波士頓物產 (BXP) 2010 Q4 法說會逐字稿

Good morning, and welcome to Boston Properties' fourth-quarter earnings call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session.

At this time, I'd like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Good morning, and welcome to Boston Properties' fourth-quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com.

An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be obtained. 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 any duty to update any forward-looking statements.

Having said that, I'd like to welcome Mort Zuckerman, Chairman of the Board and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. Also, during the question-and-answer portion of our call, our regional management team will be available to answer questions as well.

I would now like to turn the call over to Doug Linde for his formal remarks.

Good morning, everybody. We're going to change things up a little bit this quarter -- Mort's going to, I think, bat clean up for us. But thanks for joining us.

When we spoke to you last quarter, our focus was on describing the investments and the thesis between 510 Madison and the Hancock Tower and Bay Colony. Today, I'm going to focus my comments on the operating fundamentals in our markets, our leasing successes, and our expectations for 2011 from an operating perspective.

But as a quick update, we closed the Hancock Tower on the 29th of December. We have signed documents, and knock on wood, we expect to close Bay Colony in the next few days. We did complete one other investment prior to year-end, which was a swap of a $24 million cash payment and our 5% interest in the retail component at Wisconsin Place for the 33% interest in the office building, which is about 300,000 square feet that we actually didn't already own.

The project is located on top of the Friendship Heights Metro Station in Chevy Chase. And if you want to talk about it's a really supply-constrained market, this is one of them. It took more than a decade for New England Development, who was the original sponsor, to get permits, and we joined them in 2004, and the building stabilized in 2009.

The purchase price equates to a valuation on an incremental basis of $525 a square foot for the office building and $25,000 per stall for the parking garage, which is a pretty diverse parking garage which gets income from the office tenants in our building; 325,000 square feet of retail space; and 432 apartments along with transient income from the neighborhood. The 2011 NOI yield on an incremental investment is about 6.3% and the contribution on a GAAP basis is about 6.8%. The property is unencumbered and it's 97% leased.

Over the last few weeks, the sell-side analysts have all hosted conference calls by the major real estate service providers, detailing the macro views of the national office markets and overviews of submarkets, and reviews of the current trends in 2010. Most of the markets, I'd say, had a focus on CBD and here's sort of my perspective on that, which is -- there's a saying I like about the man that drowned crossing the stream with an average depth of six inches.

It's becoming harder and harder to act on broad generalizations or to expect that you can extrapolate market data to every submarkets in every individual building. We are not seeing the rising tide lift all the boats. In fact, we think that bifurcation within individual submarkets is becoming even more pronounced. And I'm going to talk about this later. Even in the depth submarkets, the individual characteristics of location in the building, sponsorship, commitment to investing capital -- not just to make things look pretty, but to really keep the building going -- attention to building operations, and focusing on what your customers really need today, all have to be put together to be successful.

For us, 2010 was a really, really strong year, if you look at leasing activity. We finished the year with almost 6.5 million square feet of leases, 2.25 million square feet in the fourth quarter. Just to give you a perspective, this is 1.5 million square feet more than our previous high, which is back in 2007. The activity was dominated by Boston and Washington, D.C., each with about 2.4 million square feet. The New York City portfolio followed the others simply because we didn't have vacancy or near-term expiration, so we couldn't lease space.

This quarter, we completed over 100 separate transactions compared to a quarterly average of about 75 during the first three quarters of the year. So things accelerated the end of the year. And our quarterly second-generation leasing stats are pretty much in line with what we have been foreshadowing above with a 15% mark-to-market. If you look at it on an annual basis, interestingly, 2010 was actually up 11%.

I think the one thing to note this quarter is that concessions were significantly lower, about $12.50 per square foot. So on a base of 1 million square feet of leasing that came into service this quarter, that's about $12.5 million. And if you amortize that over the average length of the lease, it's [8%]. The actual rental rate would be about $2.42 higher, so the net decline would be closer to 7% on a net-to-net basis.

The reason for the decline this quarter is that we had a whole bunch of leasing occur in the Reston submarket, where we had leases that were done in 2001 and 2002, which had their 2.5% or 3% escalators. And those rents just got ahead of where current market conditions are, so there was a natural roll-down when we released that space.

The market rents we used for the mark-to-market, again, are based on long-term deals with market transaction costs. And I'll sort of give you a perspective on where we think market rents are in our portfolio.

In New York City, we think rents are in the high $60s to the low $90s, with the exception of Two Grand Central, where they start in the low $50s; and at the General Motors building, where rents are at about $100 a square foot and can go up to about $140. And at 510 Madison, which I'm sure we'll talk about later, where rents range from the high $80s to base to over $130 a square foot at the top.

In the Boston CBD, rents are between the mid-$40s and the mid-$60s. In San Francisco, the high $30s and the mid-$50s at the top of the better building. In D.C., on a net basis, CBD rents are in the mid-$30s to the high $50s. In the suburban side, the greater Waltham suburban market is mid-$20s to the low $30s; Cambridge is in the high $30s to the low $50s; Reston Town Center is in the mid-$30s to the low $40s; suburban Maryland is in the low $30s; and Rockville is in the low $50s in Chevy Chase. In Princeton, rents are in the low $30s.

We added the Hancock Tower to our stack this quarter, and the Hancock Tower has an embedded growth of about $7.50 a square foot. And I know Mike is going to talk about the accounting implications of that, but when you combine the improvements that we saw over the year, in New York City and in Waltham, and in Cambridge and in Northern Virginia, versus where we were at the beginning of the year, where we had expiring leases also during the year that were a little bit on the higher side, our actual overall portfolio rent right now is pretty much at market, so there really isn't, on a gross basis, any mark-to-market down or up, as we look at things right now.

Midtown Manhattan leasing activity end of 2010 was significantly more activity I think anyone predicted. Sublet space has begun to disappear from the market and the availability rate as we begin 2011 is probably under 12.5% and about 3% of that is sublet space.

We've seen a gradual improvement in rents of the good buildings and, obviously, a much stronger rebound in rents than I think anyone expected at the Premiere Plaza district assets; high-end tenants, hedge funds, opportunity funds, private equity firms, and the venture firms have seen a rebound in their business prospects. The changes that are occurring in the large financial institutions are clearly leading to the growth and formation of lots of boutique, smaller firms. In addition, there were a significant number of big tenants in the market that looked to lock in current rents and are still out there today, and certainly are looking for large contiguous blocks in Midtown.

Overall transaction velocity still is a pretty good pace in New York City. As we've been purviewing, our overall vacancy in our portfolio is about 3%, and we got back that 110,000 square feet at the base of Two Grand Central this quarter. And to be frank, activity on that block has been slow. We completed 20 small deals this quarter, five leases totaling 44,000 square feet at 510 Madison, where we are achieving rents in excess of $110 a square foot per space in the upper portion of the building. Rents are up significantly from the beginning of 2010, but we only expect marginal growth during 2011 from where we are today. Transaction costs have settled in the $60 to $65 a square foot range and free rents in the 10 months on average basis.

Top deal in the market in 2010 was $175 a square foot at the top of 9 West 57th Street. As large as Midtown is, there are actually pretty limited contiguous blocks of space available in the 2014 to 2015 timetable. I think that during one of these broker calls, a list was published with blocks of space over 200,000 square feet and blocks of space over 400,000 square feet. And I think there was seven blocks over 700,000 square feet on a list.

So I took a look at that list and talked to Andy and our guys in New York City, and just to sort of give you a perspective -- so there are -- of the seven blocks, there are deals pending on two of them, at Worldwide Plaza and at 120 Park Avenue. 3 Columbus Circle is the subject to a fight between ownership and the new lender that would like to knock the building down and build a Nordstrom's. The former New York Times Building is being converted to a residential asset. 11 Times Square is actually made up of two blocks, neither of which is anywhere close to 400,000 square feet, based upon where Proskauer is in the building. And that building is going to be leased in 2011 -- in smaller increments, if necessary -- so it's going to be gone.

The sixth block is 9 West 57th Street; for the last deal done, as I said, was $175 a square foot. And the seventh block is at 150 E. 42nd.

So, you sort of obviously get to the question of what's going on at 250 W. 55th Street. Last year, when we were asked when we were going to restart the redevelopment, we said, we think we're going to be having legitimate conversations with tenants about pre-leasing at the end of 2010. That is, in fact, the case. Now, whether we're going to be successful at tracking a tenant at a price that will lead to beginning and completing the building again, we'll see, but we are in active dialogue and I'd say we're optimistic.

Washington, D.C. has probably had the strongest job lift in the country for the past three years, but the overall availability still over that time went from about 7.8% to 10.8% in the district. Statistically speaking, if you look at the numbers, D.C. really had a great year, with 3.8 million square feet of positive absorption, the second-highest absorption in 10 years.

But there's more to the story than that. So, 80% of that was leased by the US government and its agencies. And the sort of not-so-funny joke in the market is that the other 20% was leased to government contractors from outsourcing. The vast majority of the leasing was done in secondary locations in buildings that were built or redeveloped on a speculative basis, and completed between '07 and '09. GSA rents were in the high 30s to low 40s, and flat for 10 to 15 years.

I think the big surprise in the market during the year was when the SEC leased 900,000 square feet in the 1.4 million square foot vacant complex that was the former headquarters for the Department of Transportation. And that was pure growth -- scary thought. Recently, the rumor is that the SEC got a little ahead of itself and now the OCC is taking 600,000 square feet of that space.

I think the challenge that we think about when we think about Washington, D.C. buildings, is that if you're a 25,000 square-foot tenant, you have about 140 unique choices, in reasonably good Class A buildings; obviously, not all Class A trophy. But the good news is that for the first time in recent memory, the hangover of new speculative space in D.C. has ended. And this really bodes well for owners in 2015 and beyond, when, by the way, we have a building that we could build.

In the short-term, private sector leasing is going to be slow, and interestingly, there are really only two major uncovered law firm lease expirations between 2014. The great news for our portfolio is we're 99% leased; we have 258,000 square feet of expiring and uncovered roll-over in '11 and '12; almost half of that is in Capital Gallery, which is a building where we have a waiting list of users, but we just don't really expect to see much in the way of improvement in lease economics in 2011 in the District.

Last quarter, I described our transaction at 500 North Capital and our ability to alter the redevelopment plan, add a floor, and attract a private sector tenant. Well, guess what? We signed a lease for 15 years with a 171,000 square-foot law firm. They've committed to 74% of the building. At 2210, we're 82% leased on the office space and 70,000 square feet of retail space is 100% leased.

Fairfax County, North Virginia is sort of my example of how you have to think about markets in a very bifurcated and thoughtful way. So Fairfax County includes Tysons and Reston/Herndon and the toll road out to the Dulles Airport. Overall availability in that market is about 18%. In the Reston/Herndon submarket, which is where our focus is, Class A inventory of about 30 million square feet has a vacancy rate of 20%. Reston Town Center is a market of about 5.5 million square feet and it has a vacancy rate of 13%. Our portfolio in Town Center is about 2.6 million square feet and we have a vacancy rate of under 3%.

We have 1.3 million square feet of 2011 and 2012 expirations. We completed only one renewal on that space in calendar year 2010 -- 80,000 square feet -- yet we also completed 930,000 square feet of new deals with new tenants; 160,000 square feet at Discovery Square; 106,000 square feet at Overlook; 62,000 square feet at One Freedom Square; 70,000 square feet at Two Freedom Square; and 530,000 square feet, the GSA at Patriot Place. It was actually positive absorption of about 1 million square feet in Fairfax County, but it was really driven by two large GSA requirements totaling 1.2 million square feet, ours being one of them.

What continues to be the most striking thing is that the rent differentiation, even within the Town Center Market, where things are better than everywhere else in the marketplace, two of our competitors still sit with over 200,000 square feet of current vacancy and are asking $29 to $31 a square foot, while our portfolio ranges from $36 to $43. Again, you've got to be really careful when you think about how markets are doing.

In San Francisco, the overall availability rate in the CBD is still about 16%. Recently, there's been some growth in the market spurred by some technology tenants -- Google and Zing and Twitter, in areas of the city that when, from a Bostonian's perspective, we sort of -- we think about more like as Cambridge and the seaport of Boston, not the core Financial District.

We are seeing improved activity in Embarcadero Center as well. We completed 14 transactions this quarter compared to nine during the year on a quarterly basis, and we're pretty close on a multi-floor deal at the base of 4EC, with starting rents in the low $50s. Again, pretty consistent with where I said market rents would be.

South of the city in the peninsula in the Silicon Valley, there is actually some pretty renewed optimism this quarter about tenant growth. Facebook is in the process of purchasing a 1 million square foot campus that was the former headquarters of Sun Microsystems. Google is taking all of its sublet space off the market and has dozens of tenant improvement jobs under works. In the last 60 days, Hewlett-Packard and Dell, and Motorola and Microsoft -- obviously, all brand name, corporate users -- are all looking to expand in the Valley by more than 200,000 square feet apiece, and are focusing primarily on the 3 million square feet of new space that was delivered in 2009, which still remains vacant.

Now this is a pretty big change, and I think the first positive widespread demand that we've seen in the last couple of years in the Silicon Valley and the peninsula market. Our single-story, Mountain View product continues to see pretty good activity, and we completed another 53,000 square feet of transactions this quarter, bringing our total activity in '10 to about 114,000 square feet.

When we spoke last, we talked a lot about the CBD of Boston and the transactions we were doing in our portfolio, particularly in and around the Prudential Center. I think what is clear at this point is that there really is a dramatic difference between the conditions in the Back Bay and the conditions in the Financial District. Current availability in the Back Bay is about 6% compared to about 17% in the Financial District. And there are a lot of high-quality Financial District assets with strong financial backing, good sponsors, with very significant vacancy, including 11 blocks of over 100,000 square feet.

Wellington has taken occupancy at Atlantic Wharf, they're in there. We've completed four other leases for 139,000 square feet in our waterfront building, including three full floors, and one additional lease in the Tower. And we've leased or are negotiating leases on all of our retail space, totaling about 27,000 square feet. The project is now 79% leased.

In suburban Boston, we completed two large ten year renewals. We finalized a 320,000 square foot deal at 140 Kendrick Street starting in 2012, and a 220,000 square foot lease with a tenant at Quorum Way, which will start at the end of October. In addition, we've completed 140,000 square feet of leases in Cambridge, and have recently signed an LOI with an existing tenant for another 60,000 square feet of expansion. Our current availability, including the 60,000 square feet is about 9%; excluding it, we're down to about 95% occupied.

We have one remaining build-to-suit in Cambridge at 17 Cambridge Center. This building can be designed for office or lab tenants, and we've actually received a number of inquiries from a number of tenants, both lab and office technology, that are considering expansion or relocation to Cambridge Center. Now, overall, again, Cambridge still has an availability rate of 16% and there are three other large blocks of space, one of them which is ours, of over 100,000 square feet.

For us, 2010 was a year of organic expansion from a whole bunch of blue chip technology and biotech companies. And our portfolio really has shifted in Cambridge to these larger, expanding organizations away from some of the smarter start-ups, which were sort of the traditional Cambridge tenant.

Alright, next week, with the acquisition of Bay Colony -- again, knock on wood -- our largest exposure in Boston is going to be in the western suburbs. We have 700,000 square feet of availability including Bay Colony. Bay Colony is going to see capital and our preliminary plans are already attracting interest. We have two or three 80,000 to 70,000 square foot users who are actively seeking proposals at Bay Colony, which would not have happened under prior ownership in 2010.

Overall vacancy in Central 128 is still pretty high, though -- it's 21%; but the availability in the Premier buildings, which is really where we're focused, is at 14%, and rents are actually up 10% to 15% from this time last year. Leasing activity in the Route 128 Central Market is substantially stronger than all the other Boston markets, and we have about 140,000 square feet of leases in negotiation right now, covering five separate transactions of that 700,000 square feet of availability.

Before I turn the call over to Mike, I do want to say one thing about acquisitions and dispositions. We are clearly looking to deploy capital in 2011, but we are also going to be actively marketing some select assets. We've structured the purchase of the Hancock Tower as a reverse-like kind exchange, which gives us the flexibility to sell assets and retain capital. We are considering a sale of a significant interest in Carnegie Center right now, and have identified other assets that may also be candidates for sale in 2011.

And with that, I'll turn it over to Mike.

Thanks, Doug. Good morning, everybody. As Doug said, the fourth quarter was a very productive quarter for us. As you can see in our press release, we completed over 2 million square feet of leasing. We closed the acquisitions of the John Hancock Tower and our joint venture partner's interest in the Wisconsin Place office building. And we completed a bond refinancing and other debt payoffs that both lowers our overall corporate borrowing cost and allows for a long-term extension of a significant amount of our near-term debt maturities.

First, I'd like to go through a little bit on the Hancock and the impact that it has on our balance sheet and our P&L, since it will have a noticeable effect on both for an extended period.

Purchase price accounting requires us to mark-to-market the leases and debt associated with our acquisitions. The end-place leases, as Doug indicated, are currently below-market, so we've added about $100 million to our other liabilities and $15 million to our other assets to account for this. We will amortize the net of $85 million into income over the lives of the individual leases, resulting in non-cash income going forward.

The debt we assumed with the transaction which totals $640 million at a 5.7% fixed rate that expires in January 2017, has an interest rate that is above market. So to account for that, we have added $23 million of fair value debt adjustment to the debt balance on our balance sheet, which will be taken in as a non-cash reduction of interest expense over the remaining six years of the loan.

Our bond offering, unsecured bond redemption, and the repurchase of a portion of our exchangeable debt issue, reduces our 2011 interest expense by $10 million and extends our debt maturity profile. We were able to take advantage of the treasury market at one of its historic low points, and issue $850 million of 10.5 year senior bond at an effective yield of 4.29%. We used the proceeds to redeem $700 million of our 6.25% senior bonds that mature in 2013, and repurchased $50 million of our 2.875% exchangeable notes that are callable in 2012.

Our bond spreads have continued a strong rally and are now being quoted in the 130 to 140 basis point range, in 35 basis points from our issuance. During the same time period, the 10-year treasury rate has increased, though, nearly 90 basis points. So our current borrowing costs in the bond market will be just under 5%. The convertible debt market is open with pricing for five to seven-year terms in the 1% to 1.5% range at premiums of 20% to 25%. And in the mortgage market, spreads have been slower to compress, although the trend is favorable and we believe there's capacity to push pricing, due to the competition for high-quality loan opportunities. We see current credit spreads in the 165 to 190 basis point range for all-in 10-year debt coupons of roughly 5.25%.

We have just entered the market to refinance our $455 million mortgage loan on 601 Lexington Avenue. As we've mentioned before, the cash flow of this building has increased substantially since our acquisition in 2001, and we anticipate raising additional proceeds with a $700 million to $750 million new loan, which is still a sub-50% leverage position. We only have a few other debt maturities in 2011, all of which are in our joint venture portfolio, and we expect to refinance our $43 million mortgage on our Annapolis Junction project with a new seven-year loan, and are working on extensions of our current loans on our Mountain View properties.

This quarter, we were successful in putting a good amount of cash to work, and our cash balance is down from $1.3 billion last quarter to $460 million at quarter end. In addition to using $290 million to acquire the Hancock Tower, we acquired and repaid the debt on Wisconsin Place, $125 million cash use; extended $75 million on our development pipeline; and repaid four other expiring mortgages totaling $325 million.

This unencumbered 1330 Connecticut Avenue in Washington, D.C.; our South of Market and Democracy Tower buildings in Reston; and three buildings in suburban Boston. Our uncommitted cash balance after funding our remaining development expenditures and the closing of Bay Colony is about $150 million. In addition, we anticipate generating free cash flow, after funding all CapEx and the payment of our dividend of approximately $120 million in 2011. We expect to supplement our liquidity with the additional $250 million to $300 million of proceeds from our 601 Lexington Avenue refinancing, and also have the availability under our $1 billion line of credit that is up for renewal in August.

Now I'd like to walk through the fourth-quarter earnings results. Last night, we reported fourth-quarter funds from operations of $0.64 per share and full-year funds from operations of $3.90 per share. The most significant item impacting our earnings was the refinancing of our senior debt. Our decision to make a long-term funding commitment in 2010 reduces our future interest expense, but results in several one-time charges in the fourth quarter totaling $81.6 million, due to the premium paid on our debt repayments.

We also incurred $1.7 million of higher-than-expected interest expense for the 24 days of bond interest between the closing of our new issuance and the redemption of our existing bonds. In aggregate, these one-time items totaled $83.3 million or $0.51 per share.

Excluding these items, our earnings would have exceeded our prior guidance by approximately $7 million. In the operating portfolio, we had a host of small variances including early lease commencement, some higher percentage rent, better transient parking revenue, and improvement in our operating margins due to lower property expenses. In aggregate, our portfolio performance exceeded our plan by $3.4 million.

Our development and management services income was about $1.3 million higher than projected. In our JV portfolio, we generated $750,000 of income above our budget. Nearly all of this was due to the continued strong sales from the Apple Store at the General Motors building, and our rental revenues in the portfolio were closely aligned with our projections. Our hotel was in line with its budget. Our G&A costs came in just below the low end of our prior guidance at $79.6 million for the year; our range of $80 million to -- versus our range of $80 million to $81 million. This was primarily due to higher capitalization of wages associated with our successful leasing program. And lastly, other than the charges from our refinancing I discussed earlier, our interest expense is generally in line with our budget.

As we look at our projections for 2011, we are raising our guidance from last quarter due to additional leasing momentum in both the portfolio and in our developments; the positive impact of the acquisition of Wisconsin Place, which was not budgeted; and the reduction in interest expense associated with our corporate debt refinancing.

Picking up on the theme from Doug's comments, in New York City, Washington, D.C., and Boston, our assets are seeing increased levels of leasing activity, which is translating into slightly higher occupancy than previously expected. Our projected same-store portfolio improvement relative to our last outlook is driven from recent leases completed in New York City, and stronger absorption assumptions of our vacant and roll-over space in Boston.

For example, in Boston, we continue to see good activity in Cambridge, where we renewed two tenants totaling 140,000 square feet and have prospects for a portion of the 165,000 square feet of current vacancy. We also executed renewals in 75,000 square feet in the Boston suburbs that were not budgeted, and have upgraded our absorption projection, resulting in slightly higher occupancy projections for the Boston suburbs.

In New York City, we leased a floor of vacancy in 601 Lexington Avenue that has a first-quarter lease commencement. We now only have one floor of available space in the building. We also successfully backfilled our signage income at the base of Times Square Tower.

In the same-store portfolio, we're projecting GAAP same-store NOI to decline by 1.5% to 2.5% from 2010, while cash same-store NOI is projected to increase by 5% to 6%. These figures represent 100 basis point improvement from our projections last quarter. Our increases in cash NOI year-over-year is primary due to the conversion of straight-line rent to cash rent associated with the full burn-off of the free rent on 450,000 square feet at the Prudential Tower; 400,000 square feet at 399 Park; and 100,000 square feet at 601 Lexington.

Overall, our same-store GAAP NOI year-to-year is still down and the primary cause is the decline in occupancy and rent roll-down in San Francisco. In our Zanker Road project in San Jose, Lockheed-Martin vacated 260,000 square feet this month, and we do not expect a replacement tenant this year, costing $4 million of lost revenue in 2011. And at Four Embarcadero Center, we have approximately 200,000 square feet of vacancy coming in the third and fourth quarters, with average rents in excess of $90 per square foot, where we do not expect to see income until 2012 at the earliest.

In Washington, we will be commencing our redevelopment of the first building in Reston for the Defense Intelligence Agency this summer. The removal of this 260,000 square foot building from service results in a loss of $4 million in '11. Also, in Northern Virginia, we will see some downtime associated with the vacancy by Northrop Grumman in 220,000 square feet in Reston Overlook next month. In total, our 2011 roll-over exposure is reasonable at around 7% of the portfolio. The mark-to-market on this 2.5 million square feet of space is negative $1.31 per square foot, contributing to our same-store decline.

If you exclude the 200,000 square feet expiring at Embarcadero Center, our 2011 mark-to-market is actually positive on the rest of our roll-over at $2.15 per square foot. We expect our average portfolio occupancy to dip slightly from its current 93% level, and average 92% to 92.5% in 2011, due to the vacancies I noted earlier in San Francisco as well as Bain Capital in Boston, who will vacate 207,000 square feet at the end of the third quarter. This space is already leased to MFS; however, at this point, we're not delivering this space until the beginning of 2012.

Straight-line rent in the same-store portfolio is projected to be $13 million to $17 million in 2011, down from over $80 million last year. Termination income, which we exclude from our same-store comparison, is projected at $4 million for the year, significantly less than the $13 million recognized in 2010. And as Doug detailed in his discussion of our developments, we continue to make solid leasing progress.

At Atlantic Wharf, Wellington moved into its space over the past two weeks, and rent has now commenced on its 450,000 square feet foot lease. The remaining tenants will take occupancy later in 2011, and we continue to have activity and are working on proposals for much of the remaining space. We will deliver 2200 Pennsylvania Avenue late in the first quarter, and expect rent commencements to be phased in throughout the year and into 2012 for the 70,000 square feet that is unleased.

For the residential portions in both Atlantic Wharf and 2200 Pennsylvania Avenue, they will open this summer but will be in lease-up for the remainder of the year and into 2012. We don't expect a significant contribution for the residential buildings until they stabilize in mid-2012.

As Doug said, the activity at 510 Madison has been great at rents that are exceeding our initial projections, and the velocity is on budget to meet our 24-month lease-up. In aggregate, we're increasing our projections for the NOI contribution from our developments to $48 million to $52 million for the full year, due to the additional leasing resulting in earlier occupancy, as well as higher rents at 510 Madison. Straight-line rents are expected to total $35 million to $40 million, and these projections include a full-year contribution of Weston Corporate Center that delivered mid-2010.

Consistent with last quarter, we projected contribution of approximately $70 million in NOI from the John Hancock Tower and Bay Colony acquisitions in 2011, which includes straight-line rents of $13 million and FASB 141 rent of $8 million. The NOI impact of our acquisition of our partner's interest in Wisconsin Place is going to show up on our income statement as a reduction of minority interests, which is now known as non-controlling interest in property partnerships, as this property has historically been consolidated. And as Doug mentioned, we expect a 6.8% unleveraged GAAP return on this investment, adding nearly $4 million to our NOI.

Our Hotel had a good year in 2010 with RevPAR up over 10% from 2009. We're completing a number of new capital improvements this year, including a restaurant renovation and some exterior work. We're projecting a contribution of $8 million to $8.5 million in 2011, up 6% to 12% from 2010.

We project a 2011 contribution to FFO from our joint venture portfolio to be $130 million to $135 million, which includes FASB 141 income of $70 million. This represents only a minor increase from our prior-quarter projections. I would say we do have an opportunity here with our available space in Two Grand Central Tower, where we have a 110,000 square foot block in the low-rise and four additional full floors totaling 65,000 square feet in the high-rise, to lease.

We're projecting our development and management services income of $20 million to $25 million. This is a little higher than last quarter, as we believe we'll be successful in converting two short-term consulting projects we have into multi-year development service agreements.

On the G&A side, our G&A is expected to be $80 million to $83 million for 2011. The core compensation components of G&A are projected to be up 3%. Also included is a $4 million charge to be taken in the first quarter related to the acceleration of the remaining cost of our 2008 out-performance plan, which we expect to write off, as the plan is not expected to be in the money. As we noted in our press release, our Compensation Committee approved a new out-performance plan, the details of which can be found in our 8-K filing last week. The GAAP valuation of the plan is $7.4 million, which will be expensed through our G&A over five years. The charge for 2011 is projected to be about $2 million.

Our net interest expense is projected to be $410 million to $420 million in 2011. This is a reduction from last quarter of approximately $15 million due to the $10 million in savings associated with a reduction in the interest rate from our corporate debt refinancing, and in addition, our prior projection assumed the permanent financing of our $97 million construction loan on Wisconsin Place at market rates. The repayment of this loan at the end of 2010 results in $5 million of net interest savings for 2011. Our interest expense projections includes $30 million to $35 million of capitalized interest for the year.

After considering all of these projections, we are increasing our 2011 guidance range by $0.20 to $0.25 per share, and are now projecting funds from operations of $4.45 to $4.60 per share. For the first quarter, we project funds from operation of $1.06 to $1.08 per share. Our first quarter results are typically lower, due to the seasonality of our Hotel, which is projected to be down $0.02 a share from the fourth quarter. We will lose some occupancy in the portfolio with a couple of large leases rolling out that I mentioned earlier, and we expect to book the entire $4 million charge associated with our expiring out-performance plan, plus about $0.01 of higher seasonal G&A costs in the first quarter, front-loading our G&A expense.

As an aside, we've taken $20 million of expense for our original out-performance plan over the past three years, with no actual payout, as the plan will expire without any value.

As I mentioned in the outset, we had a strong quarter and completed several transactions that should enhance our earnings in the future. These include the long-term interest savings from locking in low interest rates in our debt portfolio and the benefits from our acquisitions, each of which have embedded cash flow growth over the near-to medium-term. 2011 is a transitional year for our development pipeline, as each property will be in a lease-up stage and will not deliver on their full potential until 2012 or 2013. The pipeline represents $1.4 billion of invested capital, which upon stabilization, should generate a blended cash return of over 7%.

I'd like to turn the call over to Mort now. Mort?

Yes, good morning. I'll just cover some of the broader perspectives of our --. There are still, I think, in an overall sense, at least in my own judgment, in a weak recovery, at best somewhere between zero and 2%, I would say, is the range that I would put it in terms of GDP growth. I realize this is below a lot of other estimates; but given the weaknesses in the housing market, the weaknesses in employment or unemployment, the problems that states have, and the problems that we're going to have in other aspects of our macroeconomic picture, I still take the more conservative view.

Having said that, what is remarkable, of course, is that American business world has done a remarkable job in terms of adapting to a much weaker economy than I suppose many of them expected. And they've done this in the form of reducing costs. So their profitability, I think, has improved dramatically over the last couple of years. And particularly, the financial sector has improved dramatically, given the support that the financial world got from the TARP money and the Federal Reserve. And I suspect that, if anything, this is just going to get stronger because of the basic pressures or trends in that industry.

So, Boston Properties, since it concentrates, A, in supply-constrained markets and, B, in the upper end of those markets, I think, is going to have a very good experience in terms of its leasing. And the question will be, how do we continue to grow the Company? We do it through acquisitions and we do it through developments. We're working on a variety of different projects in New York, in Washington. We've really done some very good acquisitions in the general Boston market.

And I think as was indicated, perhaps our weakest market is in the San Francisco area. Cambridge is very strong; Boston is very strong; and we expect to continue that these markets will be supportive of the kind of growth that you've heard about.

This is a time -- it's an unpredictable time. It is unprecedented and therefore, unpredictable. But I do think that we are in a position as a company to continue to make acquisitions, both of existing buildings and of development sites. And we intend to do that.

We're going to again remain consistent with our whole experience and our whole business strategy, because as I have said and as I'm sure you've heard from all of my colleagues many times, everybody does well in good times; but in bad times or difficult times, it is the high-quality buildings that do relatively the best. And this is exactly what we have experienced.

And in a lot of the buildings that we have where we've had big vacancies, we've been able to backfill them because tenants want to move into those buildings. And we expect this is going to continue, and it will take a slightly different form in the sense that I think some of our rents will be in a position to go up in these buildings, as we go forward through next year and this year.

So on balance, I think we have to be reasonably confident about the next several years, modestly optimistic about the next several years in terms of our own business, even if we're less optimistic than most about the macroeconomy; if the economy does prove to be stronger than we expect, then, frankly, we think we'll do even better than we are estimating.

But you know, there's still, in my judgment, a great deal of unease in the American business world about where this economy is going. So I think people will move slowly into a stronger expansionist phase of their activities. Right now I think it's very hard to see any major uptick in the employment. It is very easy to see another -- we've had five months now of declining home prices, which is a very, very important factor, and in my judgment, the most important strategic risk to the economy, because home equity, which is the difference between the price of the home and the mortgage, is the largest asset on the balance sheet of the average American family. And if that continues to go down, then we have a real concern.

And I think, in general, there is such an anxiety over what's been happening to home prices, because even if the people who have a home that don't sell or don't contemplate selling or what have you, they feel the loss of wealth. There has been a $9 trillion loss of home equity so far, according to zillow.com, which is one of the most, if not the most, reliable firm that follows all the statistics in the residential market. That's a staggering number. And it's been going down since they came back with that number.

So I just don't know what the consequences of that will be, because I've never experienced that in my own business career. And I don't think we have ever had that kind of situation. And we don't know what its consequences are.

If you look at the affordability, though, this is one illustration -- if you look at the affordability of housing, you take the median income and you figure out what, at lower prices and lower interest rates, what percentage of income would have to go to supporting a home, it's below 15%. But the conventional number is 25%. Yet housing prices -- housing sales are virtually at record lows.

And I think the reason for that is that people are apprehensive, A, about their jobs, and B, mostly they fear that home prices are going to continue to go down. The whole epic of the residential market, that old saw that home prices never go down year after year, this has been said and it was true of everything since the end of World War II. But, well, it certainly hasn't been true last year and, in my judgment, will not be true this year and may not be true next year.

And that has really caused a lot of people to hold back. And what that means for one of the key industries, in every turnaround from a recession into growth -- I mean, housing has always led that turnaround -- I don't see that happening this year and maybe not next year. So that's one of the things that makes us feel a little bit cautious.

But we're in a strong position. We're in a strong position financially. We've had a very good -- I mean, relatively good run-through this difficult time. We really have been able to take advantage of the market in terms of both acquisitions and in development sites. We've done well in our leasing. So, in a sense, I think we're going to be optimistic, although as the cliche goes, cautiously optimistic, in terms of what we're going to be able to do. And as you've heard from Doug and Mike, we really are in a very, very solid position to continue growing the earnings of the Company over the next several years.

So we're in the markets we're in. We have our eyes and ears open. We're looking for additional acquisitions. We're looking indeed to see if we can expand to other markets or at least one other market, where we can continue to grow and build an operating platform, so we have the basis for long-term growth. But we look for unique markets, so this is not something that's going to be easy to find. It is going to take some time if we're able to do it. But at least we feel we are in a position to do that.

So, that's sort of where I am and where we are on these matters. And I think we're looking forward to -- into next year as being solid years for Boston Properties. Thank you all very much.

Okay. Operator, we can start the dialogue with our investors.

(Operator Instructions). Jordan Sadler.

Just curious on 250 West 55th for a second. I know it's not necessarily factored into guidance yet at this point, although you do seem optimistic. Mike, could you tell us what would happen to 2011 FFO if you were to restart 250 West 55th, say, as on a pro forma basis, January 1 of this year?

The immediate impact would be starting to capitalize interest on the amount that we have in the building, so we have about $450 million of costs that are in the building right now and our average debt cost is about 5.5%. So $25 million would be for a full year, if you started on January 1. Obviously, we haven't started it, so -- but that's what the effect would be, immediate.

Okay. And then separately, Doug, you spoke about selling assets. Maybe in the context of your comments about the bifurcations of assets in the markets, could you maybe give us a bit of the profile of assets you would like to sell, what they would look like, maybe markets? Besides Carnegie Center.

Well, I talked about Carnegie Center. And look, we're going to recapitalize and sell a significant portion or a whole -- the entire Carnegie Center asset, based -- depending upon what the pricing looks like. We'd like try and retain management and development because we still control the land for another seven-plus years. But that will all play out.

The other assets are obviously scattered amongst our other regions. And I would characterize them as more suburban in nature, although there are a couple of CBD assets that we've looked at where we think that the opportunity for extensive growth is less spectacular than some of the other places we might be able to deploy capital. And the asset size is in sort of the $100 million, plus or minus, individual assets a piece. And we'll sort of see how it goes, based upon what opportunities we have to deploy capital. Because we're not interested simply in selling assets and reducing the size of the portfolio and reducing our overall ability to retain capital.

Safe to say, I mean, most of your assets are stabilized. I know there are some around the edges -- safe to say that they would be stabilized assets?

Yes. They would be stabilized assets.

Okay. And then in terms of deploying, do you favor development over acquisitions today, broadly?

We favor higher returns on a risk-adjusted basis than lower returns. If we can put to work our development sites and sites that we are at least pursuing with tenants, that would give us more than a significant amount of pre-leasing, I think that would certainly be in today's marketplace, given where we are looking to acquire assets, a very productive use of capital.

That being said, there are some terrific assets that are going to come to market. It's going to be competitive from a pricing perspective. We may choose to form partnerships with other capital sources to reduce our overall investment and use our operating platform to some degree of leverage, but we are -- so we don't feel we're capital-constrained, Jordan. We are opportunity-constrained. And we would prefer higher return assets if we could find them, but we're realistic about what's going to be available in 2011.

The other thing is, if I may add here, we have consistently taken a longer-term view in terms of how we measure the returns. We're not looking to have negative short-term returns, don't get me wrong; but when you look at various buildings, you can see very often the opportunity for longer-term returns.

I'm going to just mention again the General Motors building where we have two huge tenants, their leases come due in a number of years. Those leases go back -- go way, way back and they're way, way below the market. So that is a part of the strength that we have. We can take a slightly longer-term view in these things, because we do believe that there will be, in terms of the kind of growth that this Company would like to have over the longer term, that these will make a major contribution to that.

So that, I think, from our point of view, really gives us a modest comparative or competitive advantage as we go forward in the way of acquisitions.

Thanks for the time.

Ross Nussbaum.

I want to talk a little bit about Washington, D.C. Doug, your comments with respect to slow private sector leasing and no real improvement in leasing economics. I'm trying to balance that against the prices that have been paid for D.C. office buildings and the uptick in interest rates. And how do those all come together in your mind? Do you think Washington has gotten over-heated from an asset pricing perspective?

Well, you know, I said two things, right? The first thing I said was that on the short-term, we think there's going to be little impetus for growth in private sector leasing.

I also said that looking out, 2014, 2015, there are no buildings that are going to be on the docket from a private sector perspective. And, believe it or not, there are still tenants in Washington, D.C. of a couple hundred thousand square feet or more, who are going to be looking to expand at some point in the future. And the average building size in Washington, D.C. is under 400,000 square feet.

And the natural course of things in that city is that when larger firms are looking at their lease expirations after 15 or 20 years, the natural governor for them is new building construction. Without that sort of sitting out there, I think you would argue that the medium-term opportunity for rental rate appreciation in Washington, D.C. is one that you can have some confidence in.

And so, I think -- I do think that the size of the asset in Washington, D.C., the amount of capital that is looking to deploy into core real estate assets, has certainly not shown an ability to define quote/unquote great value in D.C. relative to other markets. But I don't think it's necessarily overpriced; I just think it's more of a long-term play in Washington, D.C. than a short-term play.

Ray, do you want to add anything to that?

Well, I would just say that the market is a little bit skewed in the fact that there was a major user sale on Connecticut Avenue that broke all records. And that was a one-off deal that was kind of an off-market type of transaction.

And I also kind of always viewed Washington as like a club that you had to pay an initiation fee to get in. And we've seen a lot of international buyers come in the marketplace that are really stretched to get a D.C. asset in their portfolio. There's not a lot of product on the marketplace that kind of drives demand. There's two or three really attractive assets that hit the market recently that are going to be very competitive in terms of pricing; but again, to Doug's point, the long-term trend is still very, very positive. And there's a couple that we are taking a hard look at, just to establish or reestablish or reinforce our identity as the number one iconic office building owner in Washington, D.C.

Thanks. And Mort, just a quick question for you -- did you hear anything at the State of the Union last night that made you feel better or worse about the state of affairs in the world?

Well, I mean, I think it was a more constructive speech. He -- the President, I think, was reaching out to the Republicans, and dealing with a lot of the contentious points that separate the Republicans and the Democrats in a constructive way. So, by and large, I thought it was a constructive speech. He spoke, I thought, with some more energy and authority than he has in the past.

Nevertheless, I mean, I do think that the issues that we are facing, particularly the fiscal issues, got very, very little time and attention. And I think that's going to be a huge issue going forward. And we have to be very careful. I mean, they are treading a very, very thin line if their estimates are anywhere close to mine -- and I know on some levels they are -- when they see the weakness in the housing market and the unemployment market; the weakness in state and local governments, and what that could mean for the municipal bond market and what that could mean for the United States, they've got to be very, very careful. Because the last thing in the world they want politically is a double dip.

So I don't think they're going to do much about the fiscal side because they just feel they need it -- not just for next year but for the year afterwards.

By and large, it was -- this is -- as somebody put it, it's like going to a psychiatrist for an hour, in which you talk about yourself and all the good things that you're going to do and the people you have problems with. But the psychiatrist never asks you any questions -- how are you going to do this? How are you going to get the other side to work with you? Those questions are just, by definition, going to have to be worked out.

And the one good thing that I have to say, and I think we will take credit for this, is that he brought in this guy Bill Daley as his Chief of Staff. Now, the reason why we take credit for it is, he was on our Board for half a dozen or so years, and I'm sure that's the major training that he's had -- if that's the way we tell the story.

But he's a terrific man and he's a grown-up. And I think he'll be very effective in working with the Congress and working with the business community and working with the financial world. And boy, did they need somebody like that. So I think that, depending on what influence he has, I think that's a very, very good sign. And we'll just have to see.

The thing that worries me, I don't think they can do anything about the housing industry. I'm not sure they can do very much about unemployment. I don't think they can do very much about the problems of state and local governments, who's -- you'd look at Illinois, where they just increased, I think, the sales tax from 3% to 5%. That's going to take away any of the stimulus that we were originally were going to come out of that tax field. If you look at gasoline prices, I mean, you could retail sales. If you take out gasoline prices and food prices, which are necessities, the retail sales are still quite weak; but gasoline prices have gone up and up, to take $60 billion-plus out of the consumer's pocketbook.

So I just don't see yet where the energy is; I don't think they do, whatever they have to say publicly because they have to be optimistic publicly. And I think they're very worried about that, because they know that, ultimately, the state of the economy and not the State of the Union speeches is what's going to determine how they're going to do politically. And like every other administration, they're totally focused on the re-election in two years. So we'll just have to see how it plays out.

I mean, I don't envy them, because -- nobody's ever been in this kind of a macroeconomic situation. And we have a hugely higher unemployment than the 9.4% or the 9.8% -- the 9.4% came about more because people left the labor force and because people got jobs. And if you take what is called, I think U6, which is household unemployment, which measures people who have looked for a job in six months rather than in just four weeks, which is the headline number -- I mean, you're talking about an unemployment rate that's above 17%. And you add to that the number of people who have left the labor force completely -- you know, roughly 19% unemployment -- we've never been through anything like that.

So nobody knows exactly how this is going to play out. And neither do they, and they don't know quite how to deal with it. So he has to be optimistic, quite reasonably. He has to be constructive, which I thought he was, with the Republicans for the first time. He gave an energetic speech. So from a political point of view, I think he did as well as could be expected, but everything is going to be determined on the basis of how the economy performs. And frankly, I think, more or less, it's out of their hands.

Okay. That's all, thanks.

Suzanne Kim.

I just want to get some more clarification on the underlying assumptions in your guidance numbers. What kind of leasing assumptions are you assuming for some of the lease assets in your portfolio?

And then, second of all, I didn't catch what sort of leasing pre-hurdles do you need before 250 West 55th starts up again?

I'll answer your second question first, because it's easier -- it depends. It depends on the size of the tenant, the location of the tenant, and the credit of the tenant. So we don't have any sharp rule. If a tenant that was 350,000 square feet and wanted the base of the building and that was a AAA credit came along, and was going to sign a 20-year lease, we would clearly get started. I can give you that of a floor.

With regards to our other leasing assumptions, I can't answer the question. Our leasing assumptions are done on a property by property basis. We gave you a sense of what our same-store growth is going to be and that it was an improvement in occupancy, which obviously, would suggest that we believe that we're going to do better than we told you three months ago. But it's on a marginal basis and we said it's about 100 basis points increase in our same-store run rate.

I think that occupancy is about 50 basis points above where we thought it was going to be when they talked last quarter. So I think if you think about total leasing volume, it's somewhere between two and three quarters and 3 million square feet of leasing that we'll do. And we're seeing it in leases that we're doing in New York City; we're seeing in Cambridge and in suburban Boston, which I think is probably the place we're going to see the most increase in occupancy.

And I think that we're going to be successful in getting some positive absorption in San Francisco in some of the vacancies we have now. I don't think we're going to be able to replace the 200,000 square feet that we have rolling, because it's not rolling until the end of the year, but that's roughly where it's coming from.

And we're also seeing some improvement in our operating expenses, honestly. We've signed and fixed some energy rates that we have in the Company that reduce our energy costs from where we had projected it before. And we were pretty aggressive about what -- or conservative, I guess, about what our real estate tax projections were going to be. Because of the, as Mort said, the environment in the state and the municipal governments is such that you would think that they would be pretty aggressive about having rate increases and assessment increases.

And we now have some figures for the first half of the year, which are a little bit less than where we had projected originally. So that's a little bit of the same-store improvement as well.

Sure. What about 510 Madison? I guess I was trying -- wondering at 510 Madison and like your -- and how the closing of Bay Colony impacts your guidance numbers of those two particular assets.

I don't -- I think it's an impossible question to answer in the specific. What we said was we have a 24-month lease-up projection for 510 Madison and one of the reasons that we increased our guidance this quarter was because the rents were going to be higher. I'm not going to tell you how many cents of a contribution that was, because I just don't have the numbers in front of me.

Bay Colony, we have a very conservative view on the lease-up. We think we're going to significantly exceed that. When those leases are signed and when rent commencement occurs is very much dependent upon the form of that lease. And since we don't own it yet, we're just sort of reticent to make any predictions, but we're optimistic that we're going to be more successful than I think we would have thought of a year ago.

The other thing, Suzanne, if you take a look at our third-quarter earnings release, our press release, we have attached to that the returns that we expect and some of the operating information that we expect both Bay Colony and from John Hancock segregated out. So then there hasn't been a change from that, per se, other than that we haven't closed Bay Colony yet and that would have -- those numbers would have been for a full year, because we had assumed we were going to close it at the end of the year, and we're going to close it, as Doug said, hopefully next week. So we'll have 11 months worth of that.

Great. Thank you so much.

Jamie Feldman.

Ray, if we can turn back to you in D.C. for a follow-up question -- can you give a sense of defense budget cuts that we've seen so far? How you think those are going to impact the different sub-markets?

Well, Jamie, you know, I think the defense cutbacks they're talking about is going to be much more on the hardware and the deployment towards a global battlefield. What we're seeing, and Mort opined on this in an editorial seven weeks ago, about really it's about the cyber projection that the Defense Department is focusing on right now.

And the investment that is being made at Fort Meade, and the investment is being made at Fort Belvoir and similarly at the new NGA campus down in Springfield -- all of those investments by the federal government and the Defense Department, I think, bodes very, very well for those specific markets. And we are nicely positioned in those two sub-markets.

I think a broader general concern about defense may have some short-term effect on some of the defense contractors, but those specific locations where we have established our beachheads, I think, are going to be really well-positioned for continued focus on those aspects of the defense budget. If we are a little farther afield and we're focusing in on areas that are more generic in the defense expenditures, I think we'd be concerned; but I think our portfolio is really well-positioned.

And candidly, seeing this coming, that's one of the reasons we went so hard to secure the DIA to backfill that 540,000 square feet out in Reston. That's a 20-year government lease. And not only is that income secured but that specific user, the Defense Intelligence Agency, has great coat-tails and we've already got tremendous interest. And one of the things that's driving the demand for space in Reston is the desire for the private sector defense contractors to be in close proximity to that user.

So, in terms of our position at Fort Meade, Fort Belvoir, Springfield and the DIA, I think we're about as well-positioned as we can be here in Washington, to ride out any short-term hits and take advantage of the focus on cybersecurity as opposed to hardware.

Do you get a sense of even cybersecurity that there's going to be cut-backs and just ways to rationalize spending?

We really don't see that. And in fact, we're looking at -- we're debating internally starting building some Springfield and perhaps a new one up at Fort Meade, in anticipation -- I mean, what we're seeing from both our private and public sector contacts in the Defense Intelligence Agency is that -- stand by; that there's still going to be a need for office space, well-positioned to service these needs. And we do not have that type of level of concern that others may be having.

I mean, look at Reston. We just leased, what -- in addition to the 0.5 million square feet we leased to DIA, we've probably done something close to 400,000 to 500,000 square feet of defense-related deals, all long-term, 10-year deals in the last six months out in Reston. So we're feeling pretty strong that our position is well-fortified.

Okay. And then, Mort, you had mentioned you're looking for one other market. Is this still London that you had mentioned in the last call?

This is Doug. I don't think Mort mentioned London on the last call.

Hi, it's Mort. No, I did not mention London in the last call. The only thing I said about London was that because of the language and because of the legal system and because of the culture, there were attractive features to that city compared to other cities in Europe.

But no, we're not looking in Europe, frankly. And we're going to stay in North America. And we are looking to see if there's another market that would intrigue us. We are in a position to grow the Company, I believe. You always -- we always end up starting with one or two buildings in a market and then gradually build it over time. And that's sort of our plan.

So we're just looking around at this stage of the game. And I don't want to suggest that we're going to go into one market or another, because I can't tell you -- after the last call, when somebody or other thought that we were referring to London, we got calls from just about everybody in the real estate business in London. So I don't want to create any false anticipations.

But look, we're in a position to grow the Company, both within the markets that we are already in, and we're looking for other markets that would be consistent with the kind of business strategy that we've had for 40-odd years. So they're not easy to come by and we haven't found one to date that we would be prepared to go into.

I'll just tell you a little story once. The Mayor of Chicago, Daly, called me and said, why don't you come to Chicago? he said. I hear you have a very good real estate company. Because his brother, Bill, now the Chief of Staff, was on our Board. I said, well, I have a problem with Chicago. He said, what is it? I said, the city is too well-managed. He said, what do you mean by that? I said, well, we like cities, when you go into a city and demand goes up, we would like rents to go up. In your case, supply goes up, because you manage the city so well, you make sure that sites are available. We don't like that.

So we have peculiar, shall we say, criteria for the kind of business that we're in. And there are not too many cities that fit it; but we're just going to continue looking.

Okay. Good luck with the search. Thank you.

Sheila McGrath.

Just more on acquisitions. I just wondered if you could give us some color on your acquisition team's pipeline? Is it bigger than it was six months ago? And if you have expectations for that -- for more product to come on over the next six to 12 months?

Well, since we closed $1.5 billion of transactions in the last quarter, I would say that -- hard to suggest that the pipeline that we have today is larger than that. We are aware of and following and making inquiries and fastidiously searching for ways to make acquisitions in all of our markets there. We look at chunky assets. They're larger CBD-oriented opportunities. We haven't baked any of that into our guidance for 2011. We're optimistic that we'll get some more stuff done in 2011, but I'm not going to put a number out there or make any suggestions as to what the timing of that would be.

Okay. And just quickly on 510 Madison Avenue, you did have some lease activity there already. I just wondered if you could comment how that compared thus far to your expectations or underwriting?

(multiple speakers) We were considerably above probably, I'd say, literally $15 to $20 a foot above what our original underwriting was. We had a very conservative underwriting deliberately, but it's gone and is going very, very well. And we think we're going to have a very -- we estimated that we would fill up the building in a couple of years. If I had to give you an honest guess now, I think we'll exceed that time period. That is, we'll do it in less time and we'll do it at higher rents.

The building is being extremely well-received. It is an extraordinary building that was, to his credit, designed by and built by Harry Macklowe. And it has -- it's an outstanding design. It's in the Plaza District, as you know, which is very, very difficult to come by. And we think we're going to do very, very well with it. And as I said, I think we'll do it in -- we'll lease it up in less time and at higher rents than we anticipated.

Great. Last question -- just wondering what your thoughts are on the dividend, given your improving outlook?

If you look at it in the short-term, I think we're comfortable with our dividend as it relates to our taxable income. Obviously, as we move forward into the future and our taxable income continues to increase, we're going to have to look harder at it.

Thank you.

Josh Attie.

Looking at your land bank, are there any other developments that could move up to the front burner soon? You have a lot of land in Reston and you seem recently positive on that market. Could you add an additional project there this year?

No. I think that the Reston market is not at a point where you have replacement cost rents. As I said, there still is pretty significant availability. I think the chances for us to do a build-to-suit or a partially leased building are most high around Fort Meade and Fort Belvoir, in and around Washington, D.C., at 250 West 55th in Manhattan and at 17 Cambridge Center in Cambridge, Massachusetts. Those, I'd say, are the four places where you're most likely to see something.

Thanks. And the cash balance has declined pretty significantly as you've put capital to work. Are you comfortable with where it is today? I don't know if having $1 billion of cash was helpful in terms of being able to close quickly on acquisitions. Given the opportunities that you see, are you comfortable with the level of cash you're running at today?

We are -- we're comfortable with our expectation of where our cash position will be during the year. That's not to say that it's not better to have more cash than less cash to a point, as you know, I think we've talked about. There are some capital raising opportunities for us, both on the sales side as well as the financing side. And there are joint venture opportunities. We have our ATM. There's the equity market. I mean, there are lots of ways to raise capital if we think the opportunity is such that we can deploy that capital at an appropriate rate of return.

Thanks. And just lastly, can you talk a little bit about the acquisition landscape? And specifically, are you seeing any more competition from private equity adds?

We have (multiple speakers) --

Let me. There has been a huge transformation of that market, as I'm sure all of you know and all of you have read about. A lot of money is coming back into the commercial office building market because there is a sense that American business is doing relatively well in the economy compared to a lot of other options, like hotels and/or residences.

So, yes, I think there has been a big change. I mean, I'll put it this way -- we have been offered, on one of our buildings in New York, for example, a purchaser offered to buy it at a 4% cap rate. Those are very, very competitive cap rates. I mean, we haven't seen those cap rates since the bubble of a couple of years ago. Yet there is that kind of money that is looking into it because they see a lot of the longer-term values in commercial real estate.

And I think that's just -- it's made the competitive landscape just that much more difficult. But because we have the capacity to add an operating platform to an acquisition, I think we have still the ability to put together additional transactions.

Thank you.

Michael Knott.

Mort, was that 4% cap rate now? Or are you talking about back in the bubble days?

Oh, no, no. It was offered to us within the last 30 days.

Interesting. And then, I guess the question (multiple speakers) --

Pretty scary, is the way that I would put it.

I guess a question for Mike or Doug. Can you help me understand the thinking behind the debt swap and paying the big premium on redeeming the debt that you did?

We really looked at it on a long-term basis. We didn't necessarily look at it on just a MPV basis for that isolated -- those isolated transactions. And we looked at the ability to lock in for 10.5 years, 4.2% money, which we thought was just incredibly attractive and would be great capital for us to have for 10.5 years.

We obviously looked at the maturities coming up in 13 months and about 20 months and said we're going to have to deal with these maturities in the near-term. There is a premium to them, and maybe that premium does go down as you get closer to the maturity of that debt, but we were really struck with what we saw the treasury market where it was. And said, you know, if the treasury market continues to go lower or stays flat, maybe we'll be able to do something again and take advantage of this again, but we really don't want to lose this opportunity to put that kind of capital on our balance sheet for long-term.

And Michael, the most simplistic analysis that we did was, we said, if we did nothing today, at what rate would we be able -- would we have to issue at, when those loans matured at their perspective dates, in order to be indifferent? And the rates were in or about 5.25% to 5%. And our view was, we're probably better off issuing today at 4.22% than taking our chances that in 2012 or 2013, we can issue at 5%.

Okay. And then a question for Mort. Mort, obviously, there are a lot of demands on your time outside of Boston Properties. How should we think about your role as CEO and how long you're interested in holding that role as opposed to just Chairman?

Well, I mean, I -- whatever the title is, as you may know, I did not have the CEO title for many, many, many years. This is still my prime interest and my prime occupation. The fact that I do other things, frankly, makes -- enhances, if I may say so, the opportunities and the role I have at Boston Properties. But this is the principal focus of my attention and will remain the principal focus of my intention. And whatever I have to do here, I do. Everything else that I do is secondary to this and in addition to this. And this is the one that has the first priority and the one that fits the agenda for whatever else I may do.

Okay. Thank you.

John Guinee.

It's Erin Aslakson for John Guinee. Thank you for taking my question. It essentially relates to Cambridge and the recent news that Vertex might be moving to Fan Pier, Joe Fallon's project, in 2013. I don't know if you had discussion with Vertex or if you even have a land bank ability large enough to complete the development for Vertex's size requirement; but could you talk about that move? And what effect that has on Cambridge and what outlook you have for Cambridge, why Vertex would move to South Boston?

Sure. So -- and to answer the simple question first, we can build 170,000 to 200,000 square foot building depending upon whether it's lab or it's office in Cambridge. And we have no other availability between now and, call it, 2017 -- '16, '17. So we never talked to, never were approached by, and never attempted to talk to Vertex about Cambridge Center.

Vertex is a company that have grown up in some rather antiquated facilities in Cambridge and over time, has organically moved from building to building. And so, they're sporadically located in lots of single-story and a couple of mid-rise buildings in and around the East Cambridge submarket. And I think that their desire to consolidate was one that comes when companies mature.

And the choices that they had were twofold -- they could stay put or go to a new development; because there is no obvious existing campus in Cambridge for them to go to. I think they probably had a choice to look real hard at the site that Alexandria has got under development. And they also probably looked at what is referred to as Northpoint, which are both Cambridge opportunities. And then they looked at the -- I guess what the city of Boston is now referring to as the Innovation District, or the Seaport.

And I don't know what the economic opportunity was that is being offered by Joe Fallon and his partners, relative to what Alexandria and others were offering, but I assume that, economically, it was more advantageous for them to move to the city of Boston from Cambridge. I think it doesn't really impact the market for high-quality lab space or new lab space. I think there's a very big difference between second-generation lab space and primary lab space, in terms of how it's being built, how it's being used, what the infrastructure looks like.

There have been some examples of some older lab buildings that have really had a challenging time leasing up, but they have leased up in the Cambridge marketplace. And the good news is that the owner of the Vertex buildings has a couple of years, assuming Vertex gets their FDA approval, and they have a drug to sell, and it's able to be financed, to at least talk to tenants about what the opportunities might be within their portfolio.

One of the additional comments would be -- one of the interesting stories about Cambridge right now is the fact that the activity on new delivery of products has really been in the lab sector. On the office side, the last building brought to market really is our 8 Cambridge Center, which is now going on a decade. So the office sector, this particular real estate decision really will have no impact on it.

Great, thank you.

Our next call (multiple speakers) --

Thank you all very much. It's Mort. We look forward to talking to you again after our next quarter and we appreciate your interest.

Hey, Mort, we still have a couple more people we have to get to.

Okay.

Your next call comes from Chris Caton.

I wanted to follow-up on talking about entering new markets. I think I heard that it would be -- or a market -- I think I heard it would be more incremental in nature rather than a larger portfolio. Can you talk a little bit about your thinking around that?

I don't want you to read too much into what was said. I think, to paraphrase what Mort said, was that we'd like to grow. If there is an opportunity to find a market that meets the supply restrictions that we found exists in the markets we're in, where we think there are opportunities to see strong demand growth over time, it's a market -- that would be an opportunity we would like to explore.

We continue to look at lots of different markets and we continue to look on a periodic basis at those markets, because conditions change, right? I mean, nothing is static in this world. And in the perfect world, we'd like to establish an operating platform in whatever market that might be if we were to find one.

If we can't do that, and we can do it on incremental an basis, that would be okay too, if we thought we could eventually get to a platform size that would be similar to what we have in the markets that we're in today. But I don't want you to read into this that you're going to see an announcement that, three weeks from now, that we're suddenly going into a new market and that we're going to buy a building, and market XYZ with an expectation to grow. It's a long-term, consistent view that you will hear about in 2011, in 2012, in 2014 -- I mean, we're just -- we're going to continue to look, because we don't want to preclude ourselves from doing things in other places if we think the opportunity is there.

Thanks for clarifying that. And one small housekeeping item. You talked about releasing spreads and how -- and you segmented San Francisco, which is down, and the rest of the portfolio, which is flat or up. How much of that is already agreed to and how much of that is kind of speculative?

In terms of its spreads?

Yes.

I mean, just the way -- well, the way we do our spreads is that we look at our existing in-place rent and we look at where we think we could lease that space on a day-to-day basis. And aside from San Francisco, on average, we are at or above market, in terms of where we think we could lease the space relative to where our current in-place rents are.

When you push the San Francisco stuff into that, it's basically flat.

And I would just add that none of it is really agreed to. That none of it is assigned or anything like that. This is exposure. If we have an expiration that we've already signed a lease for, then we don't consider that exposure.

Got you. Thank you.

Jay Habermann.

Sorry for making this call go on a bit longer, but on West 55th Street, Doug, could you talk a bit about where potential tenants are most focused on timing and perhaps how far apart you might be today on pricing?

I'll focus on the timing because that's an easier question for me to answer. We -- it's going to take us a couple of years to deliver the building and it's going to take us six to nine months to Marshall, to get there. So we're talking about basically a 2014 delivery of space. We probably could push it up a little bit but not a lot.

With regards to timing, I told you where I thought market rents were in the city. We recognize that the West side is weaker than the Plaza District; we recognize that 8th Avenue is different than 6th Avenue; but we also recognize that new construction and the efficiencies of a new building come at a premium to potentially existing rents in those same places.

So we're looking for a fair rent based upon the product that we have and the current environment, and where we think rents will be in 2014.

Okay. And just last thing maybe for Mike LaBelle -- any thoughts on debt paydown because of the exchangeable notes? Further paydown of the 2012? Or even looking out to 2013, the senior notes? Any thoughts there, just given your all-in cost of around 5% today?

We haven't -- obviously, that's not in any of our guidance. We think about it on a consistent basis. I would say it's not on the front of our mind at this moment. But with our 2012 exchangeables, we're going to create a strategy for that in the next few weeks to months, because clearly, that one's coming up in February of 2012.

And we'll continue to evaluate where rates are and where they're going, given, as you heard Mort say, we're a little less bullish on the overall economy, so is there possibilities that treasuries could dip down a little bit? Maybe there is those possibilities. And if we see that, will we potentially take advantage of a moment like that? I think that's possible. That's pretty much where we stand now.

Okay. Thank you.

Rob Stevenson.

Doug, when you have conversations these days with your bigger legal tenants, what's the outlook for them taking additional space or needing additional space over the next three to five years?

So, I would -- I'll characterize it in two segments. So for all the tenants that did something between 2008 and 2010, I actually think, in many cases, they are feeling a little bit pressed for what their current space looks like. And if they're a firm that is considering either doing partner acquisitions or they're looking to maybe sort of, how should we say, ratchet back the amount of partner time that is being spent on clients, and looking to use a little bit more operating leverage, I think they are feeling that there may be a need for more space on an incremental basis.

For anybody who has not yet hit that sort of 2008 to 2010 leasing timeframe and is working with their existing platform, they probably have 10% to 15% more space than they need. The way they utilize their space is dramatically different than it was when that lease was signed -- the number of file uses they have; the number of conference rooms they need; the number of support staff they have and cubicles stations to perimeter offices; the size of those offices -- all that has changed. And there's been compression of the ability to get into less space more efficiently. And all of those tenants are, in our expectation, unless they're doing a merger, are going to be looking for less space than they currently have.

Okay.

Doug, I think that's a good thing -- this is Ray Ritchey -- that what we're seeing with almost all these firms is if they're taking 20% to 30% less space, they're much more willing and much more open to pay more to upgrade their space, to go to a better building, which clearly plays to our strength. And that was one of the key things with the McDermott deal in D.C. here, is they came out of 220; they took 170 with us, and viewed it as a real value play and a chance to upgrade. So, the lack of growth or the consolidation of space on the law firm side actually plays to our strength in many occasions.

Okay. And then for Mike, just quickly, of the, call it, $0.22 of increased guidance for '11, how much of that is the stronger leasing versus the interest and any of the lease stuff on Hancock, et cetera?

I would say that we brought our same-store up about 100 basis points. I would target that in a per-share number of somewhere around $0.06 and a dollar number of somewhere around $10 million, is what that means. And again, a portion of it's coming from expenses and a portion of it is coming from faster absorption of space and 50 basis points of occupancy.

Okay. Thanks, guys.

Alexander Goldfarb.

Appreciate taking the questions. This is a question for Mort, if he's still on the line. Just wanted to get a sense of here in New York, what your view is for the success that Cuomo may have in reforming Albany and sort of, hopefully, starting to write the state's financial position.

I guess Mort has left. Then Mike, on 601 Lex, as you're thinking about CMBS versus portfolio lenders, can you just give a sense of who's more competitive? And also what they're doing in terms of terms, if someone is trying to sell additional products? Maybe the CMBS guys are trying to sell additional products to make their bids more competitive, if you could just give some color?

You know, I think that it's interesting because everybody in the CMBS market feels like the origination of CMBS is going to be up four-to five-fold from 2010. And we probably have a half a dozen or more investment bankers in here on a consistent basis touting their origination platform and expansion of their origination plan platform in anticipation of an increase.

So they are very, very excited and interested in doing something. One of the big questions, though, is how comfortable are they going to be in putting something on their balance sheet for a period of time, that it will take to bundle it into a securitization? Now, the good thing for a large transaction like 601 Lex is that the size of the securitizations are getting much bigger. So a securitization that was maybe $1 billion or $1.5 billion in 2010 is expected to be $3 billion to $3.5 billion in 2011, which enables an asset like this to fit in well and maybe not have to be broken up into two pieces.

If it has to be broken up into two pieces and you do it with one institution, they have to hold it longer. So their aggressiveness on pricing, I think, is going to be affected by their comfort with the CMBS market. They clearly want to do more business and generate those fees, and are being aggressive about marketing.

We haven't gotten feedback yet on exactly what their pricing is going to be, however, so we'll see. We do know that in the whole lender market, which could be the banks, the foreign banks, the pension funds and the life insurance companies, that we think they will be very aggressive. We think that you'll have to put a club together, but that is something that we have done before and we're prepared to do so. And they are clearly looking at assets of this ilk and assets of this size to upgrade their portfolio and do a long-term financing at these types of leverage points.

But as far as their competitiveness, the sweet spot that the portfolio lenders are offering you, as far as rate term, LTV, is it similar to the CMBS guys or is each of a little bit different? And then for you guys, would it be looking at your maturity schedule to see where you're more comfortable having that role?

Well, I think that, from a pricing perspective, if you look at 2010, the home loan lenders were more competitive than CMBS. CMBS won some deals because they would give a little bit more leverage. We're not necessarily going to be looking for that leverage. However, I will say that I think the CMBS market is going to get more aggressive. And I think they're going to have to. And as they get more and more comfort with CMBS spreads and where they are and where they're moving, because we've seen them all come in, their pricing is going to come down.

From a terms and conditions perspective, both those parties will do long-term financings. Some of the foreign banks would rather do seven years rather than 10 years. We're going to look at all of those factors and we're going to want to do a longer-term financing, based on where interest rates are today. So, it could be a seven-year, it could be a 10-year; probably not longer than that.

And the, I guess, amortization -- maybe that advantage is on the CMBS side a little bit. I think CMBS is more willing to do interest-only. And most of your life insurance company lenders and pension fund lenders are saying, we'll do a few years of interest-only and then we want some amortization on the back-end.

Okay. That's helpful. Thank you.

Steve Benyik.

Just a question on Wells Fargo and what you think drove their decision to go to 120 Park, which seems like somewhat of a lower price point. And then just add a couple with the prospects for banks filling some of the space at Grand Central Tower, what you guys are seeing there?

Well, I think you answered your question. It's a lower price point. And I think Wells Fargo has the perspective that we're happy to be in midtown Manhattan. They weren't prepared to or aren't prepared, and I don't know if they've got a deal yet at 120 Park; I've heard that other tenants are looking at it as well still.

That being at the Seagrams Building with a couple of hundred thousand square feet wasn't in their view of what the future held for their business. And they were looking for a value opportunity. And I think they waited a little too long, in terms of finding a host of value opportunities, because I think a number of them are already gone, on Park Avenue, in particular. And so they were forced to move a little bit south. And potentially, a little bit further to the east or the west, if they're going to do what they said they were going to do on a consolidation.

With regards to our space at Grand Central Tower, we have these smaller floors. They're at the base of the building. We just gutted them. The US UN requirement that was in there before was a challenged use of the space. So we're starting sort of from scratch on those space, with a pretty substantial work letter and, literally, a white box there for people to look at. And we're confident that we're going to find tenants.

People who are looking for 18,000 square feet or 20,000 square feet of space at the bottom of a building are fewer than the people who are looking for 16,000 square feet of space or 18,000 square feet of space at the top of a building. And so it's going to be a price and a value proposition for somebody. It's not going to be a major financial institution because it's not a big enough block.

Do you think the financial institutions otherwise, besides Wells Fargo, might also follow a similar line of thinking going forward? Or is this more of a one-off decision related to them?

I think it's very dependent on the image and the view that the institution takes to how they use space and where they're putting and what they're putting in that space. I mean, you know, there's always been an ability to find cheap space if you wanted to go to secondary locations in Manhattan on a relative basis. And to date, very few of the financial institutions have done that.

I don't think the location that Wells is choosing is a secondary location. It's not Park Avenue and 53rd Street, which is where the Seagrams building is. And I can't speak for how they think about it. But Nomura is looking at a very large block of space on the west side, right? There -- again, it's a sort of off location in terms of being on 6th Avenue, but I'm not aware of very many 900,000 square foot blocks of space in midtown Manhattan. So that's sort of where they find themselves.

We believe that we will find financial institutions or legal firms or financial firms who will really like the efficiency and the competitive nature of their total occupancy at 250 West 55th Street, and will be able to generate a good return on that project. I can't tell you when it's going to be. So we're optimistic that there will be financial services users who are looking for high-quality space in core midtown market locations.

Alright. Thanks very much.

Final call comes from the line of David Harris.

Sorry to prolong it. Mort -- Doug, I should say, on TI's, did I hear you correctly that you said fourth quarter was low but is a reasonable run rate looking forward into '11?

No, I didn't say it was a reasonable run rate. I just said it was low. I think we've traditionally, David, said we think our tenant improvement package, including leasing commissions, is generally in the $30 to $35 a square foot range. And we were obviously significantly lower than that in the fourth quarter.

Now was that a function of the actual nature of the leases you were looking at reviewing or (multiple speakers) --?

(multiple speakers) Yes, as I suggested, we did a lot more as-is deals, a lot more renewals in terms of what hit during the quarter. And those are naturally lower on the TI side. The Leasing Commission is pretty consistent amongst the newer renewal because you pay what you pay. But the tenant improvement piece of it, it was significantly lower.

And so what I should look at is perhaps the prior quarters as a reasonable run rate for, as we look into the future, with some perhaps diminution over time, as the market improves?

Yes, I think that's a fair characterization. I think that if you're looking at 2012, I don't think you've going to see much of a diminution.

Okay. And Mort's gone and I don't even have a building in London to sell him.

Oh, well.

(laughter) Alright. I'll let you go. You can go take a break.

Thanks, guys. Talk to you next quarter.

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