波士頓物產 (BXP) 2010 Q2 法說會逐字稿

Good morning and welcome to Boston Properties' second-quarter earnings conference call. This call is being recorded. All audience's 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'd 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' 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 the 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 Mort Zuckerman for his formal remarks.

Good morning, everybody. We're happy to be able to rejoin you this quarter for a number of reasons, not the least of which is that we have frankly been really pleased by the response to the real estate we have and in the markets that we're in.

Obviously, it's been a stressful time for the economy in general. There is very little progress on the unemployment front. There's a lot of insecurity in the business community. Nevertheless, I think we are pleased with the ability that we have had in the space that we have to continue a fairly successful leasing program, and frankly, to be now quite energetic in the prospects of making some acquisitions, which we're working on, but which we have not concluded in any specific way.

But we do feel that we are in a position to be serious and to hopefully be successful in that area. But in terms of the existing real estate, the number of markets that we are in that are doing very well, or relatively well, is, I think, a direct reflection of the strategy we have followed for many years. And it reflects two things.

One is, these are supply-constrained markets that we are in and we are either building or owning real estate at the very upper end of that market. And this is not the first time this has happened, although this is probably the most difficult economic downturn that we have had to work our way through. But essentially, when you have vacancies in the buildings that we have and in the markets that we have, and you have a downturn in rents, a lot of people want to go into the kinds of buildings we've had, or we have. And in this regard, we have frankly done very well in terms of keeping our occupancy up or rebuilding our occupancy. We've lost some tenants to bankruptcies or other things. So we are actually feeling quite bullish about the prospects that we have.

I have to say just in terms of macroeconomic conditions, we are in an unprecedented kind of economic stress and, therefore, it is unpredictable. We have not been in anything like this since the end of World War II. This is a recession. It's called the Great Recession. This is a recession, though, that has been provoked by a financial crisis, which is the first one we've had really since 1929. And the kinds of recessions generally take a lot more time to resolve the inherent problems of them and to get back to the kind of growth that the economy of the United States has been accustomed to.

And we're still in, I think, a fairly slow level of recovery. They say the good news for us is that we are in, we think, in the best markets in this country with the best real estate. And not that everything is perfect, but I think we are really quite pleased with the effectiveness and the results that we have had.

With that, I'd like to turn it over to Doug for operations. Doug?

Thanks, Mort. Good morning, everybody. So, Mort began the discussion talking about the economy, and it's clear that, as an overall economy, we haven't seen much in the way of changes in the unemployment. And obviously, we're in the office business and when people hire, they need more office space, and if you get really strong increases in office demand, that gives us the opportunity to see rapid improvements in the economies of our business.

I don't think we're suggesting that we're seeing that; but we have seen dramatic improvements in the condition of the financial system. We've seen that massive corporate cost-cutting over the last two years has led to pretty big margin improvements. And most recently, there's really been some topline growth across a broad array of industries, and that's given corporations a whole lot of cash.

In the overall economy and in the business world, my sense of it is that there is a tug-of-war between austerity in spending. And at the moment, we seem to be experiencing a stalemate, but it looks like austerity has got the edge, at least today.

In our industry, the leading indicator is leasing transaction activity. And since 2005 -- and I use 2005 as our benchmark, because that's really when we started seeing the last major recovery in the office business -- Boston Properties has averaged about 4.3 million square feet of leasing per year, and about 1.6 million square feet in the first six months of any one of our calendar years.

So, to date in 2010, we've completed 2.5 million square feet of leasing, obviously, way above trend. This quarter, we had 77 transactions. We had 71 last quarter. Again, a slight increase. But it's really a pace of activity that appears to be pretty steady, which is, I think, something that's giving us some comfort.

We continually discuss the importance of looking at specific markets, at specific locations and building characteristics, and not the broad real estate statistics when you're evaluating real estate investments. And our strategy, as Mort said, continues to be to own and operate the highest quality assets in our selective submarkets, to design buildings and tenant spaces suited to customers' current needs, and to continue to invest, and invest and upgrade those assets.

But even in the better submarkets, the individual characteristics of the location and the building really matter. You can have two buildings across the street from each other in a great submarket, and one can be 100% leased and the other 100% vacant.

But I'm going to add one other critical component to our strategy, and that acts -- which also acts in concert with everything else we do. And it's our customers. Many of the companies that value the physical attributes of our buildings, our operating expertise, our financial strength and our stability, are also businesses that think about expansion or consolidation in our assets during challenging economic environments. And let me give you some examples of that.

Towers Perrin is a 44,000 square foot tenant that moved into the Prudential Tower last year in a relocation from 111 Huntington Avenue. They recently merged with Watson Wyatt. Watson Wyatt happens to be located on Route 128 in Wellesley. A few weeks ago, Watson Wyatt exercised a termination option at its 128 location and signed a 33,000 square foot 10-year expansion, consolidating at the Pru.

In Cambridge, Microsoft, Google and EMC are all expanding in our buildings today. Microsoft recently signed a lease, starting out at 21,000 square feet in September. They're going to grab 30,000 square feet more in January and another 62,000 square feet, as we can deliver it to them, over the next three years. Comcast recently completed a 24,000 square foot sublease and then we did a sub period on that in Reston. Well, this quarter, they exercised their rights and took another 24,000 square feet.

In New York City over the past two quarters, Citadel, which is at 601 Lexington Avenue, has expanded by more than 77,000 square feet. Perella Weinberg leased an additional 38,000 square feet, growing by 58% at 767 Fifth Avenue, the GM Building, and two of our new tenants in 399 Park are now negotiating for the last remaining square footage in the building. It's 25,000 square feet. It happens to be in a sublet space from Legg Mason. Premier quality assets, selective submarkets, continued investment in strong customers give us the best opportunity for success today and in the future.

There's a growing consensus in all our markets that overall rental levels have bottomed out, eliminating the value of delaying leasing decisions for our customers. This doesn't mean that lease negotiation leverage has suddenly shifted to us or that we're predicting spikes in rents or greatly reduced concessions.

The fact of the matter remains is that we still have significant available space in all the markets in which we operate, and as long as there are extensive opportunities for our tenants to consider, it's going to be hard to push rents or lower concessions dramatically. However, as individual building vacancy declines and there's competing interest for available space in those buildings, we will start to be able to improve our pricing power in individual locations.

We had a second strong quarter of very strong second-generation leasing statistics with an outside increase from New York City, but also strong results in Washington, DC and Boston. Now in DC, the results are skewed by the first of a series of short-term renewals with Lockheed Martin in Reston, and we highlighted that last quarter. And if you exclude that transaction, second-generation statistics in DC are essentially flat.

The story behind the numbers in New York City is at 767 Fifth, where we did a renewal with CBS on the space at the base of the building, and a renewal with General Motors, which both impacted the numbers. These were new market leases -- no story behind them.

You may recall that when we purchased 767 Fifth two years ago, we discussed the embedded upside in the asset as one of the attractive attributes of the investment. In the face of a major decline in office rents in midtown Manhattan and a reduction in percentage rent from Apple, we have seen a 9% increase in the property cash NOI since our purchase in 2008.

We've made the point over the last few quarters that our mark-to-market over the next few years is going to continue to show a modest roll-down, led by the lease expirations originally signed in 1999 and 2000 at Embarcadero Center Four, which roll in 2011 and 2012.

This quarter, the mark-to-market on lease expirations in Embarcadero Center was negative 14%, which is consistent with what we would expect. Our overall mark-to-market is still negative $1.62, which is basically flat from last quarter. Now, remember, the rents when we do our mark-to-market are starting rents under 2010 marketing conditions, so there's no growth in those rents, even though the current rents in some of our buildings may not be expiring for 10 or 15 years. And there's almost always an increase in those rents during the lease term that are not reflected in the mark-to-market.

For the remainder of the year, our average expiring office rent is about $40.10, which is about 8% higher than our current market on that same square footage; and in 2011, the average expiring rent is about $48.96, 12% higher. Changes in our portfolio vacancy also have a significant impact on our income. At an average rent on our vacant portfolio -- so this is the vacant space that we have -- each 1% of occupancy translates into about $11 million of gross revenue increases.

Last quarter, we had described the positive activity we were seeing in suburban central 128 Boston and Cambridge, including expansion from tenants into Shire Pharmaceutical and Google and Microsoft, and IRobot and Dessault Systems, and Lincoln Labs and A123. Each of these tenants has either completed its expansion or is moving to complete the search. In our portfolio, we got the benefit of a 90,000 square foot transaction with A123 that's going to start at the end of the year, and a 113,000 transaction with Microsoft that I just described.

In the CBD of Boston, we're negotiating about 100,000 square feet of additional leasing at Atlantic Wharf -- that's the building that will come online in the beginning of 2011. And in the Back Bay, we have some really good activity on the space we'll be getting back in late 2011 from Bain Capital at 111 Huntington.

I'd like to also highlight the activity we're seeing in Reston, Virginia. In 2011, we're going to have 450,000 square feet of lease expirations in our Town Center portfolio, stemming from consolidation from acquisitions by Oracle and Northrop Grumman that occurred after our original leases were executed by more than five years ago.

In addition, Sallie Mae, which is headquartered in Reston, has announced that it's relocating their headquarters to Delaware, and they're going to add another 221,000 square feet to the available market. Well, we are in the midst of three separate transactions totaling 360,000 square feet to release our future availability, and there are two tenants in discussion with Sallie Mae about occupying this entire building. There are three other users in excess of 100,000 square feet considering a move to Reston Town Center as we speak. And while most of this activity is the result of our relocation and an upgrade to better assets in superior locations away from Toll Road commodity buildings, there is some incremental growth in each of these requirements.

In Maryland, we completed a lease with the GSA for 47,000 square feet at Annapolis Junction to bring that building, located just outside the gates to Ft. Meade, to 100% occupied. In the district, we have our third major lease out for signature at 2200 Pennsylvania Avenue, which will bring our office pre-leasing to 74%. In addition, we're negotiating leases on almost 100% of the retail space.

Now both 2200 Penn and Atlantic Wharf are mixed use projects and have for-rent apartment components. We're building 333 units in Washington, DC and 80 units in Boston. Each of these buildings will be delivered during the middle of 2011. We've engaged third party management agents to assist us with the lease up and operation, and next quarter, we'll provide you with some expectations on the yields associated with these new developments.

In addition, you'll note in our press release that we purchased a loan and subsequently did a deed-in-lieu on a parcel in Reston, Virginia. We now own a 2.5 acre site, which is the last remaining undeveloped land in the Urban Core, which is also directly adjacent to all of our new developments in Reston Town Center. The property is currently zoned for 360 apartments. We're undertaking a review of the highest and best use for this site, and we may, in fact, develop additional apartments on this parcel in the very near future.

Transaction velocity continues at a pretty strong clip in New York City. Second-quarter leasing activity was slightly above the five-year historical average and our overall vacancy in the portfolio is at 2.9%. Now our immediate focus, given where we are with our leasing, has really shifted to smaller tenant demand, given the type of product we have available in the portfolio today.

This quarter, we completed 16 transactions in New York City and only one was above 20,000 square feet. Typically, these suites are pre-built or refurbished by the landlord and rents range from a low of the low $50's at 2 Grand Central to the high $60's to mid-$80's at 599 and 540 Madison; to over $90 a square foot at 601 Lex and 399 Park; and well over $100 a square foot at 767 Fifth. We have also begun making presentations to tenants at 250 W. 55th St. this quarter and there are some large users exploring the marketplace.

In San Francisco, activity continues to lag the other markets. We have seen an increase into our activity and we have issued over 400,000 square feet of proposals to eight separate tenants ranging from a full floor to 150,000 square feet during the last quarter, for that availability at EC4 that's coming up at the end of 2011 and early '12.

We have one lease out for signature on a floor and we're negotiating a second lease today. Rents at EC4 are in the high $40's to low $60's, and leasing activity is also picking up in some of the smaller suites in Embarcadero Center.

In the Valley, leasing activity is still slow, and given at availability is 20 plus percent, landlords are still being very aggressive in courting tenants. Nonetheless, there are signs of some positives there as well. Google has removed space from the sublet market in Mountain View, where availability has dropped to 16%, and activity in Palo Alto has really picked up significantly. And those are the two markets that are the leading indicators of a Silicon Valley recovery.

I do want to take a minute to just give you our impressions of the acquisition market as well. While on a historical basis there's still very limited activity, there has been a significant pickup in the number of potential investments we're reviewing and underwriting. Many of these transactions are assets we've been tracking for the last 15 months, where it appears the combination of the seller's view on pricing, their motivation and ability to sell, are starting to become aligned with new capital availability.

While there are no -- certainly no -- lots of fee simple sales, there are also significant structured investments, including mortgages and mezzanine debt as well that we're looking at. There is an abundance of capital seeking high-quality investments in our markets, and it is clearly resulting in pricing that is exceeding expectations from both a value per square foot and a cap rate basis than anyone might have expected.

Return expectations, both current and total, are being lowered by the current interest rate environment and lack of alternative investments. As Mike will describe, attractive debt is again available for high quality assets in our markets. And even double-digit availability has not seemed to mute investors' expectations regarding rental rate growth.

We are focusing our attention on assets where there is inherent risk and opportunity in the operating issues of the asset, and where we'll be able to use our operational and financial strength to create value for our shareholders. Cases in point are the land parcel we just purchased in Reston, Virginia and the JV we're doing at 500 N. Capital.

During the last cycle of appreciation, investors were able to make money simply through holding assets and watching cap rates compress and rental rates rise rapidly. We may be operating in an economy with limited job growth for an extended period of time. In this environment, we can't count just on dramatic market rental rate growth and market occupancy gains to create value.

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 asset, developing long-term relationships with the right tenants, current and future; developing the right plan to position a building in the changing market is what we do every single day, and we're optimistic that we're going to be able to execute on these types of investments over the coming quarters.

And with that, I'll let Mike talk about our results for the quarter.

Thanks, Doug. Good morning, everybody. I want to start with just a quick discussion about our balance sheet.

Last quarter, we were very active in refinancing the majority of our 2010 debt exposure and we raised additional capital in an attractive bond market. And today, our balance sheet is highly liquid with $1.7 billion of cash and full availability under our $1 billion line of credit.

Our liquidity, combined with our moderate leverage position, provides us with a good amount of dry powder to act on new investment opportunities. As Doug mentioned, the opportunities that we are tracking in our pipeline continue to grow, and we've prepared our balance sheet to quickly capitalize on those opportunities that we find attractive.

Our other short-term capital needs are very manageable. We have only $365 million of expiring debt, including our share of joint venture debt, remaining in 2010, with three of these loans totaling $270 million, containing short-term extension options that we currently expect to exercise.

This month, we paid off our $56 million loan on Carnegie Center and the remaining loan, an $80 million loan on our 50% owned Market Square North joint venture, expires in December. We've recently executed an application and locked our interest rate with a life insurance company on this property for $130 million 10-year refinancing at an interest rate of 4.85%. We anticipate closing this loan some time in the late third or early fourth quarter of 2010.

This is a good representation of where the secured markets are today for reasonably leveraged, high quality office buildings such as those in our portfolio. And it demonstrates a 90 basis point reduction in pricing from the rate on our Metropolitan Square loan, which we locked in the spring. Credit spreads have tightened by about 30 basis points over this timeframe, while the majority of the compression has come from the rally in treasuries as the 10-year Treasury rate has dropped by about 60 basis points.

The secured market has now moved inside the unsecured market, with our unsecured spreads still hovering around 200 basis points. We could issue a new 10-year unsecured bond today in the very low 5% range. In the convert market, we could issue a coupon in the 1% to 1.5% area for five years with a strike price premium of 20%.

In 2011, our maturities are also quite reasonable, with approximately $680 million of maturing debt, the largest of which is a $460 million loan on 601 Lexington Avenue that expires in May. This loan had a pretty high coupon of 7.19% and is significantly under-leveraged at a loan of $275 per square foot. In addition, we have to fund the remaining $140 million of equity to complete our development pipeline. And overall, the portfolio is generating positive cash flow, after funding all of its capital needs plus our dividend. So, again, we're in a great position with moderate capital requirements and strong cash flows.

We're also looking at our medium-term maturities and bought back another $133 million of our exchangeable notes that are callable in 2012 in the second quarter. We've now repurchased a total of $186 million, all at slight discounts to par. And lastly, we exercised our right to extend the maturity of our $1 billion revolver to August of 2011.

Getting on to our second-quarter results, we had a solid quarter and reported funds from operations of $181 million or $1.12 per share. This significantly exceeded our expectations by about $0.14 per share or $23 million. However, much of the performance, roughly $15 million, was due to nonrecurring items.

The biggest impact was from the acceleration of the deferred management fee for 280 Park Avenue totaling $12.2 million. When we sold 280 Park Avenue for $1.2 billion or $1,000 per square foot in 2006, we entered into a master lease that was associated with about 75,000 square feet of space as well as a below-market 10-year management agreement. A portion of the management contract was recorded as deferred revenue and reduced our gain on sale at the time by $16.6 million.

This past quarter, the leasing of the building surpassed the requirements in the master lease, which encompassed payments by us of $4.1 million over the last four years. We now have no future obligation under the lease, but the owner gained the right to cancel the management agreement early, which they have done. We've taken the remaining balance of the deferred revenue into income this quarter, and the loss of the management agreement will reduce our fee income by $2 million annually going forward.

We also earned $2.6 million of termination income in excess of our budget and total termination income of $4.2 million for the quarter. 90% of this termination income relates to three tenants. Two are in New York City and one in Boston, where we proactively negotiated terminations because we had replacement tenants committed to the space. $1.8 million of this came from our joint venture buildings.

Our core operations exceeded our projections by about $8 million. Approximately $5 million came from the portfolio with a lot of small leasing wins; the delivery of Weston Corporate Center a month early, which generated $1.4 million for the quarter; and operating cost savings of just over $3 million.

Half of the expense savings were in utilities, which is hard to believe, given the heat wave we've been dealing with in the Northeast, and we expect to give some of this savings back this quarter. We've also pushed off some repair and maintenance projects, which we also expect to move into later in the year as well.

Our development team did a terrific job, and we delivered our Biogen headquarters development at Weston Corporate Center a month earlier than expected, and also with significant cost savings. Based on its final cost, we expect Weston Corporate Center to deliver an unleveraged NOI return of over 11%, exceeding our original budget by nearly 200 basis points.

Our hotel in Cambridge was up by $600,000 and it has now beat its budget for the fourth consecutive quarter, demonstrating stronger occupancy and enabling us to push room rate. The second quarter is typically a good quarter for our hotel, with the demand from college graduation activities boosting occupancy.

Excluding the $1.8 million of termination income that I already mentioned, the contribution from the JV portfolio was higher by just over $1 million. Late in the quarter, we achieved the lease up of the remaining 47,000 square feet of space at our 50/50 Annapolis Junction joint venture project. And as Doug mentioned, we're now 100% leased. We also saw better retail sales in our joint venture properties, resulting in higher percentage rent this quarter.

In addition to the one-time fee at 280 Park Avenue, our development and management services income was about $600,000 above budget, with increases in our work order requests in New York City, Boston, and San Francisco, plus commissions that we earned on the completion of several leases within the New York City joint venture portfolio. Our G&A expense for the quarter was right in line with expectations.

We've reported a non-cash $6.1 million loss on extinguishment of debt related to the buyback of our exchangeable notes. Now, we talked about this last quarter, and in accordance with GAAP, these notes were bifurcated into a debt and equity component at issuance, and roughly 96% of the face amount is currently reported as debt. Given that we are buying them back at closer to par and the value is virtually 100% debt today, GAAP math shows that we are paying a premium and results in a paper loss.

We had projected all but $1.3 million of this loss, as we've completed most of the buybacks before we reported last quarter. The remaining negative variance was offset by a reduction of interest expense associated with the repurchase exchangeable notes, plus savings on our floating rate debt, where LIBOR has remained low. And our debt balances are lower than projected as well, as we're using cash rather than borrowing under these facilities.

On the interest income side, we generated approximately $750,000 more than we expected, as we were able to maintain our earnings rate for the quarter, where we had projected some decline.

As we had guided last quarter, our FAD returned to a more normalized rate this quarter at 66% after spiking due to the high volume of leases that hit in the first quarter. We had 1.1 million square feet of second-generation leases commence this quarter, more in line with our historical experience. And transaction costs were in line as well, at $23.18 per square foot for an average cost per lease year of $4.28 per square foot.

We still have an inordinately large amount of straight-line rent impacting our FAD. And over the next two quarters, a good piece of this will convert to cash rent, reducing our straight-line run rate by approximately $10 million quarterly by the fourth quarter. Going the other way, we haven't spent much of our capital expenditure budget yet, but still expect to end the year around $20 million, with only $3 million spent to date.

Turning to our projections for the rest of 2010, as Doug detailed, we have not seen a significant change in the rents or velocity of leasing in our markets. And things are pretty steady. As a result, we've not made many changes to our leasing projections and expect to end the year at an occupancy rate in the mid-92% range.

We experienced positive absorption of about 100 basis points this past quarter in New York City and are now 97% leased, with about 250,000 square feet of vacancy. 140,000 square feet of this availability is in the upper floors of 601 Lexington and 599 Lexington Avenues, where we're seeing good activity. We do have an 80,000 square foot vacancy coming in the third quarter at the bottom of Two Grand Central Tower. This vacancy will offset our other projected leasing gains, and overall, we expect our occupancy rate to remain pretty stable in New York City.

As we've discussed before, our occupancy in Boston is declining and we expect it to continue to drop modestly with just under 300,000 square feet rolling in the next two quarters. We've seen improved activity at the Prudential Center and in Cambridge, but most of it is for 2011 or later occupancy. And in the interim, we've taken back 50,000 square feet from a recent renewal and contraction at 111 Huntington, and 80,000 square feet in conjunction with Biogen's relocation out of Four Cambridge Center to Weston Corporate Center this quarter.

In Washington, we are well-leased at 97%. And our occupancy has been creeping up over the last couple of quarters with the continued lease up at South of Market, Wisconsin Place, Annapolis Junction, and One Preserve Parkway. We expect to continue to see steady absorption of the remaining 100,000 square feet available in these projects, particularly at South of Market and Wisconsin Place, where we have deals in the works.

The activity at One Preserve, where 50,000 square feet of this availability resides, is still pretty slow. We have over 900,000 square feet of leases expiring in Washington over the next six months. Virtually all of it is in the process of renewal, so our speculative exposure remains light.

Our occupancy in San Francisco is pretty stable in the 91% range and we expect to maintain this through year-end. Our rollover for the rest of the year is manageable at 380,000 square feet, with the only large exposure being the 270,000 square foot vacancy that will be created in North San Jose when Lockheed Martin downsizes in December. This vacancy has no impact on 2010 and it will reduce 2011 earnings by less than $4 million, assuming it remains down all year, as it's a relatively low rent lease.

In Princeton, we recently signed a full floor lease for Tower Center, the first positive leasing we have had there in over a year. Activity in Carnegie Center has also picked up recently, with several larger users looking at our vacancy and our 2011 rollover. We have minimal additional exposure in 2010 and anticipate occupancy to remain in the 90% range for Carnegie Center.

In summary, and similar to last quarter's report, we expect our 2010 same-store GAAP NOI to be flat to down 1%, and on a cash basis, to be negative 3% to negative 4% compared to 2009. As we have stated before, our cash NOI is lower in 2010, due to the free rent associated with many of our larger new leases that commenced earlier this year and late last year, including 475,000 square feet in New York City and 480,000 square feet at the Prudential Center in Boston. All of these leases will be cash paying by early 2011.

On a quarter-over-quarter basis, we expect our second quarter same-store topline revenue to be a good proxy for the next two quarters, while our margins will deteriorate slightly by 100 to 200 basis points, due to the seasonality of energy costs and the deferral of some expenses into the second half of the year.

We project full-year straight-line rents of $80 million to $85 million, which is up slightly from last quarter. We do not include termination income in our same-store numbers and are projecting $1 million for the fourth quarter in the wholly-owned portfolio.

Given our hotel's continued improved performance over the past few quarters, we're increasing our projections and now expect that it will generate $7 million to $7.5 million of NOI for the full-year 2010.

Buildings that aren't in the same-store portfolio include our 2009 developments with Princeton University, Democracy Tower in Reston Town Center, and Wisconsin Place, which in addition to Weston Corporate Center, are collectively 99% leased. Looking at all four of these recent deliveries with a total investment of $335 million, their weighted average unleveraged GAAP NOI return is 10.8%, demonstrating our ability to deliver superior returns through the development process. We also added 500 N. Capitol St. to the portfolio this quarter. And in total, our developments and 500 N. Capitol are projected to add an incremental $20 million to $22 million to our 2010 NOI.

The contribution to FFO from our joint ventures is projected to be $145 million to $148 million in 2010. This range has increased by $8 million from last quarter, a portion due to out performance in the second quarter of nearly $3 million. We also leased, as I said, the remaining space in Annapolis Junction, which adds $1.5 million to the year, and are projecting some additional leasing at Two Grand Central Tower.

Lastly, this month, we negotiated a settlement agreement and received $1.75 million, representing our share from a tenant that terminated its lease back in 2008. Our joint venture projections include $82 million of FASB 141 income for the year.

Our development and management services income will be lower over the next few quarters, as we've recently completed several fee-oriented projects, such as 20 F, and now we'll no longer earn the $2 million annual management fee at 280 Park Avenue. On the positive side, we're seeing progressively more activity from our tenants for work orders and other services after a moribund 2009.

We project our 2010 development and management services income to be $39 million to $42 million. Our projection is up from last quarter, solely due to the impact of the $12.2 million acceleration of the 280 Park Avenue management fee this quarter.

We're projecting our G&A to be $82 million to $84 million for the full year. Our net interest expense projections have not changed significantly. We're not budgeting any additional debt buyback activity, and our quarterly run rate for interest income is expected to be $2 million to $2.25 million, similar to the second quarter results.

Our net interest expense, including interest income, is projected to be $380 million to $385 million for the full year, including the one-time, non-cash charges associated with our buybacks.

Considering all of these assumptions in addition to our second quarter results, we're increasing our 2010 full-year guidance and now project funds from operations of $4.24 to $4.29 per share. This is an increase in our range of $0.18 per share at the low end, resulting primarily from the outperformance in the second quarter.

For the third quarter, we're projecting funds from operation of $1.01 to $1.03 per share. We haven't included any earnings from new investment activity in our projections. As Doug discussed, we're actively underwriting multiple opportunities, have seen our pipeline of potential deals grow, and are hopeful that we will be successful in making acquisitions in this environment.

Our cash balances of $1.7 billion are currently earning approximately 50 basis points and are dilutive to our earnings. For every $500 million that we invest at a 6% return, our annual earnings would increase by $27.5 million or $0.17 per share.

That complete our formal remarks. Operator, you can open the line up for questions.

(Operator Instructions). The first question will come from Jeff Spector with Bank of America.

Jeff has withdrawn his question. The next question will come from Jordan Sadler, KeyBanc Capital Markets.

Just curious about the apartment investments. Maybe you could just give us a little bit of color around the allure of that business and maybe the strategy, as it seems that maybe you're expanding or broadening your amount of capital invested in that sort of space?

Let me try and answer the question in the following way. Many of the projects that we have become involved with are mixed use in their focus, largely because that appears to be where office tenants want to be located. We believe that developing mixed use products under the right economic scenario in the right locations could be a pretty significantly accretive use of our capital and where we can create some value. And so in those circumstances, I think we would certainly look to explore alternative uses in those locations.

So if you think about what we've done or what we might do, we're talking about downtown Boston associated with their office building retail complex; we're talking about infill Northwest Washington, DC next to our office building with almost 100,000 square feet of retail as part of the same development. And in Reston Town Center, where we have 3.5 million square feet of office space and a couple of hundred thousand square feet of very successful retail space, doing a residential project in that kind of a context.

I wouldn't want to give you the impression that we are out there looking to do stick frame residential or stand-alone urban residential right now. We're really sticking to the types of projects and the types of environments that we've been very successful in, and just thinking about whether or not it makes sense as a developer right now to be the owner of those assets, and whether there's enough value creation there to make sense for us to deploy our capital. And to date, the answer has been yes.

And the return expectations are similar to what you would expect from your office product? Or is it just that there's a lower risk profile?

I think there's a lower risk profile. There's more incremental annualized growth. Our expectations are that if you can develop an apartment building and a 7 current NOI at stabilization, that's a pretty accretive apartment value. And so under those types of economics where we're saying, gee, if we can bring that type of value creation to the table, maybe it makes sense for us to do this.

This is Mort. Let me just say one other thing. These are -- as Doug indicates, all part of other, much more substantial activities in our traditional roles. We think it is something that would enable us to not only complete the developments, but to control the environment of some of our developments over the long haul. And given the particularly attractive, we think, residential locations that we have that are part of these developments, we think it makes sense for us to do this.

We are not -- as Doug says -- we're not going out looking for free-standing residential developments. That's not what we're going to be doing.

No, that's helpful. And maybe just sort of along these same lines, just thinking about the other investment activity that seems to be picking up that you're looking at, there seems to be a little bit of a disconnect -- and we may have discussed this in the past on this call -- in terms of the performance of high quality projects that would be parallel or similar to what BXP would ordinarily invest in, so maybe the operating performance is strong; yet, you guys are focused on taking down assets where there are operating challenges.

So should we expect as you go forward maybe close of some of these things you're pursuing, that the quality of the location or the asset may be not quite BXP quality?

No, that is something that we are not going to change our basic strategy. We are still going to be focused on the highest end real estate, commercial real estate developments. And this is what we are looking at.

And I will add one other dimension to it. It's not just the highest quality; it's basically on the assumption that these are the best long-term holds. Because we have found, as we have repeated over and over again, that not only do they do well in good markets, but they do relatively much better in tough markets. And that's still the combined forces that have shaped our strategy. And we're not going to give up on that.

We are looking at developments that we think fit into what I would call the sweet spot of our both presence and activity. Now I have to say to you that we have not been too successful in some of the things that we have tried, because the market for these assets is stronger than, frankly, we would have anticipated. There still seems to be an awful lot of cash on the sidelines waiting to go into real estate, and particularly in the markets that we are in, which is both a testimony to the markets.

But we still think we'll be able to be successful in putting this money that we have to work. And we've tried to indicate, we're working along those lines. We obviously can't talk more about these things, obviously, until they're done; but as soon as -- if and as soon as they are done, we will be undoubtedly sharing the news.

We're waiting patiently. Thanks for the time.

Alexander Goldfarb, Sandler O'Neill.

Just want to go to some of the tenant discussions. Have you noticed -- there were some articles from some of the commercial brokers just talking about how some of the law firms have been reassessing their needs and maybe being a little more space-conscious for some of the senior guys.

Just want to see what trends you guys are seeing from the law firms. And then in addition to that, if you're seeing any impact so far from FIN Reg as far as firms reassessing their space, whether they're going to take the separate space to house different operations or what their thoughts are on that front.

So, last quarter, Alex, I think I did a little bit of a diatribe on the legal profession and our views on those firms. And just to summarize, what we said was, overall, any law firm that was looking at its overall use of space in 2009 or 2010, was probably, unless they had done a major acquisition or a merger of another firm, looking at reducing its overall footprint by 10% to 15%.

And we have seen countless examples of law firms who are signing new leases and/or doing early renewals/givebacks in both Boston and San Francisco, in Washington, DC. We haven't yet seen that in New York City, largely because I just don't think those leases have rolled over. Although, if we looked at what Proskauer fundamentally signed as their lease at 11 Times Square and what they were talking to us about when we were doing our development conversation with them at 250 West 55th St., it's a pretty proximate change in terms of what the total square footage is.

So, big picture, we have seen a clear change, and largely, that's due to two things. One, it's due to changes in the way law firms use their space. There are obviously law firms that, 10 years ago, had one assistant for every partner or one assistant for every associate and a half, and had lots and lots of space for file rooms, and lots and lots of conference rooms for -- spread out throughout their space for their clients, have changed the way they work. They don't have any -- that need for the hard file space any longer. They're creating conference centers where they're consolidating all their conference rooms. There are far fewer administrative professionals working in these firms.

And then they also, all of them, laid off either lawyers or of-council associates over the past year or so, and they have yet to start hiring back those people. So that's from the legal perspective.

On the financial/regulatory side, we have not seen any of the firms, at least that we do business with in New York City, making changes to their footprints based upon the changes to the regulatory reform. Interestingly, I sort of go back every quarter and look at the financials -- when the bolt to bracket firms put their results out. And many of them actually show you what their hiring is on a worldwide basis.

And to -- I think to every one of them, there was some incremental growth in employment between the third -- the end of the first quarter and the end of the second quarter, as well as from the comparable period second-quarter of 2009 to comparable period in 2010. And that includes firms under tremendous scrutiny, like a Goldman Sachs. If you go to their financials, they will show you what their overall headcount is.

So we have not seen any changes on the downside. What we have seen, and I think we have been the beneficiary of it, is that some of the professionals that have founded the business strategies that they were pursuing, might not be aligned 100% with where they were doing them at the investment banking firms, have just decided to take their shops and go elsewhere.

And we've seen some of the hedge funds and some of the smaller investment banks growing, a.k.a. Avenue Financial at 399; Moelis at 399; Citadel at 601 Lexington Avenue; Perella at 767 Fifth Avenue. I mean, that's what's going on here; but in total, the headcount of the actual large firms hasn't really declined to date.

Okay, that's helpful. And sorry about the law firm thing. There was just a few commercial reports out -- the brokers just commenting. So, clearly it's a topic on folk's mind.

Next is just on the development front, I think I may have missed it in your MD&A. Did you comment on timing for the NPR site? And then as far as the 46th Street and Eighth Avenue site, just wondering if the commentary in the press release was just settling up some old negotiations or if this is a prelude to perhaps the start of negotiations for something -- to start something in the near future?

On NPR -- NPR is under development and we are their development manager on a new building in the north of Massachusetts area. That building I believe is going to be delivered in 2013 or 2014. We will get our site from NPR when they move into their new location.

We have begun discussions preliminarily with architects to design a conceptual plan for that site. And our expectation is we will, sometime between the end of this year and the beginning of 2011, begin a strong development process endeavor on the design side of this thing. And we will then start, as Ray has always been able to do with his team in Washington, DC, procure a major tenant to lease the building before we have to put a shovel in the ground. So that's our expectation. And that's sort of --

I think it's a real testament to the market, Doug, that we're already fielding inquiries about pre-leases from major law firms for that building in the '15, '16, '17 timeframe. So I think that's a testament to the lack of a large box of available space in that time period.

And then regarding on the 46th Street site, we did a land swap to change a little bit the characteristics of the current land that we have. We right now don't control enough land there to build a significantly sized office building. We do control enough land to develop a residential building, but it's not something that we're contemplating getting going any time soon.

Sri Nagarajan, FBR Capital Markets.

If I heard you guys right, you obviously said that you're working on structured finance deals. Now -- as well as, obviously, outright acquisitions. If you could throw us some color on the strategy here. Is it more or less an expectation of total lack of distrust that's coming to -- going to hit the market in, say, 2011, '12? Or you believe that these one-off deals are pretty opportunistic here?

When you use the word structured finance, I sort of just want to pause and say we're not getting into the business of becoming a structured finance lender. As an example, we purchased a loan from Bank of America and two other banks on that piece of parcel in Reston, because that's what they were selling.

We then were able to get a deed-in-lieu and owned up with ownership of that land. That is the mentality and the approach to the structured finance investments that we would be making. We're not getting into the structured finance business.

Understood. But I was just referring more to one-off opportunities as opposed to a wave of distrust that's going to hit the market.

Well, we assume that there's going to continue to be lots of opportunities for buildings that were over-financed to be sold by the controlling capital partners. And in many cases, the controlling capital partner in those assets is someone who is in either a junior debt or a junior mezzanine position. So that's where we think the value and control will be seeded from.

Okay. And in terms of tenant concessions, I mean, one of your competitors obviously remarked that they were coming down and tapering off already. Do you guys believe that it's a Manhattan phenomenon? Or is it just across all your markets, CBD markets?

We have not seen any strong change in tenant concession trends from quarter to quarter. I think in midtown Manhattan, there are -- you might argue that there's been a very, very modest reduction in either the tenant improvement allowance or the amount of free rent, but you're talking -- instead of giving somebody $60, you're giving them $55; or instead of giving someone 10 months of free rent, you're giving them nine months of free rent. It's sort of on the margin.

In all of our other markets, I think the concessions have been consistent. Depending upon the market, the concessions have actually widened out but the rents never came down. As an example, in Washington, DC, tenant improvement allowances probably have increased, but the base rental rate has been maintained, so you're still getting a $40 to $50 triple net rent depending upon where you're located, but you might have increased your tenant improvement allowance from $60 to $70 to $75 a square foot.

So I don't think we have seen any type of a sign that concessions have come down and/or that the landlord has been able to exert influence overall, because the market has strengthened to the point where they can do that.

Okay. Perhaps a last question, if I may. It appears that your commentary on San Jose and in general Northern California is turning positive. While I recognize that there are rent rolldowns in Embarcadero Center, what if any positive trends are you seeing other than leasing activity in Northern California?

Honestly, we are seeing -- if you look statistically at what the brokers put out there, they would tell you that the overall rents had actually started -- continued to drop a little bit. But there is clearly -- there's an epicenter. The epicenter is Sand Hill Road for the venture capitalists, and Page Mill and the Stanford Research Park for Palo Alto for the companies. And then it leeches into Mountain View. And depending upon where the company is and what the company is, there might be a little bit of a pocket in Sunnyvale or a little bit of a pocket in Santa Clara.

But overall, the better markets have started to tighten. There's more activity. There's a little bit more sense of expansion there. It is not because of the significant amount of overhang of available space translated into any changes in the economics of the business down there.

Chris Caton, Morgan Stanley.

Can you give us some commentary on the last, say, 45 days or 60 days on the momentum in showings and decision-making on signing leases? Have you seen that continued incremental improvement we've seen through the beginning of the year? Or has there been a slowing in decision-making? And if there has, has it varied by market?

I would say that, overall, I use the word steady in my comments. I think steady is the right word. It's steady and consistent.

Depending upon the week in the summer -- the week of Fourth of July was obviously a slow week. There will always be the summer slowdown. But I will tell you that in certain of our markets where we're working on transactions, the amount of time our leasing folks are working on either showings or doing lease negotiations, has continued unabated.

I think there was a slight dip in Manhattan in the beginning of the second quarter when the markets went into their sort of -- I don't want to say tailspin, but their significant decline, and there were a lot of people who were focusing on the screens for a period time. I think that was a momentary change and not one that we've seen on a consistent basis to sort of have elongated itself out.

So again, I think steady is the right word, and we really haven't seen much over all of our markets in terms of a pickup or a reduction in the overall activity that our leasing folks are seeing.

George Auerbach, ISI Group.

Doug, you mentioned that the pricing on the value per square foot and on a cap rate basis has generally exceeded your expectations. But how are buyers today thinking about appropriate unlevered IRRs for Class A assets in your core markets?

I think they've come down, George. I think that there are lots of high quality institutional investors who are looking at the market environment we're in and saying to themselves, there is an opportunity potentially for some upside, and this asset and this stream of cash flows over a period of hold; and I'm satisfied investing my capital -- I mean, I think the sort of the number that people are using as the average out there is sort of in the mid-5's to low 6's.

That's sort of where the DC and the New York City assets seem to have been trading on a cap rate basis. My guess is in many of those cases, the rents are either at or slightly above market, so there's probably not much in the way of short-term pickup and overall cash flow that would occur there. And so my assumption is that those IRRs are in the 7% to 8% range. That's where people are looking at high quality real estate in the kinds of markets that we operate in.

Do you think those return hurdles have declined over the last three or six months, just given the lower risk-free rate environment? Or are buyers holding the return hurdles steady and just raising their growth expectations?

I think those returns have come down. I honestly do. I mean, I think that there was an expectation that there was going to be this tremendous opportunity to grab real estate at very significant returns a year ago. And as we have clearly seen that that has not happened, there hasn't been the distress, there hasn't been this intermediation of ownership that I think a lot of people thought there was going to be.

Overall returns have come down. And they came down at sort of a step function between March of 2009 and the beginning of 2010. And then I think they've slowly creeped down since then. And there continues to be a dearth of opportunities and there's a lot of capital looking. And as long as that's the case, I think that the expectations of the overall buyers are going to be very moderate.

Helpful, thank you.

David Harris, Gleacher.

Did you have any sense that the possibility of higher capitol gains tax is weighing on the minds of potential sellers?

We have not seen any increase in sales activity that would suggest that that's the case.

Okay. Any news on any changes to FIRPTA?

Not that we're aware of. No.

That you're aware of? Okay. If we think about the value-added acquisitions that you're looking at, have you had any potential interest from overseas investors? Or are we talking principally of on balance sheet proposals here?

We are continually having conversations with sophisticated capital providers who would be very interested in doing transactions with us.

We are, as Mort and Mike alluded to, we're sitting on a pretty liquid balance sheet and the opportunities have been very limited. So I think that at the moment, opportunities are what's driving our desires, not capital. And if a megadeal came along, we would certainly look at continuing to do something like what we did with the General Motors acquisition, which is where we went into a group of very sophisticated investors and put together a partnership.

I think other than outside of that type of a transaction, we are looking at using our own balance sheet and our own capabilities to be acquisitive and make investments over the next period of time.

Mort, would you agree with that?

Keep going.

Mort's probably gone. He's probably writing a letter to Paul Krugman again.

No, I'm here.

Oh, there, Mort, how are you?

(multiple speakers) Would you consider the GM acquisition to be a value-added acquisition? I mean, I'm just trying to get my head around your definitions here.

Absolutely. Bear in mind, let me just explain what several of the most important features of the GM Building were and are.

We have close to 1 million square feet at the top of the building leased to two major tenants -- Weil Gotshal being one and Estee Lauder being another. Those rents are so far below the market that we knew when we went in, that that would be the major inflection point in terms of yield. But even without that and even in this difficult market, I have to say, we were helped, I confess, by the introduction of the iPad in the Apple store, which you just can't imagine how successful it has been. And we have a modest participation rent.

But generally speaking, we have been able to lease up the space that we have. The building is doing extremely well. If we had another 200,000 square feet today, we could lease it. But the most important and transforming event in that asset will be when those two leases roll over. And they will roll over in about -- I don't know, five years, just give or take -- a short period of time.

That's always been -- or maybe six years -- but that's always been a critical element of this thing, which is not fully appreciated, but we basically have, as a philosophy, a long-term hold view of the assets that we try and buy. And when you take those numbers and those increases, and they're in the $60's and $70's, if that -- and this is at the top of the building; I didn't prepare by doing the research on that space -- but when you take those increments that we will definitely get, and you assume that that gets wrapped into whatever the residual value of that building is, you will understand why we said at that time, and will say again, that in terms of an IRR, that was the most attractive investment I've seen as by way of acquisition in the years I've been in the business.

Okay. So when we're talking of your value-added acquisitions that you're looking at today, should I read it that you're much more willing to take lower returns and be focused much more on long-term IRRs --?

We will accept lower returns in the shorter run, providing it is the quality of real estate that is consistent with the things that we are doing. We do have a longer-term perspective, without question. We do believe that is when you're talking about major real estate assets, you have to think of it in the longer term.

We've done fairly well in the shorter term, but ultimately, the longer term becomes the shorter term in the assets we have. And the reason for that is because of the quality of the assets. So we're perfectly willing to be patient in that sense -- something always tends to work out so that we, in a sense, can capture some of that longer-term appreciation.

But our whole strategy has been to have the best quality of assets, to hold them for the longer term, and you know that sooner or later, you'll capture that value. Sometimes it's sooner and sometimes it's later, but it's definitely going to be captured in the markets that we are in.

I'm sorry to hog the call, but one final point to you, Mort, is that if pricing today is so aggressive and the focus of certain constituents/investors is so focused on long lease, well-led quality assets, isn't this an opportune time to be selling some stuff, and perhaps reinvesting into higher return opportunities that you can take advantage of?

Well, let me put it this way. There is that. You may recall that we sold a hell of a lot of assets before the bubble burst, because we thought at that time, at those prices, we should be sellers.

We do not feel that way in terms of where the market is today. It may get to that point, but from our point of view at this stage of the game, what we have is we have the cash resources and the financial resources to make the kinds of acquisitions we hope to make. If we get to the point where we've used up what is clearly the additional cash resources and financial resources that we have, if we use that up, we might look to the possibility of the sale of assets. Where we don't have any -- it's not an emotional decision, it frankly has been a financial and business decision.

We sold, I don't know, $4 billion, give or take, just about three years ago, just before 2006, 2007 into 2008, just before the world came apart, because we thought that was the appropriate time to sell. And if we think that those conditions apply again, and we didn't know that we were going to be heading into the kind of a ditch that the economy fell into, but we just thought those were the right prices.

We don't feel for the assets that we have today that we either need to sell or should sell. We do think it's still an opportunity to buy. And that is what we're focused on.

Jay Habermann, Goldman Sachs.

Just a couple of questions. Doug, you mentioned the strong demand on some of the smaller spaces. Just wondering what sort of interest you're starting to see for some of the larger blocks? And I know it's early, but as you think about West 55th and even some of the Bain space that needs to be released.

Well, you're talking two different markets and the demand is very different in Boston versus New York City.

In New York City, the demand that we are looking at are law firms who have 2014, 2013 lease expirations and some of the major financial institutions that have lease expirations that are coming up in 2013 to 2015. There are -- I mean, we've made, I think, four presentations thus far to tenants who have between -- I think the smallest we saw was 200,000 square feet and the largest we saw was 1 million square foot. So those are the types of tenants.

Boston is a small tenant market at this point. There are very few tenants above 300,000 square feet in the city of Boston. That being said, we are talking to a couple of larger tenants about the Bain block of space, although we are also talking to a number of smaller tenants who would relish the opportunity to take two or three floors at 111 Huntington Avenue in and about when Bain's lease expiration occurs.

And how much are you having to adjust rents, do you think, at this point in the cycle versus your prior expectations for the larger blocks?

Well, obviously again, the markets are different. We believe that we will get a premium to where rents currently are in midtown Manhattan, in order to satisfy the type of tenant that is looking for a new building and looking for the potential to expand in that building, and growth options and things like that.

In Boston, there's really not -- our expectations are sort of understanding where the market is, and we have a view that where market rents currently are today, which are in the low $60's for the top of the building and the mid-$40's for the bottom of the building, and we think that's where we're going to ultimately cut a deal.

That's helpful. And then just lastly, you mentioned perhaps an update on the two developments next quarter. Can you just give us some sense of where you are in negotiations today and how the pace of leasing is going -- in Atlantic Wharf and 2200 Penn?

Yes, as I described, we have a lease opportunity that's going to get us to 74% on the office component of 2200 Penn and we have 100% of the retail leases under negotiations as well, including there's a supermarket that's part of that residential complex.

At Atlantic Wharf, there is 100,000 square feet of quote/unquote what we call tower space, and then 215,000 square feet of what is referred to as the waterfront building space. And we have about 100,000 square feet of lease proposals that have been agreed to where we're negotiating.

Shane Buckner, Wells Capital Management

Could you give a little color around the amount of underutilized space you're seeing in your occupied portfolio? And has there been any meaningful change in that over the past quarter or so?

That's a really, really difficult question to answer. We don't believe there are any major pockets of space in our portfolio that aren't on the sublet market, that are underutilized by our tenants, particularly in our suburban portfolio.

In our urban portfolio, where we have law firms that have, again, signed leases in 2005 or 2006, and their headcount has changed, I'm sure they are sitting on unutilized space. But the fact that they haven't chosen to put any of that space on the sublet market leads me to two conclusions.

One is, it's so disjointed and the capital investment associated with moving people around is so significant that it's not worth them to spend the energy and capital in doing that, and putting the space on the sublet market; or they have a view that they're going to grow back into that space over time.

There are tenants that do have space on the sublet market in all of our markets. They're few and far between, but it's generally law firms. And they're -- I'd say the preponderance of them is in -- are in San Francisco and in Washington, DC. But they're limited. And we have not seen any change in those types of characteristics quarter-to-quarter.

On the other side, financial services companies, not our particular tenants, but overall, in the marketplace is we've seen a reduction in sublet space on the market in Manhattan, and we've seen a reduction of space on the tech side, as I spoke before, in places like Mountain View, where Google had space on the sublet market that they've taken off. So we've seen a retraction of available space on the sublet market in many of the markets over the last quarter.

Michael Bilerman, Citi.

And Josh Attie is on the phone with me as well. Mort, I wanted to come back to you. You've obviously been a little bit critical of the Administration, and go back to an editorial a couple of weeks ago, where you talked about the Administration's anti-business policies and referencing almost a certain economic Katrina.

And I'm wondering, in your discussion with CEOs, as you think about -- as they look at space, I mean, how much of a lack of business investment is rolling into the space markets? And concern over business. I'm just wondering those two aspects of it.

Well, let me just say this, because I've been surprised actually. After one of the earlier editorials, the response which I got from a whole range of people, and mostly CEOs of many, many major companies, who called just to reinforce the view. If anything, they were much more intense about this concern than I was. And I wasn't exactly low key in my concerns.

And when I talked to them, I mean, people sort of feel -- the word demonized is a word which I've used. And I think it does affect -- when they're making decisions, it's not the only thing that affects them, obviously, but I think it would be a lot easier for them to think about making investment decisions if they didn't feel somehow or other that this is an environment which is hostile to business. And this is what -- it's not the decisive factor in most cases, but it is certainly a part of the culture of business today. And it is very widespread.

I mean, just this editorial that I just had in the Financial Times yesterday -- I mean, I can't believe the number of people, many of whom are household names in business, who wrote me, emailed me, called me about it. So there is that out there. And I do think it affects the business environment.

As I say, I don't want to overstate it, either. I think the business environment is, as much as anything else, affected by -- their sense of what the economic future is in their particular businesses and in their particular industries, and what their own financial capabilities are to go ahead.

Right now I think there is a lot of uncertainty. And part of that uncertainty, I have to say, is also created by new regulations, costly regulations, and a sense of an unfriendly environment in Washington. The Washington people -- by the way, the Obama people don't feel that way, of course. And I've had conversations with them as well. They seem to contact me primarily after I write the editorials, not before.

But I do think it's quite widespread. And I have to say, as I have written, I think they're doing it for political reasons. I mean, they want to find somebody to blame for the very poor economic performance in response to their stimulus program, in particular, which I have to say I wrote at the time I didn't think was adequate, and nor do I think it was properly structured to create jobs. It preserves some jobs, mostly public service, union jobs, I might add, but that's a part of the problem. They didn't ask for anything in return from the public service unions.

So I just think there -- that whole policy structure that they have put forward is just -- it's not working. And I don't know whether they're going to change their policy. Because I think it's remarkably driven by their perception of what the politics of the issues are rather than what the economic interests.

I got a call, I have to tell you, from several governors -- and they're Democratic governors -- and they said to me, they agreed with me, I might add. But they can't have any impact apparently on the Obama Administration. And as one of them said just within the last 48 hours, he said, I've always found the best politics is the best government. And if you make your policies work, your politics will work out. But here, the politics seem to be so disassociated from their politics; they just seem to be pursuing the politics -- I literally don't understand it, so I'm just puzzled by it.

They seem to be on a perpetual campaign and governing is different from campaigning. And I think that's what the country senses. And that's certainly what the business community senses. So I think it's a real issue.

Now, I do think that the financial side of it, which is something that has been affected, I don't -- it's too early to tell whether or not the financing for large companies is going to be affected. Large companies have accumulated a lot of financing, have access to financing, have accumulated a lot of cash, but the growth and jobs comes from the smaller companies. That's the probably 70%, 75% of job growth which is so critical to the economy.

And here, I will tell you there's something called the Birth/Death series in the Bureau of Labor Statistics numbers on employment. This refers to the number of jobs that are created by new companies -- these are births, whom they can't measure since they only measure somewhere between 60,000 and 100,000 and there are millions of companies out there.

And the death series are the companies that have gone under and lost jobs. This is an historical extrapolation from earlier years. And I would bet you to date they have assumed that they are probably close to 1 million jobs created out of the birth/death series, which is 150,000 to 200,000 jobs a month. Those are the numbers that they have.

I don't believe they exist. And if you do that, if you take -- if 50% of them exist, it will be a miracle. They write them down, they wrote them down last year. But that means we're virtually in a situation where no jobs are being created in this economy. That's very, very serious. And nobody has an answer.

It's an unprecedented kind of economic condition and therefore the consequences are unpredictable. And nobody knows what policy is going to work. So there's been a shift because the country now thinks the stimulus program didn't work. You should see -- you look at the numbers on that -- now, the political numbers, the polling numbers, and they're very tough for the Administration. And I don't know that I -- there doesn't seem to be any sort of change of course on their part. So I don't know how to explain it, to be honest with you. I'm really astounded by it.

And I think it is going to affect everything. I don't know how much it's going to affect it, and I think there is a much better mood today that, in a sense that nobody thinks the bottom is going to fall out, but we don't know. We don't see the bottom falling out. And we think that -- the one thing that is interesting -- this is not my number; I got it from someone who really studies it very carefully -- is that if you multiply house prices by interest rates and you figure out what the occupancy costs is, it's down to, on average, 15% of incomes.

Now that's a historic low. I mean, it got too close to 30%, so if housing prices as a percentage of income -- housing occupancy prices, given the low financing rate, that may begin to stimulate -- A, housing, and B, prices. And that will increase the equity, the home equity of a lot of people in this country who don't feel that their home equity is there any longer, or at least it's still shrinking.

So I don't know, that may have an opportunity to turn around the economy in ways that we -- that nobody has anticipated. But it's all up in the air. And I think -- I don't know, as I say, the reason why I have to say I'll take it back to Boston Properties and I'm sorry for going on for so long, but the reason why we are sort of in this position is because people still -- there's still always some companies that are doing well, some companies that are growing. And in most of the markets we are in, they would rather be in the best buildings.

Now, the two cities -- or the cities that we are in, Cambridge, or even Boston, but certainly New York and Washington -- those are cities that have been relatively unscathed through all of this. I mean, there was a brief period when everything seemed to be dropping through the floor, but it's come back quite constructively, as far as we're concerned. And I think that's going to continue.

You don't think that the caution that businesses and all these CEOs that are calling you, that you would have expected there to be a bigger pullback in their decision-making process? And certainly you've referenced leasing activity being steady, prospect showing being steady -- all these things. And granted, that's clearly a reflection of the quality of the portfolio that you own in the cities that you're in, but I would have just expected that it was much more of a grave concern, which, in parts I do agree with you, that we would have started to feel that in the space market in a much more profound way.

Yes. I don't know whether that's where it would show up. Where it does show up, I think, is in corporate investment. And there, we've had a dramatic drop in corporate investment.

Where it does show up is in corporate hiring. And there you've seen very little corporate hiring, as I say, on a net basis, I think virtually nonexistent. And in fact, part of that is because they have found -- I think two things play a role here. One is, people realize they didn't need as many people as they had. And two is, that they have found that by the use of technology, they can replace people partly through offshore manufacturing and investment, but really even here. So those are the areas where corporate decision-making really begins to have consequences.

In terms of space occupancy, as Doug has described, it affects some law firms. If you take the financial world, what we have seen is a whole host of new smaller financial companies has emerged and are taking space, and they want to be in the best buildings. So -- and they're very well-capitalized.

So we are, I think, in that sense, benefiting a little bit from it. I mean, it's not the greatest market we've ever been in; it's also not the worst. But I do think if you going to look for where corporations do focus in terms of their concern about the future, it's on employment and basically the expansion of their capital plan. And there, I think you see the effect.

And just a clarification. Doug, I thought in your opening comments, you made a comment about Apple of, I guess, percentage rents being down, but I guess, that's hard to believe with the iPhone 4 and iPad and everything that's come out.

Well, I'm describing where it's been since -- where it was in 2008 when we purchased the property. It was -- it's significantly down from there. Now it's coming back but it was significantly down.

Yes, let me explain why, by the way. That is primarily because tourism dropped dramatically and the value of the dollar in relation to the euro dropped, with the euro dropping, that affects tourism and their purchases. But you are absolutely right about the iPad and the iPhone and the iPhone 4, all of that stuff.

I mean, we had a couple of months this year that were just astounding in terms of Apple's sales, but I think we did see a drop in percentages. I think primarily because tourism dropped significantly, particularly from Europe. Because people used to come in from Europe and just load up on goods at Apple because they were so cheap relative to the prices in their own countries.

Great. Thank you.

Just one other comment on 767 -- that when Mort was describing the lease expirations, just to clarify that most of the lease expiration is 2019 and 2020.

Jeff Spector, Bank of America.

I apologize for before. We were disconnected. Hopefully, no one asked this question already. Just following up, I guess, along the previous conversation, the market is having a tough time to digesting good corporate earnings versus some of the bad macro data, as we saw this morning with durable goods. Mort mentioned that you still believe in the slow recovery. I guess, what do you -- can you just talk about that a little bit more? What gives you comfort that we remain on that path?

That we will continue to have a slow recovery?

Correct.

Well, let me put it this way. There is, sort of right now, the debate as to whether or not we're going to have a double dip. Even if we did have a double dip, in my judgment, it wouldn't be the kind of decline that we saw before. It would be a nominal decline, 0.5% to 1%. I think the odds are probably 50/50 that in macroeconomic terms, it will probably be a slow improvement rather than a slow decline.

The one thing that worries me is that the federal stimulus program is winding down. It's going to stop -- the stimulus is going to stop stimulating, I'll put it that way. And, of course, the state and local governments are in for a bloodbath, in terms of the decline of their finances and the need that they're going to have to let go people. And again, we're in an unprecedented time. I don't know how they're going to cope. I don't know how many people are going to be laid off. And I don't know what it will do to the general mood of the consumer.

The consumer obviously has been -- if you look at the consumer sentiment, the consumer confidence, it dropped like 10 points in the last month. So we're just in an unprecedented thing -- I think it will be in a very narrow range though. And I think this will continue for awhile.

I just don't see yet American business really hiring and investing in a way that's going to grow the economy, particularly since, as I say, the job growth really comes out of small startup companies. And they have traditionally got their financing from three sources -- their credit card lines, home equity loans, or bank loans. And these three are all under great, great pressure. So the financing is really difficult for startup companies.

What is more -- as I say, a lot of -- so that you'll have many fewer startup companies and a lot of smaller companies are going to go under. So I just don't know how to measure that because it's just unprecedented. I would just put it this way -- there's reason to be cautious.

Okay. And maybe this is a question for Mike. If you can just comment on your latest views, how banks are handling commercial real estate debt?

Sure. I finally get a question, thank you. (Laughter.)

The banks that we are dealing with are actually -- they're interesting; it's almost like a balancing act. One banker quoted to me a few weeks ago that, with their left hand, they're doing a workout with somebody; with the right hand, they're marketing them.

There is some pressure for them to start making loans again. Now I'm talking about large-scale, high quality real estate loans versus small new business loans for startups, so maybe a little bit different for the startups; but from what we're seeing is there's clearly an up-tiering of borrower quality that the banks are looking for. And I think if you see some of the banks -- some of the REITs that have been going to the market with their line renewals, the success that they are having in terms of being able to get the size of the line that they want; even being able to start -- to push pricing a little bit, is happening.

And we are seeing that as well. And we expect to see that continuing to happen. One of the reasons that we've decided to kind of defer and push out our line is that we believe when we renew and start our renewal talks later this year and early next year, that we're going to be able to do better in pricing than we are doing now.

And we're starting to see a trend of that. I think that the bank pricing was a little more sticky than we saw in the life company market and some of the other markets. And it's just now starting to come in a little bit. So that's a good sign for us.

The other thing I would say is that the banks have been woefully surprised on the upside by what people are prepared to pay for well-located assets, even well-located assets that they presume were underwater from whatever their particular position was in the capital stack there.

There are loans that, my guess is they had written down to $0.70 or $0.80 on the $1.00 that they're getting par for. And so everyone has been vindicated by waiting and holding off on transacting. And there's enough capital out there right now where people are feeling much better about their prospects.

So the banks, are they now getting more aggressive with those property owners, forcing them to sell?

We haven't seen them get more aggressive with the property owners; we've seen them get more aggressive with their own portfolios and they're selling their loans. And the question will be whether or not the new owners of those loans will be more aggressive with those property owners.

Great. Thank you.

It's easier for them to make that decision because there's a more liquid market, and they don't feel like they're going to be second-guessed, because there's enough transactions out there that they can point to. So they don't think they're making a mistake.

Great. Thanks.

The final question will come from Michael Knott, Green Street Advisors.

A couple of DC questions for you. First, I wanted to ask if you pitched Northrop on a build-to-suit for their relocation requirement? And then I also wanted to ask if you -- how you sort of take their decision to buy instead of lease a building? Is that a shot across the bow from an accounting standpoint for a business model like yours, that that sort of focus on long-term leases -- will this new accounting alter tenant behavior significantly?

Well, I'll be glad to respond to that, Michael. Northrop Grumman was really focusing on establishing a new presence in Washington. As you know, they're an existing tenant of ours and we negotiated with them for over a year, and they elected not to renew at Reston but to consolidate back into Tyson's.

I think they also wanted to be inside the Beltway for operational purposes. As it turned out -- and we didn't have land inside the Beltway -- as it turned out, they bought an existing building in Fairview Park. And the existing building -- I think they bought that for two reasons. First of all, the commitment to the state of Virginia to make a major investment as quickly as possible, certainly in the 2011, 2012 timeframe, which a protracted build-to-suit would not permit. They also wanted to move people quickly.

And lastly, this site is in close proximity to a recently announced GSA deal. So I think all those things were the factors towards them buying. I also think that, to your point, that the new financial regulations regarding the treatment of leases did force them to take a much longer and harder look at buying the buildings, as opposed to a long-term lease.

Okay. Thanks for that. And then just last question also on DC -- Mort, if you're still there, or Doug, I know you said you don't feel like you need to be sellers of real estate at today's prices and obviously have a lot of capital already, but we read that a competitor put a DC building on the market for $900 a foot. I just wonder if that kind of gets you a little closer to feeling that way about real estate values?

It isn't going to make my lunch feel better. No, I don't -- at this stage of the game, we're just going to correlate whatever the market prices are to our own inventory. There may be things that we will sell, but as I say, when we sold the assets on the last go-around, we really tried to retain every building we thought was a great long-term hold. And there were 17 that, for various reasons -- and while they were all very good buildings, we didn't necessarily feel they were great long-term holds. And we sold 16 of the 17.

So we weren't unhappy with the other one, without going into the details of it, but it is possible that we will sell. But I have to say at this stage of the game, the kind of assets that we have are, in many ways, assets we would like to buy, not to sell. So I just don't see at this stage of the game that we will be doing that. If we do anything, as I said, I think we're going to focus on buying assets in this market, not selling.

And Michael, if you take $900 a square foot to a reasonable valuation, I would agree to a 10% discount if you wanted to raise our NAV up to that level on a per square foot basis. And then we're screaming "buy" for the rest of the market.

Alright, thank you.

At this time, I would like to turn the call back over to management for any additional remarks.

Thank you, everybody. Have a good rest of your summer. We apologize for having to have earnings calls in the middle of the summer, but that's what you have to do when you're a public company and you guys have to listen to them. And we look forward to getting back together with you all in the fall. Thanks.

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