波士頓物產 (BXP) 2011 Q1 法說會逐字稿

Good morning and welcome to Boston Properties first-quarter earnings call.

This call is being recorded. All audience lines are currently in a listen only mode.

Our speakers will address your questions at the end of the presentation during the question and answer session. At this time, I would like to turn the call over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

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

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

At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in Monday's press release and from time to time in the Company's filings with the SEC.

The Company does not undertake a duty to update any forward-looking statements. Having said that, I would like to welcome Mort Zuckerman, Chairman of the Board and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer.

Also during the question-and-answer portion of our call, our regional management team will be available to answer questions as well. I would now like to turn the call over to Mort Zuckerman for his formal remarks.

Good morning, everybody. I think we are continuing to see fairly good progress in virtually all of our markets and feel very comfortable about the market responses that we anticipate going forward.

As we have indicated many times in the past, I think the markets that we are in and the product that we have within those markets really does work in times like this and we are optimistic about being able to start another building in New York and to lease that building up fairly well. So I think we are feeling modestly confident about the future and reasonably optimistic about our particular role in the real estate markets that we are in.

This is all within the context of seeing still a fairly anemic recovery in the economy in general. This suggests that interest rates will remain fairly low but demand will be selective and there will be pressure on the best buildings in the best markets.

So we think we have a chance to increase our prices, but it's not going to be anything like what we had several years ago until the overall economy gets to be stronger, and I just don't see that happening for a while. With that, I'll turn it over to Doug Linde who will give you a detailed analysis of our performance. Doug?

Thanks, Martin. Good morning, everybody, and thanks for joining us today.

When I spoke to you last quarter, I gave you a pretty thorough dive into the operating fundamentals in our markets and our expectations for 2011. So this morning, I'm going to give you a more condensed summary of what we are seeing from a leasing fundamentals perspective.

And then I thought I would put some more detail on our current plans for deploying capital which everyone is always interested in, and give you a little bit of a perspective on what we're seeing in the acquisition markets. But first let's start with the leasing markets.

And sort of feeding off Mort's comments, I think it's fair to say that our business is clearly more correlated to what's going on in the stock market than the overall economy, and it's pretty evident in our quarterly earnings numbers. The stock market continues to perform well, gross margins are at historic levels.

Corporations have robust earnings and guess what, we are seeing pretty good leasing trends particularly in Midtown Manhattan, the Back Bay of Boston; Cambridge, Massachusetts; Waltham; Reston Town Center, Virginia; and the Peninsula which for us is Mountain View, California. These are markets that are all being characterized by accelerating leasing velocity, increases in rental rates and/or lower transaction concessions.

Now, I would say the Washington DC, the city itself, has really yet to see a pickup in the private sector activity. And while San Francisco's CBD is starting to see more tenant demand from technology type tenants, in less traditional buildings, we're only beginning to see improvements north of market, which is where our portfolio is.

Our quarterly second-generation leasing staff, I think we're better than we had forecasted with a rolldown of just under 3%. The Boston activity was concentrated in the suburbs where we rolled leases in the mid-30s to low 40s, down to about $30 per square foot in Waltham.

In New York, we had 22 transactions that hit the statistics this quarter. The largest was only 13,000 square feet. 67% of them were actually in Times Square Tower or 2 Grand Central Tower which are obviously our lowest end properties in the market.

In DC, more than two-thirds of the leases were in Northern Virginia and rents actually rolled up about 10 to 20% there. And in San Francisco, the statistics included a 270,000 square foot renewal on Zanker Road where the rent went from $14 triple net to $13 triple net.

Our average lease length was about six years and given the concentration of suburban deals, transaction costs were pretty low this quarter at about $22 per square foot. The portfolio marked to market is starting to get more and more positive and today it stands at about $0.67 per square foot.

During the quarter, we continued to lease at a pretty normalized clip with 1.475 million square feet of new transactions which is actually the median level for our first quarters over the last seven years to sort of give you a sense of how normalized that is. Our activity was concentrated in DC.

58% of the deals were completed and many of the transactions were ones we have been discussing for the last few quarters but actually got signed including McDermott Will and Emory at 500 North Capital, Northrop Grumman in Reston and an extension and partial reduction by Akin Gump at 1333 New Hampshire Ave.

I would note that what we are seeing in Washington DC continues to be this trend of reductions by law firm tenants when they sign new leases. So as a couple of examples, McDermott is moving from about 200,000 square feet to a current commitment of 170,000 square feet when they move into 500 North Capital at the end of next year.

And Akin Gump reduced its 290,000 square foot footprint by about a floor or 26,000 square feet. So I would say that our short-term outlook on the DC office leasing market is cautious.

There are significant blocks of high-quality space available in traditional private sector locations as well as new additions to the inventory in the form of tenant relocations such as when McDermott moves from 613 St. to 500 North Capital and there's some new construction going on too. 1000 Connecticut Avenue which is a building that's got about 115,000 square feet of speculative leasing in it to be done as well as the old convention center which is purportedly being resurrected by [Heinz] which is about 450,000 square feet.

The DC private sector market with the concentration of law firms continues to be lease expiration driven and there are quite frankly limited lease expirations from major tenets between 2011 and 2014. But, I think the good news is that between 2015 and 2017, there are 12 users currently leasing over 150,000 square feet and eight users between 80,000 and 150,000 square feet with lease expirations.

And I would note taking a page out of our own book that we expect our planned 450 square foot development at 601 Mass. Ave. which matches up pretty well with this expected demand to deliver during that timeframe and I think Ray would be disappointed if I didn't point out that even though we're somewhat cautious on DC, our portfolio is 98% leased and we are in active discussions on our availability at 2200 Penn and Market Square North. Overall transaction velocity continues to be strongest in New York City.

As we have been previewing, overall vacancy in our portfolio is about 3% as we got back 110,000 square feet will at the base of 2 Grand Central, but activity on that block has actually started to pick up, a big difference from last quarter. We've completed 90,000 square feet of leases at 510 Madison since we spoke last quarter including a recent transaction with a large hedge fund for 67,000 square feet at the base of the building, so that brings our total signed commitments to 36% of that square footage.

We completed 14 other small office deals this quarter in the remainder of the portfolio and we think transaction costs have pretty settled at this point between 60 and $65 per square foot. Free rent is now under 10 months and pre-built spaces where the cost is a little bit higher, we get paid in the form of a premium with less free rent but those costs are about 15% more expensive in terms of what we are putting in for TIs.

I would also note that Toys "R" Us/FAO Schwarz has chosen to exercise their five-year extension right at 767 Fifth starting in January of 2012 and we're working through a rent arbitration process as we speak. Well another US law firm disbanded as the Howrey firm made a bankruptcy filing and they occupied the 54th floor of 601 Lexington Ave. 30,000 square feet.

They abandoned their space last month and we are in the process of negotiating a new lease on the entire premises at a starting rent that's about 25% higher than the contractual rent for the lease and that lease was signed in 2006 which I think is a pretty good indication of the recovery of the Midtown market.

As a side note, Howrey had a major presence at 2099 Pennsylvania Ave. in Washington DC which we expect will be another addition to that market's current inventory. In the Bay area, the story continues to be the dramatic increase in activity on the peninsula and in the valley.

LinkedIN, Dreamworks, Apple, Facebook, Google, Dell, HP, Motorola and Broadcom, they have all committed to significant expansion and positive absorption. This is a continuation of the big change we described earlier this year.

Our single-story Mountain View product continues to see good activity and we're now conducting a tour a day compared to a tour week in the second half of 2010. And we are finalizing a 73,000 square-foot lease on two buildings in our North First site which were originally intended to be scraped and redeveloped as Class A site and have been vacant for an extended period of time which gives you a sense of how much stronger the market is down in the peninsula.

On our last call, we described the significant activity in our CBD Boston portfolio and the dramatic difference between the conditions in the Back Bay and the financial district. Current availability in the Back Bay is under 6% and about 17% in the financial district.

There are a number of high-quality financial district assets with strong financial backing with significant vacancies. Yet even in the financial district, we have been able to outperform the market i.e. Boston Properties.

The Atlantic Wharf Waterfront building, the lowrise, floors two through seven, contains 220,000 square feet. Since late last year, we have leased a total of 140,000 square feet. The tenants include a social media company which was recently purchased by a global ad agency, an architectural firm with a focus on institutional work and the Boston Society of Architects, and we are negotiating a lease on the remaining 80,000 square feet with a tech company coming out of Cambridge.

This is in the face of nine blocks of space in the lowrise portions of Class A buildings in the financial district in excess of 100,000 square feet. So even in a challenged market as Mort said, our product can lease.

Let me switch my comments now to our investment in our capital activity. This time last year, we were busy underwriting and mining a series of assets that we expected to trade.

I think we are ahead of the curve and given our view on the improvement in the tenant demand for these very specific assets and submarkets, there was limited capital chasing these transactions and we ultimately closed on 510 Madison and 500 North Capital, the Hancock Tower and Bay Colony. Well the dam has clearly broken and there is a flood of capital chasing assets in our core markets today.

The auction of Market Square in Washington DC last month I think is illustrative of the magnitude of bidders and the aggressiveness of the bidding. There were a number of third-party bidders within 1 or 2% of the purchase price paid and they include REITs, open-ended pension funds, and sovereign wealth funds.

Since last week, another high-quality building, Liberty Place in Washington DC was put under agreement on a preemptive basis by a fund manager during a marketed process and at very similar pricing. And we're seeing similar outcomes in New York City, 7 57th Ave. in Midtown, a good building with very long-term leases traded under comparable circumstances. Current NOI returns are between 4.5% and 5.5% for stable assets with limited short-term rollover in DC and New York and total costs are approaching if not in excess of replacement costs.

While we continue to aggressively pursue acquisitions, we also have the opportunity and the ability to deploy capital and development in our current and near-term pipeline is very promising. The initial office components of Atlantic Wharf and 2200 Penn were put into service during the first quarter.

The residential and retail portions of these projects will be opening over the next few months. The retail components are 94% leased and the apartments are being delivered into an accelerating and strong recovery in both DC and Boston apartment markets.

Our apartment asking rents are 10% higher than our original trended budgets and our pre-opening commitments are absent any tenant concessions. We expect to stabilize apartment components to yield in excess of 7.5% in DC and almost 6.5% in Boston on a cash basis.

In total, we will invest $177 million in these apartment projects and about $950 million in total in the whole mixed-use project at 2200 Penn and Atlantic Wharf. We will see a growing income contribution from these projects that will stabilize in 2012.

But that's just the beginning. We're completing the design work on our campus redevelopment for the Defense Intelligence Agency in Reston and will be under construction in July on this $130 million project which will deliver in February 2012 and May of 2013 with a mid-8% cash on cash return.

We have begun demolition and mobilization of the $122 million of 500 North Capital JV development and anticipate completion of that building in December of 2012. We are negotiating an expansion of our 50-50 joint venture with the Gould family at Annapolis Junction outside of Ft. Meade.

Government users have already leased the first building and we are constructing a two-story 120,000 square-foot $28 million speculative development that will be completed in the fourth quarter of this year. Last year we successfully purchased a defaulted mortgage secured by the last remaining land parcel in the urban core in Reston Town Center.

We obtained fee ownership of the parcel which is zoned for 359 residential units and 28,000 square feet of retail space. We are in the process of completing design on this 350,000 square-foot building and expect to commence construction late this year on a $135 million project for delivery in late 2013 or early 2014 and our current return estimate is in the low 7% range based on current market rents.

We are in active lease negotiation with a tenet for about 20% of the office space at 250 W. 55th St. As Mort suggested if the lease get executed which we believe it will, we would be expect to begin mobilization and restart the building during the fourth quarter of 2011.

Space could be delivered back to tenants as early as the summer of 2013 and the building would be placed in service in early 2014. When we suspended the building in February of 2009, our outlook on leasing the rest of the space as we entered a declining market was pretty daunting.

Our perspective today is just the opposite. We see the market improving, availability of large blocks of space in Midtown becoming limited, the efficiency and sustainability of our building being very attractive to tenants and the prospects for opening the building into a rising market being so much stronger.

We are in discussions with other large tenants as well. The current investment in the asset is about $480 million and our current estimate to complete the building including capitalized costs on the entire project assuming a fourth-quarter restart are about $1.05 billion.

Spot rents on the building go from about $80 at the base to in excess of $100 at the top and our expense budget including taxes will be in the low 30s once the building is fully assessed and opened.

We have two entitlement development sites in Cambridge. The first is a 250,000 square-foot development which shares a parcel with our West garage.

The Broad Institute has agreed to purchase this site and hire Boston Properties to develop a building. In total we will receive payments totaling $56 million.

The sale is being structured as part of our 1031 exchange which will allow us to retain the proceeds. We will also be managing the building on a long-term basis once it is completed.

Our site at 17 Cambridge Center has been designed to accommodate a 200,000 square-foot office or lab building. Last week, we signed a letter of intent with a tenant that is committed to the entire development as an office use with a total cost of approximately $88 million.

If this transaction moves forward, we would be under construction by the end of the first quarter 2012 with a delivery by July 1, 2013. Now before I turn the call over to Mike, I did want to make just a few comments on our Princeton disposition.

We've owned Carnegie Center from almost 13 years. When we purchased the asset, we had hoped to avail ourselves of the opportunity to develop almost 2 million square feet of additional space.

The Princeton market has been very stable but has not exhibited the conditions necessary to achieve this objective. We have been able to grow our portfolio in other markets and if we complete the sale, we will redeploy our capital.

Our Princeton team has continually outperformed the market and we have consistently achieved premium rents and lower vacancy, and I want to publicly thank them for all they have done to create value for Boston Properties shareholders. We've entered into a contract and as outlined in our press release, we structured the purchase of the Hancock Tower as a reverse like kind exchange that gives us the flexibility to sell the assets and retain the capital.

It is the intent of the parties to close this transaction inside a 180-day period mandated by the IRS regulations around 1031 which ends at the end of June. And with that, I'll turn the call over to Mike.

Thanks, Doug. Good morning, everybody. I just want to start by briefly talking about the state of the capital markets which have strengthened.

The debt markets remain active to real estate companies like ours and lenders are really seeking good opportunities to invest today. The corporate bond market is stable, our spreads are in the 140 basis point range and that results in borrowing costs in the 4.75% area today for a ten-year term.

On the mortgage side, lenders have become more aggressive and spreads have come in approximately 25 basis points in the last quarter since we last spoke. We are seeing spreads in both the insurance company and CMBS markets in the 150 to 175 basis point range at leverage points from 50 to 70% of value.

The success of new securitization offerings have given confidence to CMBS originators and added to the competitive environment, and we believe it's likely to result in further spread compression. The banks are also actively lending again in the three- to seven-year term financing market and once again pursuing construction loans for well-conceived development projects. The convertible debt market is also open to us with coupons of 1 to 1.5% at strike price premiums of 20 to 25%.

We are in the final stages of documenting the commitment application for the refinancing of our $450 million expiring mortgage loan on 601 Lexington Avenue. We expect to close a $725 million 10.5 year year mortgage financing in June with pricing in the 5% area.

We plan to utilize our line of credit to preserve the mortgage tax and provide bridge funding from the existing loans expiration date on May 11 until we close the new loan. The only other mortgages coming due in 2011 are two loans totaling $135 million on our joint venture value fund properties in Mountain View, California. Our share of these mortgages is just $54 million and we are in discussions with the lenders for extensions of up to three years.

We are finalizing terms for a construction loan to refinance and fund the development of our 500 North Capital St. joint venture development. As we noted in our press release, we signed a pre-lease in this development for 75% of the space with a major law firm. The interest from the bank market for this financing opportunity has been strong and we expect to close in early summer.

In addition we're concluding the negotiation of a three-year extension of our corporate revolving credit facility that currently expires in August of this year. We anticipate downsizing the facility to $750 million and closing in early June.

Overall, our balance sheet remains in great shape. As we noted in our press release we completed the $185 million acquisition of Bay Colony Corporate Center in February.

Combining that with 510 Madison Avenue and the John Hancock Tower, we have now added $1.5 billion of new investments to our balance sheet. To maintain ample capacity, to continue to opportunistically invest in both potential acquisitions as well as new developments, we have layered in an additional $400 million of common equity issued under our At the Market equity program. We believe that an ATM program is an excellent tool and should remain a financing option in the future to assist us in managing our leverage position as we make new investments.

Today both our corporate leverage and liquidity positions are strong, giving us dry powder for new investments. As of quarter-end, we had unrestricted cash balances of $750 million and assuming the closing of the 601 Lexington Ave. financing and the sale of our Carnegie Center portfolio and the Broad Institute land, our cash balance will increase to nearly $1.5 billion.

Now I would like to spend a few minutes discussing our first-quarter earnings results. Last night we reported first-quarter funds from operations of $1.12 per share after accounting for $0.015 of dilution related to the 3.7 million shares of common stock issued during the quarter. Our FFO was up just over $0.06 per share above the midpoint of our guidance or approximately $10 million.

In our operating portfolio we exceeded our projections by $6 million with $4 million coming from rental revenue and $2 million in operating expense savings. The revenue outperformance came from the early occupancy of 450,000 square feet by Wellington at Atlantic Wharf where we brought the building into service two weeks early and started recognizing income of close to $1 million ahead of our budget.

We also generated $1.5 million from a number of early lease commencements across the portfolio and $500,000 from better than projected parking revenue. Lastly, we generated termination income of $2 million from cashing of a security deposit related to a defaulting law firm at 601 Lexington Ave. that Doug mentioned. This income was offset by the write-off of the tenant's straight-line rent and receivable balance and the net impact of the termination to the quarter was positive $600,000.

As Doug described, the demand for this space is strong with several tenants showing interest before it was even on the market, and we are in active negotiations with a replacement tenant now. On the expense side, we received our final fiscal year 2011 tax assessments in several markets that were lower than we expected resulting in $800,000 of savings.

Other expense savings related to our delaying some repair and maintenance to later in the year at slightly lower than projected utilities expense. Our development and management services fee income came in $1 million above our budget.

Half of the outperformance is due to higher than expected tenant service fees such as overtime HVAC usage and other work orders coming out of New York which is a noticeable change in our tenants' work habits. The remainder comes from a new multiyear development fee associated with an assignment to develop a new science center for George Washington University in Washington DC.

Our JV portfolio produced $1.4 million of FFO above our budget. The majority of this is due to the continued growth in sales at the Apple store.

As Apple announced recently, company sales were up over 80% and the Apple store at the GM building was no exception with sales double our projections, resulting in percentage rent outperformance of $800,000. The remaining variance came from higher tenant service income again and operating expense savings.

Our G&A expenses beat budget by about $1 million due primarily to savings in our projected acquisition expenses with final costs associated with the John Hancock Tower and Bay Colony acquisitions coming in lower than expected and we also had various other miscellaneous G&A related savings. One last note on our income statement, our depreciation expense was up pretty significantly this quarter by $27 million.

This is due to the additions of the John Hancock Tower and Bay Colony as well as bringing into service a part of our development pipeline. In addition, we are accelerating some of the depreciation in our Lockheed Martin buildings in Reston as we prepare to take them out of service for redevelopment for the DIA.

As we look forward to the rest of 2011, we project our same-store portfolio performance to improve with the activity we are seeing in the leasing markets. We are also outperforming our projected leasing guidance at 510 Madison and the Hancock Tower and we've been awarded two significant fee income assignments. These positives are offset by the dilution associated with issuing 4.2 million shares of common equity and the loss of income should be successfully closed on the sale of Carnegie Center.

A significant portion of our same-store improvement is in the Boston region where we've seen faster than expected absorption. For example in Cambridge Center, we completed a 60,000 square foot expansion with Google at 3 Cambridge Center and are working on a number of smaller leases in 1 Cambridge Center.

In the suburbs, we continue to see good activity and are now projecting 75,000 square feet of additional leasing that was previously projected to occur later in the year or in 2012. In the same-store portfolio we expect our full-year 2011 NOI to be up 5.5 to 6.5% on a cash basis and down 0.5% to 1.5% on a GAAP basis from 2010. This is an improvement of 50 basis points and 100 basis points respectively from our guidance last quarter with a portion of the improvement realized in the first quarter.

Although the decline in our GAAP same-store NOI is narrowing,, we are still faced with several large lease rollovers that impact our occupancy. As expected this quarter we lost 100 basis points of occupancy in our same-store with 260,000 square feet of space in our Zanker Road project in San Jose and 130,000 square feet of space in Reston Overlook from the downsizing of Northrop Grumman.

In addition we brought Bay Colony corporate center into the portfolio at 65% leased driving the overall portfolio occupancy down to 91.7% this quarter. Our quarter to quarter same-store occupancy was down just 80 basis points to 92.4%.

Near-term declines in the same-store include the expiration of Lockheed Martin in 264,000 square feet in Reston where as I mentioned we will remove the building from service for redevelopment for the Defense Intelligence Agency. This will cost $2.2 million of rental income each quarter starting in June of this year until we deliver the space to DIA in late 2012.

In addition, we will have downtime at 111 Huntington Ave. upon Bain Capital's 207,000 square-foot lease expiration in September until the commencement of the MFS lease for this space at the beginning of 2012. At Embarcadero Center 4 in San Francisco, we will lose 190,000 square feet of occupancy in the second half of the year paying current rents of approximately $96 per foot.

For the remainder of 2011, we had 1.9 million square feet of leases expiring which if you exclude the leases at Embarcadero Center 4 are roughly at market. As we have stated before, our cash same-store NOI is up year over year due to the burn-off of free rents associated with our 2010 leasing program.

We project our straight-line rent for this portfolio to be $17 million in 2011 versus $80 million in 2010. Straight-line rent and FASB 141 rent for the remainder of the wholly-owned portfolio including our developments is projected to be $62 million to $67 million.

At the Hancock Tower, which is not in the same-store, we are projecting 2011 NOI to the approximately $2 million ahead of our budget, a portion of which came in the first quarter due to the combination of better than projected absorption and lease rates plus slightly lower than anticipated operating expenses. Our hotel was in line with our budget and breakeven in the first quarter.

We still projected to generate $8 million to $8.5 million of NOI for the year. We do not include termination income in our same-store results and are now projecting $5 million in termination income for 2011, significantly less than the $13 million we recognized in 2010.

Our 2011 projection is $1 million higher than our guidance last quarter due to the outperformance in the first quarter. As Doug detailed, we're starting to deliver our development pipeline with the office components of Atlantic Wharf and 2200 Pennsylvania Ave. opening in the first quarter.

Additionally we will be delivering 510 Madison Ave. this quarter and continue to see good leasing activity. We're increasing the estimated contribution to our NOI from our developments in 2011 to $35 million to $38 million. This excludes our Weston Corporate Center development that was completed in mid-2010 and will contribute $15 million in 2011.

Now that these projects are nearly complete, you will note in our supplemental report we've reduced our budgeted total investment by $30 million to reflect cost savings for the development. Although these developments are delivering in 2011, we do not project them to stabilize until mid to late 2012, and at stabilization, we project this $1.3 billion of invested capital to generate an unleveraged cash return of approximately 7.1%.

We project the contribution to FFO from our joint venture portfolio to be $130 million to $135 million which includes $70 million in FASB 141 fair value lease income. In the last few quarters, we have been describing the runoff in our fee income due to the completion of several fee development jobs in 2010.

Our regional teams have done a great job of rebuilding our base with two large fee assignments being awarded this quarter. In addition to the work we're doing for George Washington University, in Cambridge we will be constructing a new 250,000 square-foot lab building for the Broad Institute.

In aggregate we will generate nearly $20 million in fee income from these projects over the next three to four years. For 2011 we increased the projected contribution from our development in management services income business by $5 million to $25 million to $30 million.

For G&A, we expect an expense of $80 million to $82 million for the year in line with our guidance last quarter. We are projecting our net interest expense to be $403 million to $408 million for the year.

This is lower than our guidance last quarter as we are now projecting our 601 Lexington Ave. financing to price in the 5% area down from 5.5% last quarter. We anticipate placing this financing on a line of credit for 30 days to 60 days saving an additional 400 basis points over this time period. Our interest income will be higher than our prior projections with the additional cash proceeds from our equity raising and disposition activities.

Our interest expense assumptions include $32 million to $36 million of capitalized interest. We've not assumed a restart of our 250 W. 55th St. development in our capitalized interest projections. If we were to commence redevelopment, we would immediately start capitalizing interest on the $480 million that we have currently invested at our average cost of capital of about 5.5%.

The NOI from Carnegie Center is included in the same-store projections I described earlier, and if we are successful in our sales effort, it will have an impact on our same-store results as well as our portfolio occupancy. Carnegie is currently 86.6% occupied and we are projecting an average occupancy for the year of approximately 83%.

Assuming we close in late June and reinvest the proceeds in short-term cash deposits, the 2011 dilution is approximately $0.09 per share. The projected GAAP gain of $124 million for Carnegie Center will show up in our net income and earnings per share as we note in the EPS guidance we provided in our press release. Due to the structure of the Broad Institute transaction, it's gain on sale will be deferred to a later year in accordance with GAAP.

After considering all of these factors including the dilution from our equity issuance and the sale of Carnegie Center, our full-year 2011 FFO guidance is now $4.45 to $4.55 per share. For the second quarter, we project funds from operation of $1.18 to $1.20 per share which includes the interest savings from temporarily financing 601 for Lexington Avenue on our line of credit.

Additionally, our second-quarter FFO was higher than the first quarter due to the seasonality of our hotel and the $4 million one-time G&A charge taken in the first quarter associated with the termination of our old outperformance plan. As we have described, we are seeing sustained improvement in tour activity and leasing velocity in nearly all of our markets.

Our regional teams have done a terrific job the last couple of years mining for third-party development fee opportunities during a timeframe when starting our own new developments was unwarranted. These efforts are now paying off with our winning the new development management contracts that I mentioned.

This is resulting in better than projected absorption in our portfolio and higher than projected fee income, positively impacting our FFO guidance. So despite the $0.18 per share of dilution associated with raising $400 million of equity and selling our Carnegie Center portfolio, we're able to maintain the low end of our previous guidance. That completes our formal remarks. Operator, you can open the lines up for questions.

(Operator Instructions) Jim Sullivan, Cowen and Company.

Guys, I have a two-part question on San Francisco. Doug, in your prepared comments, you summarized very active leasing activity on the part of several large tenants, technology driven tenants, and I'm just curious as you think about that market whether the -- and you stress of course your exposure being in North of Market rather than Soma. I just wonder if you -- as you look at how that market is developing whether you are tempted to consider development opportunities in the Soma district.

And then the second part of the question is in the North of Market district, do you anticipate that you will see technology firm demand in that market or is it simply waiting for related professional and financial service tenants to -- demand to expand?

I will take a stab at this and Bob, you sir can correct me or add on if you think I'm being too simpleminded in the way I'm thinking about this. When you think about the South of Market market from a technology perspective, for the most part, those are tenants that are relatively small that are looking at older brick and beam warehouse renovated buildings and they are looking at them for two purposes.

One is there is I guess a unique character about what the workspace looks like. And two and probably as importantly, they are relatively inexpensive. So they are all being leased at rates that are -- I'm being a little bit obtuse about this -- but somewhere in the mid to high 30s, sort of where rents are.

And the question of new development in that particular market is I think sort of not part of the equation because the type of cost associated with new development and the type of density that would be required to make sense of it would preclude those types of tenants from getting both that funky type space that they are currently at least seem to be enamored with and the pricing would be significantly different.

With regards to North of Market, there are three or four what I would refer to as mature technology companies that have made the leap across or pretty close to North of Market, salesforce.com being one, Google being a second. Those two are in the Hills Coffee former building as well as 1 Market Street.

So there is a technology tilt to certain tenants that have gone to that market. But for the most part, the tenants that are most active today are tenants that are probably at least in terms of what they're thinking about from an infancy to maturity perspective not ready to be in a 30-story high-rise office tower with other tenants who are wearing jackets and ties or at least clothing with an attitude that is different than what you are seeing, quite frankly in the types of places that they're looking at when they look at South of Market.

Bob, do you have anything to add?

Yes, I would just say if you take out the Zynga transaction which was 250,000 square feet, most of the activity that has been in Multimedia Gulch has been substantially smaller transactions or shared space transactions.

Doug referred to the North of Market tenants as more mature. I call them grown-up tenants and that includes Microsoft which also has space right across the street from us in the Landmark at 1 market.

Okay, one other question for me, concerns the Route 128 submarket. The Carnegie Center portfolio albeit it outperformed in its submarket generally lagged the overall portfolio I would say over the last 10 years.

There are segments of your Route 128 portfolio that have I would say relatively speaking underperformed as well. I wonder if you are considering any culling if you will of that portfolio at all?

I would say that if you look at Route 128 portfolio, that portion of the portfolio has actually outperformed the suburban marketplace in a very significant way. Some of our Route 3 properties I would say have been laggards and that's largely because companies from Cambridge and the companies that are being backed by the venture capitalists who are located in Waltham Marketplace or now in the city or in Cambridge tend to want to locate those companies as close to the (inaudible) of 128 and the Mass Pike as possible.

And our portfolio has sort of -- I would say we have become more and more focused in our approach to where we have owned and where we've put capital into our suburban campus so that I would say 90% of our portfolio from a capital perspective is between Lexington and Waltham and now Westin with the one property down south which is 140 Kendrick St. And that's really what I'd say our focus is in. And if there's going to be some culling which there may be, it would be the stuff that is sort of to the north of 128 which is either in Bedford or in Andover or in Chelmsford, places like that.

Alex Goldfarb, Sandler O'Neill.

Just a question, my first question is on New York. With the recent WilmerHale departure to downtown and the possibility for Conde Nast day to potentially sign a deal down there, you think if both of those -- well the WilmerHale but do you think that would fundamentally change the way Midtown Midtown tenants will start to look at downtown or do you think that Midtown will always be the preferred place?

Mort, do you want to take that one?

Yes, I mean, look, I still think Midtown will be the preferred place by a wide margin. People going downtown have a very different concern. One of them is the rents are going to be significantly lower and people are much more sensitive to that issue.

And two is there are a lot of -- downtown has become a much more vibrant community if I may say so with a tremendous amount of activity and sort of the new technologies of our current era taking place there. We're getting a -- New York City is a tremendous beneficiary of that, both the atmosphere of that place and the attraction of it for the kind of younger people in the world of technology and it's where they want to work.

So I think that portion of it is definitely going to be for the benefit of the downtown area. However, it's still much less accessible in certain important ways for a lot of the people whom we generally tend to cater to in the Midtown area and particularly in the best buildings of the Midtown area.

I don't think there's going to be that much of an effect on our real estate, but I think it will -- what you were referring to definitely will have some effect on the overall Midtown market. We still think all the major users are by and large going to stay in the Midtown area for all kinds of reasons particularly relating to where their main employees work.

I also would note one other thing, Alex, which is when Wilmer Cutler went on their journey for space, they initially landed on a building on the Midtown West side actually at Worldwide Plaza. And ultimately we're I would say within a stone's throw of doing a transaction there and then we're basically pushed aside for a larger tenant and we are unable to consummate a deal there, and then looked downtown. So it wasn't a we want to go downtown for business purposes first. It was we weren't able to find what we were looking for from either a price or a space perspective in Midtown Manhattan and they ultimately went there from a secondary perspective.

Okay, so whereas you guys had considered 1 World Trade before, that's still in your thinking that decision was still a one-off. You would not start to look downtown would you for possible investment?

By and large, no, I think that was a one-off investment for sure and an interesting one, I might add. But in part it was a one-off because it was being so dramatically subsidized by every government agency in North America and probably some in South America.

So I think that was a very, very specific situation. And I think it should work out well for the people who ended up doing the development because (inaudible) so I do think that was definitely a one-off. We have not really been focusing or looking in that area.

And my second question is for Mike. You guys use the ATM obviously a good amount year to date. Two part to this.

One, is there anymore ATM in your guidance perhaps under a new program? And then two, given that you guys are going to presumably close Carnegie, close Broad and then you had about $500 million of cash as of the end of the fourth quarter, what drove your ATM -- what was the decision to use the ATM.

Alex, we really looked at the Company's fixed charge ratios and leverage ratios and we did $1.5 billion of new investment and we thought it was prudent for the Company a little bit of equity to match up with that asset investment. I think that going forward, we're going to look at what our opportunity set is for making new investments and we will consider and make decisions about future equity raises depending on what those opportunities are as we look into the marketplace.

I think that we have experienced the use of the ATM, we're happy with the way it worked. I think that as I mentioned in my comments, it's prudent for us to have that tool of capital raising available to us in our arsenal so that if we are in a position where we do want to raise a little bit of equity that we can use it if we want. So that's really how we look at it. If we find additional opportunities to invest new capital, we're going to evaluate our balance sheet and our leverage at that time.

Let me add something to that, okay? We are not out of the expansion business here. We're going to be continuously looking at opportunities.

And frankly, the larger scale opportunities will be a little bit more attractive to those who can move quickly and have the capital to move, and we're going to keep ourselves in a position where we have enough powder to do just that. I think we had the chance to make some wonderful acquisitions last year and we're not going to stop looking at that whether they be development opportunities or existing buildings. And we're certainly going to continue those efforts.

Steve Sakwa, ISI Group.

Mort, I was wondering if you could just address the West side opportunities. A number of your peers are getting ready to either start construction on some platforms or talking about doing some built to suits. So I'm just wondering how you think about the West side as additional competition coming into Midtown.

Look, I don't think the West side has the same stature as the shall we say the Upper Eastside of New York City. By that I mean from the mid-40s to the 70s up on the East side. But you have a gain, let me just say, certainly a sensitivity to price on a certain part of the market and a lot of people looking for new space.

I forget the number, but we have a large number, a very large number, I mean better than -- in double digits of large-scale tenants of 100,000 square feet or higher who are going to be looking for space in the next several years. And those of us who follow that market would like to get there with the right kind of product.

There will be those that will not want to leave the East side and there will be some who will. All I can say is that if you are -- from our point of view, we're still going to stay in buildings whether we build them or buy them that we think are in a very upper end of the market.

That is a strategy that works extremely well and has worked extremely well during the downturn. Everybody does well when everything is booming, but we find these buildings continue to do relatively much better when there is a downturn and knowing the cyclicality of the business we are in, we always plan for that and prepare for that.

We think there will be opportunities for us to buy things and we are definitely going to need -- if we want to be able to get some of the best buildings, a lot of them are going to be in very, very big numbers and we want to be prepared for it. The West side is an area we would be open to.

I think we're a little bit less confident about its future than we are in the East side but I think both of them are going to do well. New York City has come through this particular downturn as we all know remarkably well.

We are frankly surprised on the upside at just how well it has done. There's a lot of growth going on on the East side. It's not to say that people are not going to be conscious about rents, but I think you're going to see a lot of growth and I think you're going to see some real pressure of demand on supply in the next couple of years and it's a long-term sort of business develop program that we have and we're going to just be focused on all of that.

Okay and maybe you could just address I guess some of the issues down in Washington. I know there's a few generally by most real estate professionals down in the district that the government just will never really cut the workforce and that when they say cut, they really just mean slow growth. I mean do you really believe that it's not going to change or do you think maybe it is different this time in terms of how the government will think about its workforce?

I would put it this way. I think the government will make some token cuts in various areas, but on balance, those cuts will be relatively minor compared to the just natural growth that they have out of all the various programs that they are in.

It's hard for me to imagine the government is really going to be cutting back. There will be some cutbacks without question, but they will be I think more political and symbolic than real.

We don't -- we think Washington is just in very good shape. We're doing very, very well there. We are looking for sites or acquisitions but particularly for sites to do development.

I just went through in great detail our development along Pennsylvania Avenue. It's just a huge success meet both on the residential side and on the commercial side. And that is the kind of thing that -- where we are able to build not just to the upper end of the market.

I would say that building both on the commercial and the residential side is just seven league boots ahead of almost everything else that's being done in Washington. And it will be received as such. It is being received as such.

And that's where we think we can do best. And we intend to continue looking for sites where we can continue to do that quality work.

That's going to be just a huge success for us. So that sort of just gives us even more impetus to continue in that vein. We think we're going to find some sites, we hopefully will, and continue working in that particular sort of bracket.

Jeff Spector, BofA.

I guess just one follow-up on DC. I'm here with Jamie as well.

Jamie and I were actually thinking that given some peers are talking about now entering DC or doing more in DC, is it a good time to get a little bit more aggressive on disposing some properties there? Is that incorrect thinking?

I don't think we approach it that way, to be honest with you. Look, we've got a lot of great assets in DC, probably the best pool of assets that anybody owns in DC.

And I do think that there is a revival shall we say to some extent at least in terms of what we have seen. There's a lot of growth in the DC market.

We don't want to sell assets into that kind of a market. We frankly want to hold assets or buy assets in that kind of a market because we think the longer-term values are embedded in that market.

And we don't think -- look, there is a real supply constraint on that market which is called a height limit in terms of how high you can build. That automatically limits the amount of space you can put on. In most projects, it means you have to find big sites if you want to develop large projects.

So the assets that we have, we're very happy with the assets we have. We don't think we ought to sell them. We think they're very good long-term holds. And that is still the basic part of our business which is to have outstanding assets and hold them for the long term.

Good answer, Mort.

Alright, thanks. We felt Ray's hand (multiple speakers)

(multiple speakers) that voice sounded very much like Ray Ritchie.

We felt his hand come through the speakerphone. I guess maybe thinking about the markets, any markets you regret not trying to enter over the last couple of years like LA? It seems the stock market at least is predicting a big return for fundamentals in that market.

Well, I'm sure there are markets that we would like to have been in but again, in LA there is one part of it -- the downtown LA market is not a market that really appeals to us by and large. You generally have what I would describe by and large as commodity space there.

We just prefer to focus in on those kinds of buildings that set themselves apart from the rest of the market in qualitative terms. And there are certain parts of that market where you might have -- in West LA for example. But it's very difficult to work there, to assemble sites or even to assemble buildings there.

So we just have not yet found a way to break in. We've tried a couple of times and frankly we haven't succeeded.

But we are -- there isn't a market that we wouldn't be interested in if we thought it met the criteria that I have more or less tried to outline. And there are markets -- Seattle might be a market for example that would be interesting. But for the moment, I think we are really not looking aggressively in these markets and perhaps we should but frankly we've been kind of busy.

Thank you and this is Jamie with a final question. Can you guys just give us an update on how you're thinking about the end of 2Q and what it means for treasury rates and what it eventually means for cap rates?

Oh, boy, well, let me take a crack at that and, Doug, if you would mind joining in, I would appreciate it. I think the end of QE2 is certainly going to affect interest rates at some point.

The Fed will still do whatever they can -- if you saw the Bernanke interview -- whatever they could to make sure that interest rates stay low because monetary policy is about the only thing we can do. There is certainly going to be pressure on the fiscal deficit side of the equation.

So I don't think the kind of fiscal stimulus that we have seen is going to continue. The stimulus program itself that was that special one of $870 billion is basically going to run out of money sometime this year.

We are faced with real headwinds because of higher energy costs, higher food costs, declining home equity because of declining home prices. It's very difficult to see a major upturn in the economy unless business begins to start spending the kind of money they have accumulated to expand.

There will be some of that but I have to say, I think the business community is still very, very cautious and I think they will be very careful about the capacity. So I don't see that there's going to be pressure in the economy, upward pressure in the economy of any significant levels.

I think we're going to have a very anemic recovery. There's been -- you have to think about the fact that we are in a very slow growth economy.

We after all had a 1.8% growth in GDP in the first quarter and if you took out inventory which is a one-shot operation there, it was down to 0.8. We need substantially more than that to begin to have any impact on the unemployment numbers.

We'll see whether that comes about. I still remain very cautious about how the economy is going to do because we have to think about where we would normally be given the amount of fiscal stimulus and monetary policy and bailout policy that we've had.

You compare this to sort of the trajectory of any previous recovery in a recession and it's way below -- it would've been somewhere between 6 and 7% growth in GDP at this point, 20 to 22 months beyond the trough of recession. We are nowhere close to that.

So I don't know where this goes. We are in an unprecedented time which is therefore unpredictable. But what is known is that this is a recession as we all know and the Great Recession they are calling it because it's the worst one we've had.

But it was provoked by a financial crisis and none of the recessions since the end of World War II were provoked by that kind of financial crisis. There still is a sense in the country that particularly the consumer is over-indebted.

The relationship of household debt to household income is still much higher than it typically is coming out of a recession. We still have a household debt that's somewhere around 150% of household income. The typical range is between 70 and 80%.

To get down to those levels, we're going to have to have a liquidation or a deleveraging of another $5 trillion to $6 trillion. That's bound to put pressure on the willingness of the consumer to spend when he looks or she looks at the equity they have in their home and decide what they're going to spend and look at the debts they have.

So at this point we're doing relatively well, I must say. I just don't know how long it's going to take to really get this economy really working on all cylinders.

And I think it's going to be a very slow process, so I don't think interest rates are going to go up very much even without QE2. I think they used QE2 to try and frankly restimulate home values and stock values.

They succeeded in one but not in the other. There's a huge oversupply of residences on the market.

Either of ones that are occupied that are on the market, the ones that aren't occupied that are on the market, those that are in delinquent or in some level of foreclosure. I mean it's a gigantic number, way more than we anticipate.

So I don't see the housing market getting better for quite a while. I think with unemployment still being strong and employment being week, consumer attitudes being quite pessimistic, housing still in the doldrums, a cutback in fiscal stimulus, I think we're going to have a very interesting time.

I just don't know. It's just unpredictable how it's going to go. You can't go into this with a total level of confidence. At least that's the way I feel.

Many of you have heard me say to probably the boredom of the listener, but as I keep on saying, the optimist thinks this is the best of all possible worlds and the pessimist fears they may be right.

Just to sort of -- I'd add to sort of more practical you know Boston Properties perspectives which is we raised an awful lot of debt last year. We raised that debt because we liked where rates were.

We didn't think rates were going down and we are doing another $750 million issuance as Mike described. Again we think that where rates are today is a good place to be borrowing.

If we thought rates were going down, we would probably have a different perspective. We don't think rates are going down. There has been a 120 to 150 basis point increase in rate since we did our last bond deal.

I don't think it has had any impact on cap rates for our CBD office buildings in Washington DC, Boston, New York City or San Francisco. I think that the yield, a vacuum that appears to be all across the investment perspective is a bigger force in driving capital to real estate at the moment.

And there are investors who are taking an exceedingly long-term perspective at least in terms of how they're underwriting and reviewing their acceptable yields on office buildings, single assets in places like New York City and Washington DC because if they aren't, then we don't understand how things are being priced.

And I think that has a lot to do with being comfortable that while over time there will be an improvement in operating fundamentals that will be generated into changes in the cash flow for the good, they are prepared to live with what we would probably have considered two years ago to be abnormally low returns for an exceedingly long period of time looking like a not bad place to put capital when there are now banks who don't want to take deposits any longer and are paying out dividends as opposed to taking in deposits. It's just that the perspective in terms of where the money flows are and where you can pick up yields are so unusual today that I think they are allowing interest rate rises to be ignored by people who are purchasing real estate and even people who are purchasing real estate with a significant degree of leverage.

Mitch Germain, JMP Securities.

Just curious about your decision to downsize the revolver.

Sure, I'll cover that one. As you probably recall, we went for a really, really long time with a revolver that was $600 million or actually $605 million I think it was. We were very, very comfortable at that level and operated just fine.

The only reason we increased it to $1 billion was we were in 2008 and we saw the difficulty in the credit markets and we thought it was a pretty good idea since we had this accordion feature to increase our sources of capital which we did. We have analyzed our expected working capital needs and our strategies for funding things like our development over the next few years and we feel like we have got good access to other capital markets, consistent access and diverse access and that a $750 million line is plenty of size for us to deal with any kind of working capital we may have.

We will expect to have another accordion feature. So to the extent that there is demand from other institutions to provide us with that type of credit, we could increase it. In the future, we expect to have that feature, but we thought 750 was the right number.

Great, and just one final question. Your G&A Mike, does that include the transaction related costs and any litigation charges?

No, it includes acquisition costs associated with Bay Colony in the first quarter, it includes kind of what our normal legal costs are that are in G&A and things like that. But it does not assume any material future acquisition expenses or litigation expenses because we don't expect to have any litigation expenses, that is.

Michael Knott, Green Street Advisors.

Can you talk about your view of risk-adjusted returns for acquisitions versus development? It seems like your capital allocation profile has shifted pretty substantially and I am wondering if -- is it that your risk appetite is higher or maybe more that acquisition pricing is now richer?

I will start and I will let Mort jump in if he has something slightly different to add. I would say that when we look at our development program and the amount of return that we think we can generate from the developments on what I would consider in most places to be modest risk relative to what the leasing profile of those assets will be relative to where the market is, we think that that is a clearly much higher cash on cash current return and therefore a much higher IRR and much higher total rate of return over a long period of time.

At the moment what we have seen come on the market from an acquisition perspective has been priced down to levels that are significantly lower than what we are describing in our development pipeline and I don't think the risks are marginally lower for what those returns are. I think others have probably talked about the building on 7th Avenue that is being sold and there is an asset with a yield that is I'm guessing slightly below 5% for an extended period of time.

And we're talking more than five or more than 10 years potentially depending upon what tenants choose to do. And that is the profile, seemingly the profile of many of the assets that we are seeing on the market today or we're seeing assets in certain markets where the cost per square foot is in excess of what the replacement cost would be at least for us on sites that we might have that are tangentially close to where those buildings are and where we think we can generate hundreds of basis points more in return on an incremental cash on cash basis from the out of the blocks.

My point being at Market Square, you look at that building and we looked at where price -- and we looked at what our development opportunity might be at 601 Mass. Ave. and said well we can build a building for a couple hundred dollars a square foot less than this and we can generate a yield that's hundreds of basis points higher, hard for us to get excited about deploying capital into that asset at that time in the marketplace given what our opportunity set is.

Okay that's helpful, and then just one other question. In the last cycle you guys sold a couple of core BXP quality buildings in New York. Just curious how you think about those sales in hindsight sort of in the context of cap rates declining significantly kind of without the benefit of significant embedded rent growth at this point.

The buildings we sold in New York were sold at phenomenal prices. I mean we sold two buildings in New York. One of them was at I think a 3.76% cap rate with an assumption of 100% of the space being leased including the modest amount of vacant space.

And we were very happy with the prices we got for both of those buildings. And frankly, I don't think the market even though there has been some shall we say recovery in the market has come back to the prices where we were, where we were able to realize those.

So I think we -- in fact I would say that was true of virtually every asset we sold. We sold assets based on the following simple principles.

We like to have A assets in A locations. The assets we sold we thought were either B assets in A locations or A assets in B locations. And that was a very specific program that we had underway.

We thought we did very, very well with them. We did it at the right time. I don't know, we took out something -- we sold in the range of at least $4.5 billion in assets.

We could not be happier with the program that we had at that point. It gave us a great deal of liquidity.

It is one thing to be able to buy buildings, its another thing to be able to sell them at the right time and we thought we did that. So I don't think we have any reservations about what we did and frankly, we are going to just keep a pragmatic view going forward in terms of whether we buy or whether we sell.

Michael Bilerman, Citigroup.

On the asset disposition side, Mort, I guess from your perspective of DC and New York, it sounds like much more long-term holds of the assets that you have. But does that exclude potentially selling interest in assets that take advantage of where the pricing market is of assets?

While I can appreciate the fundamentals are not going back towards peak in your view right away, the asset pricing seems quite rich. Instead of getting rid of the whole asset, why not rid of part of an asset? And I'm curious whether you're being approached sort of off market for people to buy your assets or buy an interest in the assets.

Sure, we're always being approached. As I say, when I looked at the asset sort of inventory that we have, to be honest with you, virtually every asset that we have I would like to buy, not to sell.

So we are frankly looking to add to our portfolio of assets. We just don't want to take -- look, we're in this kind of business for the long haul in terms of accumulating a portfolio of the highest quality assets that we can possibly put together.

And as I tried to use by way of a reference -- this is not a perfect analogy. We try to have A assets in A locations, and sometimes their values will go up and sometimes they will go down. But as long-term holds, we find that these are the best assets.

And when I look back upon the assets that we had and have and those that we sold, you see what the valuation is that we were able to sell the assets in the past when we had a bull market for it. But in the long haul it seems to me that our basic business is putting together sort of an outstanding list of A assets in A locations and holding them for the long haul.

We believe that over time, these assets are frankly going to be irreplaceable and that in any five or ten-year period, we will look back on these assets as holds and be very happy that we held them. And we see it even in this market, that that's why we went after the Hancock building, that's why we went after 510 Madison Avenue etc. and that's why we're going to continue to look into additional acquisitions because that's a part of what we do and do well and intend to continue doing it.

I don't have any second thoughts about the assets we sold nor about the assets we keep. We're still going to be looking over time to buy assets and to build assets of the quality that we have specialized in for quite a few decades now. And we will just have to see how it goes. I'm not saying it's going to be easy but we're definitely going to be continuing along those lines.

Maybe you could just delve a little bit deeper into in terms of the large boxes of space in New York in terms of tenants booking and I think, Doug, you referenced in DC the law firms contracting. And I'm just curious, of the tenants that are looking forward to 2013-2014 expirations, how much of that is sort of flat space, how much of that is sort of expansions of their space going forward?

You are talking about in New York City, Michael?

Yes, I was just referencing what you talked about on the DC side.

So the majority of the tenants that we are having conversations with in New York City are law firms who are making lateral moves because they have lease expirations. So you have a tenant who has got either a 2012 or 2013 or 2014 lease expiration and they're trying to figure out what they should do.

In some cases they have the rights to extend for a period of time. So a building like 250 W. 55th St. can work and in other cases, they may have to do something sooner than that.

And then there are some financial services institutions that are growing. And so they are both some quote unquote typical bulge bracket institutions that are having gotten through what occurred between late 2007 and 2010 are starting to at least expand or think about expanding their footprint, and others who are growing their businesses because they are changing the profile of what they are doing.

And we are talking to those types of tenants. And interestingly enough, and I think it's somewhat of a surprise, there are some larger privately held financial institutions, hedge funds, asset managers etc. who are on the west side who are looking at what we have to offer at the top of the building and are saying, geez, would Boston Properties consider doing the lease today at the top portion of the building and it's actually an interesting question that we are wrestling with which is would we lease the space today or would we rather wait for that portion of the building to lease the space in smaller tenants; meaning 75,000, 100,000 square-foot tenants closer to when the building is being delivered and where we think the market will have strengthened.

So that's sort of the profile of those institutions. But for the most part, the financial companies that we're talking to have growth associated with them and the legal firms unless they are the beneficiary of a practice group coming from someplace else are clearly in a status quo or probably a reduction because they're becoming much more efficient in the way they use space.

It's Robert Selsam. Can I add just one thing to that?

Sure.

All of these law firms that we've spoken to about 250 W. 55th St. have strong interest in expansion space. So it's not that they've closed the door to that, they actually anticipate future growth.

Into the space they are growing into?

Yes.

Just Doug or Bob, can you clarify on 601 Lexington, you talked about that lease filling up 25% relative to the lease at (inaudible). How much are the improvements affecting that and how big of a difference do you think a lease signed at the base of 601 relative to the top of 601 have been different?

The improvements are worthless, we are ripping them out. The improvements were a sort of a -- I don't want to say a new installation but a reuse of an older installation that this tenant has no interest in. So they are starting from scratch. And I think the rents overall in our buildings on the Upper East Side particularly on 53rd St. have all seen a similar increase both at from at the bases as well as the tops.

Suzanne Kim, Credit Suisse.

I'm trying to get some information about the cap interest guidance. So embedded in your guidance, are you looking at the impact of capitalized interest on projects you described during the call? And secondly, if W. 55th does come on line at the beginning of fourth quarter, what sort of quarterly run rate do you think that is going to be?

With respect to capitalized interest, we have got capitalized interest on our existing pipeline. We have got 500 North Capital that we started and we have got some of the projects -- primarily the residential building that Doug spoke of in Reston, we've got some of that in our projections.

Some of the other developments that Doug spoke of but not starting until later in the year like the Cambridge building where he said that we were working on a letter of intent would not start until later in the year. The building in Maryland that he spoke of is pretty small so that would have an impact but it's a small impact.

On 250 W. 55th St., I mentioned that it's $480 million of investment today at a 5.5% weighted average interest rate for the Company. We would not -- if we're lucky enough to get started, we would really not start spending a lot of additional money until much later in the year.

So it really depends upon when we actually start capitalization for that project, and we have not determined when that will be. If we're lucky enough to sign a lease in the near term, it could be turned on sooner than we would actually start spending money i.e. if we sign a lease in the third quarter, we could start it in the third quarter even though we're not starting to spend real dollars until the end of the fourth quarter. Does that help?

Yes, that's helpful. And then secondly just to expand upon the comments made about the development pipeline, are you looking more at projects that are sort of mixed use or are you sort of focused in on office projects now given that the yield that you've gotten on these sort of mixed use projects have been much more attractive.

I would say that we are cognizant of the fact that there's certainly been a shift to -- from a zoning perspective in urban areas with there being mult-uses associated with projects and that we are very comfortable doing residential, retail and office development at a similar time. So I don't think there's been a -- we've tried to shift our focus, but that's sort of where the focus has been because that's where the zoning and land-use desires have been for most jurisdictions.

Okay, that's helpful, thank you so much.

Jordan Sadler, KeyBanc Capital Markets.

Just quickly, Mike, just curious what you were assuming in terms of the average balance relative to the $1.5 billion of cash that you mentioned in terms of liquidity for the rest of the year and what's sort of the average balance maybe (multiple speakers) and the dilution you sort of put in the press release and talked about on the call.

We're assuming that -- the balance currently is $750 million as I said. We are assuming the Carnegie Center happens at the end of June. We are assuming that the increase from the Lexington Avenue financing happens at the end of June.

So that would climb our rate up to $1.5 billion. It would not change dramatically. There's some development spend. The larger projects are finishing up so I think the development spend on those projects is $100 million or so left that would be spent in the next six to 12 months. And the newer projects on the development side will not ramp up until later in the year.

So barring any acquisition activity which could occur which would have a material impact on that number or our decision to try to repay debt early which right now is not in our projections and it's something that we look at. In 2012 we have $660 million coming due in February, so that is something that we always look at.

But at this time, we have determined that that's not the best use of our capital, that we would like to conserve this liquidity for the potential to do acquisitions or other developments. So I guess in a roundabout way, we would expect it to be pretty stable for the second half of the year.

That's a perfect. And that brings me to the second question which is we talked a lot about dispositions and development, but we've talked very little about acquisitions.

Can we talk a little bit about the pipeline or are there still opportunities to buy the assets that you guys might be targeting? And is this sort of type of asset you're targeting sort of changing at all?

The type of asset that we're looking at, I think Mort was crystal clear on what our predilection would be, so it's Class A buildings in Class A locations. Obviously you have -- you can't buy things that aren't for sale.

There are some larger transactions that are -- everybody in the real estate community is sort of aware of that may or may not occur in 2011 in markets we are in. There are some large portfolios of assets that are owned by some private individuals that they may have an interest in doing something and they may not in 2011 that we're looking at.

And then there is the one-off broker sales. I'm sure we will see additional volume in New York City and I'm sure we'll see additional volume in Washington DC. Probably not much in the way of Boston or in San Francisco on the sort of single asset step-up size.

And then as Mort said, there are other places where we are considering to make investments and if something happens in one of those places and it's something we're interested in, we will also look there. But there's no definitive pipeline of assets I can tell you. We have three deals we're working on and we think they're going to close in the next six months.

Is that fair to say you're a little bit less sanguine about sort of the acquisition opportunity?

I think we are realistic about the acquisition opportunity which is as I sort of said in my prepared comments, the dam broke, there is money chasing assets like we were back in 2005-2006 with lower yield expectations for what they think they can find acceptable in terms of overall returns. And it's making the competitive deals associated with single asset purchases very competitive from a pricing perspective.

And if we can deploy capital into our developments or we can be more patient and find other places to put our money, we will do that. We're not simply going to grow just for the sake of growing. On the other hand, I guess I want to make this point because I think it's important, we don't care exclusively what the yield on an asset is going in.

What we care about is what the long-term value potential is both in the cash flow growth as well as the appreciation of that asset over time. So we're not scared of what a low return and what it means on a short-term basis if it's the right asset at the right place.

Jay Habermann, Goldman Sachs.

Just following on Jordan's question there, as you potentially see more assets come to market, do you see it as a function of pricing increasing or do you think it's more of the opportunity where there's some debt issues, there's some deferred CapEx? Perhaps that's an opportunity to enhance value as well.

Jay, I think that the -- and I have been saying this for more than a year, I think the reason assets are selling has -- in the core markets has is less due with near-term debt maturities than overall valuation increases. And I think for the most part, the debt issues have taken care of themselves by having values appreciate to the point where the debt is no longer out of the money and controlling the equity where you actually have equity above the debt.

And I think that most institutions are prepared to make loans today on large assets. The CMBS market has come back and you can do a large loan in the CMBS market.

So I think this is sort of -- the ability to fund the refinancing of a maturity is much less of an issue than people thought it would be in the markets we're in; in San Francisco, Washington DC, Boston and New York. And so I think what we are seeing is more simply we think the values have gone up, we think we can either find a quote unquote recapitalization of the asset or a sale of an asset that makes sense for our business and we're going to market with that asset. That is what is driving things.

Okay and just second question on San Francisco, I know it shrunk as a percentage of the total, about 10% of NOI. Can you give us some sense of maybe what opportunities you might look for whether it's broader Silicon Valley or obviously outside of downtown San Francisco?

We continue to look at anything and everything that might be for sale in San Francisco. The high-quality stuff is very sticky, it's very concentrated.

There were a lot of sales at very locked-in numbers by institutions that have a very long-term perspective. So the best stuff in all likelihood is not going to be trading anytime soon.

And our perspective on suburban stuff has been that there are times to get into the market and there are times not to be in the market. We think that the market from a rental rate perspective has clearly recovered.

There are places where we're probably more interested in making incremental investments. They're not going to be huge dollars if they're on a single asset basis. And as I said before, there's some larger portfolios that something may happen with overall over the next year or so that we will I'm sure look at.

Okay, and just final question on the W. 55th. Based on activity and sort of interest level to date, can you give us some sense of where you think even preview preleasing could be if you commence at the end of the year? Is this potentially somewhere somewhere you could get between say 40 and 50% or is that too high?

It depends on the tenant. We may have a tenant for as little as 20%, we may have a tenant for as much as 50%. It will depend on who steps up and who we're most comfortable with and what the timing of the dialogue is.

Rob Stevenson, Macquarie.

Doug, you talked earlier on the call about the trend in terms of TIs and free rents across New York. Can you talk about where you have that in Boston, DC and San Francisco these days?

Sure, I would say that the concession packages in ascending order are San Francisco, Boston, Washington DC. So you're actually getting a higher concession package in Washington DC than you are in Boston or in San Francisco.

You're getting a modest amount of free rent in each of those markets depending upon the tenant exploration that's sort of behind the transaction. But from a rental rate perspective, it's similar as well.

They're lower in San Francisco, they're higher in Boston and they're much higher in Washington DC. The face rents have been able to sort of maintain much closer to where they were pre-2008 and in fact in some cases have grown.

Okay, and then what are you guys seeing in terms of demand for the retail space in your portfolio and how has that sort of trended over the last couple of quarters?

Our retail space is sort of in three different pockets. Pocket number one is the Prudential Center and there's an insatiable demand for retail space there. We have no availabilities.

And in some cases we're getting $70 triple net and in some cases we're getting close to $100 triple net for different spaces in the various places in the [arcade]. Then our second sort of locational is the stuff that's in our first floor of our buildings in our CBDs and I'd sort of refer to that as the stuff in Reston Town Center, the stuff in Washington DC and the stuff in New York City and I would say for the most part, we are seeing good activity.

The Washington CBD is probably the weakest of those markets because it's mostly restaurants and restaurants come and they go. And then the third pocket of retail is at Embarcadero Center and we have been pretty static in Embarcadero Center in terms of what we are seeing in demand.

It is not a 24-hour mixed use center. It is an eight o'clock in the morning until six o'clock at night specialty retail and convenience retail for the users in the financial district. There continues to be consistent demand for that space but it is not vibrant.

David Harris, Gleacher.

Your development program represents about 10% of the equity base. Is there an upper limit to where you might feel you're starting to get into the uncomfortable risk zone?

Given the size of our balance sheet and the types of development that we are doing, I think if there was, we're so far away from it that it's not something that we even think about.

If we think back over previous cycles and I think as a company, you back two or three cycles, where would it have been maxed out in say the mid 2000s or previous cycles?

Prior to 2000, we were almost 20% and that was when we had a balance sheet that was probably 25% the size we are today.

So what I'm hearing in your answer there for us if we were to double the size of the program, that wouldn't put you into -- you wouldn't feel that was getting into risky territory?

No, and if we could double the size of the program, I would say that it would be a very strong indication that the economy had recovered in a very significant way. Because what we are seeing is that -- the development that we are seeing today is very specific to certain submarkets where there is clearly not a replacement cost rent opportunity for development in the current marketplace. But in certain cases, you can do a build to suit or in certain cases like 250 W. 55th St. because of our basis and where we are, we are better off developing than sort of hoping the market continues to grow at a rate of return over each year and where we are where we are.

Just on that point of the overall economy, has Mort already jumped?

No, I'm here.

Mort, I made a note on the last call that you referenced I think GDP growth, your expectations for GDP growth of north of 2% and that would've been back in January. Are you any more optimistic or less optimistic today?

If I may say, on the first quarter, 1.8% growth in GDP, I think it will get a little bit stronger than that. I still think it's going to be an anemic recovery and I certainly don't see it getting above 3%.

As I say, the real question is how much confidence has been eroded, and not just at the level of the consumer and the household, but also in business at this stage of the game. I think we will not see much in the way of improvement in employment.

We will see a lot of headwinds, higher interest rates, which will affect mortgages that have variable rates. It will affect the termination of special interest subsidy programs for homeowners.

The increased gasoline costs, increased food costs, you can go on and on, but the end of the whatchamacallit -- the stimulus program by the middle of this year, there are a lot of headwinds representing at least $400 billion of headwinds in the economy that is not what we want to have now but it's what we're going to have to live and that seems to me has got to have an effect on the economy.

So I don't see the economy as going to grow above 3% and I frankly think it will probably be somewhat below 3% unless American business really gets a turnaround and really starts spending a lot of the money and the cash that they have built up. But again, I think they're going to be very cautious about how fast and how far they go with their own spending because there just isn't that level of confidence either in the administration at this point or in the economy.

Well I'm not asking you to throw out a GDP forecast for 12, but I'm just wondering how you kind of think about a very subdued economy and how much financial services and tech and government which is essentially the basis of the driver of demand in your key markets, how much can that continue to be a source of very (inaudible) optimism for ground development if the rest of the economy is still in this very sluggish slow growth phase for an extended period of time?

We have in fact seen that there are differentials in the rate of which different parts of the economy grow. The financial services industry -- and I suspect they're going to continue to be very active and do very well.

I just see that in part because of the various government programs, various -- where the capital markets are, the confidence that they have rebuilt in terms of their own activities, where they see a lot of opportunities for the -- shall we say the investment of large pools of capital. And I think that's probably a valid judgment.

They have narrowed the -- the private equity funds have been enormously active recently as you have seen. I suspect that's going to continue.

The banks are more open to lending to the better credit, so I think there is that. So I think the financial services industry is going to be in good shape, but the industries that basically are nourished by them will also be in good shape.

Do I think manufacturing will be in good shape or the retailers, I think they are going to have a very tough time. But I think they've taken a lot of the big cuts particularly in terms of employment to date.

I just don't see that they're going to be hiring very much and the problem is we have roughly 150,000 to 200,000 people who enter the labor market every month to real unemployment rates. As I say, it's very high and I don't see that that is going to change very much. So the attitude of consumer seems to me it's still going to be very cautious.

So I don't know how else to describe it. I think we're going to do well, relatively well. We have very little vacancy and I think in the markets that we are in, those are the better markets.

It doesn't mean that if this thing -- if the consumer tanks that we're really going to be able to do very much. I don't see given the politics of the country there's going to be another big fiscal stimulus program, no matter what.

Because there is a genuine feeling and nobody knows if this is absolutely certain. But when you get national debt at the percentage of GDP that gets above 90%, which is that's where we really are today, it really begins to have a downward pressure on the economy.

So I don't think you're going to get anything out of the Congress. We're just going to have to see how it goes and see how quickly there is a rebuilding of asset values particularly on the consumer side that really gives people the confidence to go ahead and spend. I think it's just going to take a much longer time than people have been thinking for a major recovery in the economy.

One point of detail and maybe I missed this, forgive me, Mike, on the guidance. Did you throw out an average occupancy for the year?

I didn't. It's really relatively unchanged to where it was before.

I think some of the absorption we had in the first quarter simply came sooner. So maybe the average is up a little bit, but somewhere in the 92, 92.5, something like that, n that range.

Ross Nussbaum, UBS.

One or two quick questions here. Number one, is there any plans to dispose of the Cambridge Marriott?

The answer is no and it's sort of not an obvious answer. It's not because we want to be in the hotel business but because Cambridge Center is a pretty important location for us from a real estate perspective and the Cambridge Marriott physically sits in the middle of our portfolio there.

And there is a plaza in front of it and there's retail associated with it. And we think that until we are complete with our renovation and redevelopment of Cambridge Center which is going to be a multiyear program, owning and controlling the Cambridge Marriott is pretty critical to the real estate asset valuation that we have in our portfolio of buildings there.

Number two, now that it looks like you are moving forward on 250 W. 55th, what about your other development site in the city? Does that look like it becomes on the table for 2012?

No, it is currently a site that is probably a potential residential site. It doesn't have a floor plan at the moment that would be conducive to office tenants. Related and Boston Properties are still 50-50 partners in that development. I think that it will be longer than 2012 before something gets going there.

And then finally, Mike, on the ATM program, would it be fair to assume that that would be your preferred equity mechanism of choice for match funding developments going forward such that you wouldn't be doing lumpier deals unless you had lumpier acquisitions?

I think we want to have access to all of the markets. I think that it's clearly an attractive way to raise a moderate amount of equity over a period of time.

So to the extent that we had something much more significant in size that the Company was undertaking, some major acquisition of some form, it might be more likely that we would do something that would be marketed and raise equity more quickly. With regard to our development program, I don't know if we would think about that with regard to our development program because I think that we -- our leverage position today we're very comfortable with.

We feel like we have added the dry powder that we need but from a balance sheet capacity and from a liquidity perspective so that we can execute on the development program that we have as well as look at acquisitions with our current balance sheet included.

Steve Benyik, Jeffries.

I guess regarding lease expirations, what do you guys expect for the balance of 2011? And earlier you mentioned the New York City leasing spreads, how they were impacted by the fact that they were in some of the lower rent buildings I guess regarding the 600,000 square feet or so you guys had rolling through 2012 in Manhattan, what can we expect for leasing spreads on that bucket?

It's such a hard question to answer because it depends so much on each specific piece of space and what the tenant is paying when that lease expires. As I said, our marked to market for the portfolio is positive $0.67. We've got 1.9 million square feet of space rolling out between now and the end of the year.

There is very little if any space rolling over in Midtown Manhattan. The space that is available in Midtown Manhattan is almost exclusively at the base of 2 Grand Central and then there are two or three floors at the top of 2 Grand Central.

So there will be a roll down on the space in that building because of where the former tenants were if we lease it up within 12 months. But that shouldn't be an indication of what's going on in the Midtown Manhattan market.

It's simply a question of where the space was actually leased and is now vacant. But the way we do our statistics, if it's less than a year, we sort of show you that the marked to market or the markup when we do our second generation (inaudible)

And what are you guys seeing on early renewals in terms of the higher-quality space or just lower-quality space. Is there any real difference there?

I would say that we are -- in certain markets the tenants get way out in front of -- on early renewals, Washington DC being the most obvious of those markets. In the other markets, there tends to be less of a discussion until you sort of get within 12 plus or minus months except for the really, really large tenants. And we are at the moment not having any really significant conversations in New York City, in San Francisco, in Boston about renewals.

There are a couple of tenants in Washington DC with 2013-2014 lease expirations [8th and Gump] being the one I talked about this quarter where those kinds of conversations occur. But I wouldn't say there's any sort of change in terms of what that marked to market might be on a renewal versus just a simple trade of -- trading our tenant on a space.

And then just finally, I'm sorry if I missed it, on the 2012 debt maturities, you guys have over $600 million related to the exchangeable notes redemption dates of February 2012 and then also probably over $400 million of secured debt related to 510 Madison and Bay Colony. I guess on the secured side, is there any concern you guys may need to pay some of that down if leasing doesn't come to fruition quickly enough in 2012?

Well the 510 Madison debt if you recall was put on as a way to conserve the mortgage tax that was previously associated with that asset with the prior owner. So that's actually a cash secured facility and one of the reasons why we have restricted cash on our balance sheet. So our expectation is when we finalize the -- and closed the 601 Lexington Avenue loan that we will transfer the tax and extinguish that debt in 2011.

With regard to Bay Colony, it's about $140 million loan, if we sit tomorrow where we are today, it's not a huge debt. We'll probably pay it off with cash I would expect.

If we were going to do a secured financing to replace it, we might use another asset depending on what the occupancy is. I think that that asset -- it's 65% occupied today and there's some rollover still to come. So I wouldn't expect it to be stabilized by the time the debt matures, so it would be more likely than not that we would pay that one off at that time.

And I mentioned the convertibles, we're looking at that on a consistent basis to see if it makes any sense for us to pay it off early and it hasn't recently. So our expectation at this point is that we would deal with that at its maturity and either refinance it with a new debt issuance either secured or unsecured or potentially just pay it off depending on what our view of our liquidity was at that time.

Okay and then just finally, did you guys mention where the spread is going on the line of credit, where you guys expect that to go when it gets redone?

We haven't mentioned it specifically. It's not done yet. But in general, both the facility fees and the credit spreads are higher than they are today.

Those spreads are coming down, so if you look at kind of what people were doing 12 months ago, six month ago, three months ago today, there's a consistent compression in both of those things. And you know, we simply had to decide when the right time for us to enter the market was. We decided it was now. So it will be going up but until we get it done, I really don't want to say what the numbers are.

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

Thank you very much for joining us. We will talk to you in June when we are at the (inaudible) conference and we look forward to whatever update we can possibly do in the next 30 days. But we will give you what we know. Thanks, bye.

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