament that the law firms are in right now because their profits per partner are actually higher probably in 2009 than they were in 2008 in many cases because the partners are working harder and the partners have a higher billable rate. The question will be, at what point will they start to recognize that they are -- quote, unquote -- forgoing business by not having a staff and an organization that is available to take in more work as opposed to simply asking for a higher rate.

Mitch Germain, JMP Securities.

Doug, any thoughts on possibly pursuing some asset sales?

I think that it's certainly in the back burner. There are some assets that we have considered over time not strategically core to our company. I think that we -- if we started feeling even better about our opportunity to deploy capital, we would think more seriously about those types of situations, but I would say it's not a strong focus right now.

George Auerbach, ISI.

Mike, can you quantify for us the progression of straight-line rent and FAS 141 income as the year goes on and into the first part of 2010? I know you've mentioned that the FAS ticks down $4 million in 2Q. But where would you expect the run rate to start in 2011?

We really haven't provided any guidance at all for 2011, to be honest with you. We really don't want to get into that at this moment.

On the 141 side, it's going to drop down after the first quarter by the $4 million to $5 million, and then I think it stays pretty steady for the rest of the year.

And on the straight-line side, the second quarter is going to be high as well. And then the last two quarters will drop, because some of the New York City leasing that we did in the third and fourth quarter and in the first quarter of this year will start to burn off. The only big thing that will still be out there will be the Ropes lease that goes on all year.

Is it fair to say that the New York City leasing and Ropes lease will be sort of fully burned off by the first quarter?

By the first quarter of 2011?

Yes.

Yes. That's fair to say.

I think that was our last question. Thanks for joining us this quarter. And we will see many of you in Chicago at NAREIT, and others, we'll talk to you on the phone and get you again in the middle of the summer. Thanks a lot. Bye.

This concludes today's Boston Properties conference call. Thank you for attending, and have a good day.