波士頓物產 (BXP) 2010 Q3 法說會逐字稿

Good morning and welcome to the Boston Properties third-quarter earnings call. This call is being recorded. (Operator Instructions).

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' third-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 requirement. 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 statement are based on reasonable assumptions, it can give no assurances 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 Mort Zuckerman for his formal remarks.

Good morning, everybody. Thank you all for joining us.

I'm going to start just sort of by touching on the macroeconomy, and then sort of getting to the areas where Boston Properties is engaged in the economy.

You know, we've had a very, very, very problematic recovery, if you want to put it that way, from the very precipitous drop in our GDP in the very steep part of the recession. If there was any great optimism about a quick recovery, something which I have to say I did not share, as you all know, I think that optimism has been dashed.

Now, the question is, where do we go from here? And on the general theory that we are in an unprecedented kind of economy, and therefore one which is unpredictable, I'll just cover what I think are the major risks. We have seen virtually no recovery, I might add, in unemployment. And the real unemployment numbers are much worse than the headline unemployment number.

The headline unemployment number is around 9.6%, 9.7%. But that restricts itself to people who have applied for a job within four weeks. If you take the household unemployment, which includes people who have applied for a job within six months and people who are working part-time who want to work full time, it's 17.1%.

But that doesn't take into account the 1.5% of the workforce which -- and that's a minimum number -- who've just dropped out of the work force. Nor does it take into account the following. We've gone from residential construction of around 1,600,000 units to somewhere in the range of 500,000 units. That's 1,100,000 fewer units than we were building in 2007 and 2006.

Now the minimum number of people who are, shall we say, working on each job is five, and it's generally on average between five and 10. But none of these numbers account for 5.5 million people, to take the minimum number and multiply it by the 1.1 million homes -- the fewer -- that we are now constructing -- fewer homes that we are now constructing.

And the reason for that is many of those people were, frankly, working illegally here in the United States. And they don't show up in the employment rolls and they don't show up in the unemployment rolls. But when they lose their jobs, they do show up in the form of reduced income to spend on consumption. And consumption has been just basically bumping along at the bottom.

The biggest risk, it seems to me, for this economy, in addition to the fact that there is very little confidence, especially in the business community towards this administration -- it's the most unprecedentedly unanimous hostility and lack of confidence in an administration that I've ever seen in business, and that's going to have an effect on what business does, but the biggest risk, it seems to me, is the vulnerability of home prices.

While they have gone down quite a bit, there are now, something, 11 million-plus homes where the mortgages exceed the value of the homes. Another 8 million homes where the mortgages are within 5% of the value. So the 8 million homes have mortgages between 95% and 100% of value. And if home prices drop here, and you get an unplugging of the foreclosure pipeline, which is going to happen sooner or later, and it's going to raise the prospect of, shall we say, a lot of homes coming onto the market in a market where the only way to clear the market is through lower prices.

That is the biggest exposure that I think this economy has in the short run. And nobody knows what's going to happen there, frankly. Again, I'm on the slightly pessimistic side.

So, we're just looking at very, very troubled economic times, and it's hard for me to predict when we'll pull out of it. I just don't think we're going to pull out of it in the short run.

Now, the interesting thing is that there are discontinuities here. American corporate -- the corporate America has done extraordinarily well in this time. They have cut their costs; they have found an excuse to cut costs. They couldn't do it while the earnings were very, very strong, but given the conditions we are in in the last couple of years, they've found ways to cut costs in unprecedented ways and increase productivity.

But of course, a big part of cutting costs is letting go people and not hiring, which is the flipside of what's going on today, because very few in corporate America are hiring.

And the other issue there is that not only are they not hiring, but their profits have gone up a lot, and in an environment in which interest rates are being held very, very low as a result of Federal Reserve policy and the QE2, the Quantitative Easing 2, which is I'm sure going to be announced after the election, will continue to keep interest rates low. It is a real stimulus to corporate America and particularly to stock prices, and the hope is that somehow or other some of the wealth that is being created in the stock markets will feed into the economy and stimulate the economy. That remains to be seen.

Let me give you one other reason why the unemployment numbers are worse than they look. There is something in these numbers called the birth at death series. The birth/death series refers to an assumption every month as to the number of new companies that are created and the number of companies that shut down.

Generally speaking, the assumptions are there are a lot of jobs are created in this category. They, of course, have had to take down these assumptions last year, and again when they measured it from March to March, they took it down at the rate of about 360,000 jobs.

So even the jobs they project, frankly, are going to be reduced, in my judgment, when they get to the final estimates of the birth/death series because start-up companies are financed in three ways -- home equity loans, credit card loans, or bank -- lines, or bank loans, and neither of those three categories are available anywhere near to the degree they were 18 months ago, and therefore, the financing for start-ups are really, really being constrained and constricted.

All of this just goes to show is that we are not in a booming period. Nevertheless, in the markets that we are in, we are doing a lot better than what you would think the economy is because the markets that we are in are really kind of special. They are all supply-constrained markets as a practical matter -- Washington, the Upper East Side of New York, Boston itself, Cambridge, Massachusetts, et cetera.

And as we'll see when we get specific reports on the performance, we've done actually quite well in this market. Now -- or in these markets. Now, don't get me wrong, it is not that rents haven't gone down because they have gone down.

But what we have found in the category of these markets that we are in, to whit that we are in the upper end of the markets in terms of quality, that a lot of companies choose to move into the best buildings when the rents drop. So that even though we had a number of big bankruptcies, like Lehman Brothers and General Motors, et cetera, we have basically filled up virtually all of this space because companies have wanted to move into them since they are good buildings and since the rents did go down.

So in that sense, I think we have been very pleased that our strategy has worked because it has been something we have experienced over and over again, that we do relatively well in good times because almost everybody does well in good times. But we do much better, relatively, in bad times because people want to move into the best buildings, and particularly in supply-constrained markets.

So I think we're very, very pleased with the performance of the Company over the last couple of years. It really justifies the degree of risk that we believe we have been able to manage and reduce through the strategy of staying, A, at the upper end of the market and, B, in supply-constrained locations.

Nevertheless, we're -- as I say, we're in uncharted waters here. Nobody knows what the consequences could be. We think we can manage our way through it. We think it will prevent -- present us with a lot of unique opportunities for acquisitions.

As many of you know, we have made some acquisitions, some of which we've been working on for several years, like the John Hancock building in Chicago -- I mean, pardon me, in Boston, which we know very well because it's directly across the street from Prudential Center, which we also own, so it gives us an enormously strong position in that market. And 510 Madison Avenue in New York, which is a brand-new building in what is called the Plaza District in New York, which is an absolutely first-class building that we think we'll do very well with.

And we're still on the lookout for additional acquisitions. And we think they don't happen in any kind of regular sequence. Sometimes they just happen in a bunch. But we're continuing to work that particular mine, and I think we will be successful in adding to our acquisitions again of the buildings at the quality that we're looking for over the next year.

With that, I think I'll conclude my remarks and ask Doug if he would take over.

Thanks, Mort. Good morning, everybody.

So, as Mort indicated, the last 90 days have been really, really active for Boston Properties. We've completed some very exciting and important leasing transactions involving our existing assets, and as Mort started to describe, we think we've created some terrific opportunities for value creation with the acquisition of 510 Madison in midtown Manhattan and the pending acquisitions of the John Hancock Tower in Boston's Back Bay and also the Bay Colony office campus, which is a 1 million square foot campus, in Waltham.

We're going to spend some time this morning discussing the acquisitions, but I thought I'd begin my comments discussing our existing portfolio first. This quarter, we completed another 1.7 million square feet of leasing transactions, so today -- to date, we are at 4.3 million square feet through three quarters.

Since 2005, we've averaged about 4.3 million square feet per year, and during the last five days, we've completed another 510,000 square feet of leasing just in our Boston portfolio.

This quarter, we had 79 transactions compared to 77 last quarter and 71 during the first quarter.

But even in the best submarkets, the individual characteristics of the location and the building, sponsorship, commitment to invest in capital, attention to building operations, and focus on meeting your customers needs all have to be put together to give you a chance to be successful, particularly when, as Mort described, overall job growth is measured and the market-wide demand is still pretty static from an office requirement basis. So while Boston Properties' pace of activity appears to be steady, I just want to temper expectations that we should assume that we are seeing broad market recoveries because we're not seeing that.

But let me get into the specifics of our portfolio. Last week, we completed a 280,000 square foot lease with Mass Financial Services to move into 111 Huntington Avenue. They have leased the entire premises that Bain Capital is going to vacate at the end of 2011, as well as an additional 73,000 square feet.

As part of the transaction, we are going to have to relocate an existing tenant at 111 Huntington Avenue into 53,000 square foot of availability at the Prudential Tower, where that tenant is going to extend for an additional 10 years, and we're swapping space with another tenant at 111 Huntington Avenue who also is committed to expand by an additional floor in 2012 and extend its 100,000-square-foot lease until 2024.

Earlier in the quarter, we completed a 33,000-square-foot expansion with Towers Watson at the Prudential Tower and we completed the 10-year expansion and extension for another full-floor tenant at 111 Huntington Avenue. So, our availability at the Prudential Center -- that includes 111, Pru Tower, and 101 Huntington Avenue -- is under 4%.

So in contrast, the overall Boston CBD market -- that's the financial district and the Back Bay -- has a vacancy rate of about 11% and an availability rate of close to 18%, and there are 11 blocks of over 100,000 square feet in some very high-quality buildings still available. Pretty different perspective in terms of what we're experiencing and what we're seeing in the market.

In our new project at Atlantic Wharf, we've completed an 82,000-square-foot lease for two floors in our Waterfront building and we have three other office transactions and four retail spaces under lease negotiations that total 95,000 square feet, which will bring the project's current leasing to 79%, and we have an anticipated yield of about 7% on that development when it's fully leased in 2012.

In Cambridge, we have a number of large office technology companies that continue to expand, along with the biotech and life sciences industry which is also located very much in Cambridge. At One Cambridge Center, Microsoft just took over 21,000 square feet of availability in September. They're going to add another 30,000 square feet in January and yet another 62,000 square feet over the next three years as other leases expire.

And we're also in discussions with three other tenants to expand in Cambridge Center.

Dropping down to Washington DC, in the CBD, we've completed the additional leasing at 2200 Pennsylvania, so the office space is now 73% leased and we have commitments for an additional 43,000 square feet, and there is 70,000 square feet of retail, which is 93% leased and 100% committed. The yield on this project, the office and retail piece, is expected to be about 9%, inclusive of the effect of an average ground rent over the next 58 years, so on a cash basis, we are significantly higher than that.

Earlier this year, we announced our acquisition of a 30% interest at 500 North Capital, and our plan to convert that building to a market-ready speculative product for smaller users that had a desire to work in close proximity to the Capitol.

Our DC marketing and development team also created an alternative redevelopment plan with an additional floor and a more expensive redevelopment of the building with the goal of attracting a larger private-sector tenant. Well, guess what? We've signed a letter of intent to lease a minimum of 165,000 square feet, or 75% of that space. The new project is going to have a cost of about $120 million, including our existing investment, and an expected return of over 9% when it's delivered in 2012.

In northern Virginia, we've been highlighting the eventual relocation of the national geospatial agency out of our 700,000-square-foot complex. The two original buildings are over 25 years old and are currently used as SCIF space. In September, we executed a 523,000-square-foot, 20-year lease with the Defense Intelligence Agency. So as soon as NGA vacates -- in fact, we are going to ask them to vacate early, and Mike will talk about the impact of that later. They're going to vacate the first building in July of 2011, and then in early May of 2012, we are going to invest another $130 million in the redevelopment of these buildings with an expected return in excess of 8% on that new capital when the buildings are delivered in 2012 and 2013.

There is one other building on that campus, which is an 188,000-square-foot building, and that was built by us in 2002 for NGA. It will be available in 2012, and given the proximity to DIA and the modern and flexible design, we are confident we are going to see strong interest from related defense users for that building.

Just to the east of these buildings is Reston Town Center. In 2011, we have 445,000 square feet of lease expirations in our Town Center portfolio due to consolidation from acquisitions by Oracle and Northrop Grumman, which actually occurred almost 10 years ago when we did the original deals with -- at Discovery Square and Overlook. This quarter, we've completed over 300,000 square feet of leases in our Reston portfolio and we're finalizing the lease for an additional 80,000 square feet.

Now while most of this activity is a result of a relocation and an upgrade to better assets and superior locations away from Toll-Road commodity buildings, there is still some incremental growth in each of these requirements.

Again, our experience in northern Virginia is not indicative of the broad market recovery. The overall vacancy rate outside the Beltway continues to be in excess of 16.5%.

Transaction volume continues to be pretty good in New York City, too. Overall vacancy in our portfolio is just about 2.4%, and our immediate attention continues to be the smaller tenant market, given our product availability, which has taken on an even greater focus with the addition of 510 Madison Avenue.

This quarter, we completed 14 transactions in New York City and only one was over 20,000 square feet, which was a 15-year lease for 108,000 square feet at 601 Lex. Our prebuilt suites have rents that range from a low to mid $50s at 2 Grand Central Tower and Times Square Tower, to the high $60s to mid $80s at 599 and 540 Madison, to over $90 a square foot at 601 Lex and 399 Park, and well over $100 at 767 Fifth. At 510 Madison, the new building, we expect pricing will start in the very high $80s to low $90s at the base of the building and rise from there into the triple digits.

Overall activity in San Francisco continues to lag our other markets. Tour activity at Embarcadero Center is pretty constant, and we're feeling a little bit better about the activity since we've issued eight separate tenant proposals from a full floor to 150,000 square feet on the space that we are going to be having available at the end of this year in EC4, and we did sign a full-floor tenant deal this month with average rents of $58 for 10 years for space in the top third of Embarcadero Center 4. So rents there, our view is low $40s to as much as $60 a square foot at the very top.

Leasing activity is slowly, and I use the word slowly very cautiously, picking up in the Valley, but availability is still in excess of 20% and landlords are being very aggressive in courting tenants.

But there is some good news. Google seems to be expanding again in Mountain View, kicking tenants out of sublet space and looking for additional requirements, and we're hearing about deals in the Palo Alto and Mountain View downtown market where rents on a triple net basis are in excess of $5.00 or $6.00 per square foot monthly. These markets are the leading indicators of a Silicon Valley recovery.

Our partner projects at 2200 Penn and Atlantic Wharf are on schedule, and those are going to both be brought into service in the middle of 2011. We've engaged third-party management agents to assist us with the lease-up and operation of these assets. Our expectations on the yield associated with these new developments are 6% for the $47 million we are investing in Atlantic Wharf and 7% for the $150 million investment at 2200 Penn. Those are initial yields.

I would note that the -- in the last week, we also signed a contract for the sale of $12 million of historic tax credits at Atlantic Wharf, which is reflected in our overall cost and return calculations there.

We continue to move forward with plans for $140 million new project in the urban core of Reston Town Center, another apartment building that's going to have 360 units and 30,000 square feet of additional retail space. Our groundbreaking could be as early as December 2011.

So in total, since our last call, we have advanced new redevelopment and development projects in Washington DC, including DIA, 500 North Capital, and the new apartment projects in Reston, that's going to allow us to invest about $300 million between late 2011 and 2013.

For the better part of the year, and in some cases, more than a year, we've been focusing our attention on specific assets in our markets where we view the risk and opportunities and our operational and financial stakes can come together to create some pretty interesting value for shareholders. But this, again, is set within the context of an economy that may have limited job growth for an extended period of time.

In this environment, you can't simply count on dramatic market rental rate increases or dramatic market occupancy increases simply to create value. You have to do it yourself. When we underwrite these assets, we apply a pretty realistic view of current market economics and we complete a whole bunch of scenario analyses. We believe that under a conservative set of assumptions, these new investments that we're going to talk about should deliver high single-digit unlevered IRRs, if not better.

510 Madison. This is a 347,000-square-feet, newly constructed, soon to be LEED Gold certified building located in the heart of the Plaza district that has been ignored by the leasing market for the past 24 months due to its ownership status. The location, the design, the glass line, the building systems, the availability of power, supplemental cooling and generator capacity, the health club and now our sponsorship will make it one of the preeminent boutique buildings in Manhattan.

Again, our asking rents start in the high $80s to low $90s at the base of the building, and work their way up into triple digits. We anticipate that operating expenses and taxes upon stabilization are going to be somewhere in the high $20s to the low $30s, and we're going to deliver a yield on cost in the low to mid 6%s based upon a cost, including all tenant improvements, brokerage commissions, and carry, of about $375 million.

Bay Colony. Bay Colony has been, as the people in Boston refer to it, on ice from a leasing perspective for the past two years. Ownership has transferred four different times, and there has been no capital investment in the project or availability of any money for tenant improvement dollars. For all intents and purposes, leasing brokers would not bring new tenants to the project.

Last week, we made two presentations to users of an excess of 50,000 square feet, and we're on the shortlist for one of them.

In 2005, the project was sold for $270 million. In 2006, it was sold again for $365 million. It's now 35% vacant. We intend to invest between $40 million and $50 million of capital, repositioning and retenanting the project over the next three to five years. Our underwriting assumes a prolonged lease-up at rents in the high $20s to the mid-$30s over the next few years, not -- no growth.

On the other side of 128 at the same interchange, we purchased 230 City Point in 2005 for $211 a square foot, and surprise, surprise, it was 67% leased. We repositioned that asset. It's now 98% leased with current rents in the low to mid $30s.

Operating and taxes are approximately $11 a square foot in Waltham, so if we're able to achieve average rents in the low $30s, our stabilized unleveraged yield on this asset should be in the high single digits. If there is rental rate growth in Waltham, we'll do even better.

As a point of reference, replacement costs for new construction in Waltham, excluding land, is in excess of $300 a square foot. Again, excluding land. When the market recovery does in fact happen, Bay Colony has over 500,000 square feet of additional development capacity. We're working through the transfer of the CMBS loan now and we hope to close this in early December.

The John Hancock Tower. The John Hancock Tower is one of the most iconic skyscrapers in the United States. It has outstanding rectangular floor plates that are suited to tenants focused on providing light and air and window line to their employees, and it happens to sit in the Back Bay office market, which has become the strongest submarket in the CBD of Boston.

Boston Properties will own about 40% of the Class A office tower market in the Back Bay, which gives us the opportunity to have more product to meet our customers' demand, and it appears that this is where customers want to be. The asset is 95% committed with the recent release of Bain Capital. There are three floors available today, and there's strong activity on those floors.

The building totals one point four -- 1.7 million square feet and has parking for 160 parked cars in it when the renovation is completed on the lower levels earlier -- this spring. In addition, the acquisition includes a 2,100-space parking structure. So if you attribute $60,000 per stall just to the cars in the parking structure, the price per square foot of the tower, including the new underground parking spaces, is $475 per square foot.

There is no doubt there are going to be new buildings that are going to be built in Boston. In fact, Liberty Mutual broke ground last week on a 600,000-square-foot, 22-story building in the Back Bay. We expect replacement costs, including land, is in excess of $700 a square foot for this new construction in Boston.

Our expected GAAP yield at the Hancock Tower is 6.7%. That includes FASB 13 and FASB 141. On a cash basis, the unlevered yield in 2011 is 4.3%. Why is it so low? Bain's rent on 15% of the building doesn't commence until January of 2014, creating a very large FASB 13 balance. Current rents in the building, on a mark-to-market basis, yield about $6.25 per square foot, so the building is grossly underleased from a rental rate perspective as well.

Each of these recent acquisitions was for sale because of the aggressive financial structure that was used to purchase them during the last cycle. There is, however, an abundance of capital seeking high-quality investments in our markets, and it's resulting in pricing that some may perceive as exceeding expectations from either a value per square foot or a cap rate basis.

I have to tell you we haven't changed our view on what we're anticipating for the types of returns we're looking for. We never expected to see double-digit unlevered yields on the kind of assets the high-quality buildings in our submarkets that we are looking for.

Now, each of our assets that we're buying have unique risks and opportunities. Identifying those opportunities and challenges, developing long-term relationships with the right tenants, current and future, developing the right plan to reposition buildings, using our sponsorship, and spending every day working these markets is what we do, and it gives us great confidence that we're going to be able to execute on these new investments, and optimistic that, as Mort said, we will be able to find some other assets in the mine that we're looking for today.

With that, let me turn the call over to Mike, who's going to talk about our financial results.

Thanks, Doug. Good morning, everybody. As Doug detailed, we've been pretty busy this quarter and have uncovered several terrific opportunities to use some of our cash.

I thought I'd start my comments walking through the impact on our liquidity. After expending approximately $310 million for the acquisition of 510 Madison, our cash position at quarter-end is $1.3 billion. We will deploy an additional $330 million upon the closing of the Hancock Tower and Bay Colony deals, and we anticipate repaying another $325 million of mortgage debt in the fourth quarter.

After the completion of this activity, our remaining liquidity, including cash of approximately $600 million and full availability under our $1 billion line of credit, provides the capacity to fund the completion of our development pipeline and to continue to be opportunistic in the event we uncover additional acquisitions.

In addition to maintaining our strong balance sheet position, we have good access to a consistently improving and broad range of capital markets. Availability in both the secured mortgage market and unsecured bond markets has been prevalent, and we believe we have strong access to each. This quarter, we closed on a $130 million mortgage loan on our Market Square North building in Washington DC at a 4.85% coupon for 10 years. This reflected a credit spread of about 180 basis points.

Since that time, treasury rates have continued to drop and credit spreads have remained pretty stable in the 175 to 200 basis point area, or 65% to 70% leveraged mortgages on high-quality buildings.

Our bond spreads are also tracking in this range and our current borrowing costs for 10 years in both markets is hovering around 4.5%. Convertible bond investors are also clamoring for investment opportunities in a market where there has been limited supply of new transactions. We believe we could access the convert market for a five- to seven-year term at coupons of 1% to 1.5% and a premium of 20% to 25% above our current stock price.

Looking at our capital-raising opportunities, we have $250 million and $800 million of maturing debt in 2010 and 2011, respectively. As I mentioned, we expect to prepay $325 million of these mortgages by November 1, and the remainder we expect to refinance.

Our largest maturity is our $450 million mortgage at 601 Lexington Avenue that has an above market coupon of 7.2%. This property is significantly underleveraged, and we anticipate raising an additional $200 million to $250 million of capital through a refinancing at market rates.

There are two other capital markets transactions that I want to discuss. First, we've acquired and refinanced a $267 million mortgage loan for 510 Madison Avenue. This loan, in addition to being secured by a mortgage, is secured by cash and is the reason for the increase in our cash held in escrows. The earnings impact of this loan is negligible as the interest income and interest expense are basically a wash, and the transaction serves to preserve the mortgage tax that has been already paid in case we complete another refinancing.

The second is an update on our Circle Star building in San Carlos, California. As you recall, this property was owned by our Value Added Fund, and our share was 25%.

This summer, after conducting discussions on a loan modification, our lenders elected to sell the Circle Star loan. The new investor, who had a limited appetite for any type of debt restructure, was seeking to buy the property. Given our view of the building, which has remained vacant, with current lease economics in the market providing little support for new capital investment, we agreed to transfer the building to the new lender in lieu of the debt.

Now I'd like to shift to our third-quarter earnings. We had a strong quarter and reported funds from operations of $1.07 per share, exceeding our prior guidance by approximately $9 million, or $0.05 a share.

The portfolio outperformed our expectations by about $1.6 million, with $1 million emanating from leasing activities with several new leases in New York City, including the 108,000-square-foot lease that Doug had mentioned at 601 Lex. Our parking revenue was up by about $500,000, primarily due to the transient activity at the Pru, and we had higher than expected percentage rent across the portfolio from our retail tenants.

Our termination income for the quarter exceeded our budget by $3.35 million. $3 million of this resulted from transactions where we have worked with tenants that have shadow space in our buildings and successfully leased this excess space to existing tenants looking to expand. This consisted of taking a floor back from one of our larger tenants in our Reston portfolio and half a floor back from a law firm at 599 Lexington Avenue. Both of these situations demonstrate how we proactively and cooperatively work with our tenants to maximize the use of our space.

Our joint venture portfolio exceeded expectations by $1.9 million. Results came from a mix of better-than-projected leasing activity in our smaller suites at 540 Madison and 2 Grand Central Tower, and higher percentage rent, primarily from Apple at the GM building, whose quarterly sales have been well publicized and positively impacted us as well.

Our hotel outperformed again this quarter by $600,000 with average daily room rates and occupancy exceeding projections. RevPar was up 22% over last year at this time.

We experienced some savings in our G&A line item, coming in roughly $2.3 million below expectations. The primary driver for this is higher-than-projected capitalized wages. We had a substantial quarter of leasing activity with over 1.7 million square feet of leases signed, and our increase in capitalized wages reflects the time our leasing professionals spent on these successful transactions.

Interest expense came in $1 million lower than planned, emanating from the early repayment of a $56 million mortgage at Carnegie Center and higher capitalized interest due to faster outflows on our development projects, and the inclusion of 510 Madison Avenue to our development pipeline. We expect to capitalize interest associated with 510 Madison Avenue at our average corporate borrowing rate as we complete the final stages of the base building and tenant improvements, bringing the property into service incrementally and ceasing capitalized interest as tenant buildout is completed.

Lastly, we incurred $1.9 million of unbudgeted acquisition costs. In accordance with new accounting guidance issued in 2009, acquisition costs are expensed as incurred, rather than capitalized as had been the practice previously. These costs primarily relate to 510 Madison with a small portion due to the initial legal and diligence costs on John Hancock Tower and Bay Colony.

For the remainder of 2010, we are not expecting any meaningful changes in the portfolio. Our full-year guidance has been increased by the outperformance in the third quarter, some of which, such as our New York City leasing, will also positively impact the fourth quarter, and additionally, the capitalization of interest at 510 Madison and the unbudgeted repayment of $250 million of debt will reduce our interest expense.

We don't expect the closing of the Hancock Tower and Bay Colony to occur until early December at best, given the time it takes to assume the CMBS loans. So they will not have a real impact our earnings this year.

To summarize, excluding termination income, our same-store projections for 2010 are up slightly and now expected to be up 1% to 2% over 2009 with the improvement coming from -- the improvement coming from the stronger-than-expected leasing in New York City. These leases are in free rent periods for the rest of 2010, so our cash same-store projections continue to be negative 2% to negative 3%.

Again, and as we have stressed before, we have a substantial amount of free rent in 2010 associated with our leasing program in New York City and at the Prudential Center that will become cash paying late this year and in 2011.

On a quarter-over-quarter basis, excluding -- including the impact of our developments placed in service, we expect the third quarter to be a good run rate for our fourth-quarter GAAP NOI, while our cash NOI will improve slightly as free rent burns off. We project our straight-line rent for full-year 2010 to be $98 million to $99 million, including our share of joint ventures and our developments placed in service this year.

Our hotel is expected to come in at $7.5 million to $8 million, given the outperformance this past quarter, and we are increasing our full-year projection for the 2010 contribution to FFO from our joint ventures to $147 million to $149 million.

On the G&A side, we expect full-year G&A to be $80 million to $81 million. In addition, we are projecting fourth-quarter acquisition expenses of $1 million.

Our net interest expense projections have improved slightly with the unbudgeted payoff of some of our mortgage debt and the capitalized interest from 510 Madison, offset by the reduction in interest income from our lower cash balances. We are projecting $380 million to $382 million of net interest expense for the full year.

If you combine all of these assumptions, it results in our increasing our guidance for funds from operations for 2010 to $4.35 to $4.38 per share. We expect our fourth-quarter FFO to be $1.09 to $1.12 per share.

This is the time of year that we start to discuss 2011 in more detail, and I'd to spend a few minutes providing some insight into our leasing assumptions and our current projections. As you've heard Mort discuss, we're not expecting fundamental improvements in the economy in the near term.

We expect to continue to operate in a highly competitive environment, and while we've had a very successful 2010, our leasing projections are cautious as we consider the location and timing of revenue from expiring leases and availability in 2011. Our rental rate projections for 2011 are flat versus current market rents.

Overall, we're projecting same-store GAAP NOI to decline by 2.5% to 3.5%. On a cash basis, we project improvement and project cash NOI to be up 4% to 5%. This is an increase of $35 million to $40 million in cash earnings over 2010.

Our same-store cash NOI is increasing substantially in both Boston and in New York City due to the burn-off of the free rent associated with Ropes & Gray's 450,000-square-foot lease at the Prudential Center, plus the more than 500,000 square feet of space that we leased in New York City at 399 Park and 601 Lexington Avenue.

Our 2011 GAAP same-store projections are being driven by an expected decline in occupancy in Boston and San Francisco and the negative mark to market in San Francisco. In addition, we will take the first of our Lockheed Martin buildings in Reston that Doug talked about out of service in the summer of 2011. This removes 260,000 square feet of income-producing property and results in nearly $4 million of lost income next year.

Our portfolio is currently 93.4% leased. We expect to renew the vast majority of our remaining 2010 exposure. However, we do have 270,000 square feet of uncovered rollover at our Zanker Road property in San Jose, which expires on December 31 of this year. We expect this space, which is currently generating net rents in the mid-teens per square foot, to remain vacant for an extended period, given the slow market conditions in San Jose. This space will impact our occupancy by 75 basis points, and we expect to start 2011 with occupancy in the mid-92% area.

In our existing portfolio, we expect our occupancy to average approximately 92% during 2011. The addition of our acquisitions will dampen our occupancy temporarily by about 45 basis points due to the underleased status of Bay Colony.

Our 2011 expirations are manageable, at 8% of the portfolio. In Boston, where we have 840,000 square feet expiring, we expect some modest negative absorption in the suburban portfolio, and when Bain Capital vacates approximately 200,000 square feet in October of 2011, we may have a short downtime period prior to the MFS lease commencing.

Our portfolio mark to market is negative $1.19 per square foot. More pertinent than that is our space expiring in 2011, where the mark to market exposure is more significant at down 9%, or $4.36 per square foot, with the majority of this exposure being at Embarcadero Center in San Francisco.

We've had the benefit of collecting average rents of over $90 a square foot on 200,000 square feet at Embarcadero Center for the past 10 years. Unfortunately, these leases, which are the last remaining vestiges from the dotcom boom, are expiring next year. This is some of the highest quality space in the market with replacement rents of about $60 a square foot, but we anticipate experiencing a vacancy period, negatively impacting the contribution from San Francisco.

The straight-line rent associated with our same-store portfolio will be $9 million to $14 million next year. This is down from over $80 million projected for 2010, further demonstrating the increase in our cash revenue next year. We don't include termination income in our same-store and are projecting $4 million of termination income for 2011, down significantly from $13 million that we expect for 2010.

We will deliver a good portion of our development pipeline next year. We will complete Atlantic Wharf and deliver to Wellington its 450,000 square feet of space, or 56% of the building, in the first quarter, and we have another 82,000 square feet of signed leases and 95,000 square feet of letters of intent that will be delivered in the second through fourth quarters, almost 80% of the space.

The residential consists of only 86 units and will be ready for occupancy in the summer of 2011, leasing up over the following nine to 12 months.

2200 Pennsylvania Avenue is projected to deliver at the end of the first quarter. The two largest tenants, totaling 250,000 square feet, will take occupancy in the second and third quarters, with the remainder later in the year. We are just commencing the marketing for the 335-unit residential building which we'll deliver late second quarter and likely take 12 months to 15 months to stabilize.

Lastly, we have added our 510 Madison Avenue acquisition to our development pipeline. We will complete the base building work later this year and have started the leasing program. Our team is seeing strong activity with multiple tours daily, and we believe that the unique amenities that Doug pointed out will result in strong acceptance as a premier Plaza District building. We expect lease-up to occur incrementally over 2011 and 2012.

In aggregate, we are projecting our development deliveries, including the full year for Weston Corporate Center, to contribute $40 million to $45 million of NOI in 2011. A sizable portion of the revenue will be in the form of straight-line rent, as many of the leases contain free rent periods.

2011 is a lease-up year for each, and we don't expect these properties to achieve stabilization until 2012 or 2013.

In our hotel, we are projecting that it will maintain its current level of operations and are projecting the contribution of $7.5 million to $8 million to our NOI.

For our acquisitions, the John Hancock Tower is stabilized, while Bay Colony will be approximately 65% leased at year-end, with our projections for full lease-up taking several years. In 2011, these two properties are projected to contribute an aggregate of $70 million of NOI.

The contribution to FFO from our joint ventures is expected to decline in 2011 for two primary reasons. First, the burn-off of FASB 141 income in our New York properties of $8 million and, second, the decline in occupancy at 2 Grand Central Tower due to the vacancy by the GSA of approximately 80,000 square feet this past month. Overall, the FFO contribution from our joint ventures is projected to be $127 million to $135 million, including FAS 141 income of $70 million.

We are projecting development and management services fee income of $18 million to $23 million in 2011, and our G&A expense is projected to be $80 million to $83 million. Excluding some one-time non-cash expenses related to our stock compensation plans, our core G&A is expected to be up by 3% next year.

Our net interest expense will be higher next year with the decline in our cash balances from funding the acquisitions and development pipeline, the full-year impact of our April bond offering adding $12 million of additional expense and the inclusion of interest expense from our new acquisitions of $37 million. Our capitalized interest will be lower by $7 million to $10 million as the interest associated with 510 Madison and our other new developments is less than the amount that drops off as projects are placed in service.

On the positive side, we do have savings associated with our debt repayment activity.

Overall, we project our net interest expense to total $425 million to $435 million.

It is important to note that there were a number of one-time income items that we experienced in 2010. These include $12 million of accelerated management fee recognition at 280 Park Avenue and termination income of $9 million above our budget. These items totaled $0.13 a share that we don't project recurring in 2011.

In conclusion, after putting all of these assumptions together, we project our full-year 2011 funds from operations to range from $4.20 to $4.40 per share.

Two takeaways are that the development pipeline and our new acquisitions would start to show in our numbers in 2011, have inherent growth as the assets stabilize that will be felt in 2012 earnings and beyond. And second, our conservative absorption projections result in an occupancy rate in the low 90s, providing for future potential growth as economic conditions and demand improves.

That completes our formal remarks. Operator, you can open up the lines for questions.

(Operator Instructions). Jordan Sadler, KeyBanc Capital Markets.

I just want to dig into the guidance a little bit. Mike, you went through it very thoroughly, but without sort of plugging in all your exact figures, just bigger picture, it sounded like you did $1.07 in the quarter with, let's say, $1.05 if you back out the lease term fees and the acquisition costs that offset one another somewhat. That's annualizing the $4.20, and then you've got investments vis-a-vis 510 Madison with the capitalized interest coming on, Hancock, Bay Colony, some contribution of FFO from each as you've laid out. And then, some refinancing contribution related to the stuff you've already paid down post quarter-end.

So when I run those numbers together, I'm getting about a $0.32 contribution. I'm getting to $4.20 plus $0.32 -- $4.52, and you've still got $600 million of cash on hand or so. I understand you're not layering any additional acquisitions, but just looking at sort of your -- the bigger items, what am I missing that's driving the numbers down so significantly off of the run rate you did in 3Q?

Well, you know, I think that what I tried to talk about was some of the same-store issues that we have in terms of what we're projecting our leasing activity to be. And our occupancy to be.

So our occupancy right now is 93.5%. And we expect it to average closer to 92% next year. And we have some pretty big negative mark to markets that I also talked about in 2011. So, that's kind of resulting in the same-store decline of 2.5% to 3.5%. So that is a driver of that. The -- I think you mentioned the one-time items, which were about $0.13. (Multiple speakers)

What is the -- 1% impact from the same-store NOI is equivalent to on a per-share basis?

Hold on a second.

You want it per share?

It's about $9 million.

It's about $0.05 or $0.06.

A year, $0.05 or $0.06. And then, the other thing that I think may be new is the fact that we expect to increase our debt on 601 Lexington Avenue by $200 million to $250 million. That is -- will add $12.5 million of interest expense, where prior you may have had that just refinancing of $450 million. So, that is $0.07 or $0.08 there.

Right. And you're not layering in, to your point, any incremental debt paydowns or investments?

We are not. We have no acquisitions and no changes to our capital structure effectively.

And just as it relates to sort of the acceleration of investments that occurred, I know you guys had a previous opportunity on 510 Madison. I'm just curious what's changed in terms of your expectations? I know certain things have gotten better. You're able to underwrite now high single digit or low double digit unlevered returns. What are, for example, the rate growth expectations for New York City over the next few years now?

Honestly, this is Doug speaking, we don't really assume much in the way of growth.

We have very little in the way of availability in our New York City portfolio. We've pegged some rents for 510 Madison that we're banking on achieving, as I said, from the very high $80, low $90 range at the base to triple digits at the top of that building. That's where the bulk of our leasing is going to occur.

We gave you assumptions for we think the other buildings are, sort of on a pre-build suite basis, which are pretty close to where the market rents would be as well. And we're not really assuming much in the way of growth. So, if there is growth in market rents and we have additional leasing in 2012 and 2013, we will do a lot better than the numbers that we're projecting, but it's not baked into the assumptions that we provided you.

In terms of flow of activity, do you continue to see more or less opportunities similar to what you did in the quarter?

I think that there are -- well, let me go back, and Mort, to sort of start off. We've been chasing some of these buildings for in excess of 24 months.

We've identified a host of assets that we think would be terrific additions to our portfolio and accretive from a contribution of quality, economics, market penetration, lots of different criteria. There continue to be buildings like that that we are pursuing.

Whether or not we have another bunch of buildings that we are able to get our hands on in calendar-year 2011 in the first quarter or the fifth quarter of 2011, which brings us into 2012, who knows? As Mort said, these things don't -- they all sort of happen when they happen. So it's very hard to sort of say we're confident that we're going to be able to put -- to use X dollars of capital in 2011 for purposes of figuring out what our contribution might be from incremental capital investments.

Michael Bilerman, Citigroup.

Mike, you went through the refinancing plans on 601 Lex. And I guess as you sit here today with a pro forma $600 million of cash, what sort of drives you to raise capital, whether it be new unsecured or secured converts? Maybe even equity. At what point do you decide to tap additional capital and what would be your choice to go first?

Let me start with that, and I'll let Mike chime in or Mort may want to chime in too.

We -- I guess -- new capital and incremental capital are one way to think about it, replacement capital is another. We have maturities of debts that are going to occur between 2010 and 2012 which we are trying to take care of.

It's a very low interest rate environment, as Mort suggested, and to the extent that we are able to make sense out of refinancing as much as we possibly can refinance over the next two or three years early, we are going to think about doing that, and we've been thinking about doing that for quite some time. And the good news is, knock on wood, interest rates have gone in our favor, so not having done something hasn't hurt us yet.

With regards to our overall capital structure, we are looking at our balance sheet, our overall leverage position, and feel really good about where we are today. It doesn't mean that when we add the debt that's going to be part of the acquisitions that we are currently doing that we aren't sensitive to where our leverage might be on a pro forma basis. As Mike suggested, we've paid some debt down in anticipation of some of that.

But overall, I think that running around with an EBITDA multiple in high sixes to the high sevens is a very comfortable place for us. Now, if there was an opportunity to do something additional on the investment side or we thought it was the right opportunity to sell an asset or do a joint venture or do some other kind of capital raise, we would certainly consider those things as well. But we feel pretty good about what our current status is.

I think -- when you mentioned EBITDA net multiple, you mean debt to (multiple speakers) EBITDA.

I guess I would just say with respect to 601 Lexington Avenue, it has a mortgage loan, it's in New York City, so there is mortgage tax that has been paid for the mortgage that we have on it. It's underleveraged, so we can either pay it off and kind of lose the value of that mortgage tax forever, or we can use it and leverage it to its potential, which would be, you know to, I don't know, 50% to 60% levered, something like that. So that's how we've calculated what the additional proceeds are.

And as Doug mentioned, we may very well use those proceeds to pay down some other debt. We may find some opportunity and be able to use those proceeds in some other way. We shall see.

This is Mort. We have always had a long-term view of the assets we build and the assets we buy. And frankly, I think the availability of liquidity within the Company will continue to make it possible for us to add to our inventory of buildings certainly that we buy.

So, I think that the availability of the cash, particularly at the terms of the interest rates that we are able to arrange, is something that is a major asset for this Company going forward, as it was over the last several years. You may recall we sold a lot of assets before the market broke, and that put us into a position where we were in a position to make acquisitions that others simply couldn't sort of come in and compete with us.

We believe this will continue to be the case and we believe we will be able to make acquisitions. That isn't to say that we have specific assets on our mind. There are certainly assets we would like to acquire. But we want to be in a position to do that, and I think this is one of the reasons why we should take advantage of what I think are uniquely low interest rates, particularly -- which would -- and on fairly long terms because we think we'll be able to put that money to work very profitably for this Company over any kind of reasonable term of time.

And we have, as I say, a longer-term vision, I guess, than most because we always find that sooner or later the long term becomes the short term, and then we're very happy at the kinds of things that we bought or built, and that's going to continue to be our basic strategy.

So we should expect a 30-year to 50-year bond rather than doing (multiple speakers)

No, no, no. We haven't come to any specific conclusions about terms, and nor are we going to, frankly, at this moment.

We'll just look at what the options are at whatever time we decide to do in the way of financing. As we indicated, there are certain buildings that have very low mortgages in relation to their value, and we can easily raise money on a property-specific basis, and we'll have to look at whatever the terms are and what is the most favorable terms in our judgment, term of -- or length of term being one of the issues that we'll always look at, but we haven't made any specific conclusions on the terms at this point.

Rob Stevenson, Macquarie Capital.

Can you give me your thoughts on dispositions given current market pricing today?

Let me take a hand at that. Look, we are very, very, really very happy with the quality of the assets that we have. We think it has demonstrated what I referred to in my opening comments that we will -- when the markets really do well and everybody does well, we'll continue to do very, very well, probably outperform the market slightly.

But in a market like this, we outperform the market dramatically. So, we are always sort of in a position where we review some of the assets we have. We haven't been selling assets because we think we're in pretty good shape. You may recall that when we decided to sell assets several years ago, we had certain criteria. We want to have A buildings in A locations. That's basically our philosophy.

If we have an A building in a B location, or a B building in an A location, we were open to the possibility of the sale of those buildings. And I think that's still going to be our basic philosophy going forward.

We have very, very, very strong assets. Virtually all of our assets are what I would describe as A buildings in A locations. And if we have a chance to buy those in the future, depending on the condition of the leasing and the terms, we are going to be very open to doing that because we do believe in the longer-term value of the kind of assets we have in the markets we're in.

And frankly, if we see that any one of our buildings, in our judgment, becomes either a B building in an A location or is an A building in a B location, we will be open to the possible sale of those buildings.

And then as a follow-up, are there any future developments that are moving off your list these days that you guys may decide to start sooner than expected because of either demand or what you're seeing in one of the markets or submarkets, and what's been the sort of current conversations that you guys have had around the 55th Street site?

Well, on the 55th Street site, we are constantly looking for ways to get that project underway. There are a number of tenants that are also looking for space in brand-new buildings whose space requirements would work in terms of the timing.

But I don't want to overstate that possibility. That's still a work in progress, and that market is still in flux, but we got a tenant that we thought was substantial enough to as a percentage of the occupancy of a new building, we would not hesitate to go forward with a new building in that location.

With regard, Rob, to our other markets, I would say there are some suburban opportunities that may avail themselves.

A couple that are sort of centered around the BRAC relocation issues at Fort Meade and Fort Belvoir, where we, as we've described in previous calls, we have a campus that we are partners with the Gould family and -- up at Fort Meade. And then down at Fort Belvoir, we have some property that we've purchased that's around Springfield, and we are aggressively pursuing tenants for both of those opportunities.

There are a couple of suburban requirements in Boston that may lead to a partially or significantly pre-lease that would at least give us pause to think about starting a new building, and again in Cambridge, where we have a site that may in fact require a little bit of interest from a tenant, but where we would think about doing something.

So there are things out there. They're not at the top of our list in terms of where we expect things to occur early in 2011, but as we move forward in the year, I think there are more opportunities there.

Suzanne Kim, Credit Suisse. Jay Habermann, Goldman Sachs.

Just a question on the Manhattan market. You mentioned most of the deals have been less than 20,000 square feet. Can you give us some sense, is there demand at all for any larger blocks today and maybe comment on sort of non-financial related tenants, and as well perhaps even downtown versus midtown, given the gap in rents there.

Let me start with a few comments, then I'm sure Mort will have some additional comments.

The reason that we are focusing on smaller tenants is because, for better or worse, we don't have any blocks of space available for large tenants. So that's really where our exposure lies and where the market, from our perspective, is really at the heart of our current configuration of space.

There are some larger requirements that are out in the marketplace, and as an example, Wells Fargo is a tenant that is actively in the marketplace for a consolidation and a re-leasing of space that's coming due between 2012 and 2014 or 2015.

There are a number of law firms in the 200,000-square-foot to 300,000-square-foot range who have leases expiring between 2012 and 2014 on Sixth Avenue and on Park Avenue that are in the market today. One of them is a tenant of ours at 399 Park Avenue, Wilmer Cutler.

So, there are users like that that are very much sort of on a consistent basis with lease expiration-driven requirements that are in and about the market.

And I guess, just switching gears for a moment, looking at Boston, can you comment at all on the Downtown Crossing location? I know you've looked at some of these mixed-use locations. Is that something you would consider?

We have not spent any time looking at the Downtown Crossing site. It's an interesting opportunity for a development that doesn't have much in the way of office associated with it, if it's going to start anytime in the near future, and our sense is that the City of Boston and the BRA and the developers that are looking at it are really geared towards doing something in the short term as opposed to in the long term, and so it's just not something we've focused on.

And also on Boston, can you comment at all on the Mass Fi lease, the terms of that deal?

The what?

The Mass Financial lease.

It was a great deal. They leased 280,000 square feet of space at rents that we're excited about from the shareholders' perspective and I think they're excited about in terms of what they are paying.

And Mike, any comment on the dividend for next year?

We've said our dividend policy via acquisitions that we've been talking about aren't going to meaningfully impact our taxable income.

As Doug mentioned, the Hancock building has some free rent associated with it. The Bay Colony acquisition had some lease-up that has to be gone through over the next couple of years. Both of these buildings have debt associated with them, so there's interest expense associated with them.

So as we kind of look at the impact on our taxable income from that perspective, it's not going to put us in a position where we need to do something with respect to our dividend, and we set our dividend, when we reduced it a year ago, to a point where we felt comfortable over a multiple kind of year period, based upon our projections, that we wouldn't have to do anything with it. And we still are kind of in that position today. So, we don't expect anything.

Let me also just comment on the New York market. It's really interesting to review the experience that we've had in the last couple of years in what has clearly been a very difficult market for the financial world.

New York has come through really remarkably well, in part because the financial industry was and will be, shall we say, assisted by the Federal Reserve policy and by government policy to make sure there weren't any crashes. But those days are behind us, and I think you're going to see a steady growth of activity coming out of this city, and my sense is that there will be, as Doug was saying, there will be a number of tenants who either have -- who are growing more rapidly than their space availability would support who are going to be looking for big blocks of space.

And we're not buying sites on a spec basis at this stage of the game, but there are, we believe -- and we still believe the midtown market is going to be the strongest market in the city. And if there are opportunities that come up, we will look at them very carefully.

We are not bearish about the longer-term perspectives of New York City, nor indeed any of our other markets, but you just look at what's happened in, say, just to pick two, Washington and New York. Those are two markets that are going to continue to do very, very, very well, we believe, over the medium term, over the long term, you name it. And the real question is, can you get the best sites available? You see what we did with the site we're doing on 22nd and -- I'm going blank on this street name.

Pennsylvania.

-- in Washington, our project there is doing phenomenally well. We started that project basically on spec, but we were so comfortable about the market and we've proven it out, and frankly if we could find another site like that, we'd do the same thing all over again.

Thank you very much.

Operator? Did I lose everybody?

No.

Well, if there are no further questions, I guess we should bring this call to a close and (multiple speakers)

No, there are a slew more. The operator is not paying attention.

Alexander Goldfarb, Sandler O'Neill & Partners.

Just want to go to the general sort of financial picture of the U.S.. Just given the Fed's sort of weak dollar policy, have you seen any shift in foreign capital looking to invest in New York and other U.S. cities, or because they fund domestically, they're sort of naturally hedged to any dollar fluctuation?

I'll start with the answer to that. In the past three weeks, I have -- we have had Canadian, Middle Eastern, and European investors either in our offices or call us about whether or not we would like to do joint ventures. And my sense is that they are looking at this from an investment perspective, not from a funding perspective, and the overall cheapness or expensive nature of our currency has nothing to do with whether or not they're going to make investments on a relative basis. Mort?

I would certainly add to that. We have been approached, and in very recent times, I'm talking weeks and months, and have been consistently approached by any number of foreign investors who really want to get into long-term realistic positions in the United States, but particularly in the markets that we are in.

I mean, these are the markets, frankly, that have the best fundamentals as far as long-term values are, and there are a lot of investors who are interested in long-term values. They want to have and partner with a company with an operational platform and an equivalent long-term view of things.

So I don't think that the value of the dollar here is either the plus or the minus. It is really the sense that this is, and many people still believe, it's still a fabulous market to invest in for the long term.

That's helpful, and then switching gears to DC, you mentioned some comments about commodity space loan with beltway versus Reston Town Center. Tysons Corner clearly has a lot of development activity going on with potential for new space. If you can just comment sort of what the tenants are saying about when they're making decisions of Reston versus Tysons, what you're sort of hearing between those two different submarkets.

Mr. Ritchey, do you want to take that one?

Yes, I'll take a crack at it, Alex. First of all, I think it's not -- it's important to note that we have never been big on Tysons because we believe there is no there there, if you know what I mean.

There's no sense of place, there's no common element that draws everybody to a point of activity, whereas we have exactly opposite that in Reston. There is a significant portion of the tenant population who will gravitate toward Tysons because of its adjacency to suburban Maryland and downtown.

However, given that northern Virginia tenants have got the choice and can go either to Reston or Tysons, I think the fact that we have developed nearly 3 million square feet of space over the last 10 to 12 years, and sit there today with less than a 1% or 2% vacancy in our current portfolio, whereas the Tysons market, including some of the best buildings there, have a vacancy in the 5%, 10%, 15%, 20% range really speaks to the differential.

Never mind the rental rate premiums we get in Reston.

It just -- it goes to what Mort has always talked about over the last 30, 40 years is the flight to quality, barriers to entry, live/work/play area, and -- but we're seeing with the tenants are consolidating and getting smaller, they now have an opportunity to upgrade. And we see a tenant who may be declining by 30% or 40% in the space they actually consume, and they'll come to us and pay 15%, 20%, 30% more to put their offices in a location where they can recruit, retain, and motivate the best and brightest.

David Harris, Gleacher & Company.

I wonder if I could just pick up, Mort, with -- following on from Alex's question on foreign investors.

I was reading a report by CB Richard Ellis a couple of weeks ago, which said over the last couple of years, London had attracted six times the amount of investment that the next city had, and that next city was Paris, and New York was sitting at number three. Is it -- I mean, over the last couple of years, why do you think London has been such more an attractive destination than New York, and do you think that in any way is going to change over the next period?

You know, look, London is a great market, a great city. It has a vibrant financial world. It's had its ups and downs, as we all know. But it's a very stable political and legal environment in which to invest. It is close to a lot of European and Russian investors. So, it doesn't surprise me that it has done well.

I do think, though, that if I had to choose -- it's not that I want to diminish the London market. If I had to choose, though, between the vibrancy of the markets that we are in, just to take New York and Washington, I would absolutely choose New York and Washington before London.

We also, frankly, are very interested in looking outside the United States for diversification on a number of reasons. We are, frankly, going to look at the opportunity to really put in sort of a long-term growth plan for the Company, and you know, we want to be in a position to do this on several levels. One of the things that is important is to be able -- if you're in another market -- is to understand, as I say, the political and legal structure, and language is a big issue for us.

So, we would like to sort of stay within some parameters. We are not interested in being in every market, not even in the United States, obviously. So, I can understand why people would go to London. If you were in Europe and if you were in Eastern Europe and if you were particularly in Russia, I would go to London in a big way. I think that's a very big, a very good market to be in, and one that is very, very solid, politically and legally. And that's a big issue for those folks.

So, I think that's a factor that we have here as well, but it's -- the distance is an issue for a lot of people, and I think there is also a feeling that in many ways the New York or the U.S. markets are much more competitive, that it's a much tougher market to really break into in a serious way.

I don't know more than that about the markets because we really haven't spent a lot of time on the European markets. I've looked into London several times, and there's a different nature of the way they lease buildings there and how they measure them. A lot of them are ground leases there. So, there are differences in the London market as compared to where we are.

And we basically -- we have operating platforms here in this country, and that makes a very, very big difference in terms of where we want to invest money. And I think it applies to other people as well, so that's why they would go to London, rather than come here.

Just for clarification. Did I mishear? Did you see that you were looking to invest outside the United States?

No, we're also open to investing outside the United States. We haven't found, shall we say, opportunities that we think are comparatively more attractive than staying in the United States.

We don't have a problem in terms of investing in some other countries. I would have to say that, given the fact that I once used to speak French, I still would limit myself to the English-speaking markets.

As I say, it's a matter of communication. It's a matter of understanding the political system. It's a matter of understanding the legal system. And to some extent, you have a better understanding of the way business works.

So, I think this is something that we wouldn't preclude forever. We're going to be a very, very large factor as a Company in this country and perhaps in other countries. But, it will be -- we're going to move very carefully. We still believe, and I think a lot of other people believe, that by far and away our best opportunities still are within the United States.

And your interests in your overseas markets, are they principally located in capital and financial centers? So we're talking a Sydney, a London?

Yes, those would be the markets we would look in -- look at first of all. (Multiple speakers). Sydney is a little bit far. But London is a little bit closer.

We kind of run out of options in terms of major cities (multiple speakers)

But that's all right. We're still very happy with how well we've done in the markets we're already in.

We have a lot of options, you could say, in other cities in the United States. We have limited ourselves deliberately to a few markets where we really want to have major positions because we think these are the best markets.

So, it's all a question of relativity. And how you make the judgment as to which market is more attractive to you, as I say, it has a lot of different components in it. And in our case, for example, we have a great advantage, as Doug was referring to before. We have operating platforms in a number of terrific markets. So that would be our first priority.

I've got a point of detail for Mike, as well. Could you give us an idea of what your CapEx budget is for -- in particular, for TI, the leasing commissions for 2011, and contrast that with your budget for 2010, Mike?

I would say for 2011, if you look at kind of where our projections are for what our occupancy is and what our rollover is, to meet that budget, we need to do somewhere in the 2.5 million square feet range of leases. And if you assume that our average transaction cost is somewhere around $30 a foot for those leases, you're probably at $75 million or thereabouts on tenant improvements and leasing commissions.

And then on the CapEx side, for 2011 I would guess that our existing portfolio would be somewhere in the $25 million to $30 million range for the year, and then, the acquisitions that we have may add a little bit. The Bay Colony building, we will have a multiyear kind of capital program, so I'm not sure how much we would actually spend in 2011, but it could be some. But it wouldn't be more than, I would guess, a few million dollars in 2011. So, those ranges.

Okay, how does it split on the acquisitions? Is it the 2.5 million square feet of leasing that's on the existing portfolio, excluding the acquisitions?

Yes, that is. That's (multiple speakers) in the same store.

It's the latter number that I should think of in terms of your additional budget for leasing of the new properties.

Yes, the Hancock building really doesn't have any availability. So, there is not a significant amount there.

Bay Colony does. There's 35% vacancy. As Doug mentioned, I think we're going to be pretty cautious about the projections for the lease-up of that space, but we could lease 50,000 or 100,000 square feet, clearly, next year.

Now, transaction costs are lower in the suburbs than they would be in the downtown markets. So the transaction cost for a new tenant coming into that space could have TIs of, I don't know, $20 or $30 a square foot for -- if you have to really build the space new, and then leasing commissions of $10 or $11 a square foot, and you might be able to do better if you can use the existing conditions.

Chris Caton, Morgan Stanley.

My question is on the transaction environment. Can you characterize your pipeline? I know you haven't been specific in the past, but maybe you could give us some general comments, especially now that you've gotten -- I guess, does it still have a Value Added flavor now that you have 510 and Bay Colony?

And then, kind of a follow-up question would be, can you comment on what you think investors are thinking about with respect to their required returns? I think I heard you say that yours have remained flat as interest rates have come down, and as you look at either deals that you haven't won or in your discussions with institutional investors, are they holding their equity returns flat or are they bringing those down?

Well, I'll try and answer the first question. I'm not sure I understood it fully.

But, the transactions that we are looking at are generally centered in our core markets. They are generally centered on properties that Mort would describe as Class A assets, that the best buildings in our marketplaces, not just another building to add to our quote-unquote market exposure in any of those markets.

And I would say we think there is more opportunity where there is some challenge with regards to the operations of those assets because that gives us an ability to underwrite and use our market clout to think about ways to reposition and retenant buildings that may be different than someone else's, which may be -- allow us to be more competitive, i.e., pay more than other people in a particular asset. So, that's sort of the type of assets we are looking at.

With regards to our other investors, I think that, overall, core investors are looking for unleveraged returns that are probably, maybe, 100 basis points lower than where we would prefer to be, which is, i.e., 6.5% to 7.5%, and move up from there. I will tell you that the way we approach this is we take a pretty conservative view of what we think is going to happen, which honestly is predicated on our macro view, which Mort has expressed pretty eloquently, about the overall recovery of economy and our ability in the buildings that we are taking a position or an interest in, being able to improve our share of market, not our improvement in market conditions.

And if we can generate high single-digit IRRs, we think we're doing real well, and then when you layer in leverage on a moderate basis, be it on a corporate or on a property level basis in the 4.5% to 5.5% range, which is sort of where things are, we think we can get to low double-digit returns on equity, which quite frankly is what we think is a very smart way to invest capital, given our portfolio and the risk tolerance that we have and our shareholders should have.

That's very helpful. I guess what I was driving at is, do you see other investors kind of changing their mentality as interest rates have fallen, or do you think most investors are thinking about the same way and they just may have a different level of returns they are trying to get to?

I think most investors are underwriting growth. I don't -- I am sure that the hockey stick approach to underwriting investments in U.S. real estate has not changed. And so, there -- my expectation would be that they are -- the way they are getting about their overall returns is different than the way we're doing it. But I don't think their return levels have changed very much.

I would add one other thing here. I think that there is a whole serious group of investors who are also looking for security as well as return.

I'm not saying they're not looking for a return, but I think they have a different balance between security and return for all kinds of internal reasons in their home countries. And this is where I think we have also a comparative advantage because of the recognition of the assets we have and the record of the Company and the confidence they have in the management of the Company, and so we are, frankly, quite regularly approached by people who would like to invest with us in individual buildings.

And if anything, this has increased in the last year, and this is something we're going to look at quite seriously because this is a way of, in a sense, leveraging our management platform and our operating platform as well.

So, as I say, it's not just yield that I think drives these investors. For a lot of them, it's just having the long-term confidence in the asset and in the markets that these assets are placed, and that's where we think quality assets really make a difference. And people will accept, shall we say, more -- lower returns, more competitive returns, in order to have these other qualities in terms of long-term values and the security of the market, the partner, the country, et cetera.

Sri Nagarajan, FBR Capital Markets.

I'll be quick and specific here. Questions for Mike. You mentioned the mark to market was about dollar -- negative $4.36 per square foot for 2011. Just curious to see what the mark to market would've been if you take out Embarcadero Center.

I could tell you this. I don't have the number -- Mike doesn't have the number off the top of his tongue, but I know it would be a lot better.

Yes, I mean, if you look at it, you've got 200,000 square feet that is rolling in 2011 at Embarcadero Center that has an average rent of an excess of $90 a foot, and then the market rent, depending on those spaces, probably ranges somewhere in the mid-$40s to $60. So, that's the big chunk. So, you can probably do some math and get close, based on that.

Okay. Just a couple of questions on 2011 assumptions, if I may. Are you assuming any contribution to FFO from 510 Madison, again, so?

We have capitalized interest that is coming in from 510 Madison and we have some leasing that is coming in. Over two years, I would say, is the absorption timeframe that we have.

We're capitalizing interest at our corporate borrowing rate, which is somewhere between 5.5% and 6%, based on our average -- weighted average corporate rate today. And then, as Doug mentioned, or as we've mentioned, I think Doug mentioned, the returns on it upon stabilization are somewhere in the mid-6%s. So depending on where the leasing is, initially, we might have a little bit above our capitalized interest if it's at the average, I would say.

Okay. And finally, in terms of -- I heard -- I think I heard it right when you said that the Bain rent in the John Hancock building is starting only in 2014. Is that right and can you give some color on that?

The color is that the previous owner, when they pulled Bain out of our building, did the transaction where Bain will be moving out of our building on October 1, 2011, and their rent doesn't commence until January 1 of 2014. That's -- it's factual.

Rob Salisbury, UBS.

It's Ross Nussbaum here with Rob. Doug, can you walk through on the Hancock Tower just the math on getting from the starting point of a 4.3 NOI yield up to a high single-digit IRR? I mean, I understand Bain comes in in 2014, but what else gets you up there without assuming any cap rate compression?

Basically a rollover of leases that are currently in the mid-$30s to low $40s on close to 800,000 square feet in the calendar years 2014 and 2015 with, in my mind, a very conservative view on what the overall retenanting potential is and the transaction costs associated with that space. That's where the vig is in this thing. If you do well, in 2014 and 2015, you're going to have a very, very attractive both levered and unlevered IRR.

And did you look at that investment and say, all else being equal, we'll take a slightly lower return than we normally would, given your existing investment in the Back Bay and your positioning in that market? Was it partly offensive and partly defensive?

I'll be brutally honest with you. We paid as much as we had to pay and as little as we had to pay to purchase the asset.

So we weren't looking to pay more or less than we otherwise would've had to. We made the clear decision that owning space in the Back Bay on a long-term basis would be a great thing for Boston Properties and that there were lots of synergies from a tenant perspective and an operating perspective with our existing portfolio of 1.2 million square feet at the Pru Tower and 900,000 square feet at 111 Huntington Avenue and 500,000 square feet at 101, and the fact that we now have 100% of the space above the 23rd floor on any building -- or 24th floor in any building in the Back Bay, in that there won't be any new buildings that are built under -- our expectations are going to be higher than that, and from a replacement cost perspective, it will be so much more expensive that we have a great, great basis in the property.

We are buying 2,100 additional parking spaces in a great garage structure that is well located in the Back Bay, and on a long-term basis, we think that our platform will be great because we are going to be able to drive more people to want to -- to live, play, and work, and most importantly in the Back Bay market. So having more product in that marketplace is a great thing to have, and when it happens to be in one of the most iconic buildings in the United States, with terrific floor plates, with vision glass from ceiling to toe, and views that knock everyone's socks off, we think it's just a phenomenal asset to add to the portfolio, and we think we're going to do really, really well with it over an extended period of time.

And we recognize that the overall return in the next few years because of leasing is what it is. To be honest with you, had the rent been higher or the rent commenced earlier, our expectation would've been that we would've had to pay significantly more for this asset than we ultimately ended up paying. So, I guess we're the beneficiaries of the leasing in the building as well as having to deal with the returns in the short term.

And your probability of re-leasing those spaces in 2014, 2015, do you think they're pretty much a done deal or do you model any downtime on it?

We were exceedingly conservative in our modeling. Our operating team has a pretty good track record of making hay on leasing well before leases expire.

I'll just point to the experience we just had. Bain Capital moved out of 280,000 square feet of space. They announced that they were leaving that 2.5, three months ago. And we have now leased 280,000 square feet of space, and we had to move three tenants around in order to accommodate that tenant.

Buildings are somewhat organic. You can do things with your tenants and buildings if you have a large enough ability to move people around in terms of what your available square footage is to accommodate growth and to accommodate contraction well before leases expire in certain markets when tenants are well in front of their lease expirations, and we're optimistic that those types of situations will be abundant in the John Hancock Tower.

Jamie Feldman, BofA Merrill Lynch.

Thank you. I was hoping to get your latest thoughts on how long you think we can keep rates this low and how you're thinking about the longer-term risks for cap rates and commercial real estate values.

My own view is that this economy is going to be in serious difficulty for several years. I mean, I just don't see that things are going to improve much, and they may be even deteriorating somewhat, not at any major rate, but at minor levels for several years.

If you look at all the academic studies about recessions that were initiated by a financial crisis, they go on for at least twice as long as the recessions indicated or provoked by excess inventory of either inventories or plant and equipment spending. It's going to be a very, very difficult time, in my judgment, politically and economically, for several years, and I don't think there's much of a chance that interest rates are going to be changed.

As you -- Bernanke is also talking about QE2. What the real message is we're going to have interest rates at very low levels for quite a long time, and the reason for that, of course, is that fiscal policy is more or less blocked by politics. If you get, as it is almost a predictable, highly predictable outcome, the Republicans dominating any -- either one of the houses, you will not get any fiscal stimulus of any significance through this Congress for at least two years.

And given the weakness of the economy, which I think the Fed understands better than most, anything that happens is going to be through monetary policy, and that means they're going to flood the country -- I don't know with how much. They are going to probably announce how much they are going to be spending on QE2, but it's going to be in the hundreds and hundreds of billions. That's going to keep liquidity flowing through this system at very low rates for quite a long time. (Multiple speakers). I'd say a minimum of two years.

Okay, and then, I guess, just how are you -- as you guys are framing these acquisitions or thinking about these acquisitions with 2014, 2015 when you really get to the yields you're looking for, how are you thinking about where interest rates will be then and what gives you comfort that it's sensible to buy now?

Well, obviously, we do believe that these buildings will lease up and the issue of financing is not limited to when the buildings are leased up. That is to say, we can get forward commitments on financing, and secondly, we have the great advantage of being a public company where we have access to the public markets.

And I think we want to take advantage of all of these things. Whichever seems to be the comparatively the best option, we're going to pursue and we're going to -- even though it might not be the way to absolutely enhance our short-term earnings, we want to have the availability not just to finance existing buildings but to make additional acquisitions, because we think the next several years are going to be a wonderful opportunity to do just that, as Doug was saying, at costs that are way, way below replacement cost.

The Hancock building is way, way below the replacement cost, and that is an absolutely first-class asset, almost a dominant asset in the best part of the city of Boston. It supplements our position because it's right next door to the Prudential Center. It gives us a phenomenal place in that market. We would do that again if we could find a similar situation, and we intend to be very active at least in looking, if not in finding, and we are certainly going to make sure that we have the financial wherewithal to do that.

Because sooner or later, we believe that we will get those opportunities. I mean, they don't work in any kind of sort of regular basis. You just have to be out there in the market and talking to people, and we have a lot of credibility in that marketplace when it comes to acquisitions, and the recent number of acquisitions. I mean, the Hancock building, I've been looking at the Hancock building for several years. And we're very happy to have the -- that asset in our portfolio, extremely happy.

And there are others that we would like to have, and we'll just have to see whether there is a time when we can strike. We want to be in a position to strike and strike quickly. I mean, 510 Madison Avenue, we did that in a nanosecond because we had the financial wherewithal to do it. We didn't worry about that we would be able to pay off the first mortgage and the, what it's called, the senior mezz.

It used to be, in the good old days, you had a first, second, and third mortgage, but these days we call it a first mortgage, a senior mezz and a junior mezz. It's a much more elegant way of describing it, but that's basically where we were. We just went in and we were prepared to pay 100 cents on the dollar. And that's what made it possible for us to make that deal.

There will be other situations similar to that, and we will not hesitate to move on that basis. In fact, there's another transaction in New York that just took place on a similar basis where they stepped into the third position and basically said we're going to pay off the mortgage. And that gives you control of the building.

It's a different way of acquiring buildings. It's the first way we've ever done it that way. But it really worked.

That actually leads to my next question, which is I know that Hancock and Bay Colony have been on your wish list for quite some time. Are there that many others out there that are of that caliber?

Yes, there sure are. No, no, no, listen, there are a lot of buildings that everybody knows are first-rate buildings.

And you just never know when they're going to come on the market, and there are ways to acquire them and ways to get involved with them, and we're going to be in a position to do that on many levels. We have a level of credibility, as I said, both -- sorry [a second].

We have a level of credibility that is absolutely going to make it easier for us as compared to other people. They know who we are. They know what we've done. They know we have the finances. We know how to work with them on a whole variety of deal structures. We are totally flexible in terms of how we did that and do that.

So I think this is an opportunity for us over the next several years that wouldn't otherwise be there when the financial markets are not available to everybody.

Okay. And then, finally, a question for Mike LaBelle. Do you have an estimate for AFFO for next year?

Well, I haven't provided one, but I kind of talked a little bit already about what the leasing costs would be and what the CapEx costs would be.

The other thing I would point out is that our straight-line rent is going to be down pretty dramatically, so our cash rent is going to be up. So, our cash flow above our dividend should be higher in 2011 than in 2010. The other non-cash items we have that are significant are the FAS 141, which from the JVs is about $70 million, and then it's about $8 million from the new acquisitions.

And non-cash interest expense, which is the APB 14-1 that's associated with our exchangeables, that's going to be about $30 million. It's actually coming down a little bit because of the Hancock building and Bay Colony have above-market debt. But basically, we would expect our cash flow above our dividend to be somewhere in the $100 million to $125 million range above of our current debt (multiple speakers)

Mitch Germain, JMP Securities.

I'm all good, guys. Thanks.

Well, okay, listen, thank you all very much. We look forward to keeping in touch with you all, and I think we hope to have a lot of interesting things to say as we go forward. But thank you all for your time.

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