波士頓物產 (BXP) 2011 Q3 法說會逐字稿

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

This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session.

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

Good morning and welcome to Boston Properties' third-quarter earnings conference call.

The press release and supplemental package were distributed last night as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg. G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.BostonProperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday's press release and from time to time in the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statement.

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

I would now like to turn the call over to Mort Zuckerman for his formal remarks.

Good morning everybody. Thank you for joining us. Let me just give you sort of a broader macro view of the markets that we are in and the economy in which we function.

I think everybody understands that we have been in a very, very weak economic recovery, if it is a recovery, and that we are still in danger of having a continued decline in the economy, some version of a double-dip or at the very least probably an even more likely scenario is a very, very, very slow recovery. Obviously, this affects the overall economic environment in which we work.

However, as you also probably have heard us say many, many times, we have adopted a basic strategy which has really informed everything we have done for all the years that we have been in business, which is to try and concentrate on supply constrained markets and to have the best buildings in those locations. We are in very few markets, as you probably know -- San Francisco, Washington, New York, Boston, Cambridge and Princeton. All of these markets, but particularly the four major urban markets and the surrounding areas, we believe have been the markets that suited basically our business strategy, which is to be in the upper end of the markets, to have the best buildings in these supply constrained markets, not because everybody doesn't do well in good markets but because this kind of investment and development philosophy has proven to our satisfaction at least that we do much better in difficult markets. I think, frankly, the last three to five years, which we consider to be the beginnings of the downturn in the economy, and we started to act upon that actually back in 2007 and 2008, we believe that we have been able to do very well relatively in these kinds of markets, both in terms of the occupancy and the rents of the buildings we already own, but in terms of the buildings we were able to acquire and the buildings we have been able to develop.

But we are I think in very solid condition as a company in the high end of the real estate, commercial real estate business. We believe that we are positioned as well to continue to take advantage of any opportunities which might come up, as we have demonstrated over the last several years in terms of the acquisitions of buildings like the General Motors building, the John Hancock building in Boston, the developments we have done in Cambridge, Massachusetts and in the Washington area, particularly as an example the buildings we've done in Reston, Virginia or in Washington itself, 2200 Pennsylvania Ave. being an outstanding example of a development that has gone extraordinarily really well given the nature of the location and the nature of the markets we are in.

So we remain modestly optimistic as we go forward because we simply cannot predict the overall macroeconomic environment. And as much as that we are in an unprecedented kind of environment that I think nobody has been through before and therefore it is not only unprecedented, it is also unpredictable, but we believe we are positioned to take advantage of that market or those markets, especially the ones that we are in, be they whatever direction they may go into, either because it will help in our development side of our operations or it will make it further feasible for us to make additional acquisitions.

We are in very strong financial shape and in a position to move in either direction. We will be opportunistic in terms of any of the activities that we undertake because we are going to be very, very prudent until we get a better sense of where the macroeconomic future of the economy of the United States will take, because it will clearly have an influence on the markets we are in. We look forward to continuing what we believe has been a very solid performance in the context of what has been, for many people, a very difficult business environment.

With that, I will end my comments except to say that we do think that interest rates will remain very attractive for us over the next several years, and we will be, frankly, opportunistic in terms of any financing which we might do on the corporate level or at the property level. We think this will in effect help us because where there will be some decline in rents, and we expect that on occasion in certain of the markets but not in all, we will take advantage of much lower interest rates as we can refinance various assets that we [haven't], which we have done in at least one particular location but I'll leave that for my colleagues to discuss and describe.

With that, I will end my comments and look forward to your questions later on in this report.

Thank you Mort. Good morning everybody. I want to start off by giving my thanks for the effort everyone made to either come down to Washington DC earlier this month or listen to our presentation via webcast when we had our investor conference. We had some pretty simple objectives for that day. We wanted to showcase the depth of our regional management teams. Those are the people who are really doing all the heavy lifting on a daily basis, all the work as we call it, although it's a lot of fun too, and to illustrate how we can both create and, as Mort suggested, protected value, particularly in the context of what has been a pretty weak macroeconomic environment.

The corporate strategy that Mort just articulated, if it's coupled well with a strong financial strategy, we believe supplemented by our operating platform, which we hope you got an appreciation of a couple of weeks ago, really creates a very unique approach to the office building ownership and management business and I really think makes Boston Properties a different kind of company.

Our teams identify opportunities and challenges inherent in the assets that we have and maybe the assets we actually own or future developments or acquisitions, and then we try and develop the right plan to position those in the marketplace. Sometimes we make speculative capital investments either before we try and lease space, or in anticipation of leasing space. What we do is really management-intensive and challenging, but it's the way you make money in the real estate business. Execution is everything. It's the key to increasing your market share and it's the key to superior financial performance.

So we hope you we came away with a better understanding of how we have both developed our brand and what we think is our unique approach to managing, leasing, developing and acquiring assets. So I just want to say thank you for the time and attention you gave us.

We seem to again see a pretty good quarter from an earnings perspective from American businesses, sort of more of the same I would say. The one thing that obviously strikes everybody is that nonfinancial companies are holding over $1 trillion on their balance sheets. And the percentage of cash they're holding as a percentage of their total assets is really at an unprecedented level which obviously speaks to the confidence that companies are having with regards to decision-making, but it also [screams] to the strength inherent in the tenant base that we have.

This quarter on the sort of new formation side, we again saw pretty good venture-capital investing, 29% up year-over-year. What are the three big markets for venture capital investing? Silicon Valley, New York City, and Boston. Those are the big three. Interestingly enough, New York City surpassed Boston for the first time in its overall share of venture capital dollars. Largely it was due to the fact that it was a pretty light life science investing quarter, but nonetheless there are a whole host of technology and media related companies that are being formed in New York City. Their long-term impact on the leasing market is an important and we believe a really positive long-term trend for that market.

During the second quarter, we leased about 1.2 million square feet of space if you include our Mountain View assets. While that absolute square footage was slightly below our sort of traditional third-quarter average of about 1.4 million, we completed 86 transactions versus the average of about 74 over the last seven years.

I'm sure everyone noted that there was limited activity in New York City this quarter, and it really stems from I think two things. First is a lack of availability. If you exclude Two Grand Central Tower, we're 98% leased. But also stems from the fact that sort of speaking to speculative capital investing, we decided to, earlier this year and really got underway this summer, aggressively target the build-to-suit prebuilt suite base in our buildings. So we are in the process right now of completing seven prebuilt suites at 510 Madison Avenue, five at 601 Lexington, four at 599, and two at 540 Madison. These are suites that are sort of ready for occupancy on a day's notice, and the tenants that we're marketing to really want to see the finished product. So we hope, as we get towards the end of the year and these suites get complete, that we're going to see a pickup in the actual leases signed.

I will tell you that tenant interest in these spaces really good. We're seeing tours on a daily basis, and we feel like the rents that we're asking are going to be pretty close to where we're actually taking deals, but these are going to be smaller deals. Again, it's based on the fact that the tenants that are really in the market making decisions are of a scale and size that's a little bit different than what our traditional portfolio tenancy is and it's really what we're trying to market to today. We do have one 40,000 square foot extension and expansion that's underway as well, so we are still doing the big ones, but quite frankly it's really the size of what's available that's really driven our activity over the last quarter.

Next year, we're going to have one big block of space at 399 Park. It's going to be available in the third quarter of next year, and we've just literally started marketing the space. We made our first proposal to a multi-floor user actually yesterday at two o'clock. We do expect to get the space leased sometime in 2012, but there's probably not going to be rent commencement until early 2013.

Again, you're going to hear this theme in my comments, we are transitioning tenants so we're doing -- we have a lot of roll-over and a lot of our roll-over is associated with not renewals but new tenants. When you have new tenants, you have natural downtime, and when you have natural downtime, you have revenue lapses, and it affects your short-term earnings.

Activity in New York City I'd say continues to be off the pace that it was in 2010 and even in the first quarter of '11. If you look at the number of transactions in Midtown that were accomplished over the last four months, sort of on a month-to-month basis, they're actually about 30% lower than they were over the last six years. That's opposed to the first-quarter when sort of on a statistical basis, if you look at those transactions, they were about 10% higher.

We continue to have lots of discussions with large tenants with lease expirations in '14 and '15 for our space at 250 W. 55th St. The tenants will be moving, they will be making decisions, but the users are just feeling less pressure to make those decisions today, so it's going to take a little bit longer I think for us to be reporting to you what our activity and our next lease is going to be a 250 W. 55th, but we are continually talking and working on those deals.

With regard to the other markets, Boston really lead the way this quarter and made up 46% of the transactions we did, the highlight being the build-to-suit for Biogen, about 190,000 square feet, and we're actually having an official groundbreaking tomorrow morning or afternoon for that building. Then we did three other leases between 40,000 and 50,000 square feet in suburban Boston. All of these leases had a meaningful expansion associated with them. One of them was our first relocation to Bay colony. We finally found a tenant that was ready to believe the dream of what we were trying to accomplish there before we actually got the work done. We've just literally started the repositioning efforts there, and we are trying to create large blocks of pretty creative space at Bay Colony. We're very optimistic that, over time, in the next year or so, we're going to lease up the significant vacancy there.

Activity in Cambridge clearly is the market that is leading the region. I suggested that Biogen is doing a building with us. They're also doing a building with Alexandria. Pfizer has made a commitment to lease a lab building from MIT. Last week, we had our groundbreaking for the Broad's new building, their 250,000 square foot building in Cambridge. So the Cambridge market really is the hotbed of activity in Massachusetts these days. It's dominated by life sciences and technology companies, and there continues to be incremental growth.

I think a lot of people thought when Genzyme was purchased by Sanofi-Aventis that there was going to be contraction. It's gone the other way. Sanofi is actually in the market right now looking for additional space.

Google, the other sort of large technology tenant that entered the market pretty recently and is acquiring company called ITA, which is the travel agency portal, again is growing as well.

We are still working real hard on the limited near-term roll-over of -- at the John Hancock Tower. What we're actually doing is talking to tenants to have -- or are the subtenants of Manulife and have lease extensions or expansion proposals out in front of us for 2013 and '14 and '15. We're probably going to do some of these deals in late '11 or 2012. Unfortunately, they're not going to hit our numbers. Why? Because we don't have the prime lease and until the prime lease expires, we're not going to be able to achieve any contribution from an earnings perspective, but we are actually building strong contractual growth in that building as we speak.

In Washington, during the quarter, we completed about 300,000 square feet. The first of the replacement tenants for the 240,000 square feet of 2012 availability at One Freedom was done. Nextel International took 72,000 square feet. We're negotiating leases with a second tenant which we hope to close out in the next couple of weeks for 56,000 square feet, and we have another lease for a health club for the below-grade space. So everything gets done. We've leased 83% of the roll-over for 2012 at One Freedom square. There's been a pretty significant uptick in rent on the office side of that thing, those transactions.

We are in negotiations with tenants for all of the remaining space at One and Two Reston Overlook. Again, there's going to be downtime on those spaces. Mike will talk about what the impact of that's going to be on our 2012 earnings.

This is the activity from these tenants. It is not from the defense oriented companies in fact but from telecommunications, digital marketing, construction and engineering industries. They continue to prosper and, importantly, they're prepared to pay a premium over the toll road commodity space to be in Reston Town Center. We have one other exposure in Reston which is Patriot Park, and you're going to hear a lot about Patriot Park over the next 10 or 15 minutes.

The DIA is taking 523,000 square feet, and there's one other building which is currently leased by Lockheed Martin, and it's going to expire in May 2012. At the moment, we are in discussions with other governments and users about that space, but the budget issues surrounding the Deficit Reduction Committee seems to be delaying things pretty significantly.

Again, the redevelopment of the buildings at One and Two Patriot Place and the possible downtime of the third building is going to impact our short-term results. You're going to hear me say that a bunch of times this morning.

If we're able to complete all of the leases under negotiation, we will have released 92% of our 11 to 13 1 million square feet of rollover in Reston Town Center and 74% of the 700,000 square feet that we have rolling over in Patriots Park. We have really good prospects for the remaining piece of that.

We also completed about 110,000 square feet of renewals down in Springfield, which is dominated by GSA and other government contract users. I would say that we have seen some instances again where the budgetary issues are impacting third-party procurements. We actually saw two contractors exercise some contraction rights in their leases in the last quarter in Springfield. On the other hand, up at Fort Meade, we've seen two immediate solicitations, one by a GSA tenant and one by a contractor up at Annapolis Junction. So it's sort of hit-or-miss with what's going vis-a-vis the budget and the GSA leasing requirements, particular when it comes to defense oriented users.

In the Bay Area, the robust level of activity that's been prevalent on the Peninsula and in the Valley, it just continues. Combined office and R&D absorption is now 7.7 million square feet through the third quarter. It's the highest it's been since 2000/2001.

During the last quarter, Google signed another 700,000 square feet of space, Avaya took 250,000 square feet, Polycom took 200,000 square feet. Amtel took 198,000 square feet. Synopsis took 340,000 square feet. Apple is looking for 500,000 square feet. Sony Computers committed to 450,000 square feet. YouTube committed to 100,000 square feet. The list is pretty extensive.

Where are we feeling it's? It's in Mountain View. We completed another seven deals during the quarter for 167,000 square feet. This last week, we did another 28,000 square feet. Our asking rents have moved from $16.20 a square foot triple net to $27 over the last nine months. The momentum is continuing north and we are seeing strong interest in this space that we're going to have available at our Gateway project in south San Francisco in the first quarter.

Just to talk about San Francisco in particular, the city, so during the second quarter, just to remind you, we did 22 transactions involving 165,000 square feet and they had four full deals, four full-floor deals at Embarcadero Center. While market activity continues to be steady, this quarter we did 17 small deals totaling 75,000 square feet and in the last week, we've signed five other transactions ranging from 1 floor to 5 floors, totaling 200,000 square feet, including more than 140,000 square feet which covers the upcoming availability at EC4 that we've been talking about for the last year and a half.

Other than one cloud computing company, so there is a technology company that's going into EC4, each of the transactions involves a tenant in the financial services or legal industry, very much the bread-and-butter types of companies that have always been in Embarcadero Center and had -- there's been a flight to quality and a flight to the better buildings again as Mort described.

Now not to be a broken record, there's going to be a pause in our revenue stream in 2002 as we transition between these tenants that are currently there, and you're going to see a significant roll-down as well which we've been talking about in our second-generation leasing stats in '12 and '13 because, in San Francisco, the space at EC4 was currently led at $93 a square foot, and now we're leasing it in the low $60s which is, again, the top of our market, but it is a roll-down. So just remember next year when these leases actually hit our stats, you're going to see the large decline in the leasing stats and the impact from these signed leases. It's going to all run through our supplemental and shouldn't be a surprise and it shouldn't be a concern. It's what we've been talking about for the past year and a half.

There are times when these statistics in our second-generation supplemental can be really useful for sort of getting a sense of where the market is. There are other times when it can't be because of when the leases have been signed and when they're actually bringing their way through our stats. Unfortunately, this quarter it's one of those deals that's an outlier the sort of skews things in a pretty significant way, which is in Boston. We did a 220,000 square foot lease at our Quorum property, which is sort of north of the city and is really not one of our core markets. It was originally a building that was a build-to-suit for a tenant that actually exited the market 18 months after the lease commenced. It was a 10-year build-to-suit lease. And they sublet the space. The original rent was $15.50 nnn. It stepped up to $18.35 at the end of the ten-year term, and we did a deal with a subtenant for $11 nnn. Clearly, the market has weakened significantly. In exchange for no TIs, we provided 18 months of free rent. That deal has dramatically skewed the numbers this quarter. If you eliminate it, the Boston number moves down to just negative 11.5%, on sort of the lease to lease, and the number for the company is a negative 9%. It also brings down the average free rent down to 48 days from the 180 that's in the stats.

In addition, in San Francisco, we had a floor at EC4 that came through this quarter, 20,000 square feet. It was lease at $112 a square foot and we relet it at $54 a square foot with no TIs, so again very much a skewing of the numbers and really the reason for the negative downward trend that you saw in our supplemental statistics.

On average, our lease length on all these deals was up a little bit, about 80 months. And again transaction costs have been pretty limited. We've been doing a lot of as-is deals, a lot of suburban deals. We are down around $21, $22 a square foot. The portfolio office mark to market is still getting stronger at about a positive $1.41 per square foot.

It was nice to be able to announce today in our supplemental last night that we actually closed our sale of Two Grand Central. I would say I was a little gun shy given what our experience was with the New Jersey sale or lack of sales over the last couple of quarters. But we sold the building for $400 million, $617 a square foot. If you look at the supplemental information for the third quarter on an annualized basis, the income is $13.9 million, but the building again is only 74% leased, so you can do the math and figure out what the "cap rate" is if you want to think about things in that way.

The sale of this asset was really always a possibility ever since the initial acquisition, to be truthful. I think a lot of you acknowledge this and commented to us. The building has a very different market position and leasing profile than the other portions of our New York City portfolio and was distinct enough from that portfolio that we just came to the conclusion that there was very little synergy to owning the building and so we sold it when the time was right. With the sale and our refinancings, we sit on a pretty sizable cash balance. Clearly, it again is somewhat dilutive to short-term results. We continue to spend lots of time chasing and underwriting assets, but again our views on operating fundamentals and the reality of what it actually takes to lease the vacant space today or cover near term roll-over don't seem to express themselves very well in the valuations that other people are paying, and so we just haven't been able to win deals. But we're going to continue to try and we're going to continue to try and get our money put to work.

Mike is going to go through our results and our 2012 guidance. During 2011, as I hope you got the sense of, we've done a lot of leasing to cover our major roll-over in Boston and in Reston and in San Francisco but again, it involves replacement tenants, not renewals. There's a natural downtime between leases. Given the makeup of our portfolio and the fact that we have some pretty large lease roll-overs, it impacts 2012. Nonetheless, if you wash out the income we received from Patriot Place in 2011, which came from the holdover of Lockheed Martin as their subtenant NGA moved down to Springfield to the proving grounds, and that building is out of service substantially in 2012, that 700,000 square foot complex. If you look at the large change in our FASB 141 non-cash item and the dilution from our sale of Two Grand Central, and you contrast that with the increased contribution from our development properties, again netting out the cessation of the corresponding capitalized interest, it really ameliorates the impact of all of these tenant transitions based upon the downtime, and it actually results in an increase year-over-year of our bottom-line FFO. I'm going to let Mike go through the details of that now. Thanks.

Thanks a lot Doug. Good morning everyone.

Before I get into our earnings, I just want to touch real quickly on our recent capital markets work that we've done. This quarter, we did close on our $725 million mortgage loan for 601 Lexington Avenue that we've been talking about and locked in a substantial amount of debt at 4.75% for over ten years, which is a great long-term coupon for us. We raised an incremental $270 million of cash, which increased our cash balances to just over $1 billion.

We also just closed on a $107 million construction loan for our 500 North Capitol Street development, which is held in a joint venture where we own 30%. We issued $45 million of equity early in the third quarter under our ATM program.

The sale of Two Grand Central Tower that Doug mentioned raises another $126 million for us in cash. So as you can see, we continue to strengthen our balance sheet and our liquidity.

Our development pipeline is a solid future use for our cash over the next couple of years, two to three years, and we have about $740 million to spend to complete that pipeline.

Our only significant 2012 debt maturity is the $626 million of exchangeable debt that is puttable by the holders in February. As we discussed at our investor conference a few weeks ago, the bond market is open, but it's volatile and credit spreads are varying widely day-to-day. In the past week, spreads have started to move back in our favor with our bonds trading at about 25 basis points. However, with the sell-off in treasuries, our borrowing cost has remained pretty steady at around 4.75% for ten-year fixed rate debt in the public bond market.

We're looking at a variety of different alternatives to refinance our bonds prior to the put date. Besides the exchangeable notes, we only have two other mortgages expiring next year aggregating $210 million that we currently expect to pay off with cash.

Now, I'll turn to our earnings. For the quarter, we had a solid quarter. We reported Funds From Operations of $1.28 per share, which was $0.04 per share above the midpoint of our guidance. The core portfolio accounted for approximately half of the outperformance, and was up about $4 million. We had small revenue wins across the portfolio. Our transient parking in Boston was higher than we expected and we realized $1.6 million in expense savings. Much of the expense savings are repair and maintenance items that have been pushed into the fourth quarter and are really a timing change.

I do want to point out the $9 million in termination income we received this quarter. $8 million of this is the first piece of the termination income associated with Patriots Park and Reston that I discussed last quarter. We will book another $5 million in the fourth quarter but only $1.8 million in 2012, which represents a meaningful $11 million reduction of termination income from 2011 to 2012.

Our development and management services income was down slightly quarter over quarter due to a couple of chunky items we received last quarter when we were actually ahead of our forecast by about $1.5 million. The vast majority is from stronger service income and higher utilization of overtime HVAC by our tenants. We have several tenants that have recently moved to 24x7 HVACs, which helps our service income.

Income from our joint venture properties was up by about $2 million over our budget with $11 million emanating from percentage rent from the Apple store at the GM building, which continues to perform strongly. We also booked termination of $700,000 at the GM building, where we downsized one tenant and relocated another to make room for an expanding tenant and we'll generate more revenue out of the same space going forward. That talks again to what Doug mentioned about the creativity and the work that it takes to manage these buildings.

I also want to point out the drop in our G&A of $2.7 million from last quarter. As we discussed on last quarter's call, we had about $1.5 million of abandoned project costs that did not recur this quarter. In addition, this quarter, due to the weak equity markets, we reported a loss of $860,000 in our deferred compensation plan, which showed up as a savings in our G&A. The offset to the G&A savings shows up as a loss from investment and securities, so net-that the plan is neutral to our earnings.

For the full year 2011, we project an increase in our prior Funds From Operations guidance due to our third-quarter outperformance, although as I mentioned, we will give a portion of it back as we anticipate some of our third-quarter expense savings to be incurred in the fourth quarter.

In addition, the sale of Two Grand Central Tower is dilutive to us. It will cost about $0.01 in the fourth quarter and $0.04 in 2012, assuming no reinvestment of the proceeds.

In our consolidated portfolio, we've had strong same-store growth thus far in 2011, including the 8.3% reported cash same-store growth this quarter. During the fourth quarter, we will see the impact of a few large lease expirations, as Doug mentioned, including 190,000 square feet at Embarcadero Center 4 -- 90,000 square feet of this has already hit as it expired late in the third quarter -- and 207,000 square feet with Bain Capital leaving one 111 Huntington Avenue in Boston.

MFS will take all of the Bain space plus an additional 100,000 square feet, but their lease is not projected to commence until early 2012, so we'll have a pause in our revenue with the downtime from that tenant. With this roll-over, we will give some of our earlier same-store growth back in the fourth quarter. We expect our occupancy to drop just below 91% and project our full-year same-store performance from 2010 to be up approximately 6.5% on a cash basis and flat to down 0.5% on a GAAP basis. We project straight-line and FASB 141 rents for 2011, including our developments of $81 million to $83 million. Quarter over quarter, we expect our portfolio NOI to be down by $7 million to $7.5 million from the third quarter. Again, this is due to the aforementioned lease expirations.

Our hotel has performed in line with our expectations the last couple of quarters, although we did see third-quarter RevPAR decline slightly due to seasonality from the second quarter. For the full year, we're projecting an approximate $8 million contribution from our hotel.

In our joint ventures, we're up $2 million in the third quarter and are projecting a contribution of $142 million to $144 million for the full year of 2011. Our projections include $70 million of non-cash FASB 141 revenue and $14 million to $16 million of straight-line rents.

Although not impacting our FFO because we exclude gains on sale from our FFO, the sale of Two Grand Central Tower will result in gain-on-sale income in the fourth quarter of approximately $47 million. This gain is reflected in our 2011 earnings per share guidance in our press release.

We project our 2011 development and management services income to be about $31 million to $32 million. This is up slightly from our forecast last quarter due to the outperformance in the third quarter.

Our G&A remains in line with our projections last quarter. We anticipate $81 million to $82 million of G&A expense for the year. We're not projecting any additional financing activities, so our 2011 full-year net interest expense projection is virtually unchanged. It's expected to come in at $384 million to $386 million.

Capitalized interest is anticipated to be $48 million to $50 million, also unchanged.

As I mentioned at the outset, we're investigating a possible early refinancing of our $626 million of exchangeable notes. This is not in our numbers, so if we complete a transaction early in 2011, it will have an impact on our interest expense projection.

So for the year, we're now projecting 2011 diluted Funds From Operation of $4.81 to $4.83 per share. This is an increase of about $0.02 from our midpoint last quarter and reflects our strong third-quarter results being offset by the loss of Two Grand Central Tower as well some third-quarter projected operating expenses that are leaking into the fourth quarter. For the fourth quarter, we anticipate diluted funds From Operation of $1.18 to $1.20 per share.

This is the time of year when we start to provide formal guidance for 2012. As we've been discussing over the last couple of quarters and as Doug mentioned, our guidance will reflect the fact that we have a couple of key assets in leasing transition next year which will have a meaningful impact on our earnings until full rent commences with replacement tenants. As Doug noted, these properties include Patriots Park and Reston, where we have Lockheed Martin rolling out of three buildings totaling 700,000 square feet. We have a replacement tenant for 523,000 square feet of this, but these two buildings will be temporarily out of service and full rent will not commence until 2013.

The remaining 180,000 square foot building is still available for lease. We're seeing good activity, but we don't project income for the building in 2012. As we discussed last quarter, the termination income from this project will decline by $11 million from 2011 to 2012, and the total contribution from these three assets, including the termination income, will go from $36 million in 2011 to $13 million in 2012, a drop of $23 million in NOI.

At Embarcadero Center 4, we have 190,000 square feet of roll-over and have recently signed leases for 140,000 square feet, so we've covered 75% of it. At our south San Francisco property, at Gateway, we have 100,000 square feet of roll-over. As Doug suggested in his comments, the Peninsula is seeing constant, strong demand with good activity on the space. We will have downtime even where we've leased the space, and at EC4, we will see a significant roll-down as we move from $93 average rents to low $60s rents. The decline in NOI from these two assets, EC$ and the South San Francisco asset, is projected to be $15 million in 2012.

Lastly, we will get back 170,000 square feet of great space at the top of 399 Park Ave. with the vacancy by Wilmer Hale midway through 2012. We have a deal with an expanding tenant to take one floor 25,000 square feet, but expect some downtime to occur before releasing the remaining space. Our projections assume a reduction of $6 million from this block of space in 2012. So the potential aggregate impact next year from these deals is a decline of nearly $45 million or $0.27 per share of Funds From Operation from 2011. As Doug mentioned, the majority of this reduction is temporary as all of these buildings have active prospects or have signed leases and each is a high-quality and extremely attractive building to tenant seeking space in the markets.

In addition to our 2011 expiries, of our 2012 roll-over is 2.8 million square feet and is manageable, comprising about 7% of the portfolio. We expect our occupancy to end 2011 around 91% and anticipate gaining occupancy through 2012 averaging between 91% and 93% during the year. The transition time between some of our large lease expiries and the roll-down in EC4 will be reflected in our same-store performance.

We're projecting same-store NOI in 2012 to be down 1% to 2% on a cash basis and down 1.5% to 3.5% on a GAAP basis from 2011. This includes a $6 million decline from one of the buildings at Patriots Park. The impact from the other two buildings at Patriots Park is not included as they are no longer part of our same-store portfolio and will be under redevelopment for portions of 2012 and 2013.

We're projecting an increase in the contribution from our development projects, including a full year of Atlantic Wharf, which is 89% leased, and 2200 Pennsylvania Ave., which is 94% leased, as well as the continued lease up of 510 Madison Avenue. In addition, we project the stabilization of our two residential projects in DC and in Boston in early 2012, where leasing continues to be strong and outperform our budgets.

Our development pipeline is a strong growth engine for us, and we currently have $2.6 billion of development underway at a projected stabilized cash NOI yield of approximately 7%. In aggregate, our pipeline is currently 63% leased. In 2012, we project a GAAP NOI contribution of $65 million to $70 million from our developments. This is an incremental $30 million to $35 million increase over 2011.

We anticipate straight-line rents of $60 million to $65 million from the consolidated portfolio. That includes our developments coming online.

We expect our hotel to be up modestly and are projecting it to contribute between $8 million and $9 million in 2012 NOI. In our joint venture portfolio, we actually project an improvement in the cash contribution of $5 million to $10 million as we anticipate a roll up of rents for expiring space at the GM building and project to gain occupancy At Market Square North in Washington DC. However, our improvement in cash results is masked by the burn off of FASB 141 non-cash rent. In 2012, we will have $18 million of FASB 141 income burn off, so the GAAP contribution from our JVs will actually decline.

In addition, the loss of Two Grand Central Tower from this portfolio is dilutive with our share of the lost income about $5 million. So despite strong performance with 2012 projected cash same-store NOI growth in this portfolio of between 4% and 7%, the GAAP contribution from the joint venture portfolio is projected to be $120 million to $125 million, down by roughly $20 million from 2011. The contribution includes $53 million of non-cash FASB 141 fair value lease income and $7 million to $12 million of straight-line rents.

For our development and management services income, we expect a drop from 2011 due to the loss of the management contract on Two Grand Central Tower and the nonrecurring permitting fee we received in 2011 On the Broad Institute project in Cambridge. Our projections for 2012 are $25 million to $30 million of development and management services income.

We're projecting a moderate increase of about 3% in our G&A expenses for 2012 to $82 million to $85 million. Our interest expense is expected to be slightly higher in 2012, due primarily to the reduction of capitalized interest from the delivery of 2200 Pennsylvania Ave. and Atlantic Wharf, and the cessation of capitalized interest at 510 Madison in the second quarter of 2012. These should be partially offset by the increase of a full year of capitalized interest at 250 W. 55th St., which was under development for only the second half of 2011. Additionally, we expect to increase our investments in our development pipeline and project incremental development spend of $400 million by the end of 2012.

In our mortgage portfolio, our interest expense will be pretty stable year-to-year as a decrease from the expected 2012 payoffs of loans on the Bay Colony property and One Freedom square and Reston will be offset by the additional interest costs at 601 Lexington Avenue, which was floating at low LIBOR rate and lower balance for several months during 2011.

In total, we project net interest expense of $385 million to $395 million for 2012 and capitalized interest is anticipated to be $40 million to $50 million. So if you combine all of our assumptions together, it results in our projection for 2012 diluted Funds From Operation of $4.58 to $4.78 per share. As I noted earlier, we have a few significant lease roll-overs where we know we will experience downtime between leases that is impacting our 2012 FFO. If you eliminate the impact of the redevelopment transition at Patriots Park and the reduction in non-cash FASB 141 income, our guidance has actually increased from 2011 due to the contribution of our development deliveries. In addition, we've assumed no new acquisitions or other new investment activity in our projections.

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

(Operator Instructions). Ross Nussbaum, UBS.

Hi guys, good morning. I'm curious. There was obviously a large gap between where your guidance is next year and where consensus was. Is it your stance that perhaps the Street was underestimating the impact from the transitions that you've just gone through, or do think there was something more than that that was generally missed?

I'll give you my perspective on that, which is that we have -- we've tried to be as transparent as we possibly can be with the Street for the last 12 years. As part of that, the last couple of quarters, we've been describing the changes in our FASB 141, the impact of Patriot Place, as well as the expected roll-down associated with the rents at EC4. There are 20-plus analysts who cover us, and we hope that everybody is listening to what we're saying and they're putting those variables into their models. I don't know it if they have or haven't.

That's fair. Do you think -- as I think about last year at this time, you gave guidance for 2011 that was below where the Street was, and then you came out the next couple of quarters and solidly beat numbers consistently. So is part of the differential your general level of conservatism and perhaps setting the bar a bit low?

It's funny because I -- when we sit, stare at each other and we sit around the room in our board meetings, we don't feel like we're being conservative. We feel we're being -- I hate to use the word because Mort uses it all the time -- realistic. And we --

You don't have to hate to use the words I use, [Doug].

I don't like to copy. So the prospective that we have when we give our earnings guidance is this is really what we think we have on the table and based upon the facts and circumstances before us in terms of our portfolio. We've always said we're not going to include acquisition assumptions in our numbers, and there are many years when we do acquisitions.

In calendar year 2011, we had some pretty meaningful hits that changed our numbers dramatically. The first was Patriot Place. We did not know what was going to happen with the termination associated with the NGA's moving down to Springfield, and it was a big, big deal. Then second, we started construction, reconstruction of 250 W. 55th St., and the change in the capitalized interest made a very big impact, and finally the refinancing at 601 Lexington Avenue and going from floating-rate to -- from fixed to floating for a significant portion of the year all really impacted what our actual results were in 2011. They are all good things, and this is real cash and we're happy to get it, but when we think about that and we think in relation to how we think about our 2012 guidance, we don't try and predict those types of events.

Chris Caton, Morgan Stanley.

I was hoping you talk a little bit more about the acquisition environment, if you could shed some light on how you're approaching it, given some of the leasing you intend to do in the core portfolio and your appetite for, say, taking on risk through the acquisition activities.

Sure. Look, when we do an acquisition model on a new property, what we unfortunately are handicapped with is the fact that we lease space in these markets every single day. So the best example is in Washington DC. I'll let Ray opine on this if he wants to. We are hammering it out with tenants to lease space in our existing buildings as well as our new buildings, for example at 2200 Pennsylvania Ave. We know what we're doing deals that.

When a brokerage assignment comes along and they send us a package on a particular building -- and these are very much high-quality buildings, and there is either vacant space or near-term roll-over -- we look at what we are currently doing in our portfolio and we try and translate that into a set of assumptions. And 99 out of 100 times, we think we're being, again, realistic about how long it's going to take to lease space and what the concessions are going to be, and where rents are really going to be. We find that assumptions that are built into the models that many people are using to do that same analysis are, in some cases, 10% or 15% higher in terms of what their rental rate expectations are, 10% to 15% lower in terms of what their transaction costs are, and they never assume it's going to take more than 12 to 18 months to lease that space.

I'll let Ray speak, but there is a lot of available space for 20,000 to 25,000 square foot users in a market like Washington DC, and there are very few tenants who are 200,000 square feet who are looking to lease space when the space is currently vacant in a building or there's a roll-over within 12 months. So you are by definition sort of stuck in this sort of spot market where there's a lot of availability. We underwrite it to what we predict is realistically going to happen. We tend to find ourselves at the short end of the stick when we've done that.

Doug, I think you did a great job of reflecting the current market. The only thing I would say is I think the only thing that exceeds the availability of space is the availability of cash. We're seeing it in Washington as a lot of people are parking money here and hoping against hope they're going in at [7-5] cap rates for office buildings with short-term roll, and we're seeing a lot of the same dynamics we saw before, that people will change the assumptions to justify the underwriting. We just have the ability to create (technical difficulty) development and are steadfast in our standards relative to underwriting space. If we get a package, it's too late. The only way we can buy a building is off-market and we're just not going to participating in the bidding process. We're seeing invoice (inaudible) any of our markets.

Thanks. A follow-up question on Boston. You talked about at the investor day and also today doing leasing at John Hancock. How are rents that you currently have under negotiation working out relative to underwriting? Then second on Bay Colony Center, you talked about on the one hand being pleasantly surprised to get a new tenant in, but then also anticipate good momentum on a lease-up just over the next year. I wonder if you could add a little bit more detail on those two assets.

The Hancock Tower? We are probably a significant amount -- I'm not going to -- I really don't want to give a percentage because we're leasing space right now on higher than what our underwriting was, particularly with the higher portions of the building and by higher portions, I'm defining that as floors 20 through 60, so the vast majority of the space. We are probably right on line with what we were thinking about with regards to the low-rise portions of the building, which are floors I'm going to call it 2 through 17.

Out at Bay Colony, we are I'd say probably 10% light in terms of where we thought the rents would be with regards to the space at the bottom of the building, in other words the non-view space. We're probably 15% above where we expect the space to be in the better portions of the building. So it's I'd say we're right on target, sort of on an average basis because about half the space is the third of fourth quarters, and half of the space is the first and second quarters.

The thing that I think that's the most disappointing from our perspective is it's taken us a little bit longer to get to where we are on Bay Colony in terms of getting our redevelopment work going. We would've liked to have been under construction in June of this year, and we literally just started, you know, completed our bidding of the first building redevelopment and are underway as we speak. We're actually replacing the glass which we didn't expect to do, but we found a very economical way to do it to bring floor-to-ceiling glass on two of the floors on one of the buildings. So we think that, when people finally see what's there, they're going to be wowed by what the environment is. We are trying to change the profile of that building to market to tenants who are 25,000, 35,000, 55,000, 100,000, 200,000 square feet as opposed to 5,000s and 10,000s and 15,000s, which is what the building had -- those buildings had become. So those tenants tend to be a little bit further out of -- in front of what their space requirements are, although in suburban Boston it's sort of 9 to 12 months. It's not 18 months to two years. So we're hopeful that we're going to get some leases done in 2012. We may not have rent commencement until the end of the year or early 2013.

This is Mort. Let me add one other comment on the whole issue of acquisitions. I think you probably have understood that we basically are looking for buildings that have the quality to be long-term real values for us. That means there are going to be locations where we will -- we are willing to accept a lower rate of return in the shorter term because we see that as a great long-term hold. That's going to continue to be a part of our acquisition strategy. So do not get the feeling that we are necessarily or totally precluded from the acquisition market because that is in place, but it is the case if we're going to concentrate, as we always have, on buildings that [instead] have long-term value, and these are the best buildings in the markets that we are in, and that's still what we're going to concentrate on and focus on.

Thanks very much for your comments.

Michael Bilerman, Citigroup.

Thanks. It's Josh Attie with Michael. Is there a way to shield the $47 million gain on Two Grand Central?

It's a gap gain, not a cash gain. It's actually slightly less than what we paid for the building, so there's no need to shelter it, unfortunately.

If you recall, in the fourth quarter of 2008, we did an impairment based upon what was going on in the fourth quarter of 2008 on some of the assets in New York City that we acquired that were in our joint venture portfolio based upon the GAAP requirements at that time.

Okay, thanks. Can you also talk about your outlook for rent growth in the New York City market into 2012? I know you were initially more conservative in your assumptions, but have your assumptions changed at all?

I'll go first and I'll let Mort give his perspective too. I don't think we are changing our view on where rents are. We don't see much in the way of growth. So if you said to me how do your rents compare as you look forward in 2012 to where they are in 2011, based upon what we are asking today, I think we would feel very comfortable that the rents that we're asking today are going to be very similar to the rents that we're asking six months from now and they're taking rents that we would take today and they're taking rents that we would take 12 months from now.

I would agree with what Doug has just outlined. There will be certain facets of our assets that I think will show better-than-expected results. We're in the process of having conversations with a couple of tenants on these issues, and so I really can't comment on it. But I think, if they come through, I think they will be significant and relevant. But I wish I could be more specific, not possible to do that at the moment.

Thank you very much.

Jamie Feldman, Bank of America.

Mike, can you talk a little bit about your CapEx needs for next year, and also what the guidance suggests for AFFO, and maybe even dividend coverage?

Sure. If you look at CapEx this year, I think we're at $16 million right now. We expect that we'll spend another $10 million or $15 million maybe to end the year somewhere between $25 million and $30 million. Next year it will be slightly higher because we will have more CapEx at Bay Colony than we had this year. As Doug mentioned, we geared up kind of in the summer, early summer, and we've really started to spend some money now, and we're going to spend more next year. But I would suggest that the number is maybe $5 million higher, you know, it's somewhere in the $30 million to $35 million range for pure CapEx.

If you think about leasing costs and you think about where I mentioned our occupancy might go and look at our roll-over, we have 2.8 million square feet of roll-over. I think we're going to leave somewhere between 3 million and 3.5 million square feet next year on an average transaction cost of somewhere in the $30 range. That's probably $100 million to $110 million of leasing transaction costs. We talked about the non-cash rent and the wholly-owned portfolio and the JV portfolio, and we'll continue to have some non-cash interest expense as well. So if you kind of add up all those adjustments, there's somewhere around $200 million of adjustments that you would include. If you think about it and you look at what our FAD is for 2011 and if you think about those numbers I just gave you for 2012, it's basically flat from '11 to '12. Even though the FFO is projected to be down, on an AFFO basis, you've got a little bit of decline in the same-store but you've got the development coming on line where some non-cash rents are turning into cash rents with regard to the AFFO.

In terms of the dividend coverage, if you look at -- if you kind of think about free cash flow and you look at cap interest and you look at principal amortization, we're going to have -- we should have somewhere between $150 million and $200 million in excess of what our current dividend is.

Where does that leave you guys in terms of thinking of the current dividend level and potential upside?

When we changed our dividend two, two-plus years ago, we tried to size it appropriately for a steady-state period of time, recognizing that as things improved our taxable income would go up and our dividend would ultimately need to be increased. We've begun a dialogue with the Board regarding what our projections are for our taxable income in 2012 and beyond. I think it's fair to say that, as our taxable income goes, up our dividend will go up. The timing of that is something that will continue on during our fourth-quarter conversations and on into 2012.

Then just a quick follow-up on the guidance, Mike, again, if you were to back out the leases you call in-transition, what do you think your leasing spread will be on I guess more like renewals next year?

What do you mean by the leasing spread?

Old rent versus new rent. I'm trying -- if you back out the major leases that are long-term vacancy, or vacancy for most of the year, what's a more normalized change in rent?

I'll try to answer it in this way. We talked about 2011 where we've had some pretty big roll-down, particularly in San Francisco. So if you look at the roll-down in '11, it's down 10% to 15%, somewhere in that range for '11. If you look at 2012, I think it's much closer to market, to a slight roll-up on the 2.8 million square feet that is rolling in 2012.

Great, thank you.

Sheila McGrath, KBW.

Good morning. I was wondering if you could discuss in more detail your view on net absorption prospects for your major markets over the next year or so. Specifically for New York, does recent chatter about financial firms' cutbacks increase your concern about Manhattan's absorption prospects?

If you want to deal with Manhattan as a whole, that is certainly a possibility for some kind of users, but as Doug pointed out, there is going to be some contraction in some dimensions of the financial world, in part because, for example, a lot of number of firms will probably be managing less money, and therefore will probably seek to if not contract their space at least they won't be growing in the way they did. But there's a whole other dimension to the New York City economy, which is this whole world of the Internet and all the relevant companies, and New York is just busting out all over in that capacity. There's a lot of business that feeds off of that and that it stimulates. So I think actually New York is going to be a terrific market. It's hard really to set stay whether it will be just in that one year, but within the next couple of years, I think the New York market is going to continue to be a very, very, very strong market.

Could you discuss any additional color on leasing prospects at 55th St.?

Well, we have, as Doug pointed out, we've signed one major agreement. We are very comfortable about the leasing progress going forward, and we think we'll have substantial progress in the leasing of that building in the coming years. There -- this is one of the very few buildings coming into the market in the time that it will be coming into the market. There are a large number of large tenants who are looking for space. We think we're going to do very well in that environment.

Just in the context of 250 W. 55th, just so you appreciate what the advantages are of the building, and I'm not trying to toot our own horn. Aside from sort of the physical issues that the building brings to a new tenant in terms of efficiencies and the fact that [it's] sustainability and the floor-to-ceiling glass, all the sort of physical attributes, the fact that the building has no encumbrances on it is a pretty big deal to tenants that are looking to sign twenty-year leases and are looking to grow.

So one of the advantages that we have is that we can offer flexibility both in terms of us getting bigger and getting smaller for tenants as they think about what their needs are where a commencement in 2014 or in 2015 and an expectation they're going to be there until 2024 to 2034. And so there are a lot of tenants that would prefer to be in a new building with a new installation with that type of flexibility. This is not going to be a financial services building that has a 400,000 square foot or 500,000 square foot investment bank or universal bank in it. It's going to be leased to 200,000 to 300,000 square foot tenants at the base -- to the middle of the building and as we get towards the top of the building, unless something surprises us, we're going to be doing single floors or two or three floor segments that are similar to what I was describing. When you compare that to new existing inventory, the existing inventory tends to have all sorts of encumbrances that we have to deal with in our own space that make it less attractive for tenants who are looking for maximum flexibility. We hope that's going to be a real advantage as we think about who the tenants are and the discussions that we're having on a current basis for 250 W. 55th.

Okay, thank you.

Alex Goldfarb, Sandler O'Neill.

Good morning. I just sort want to follow up on Sheila's question from a different angle with regards to New York. Certainly the big banks have been under the newspaper headlines. At the same time, a number of them have exposure in the '13 to '15 time frame. So just so curious. As you're talking to the sorts of tenants, are they looking to still move to new space, or are their boards of directors just telling the folks who are heading those entities here in New York to just stay put in their existing real estate locations and just reconfigure the existing space rather than move to new space?

I'll try and restate what I said before. So at 250 W. 55th St., we're really not talking to those tenants. In other words, anybody who has a 2013 and 2015 lease and is a 500,000 square foot financial institution is not the primary focus for 250 W. 55th St., given the way the building has been designed in the [floor place].

I will say that we do have some financial institutions who have 2015/2016 lease expirations and we're certainly engaging those with those tenants about conversations of renewals. So to the extent that -- that is an anecdotal way of suggesting that those larger tenants are not necessarily thinking about moving, I think it's a fair comment. But with regards to 250 W. 55th St., it's really not the profile of the user that we've targeted and identified as a likely tenant who will find its home there.

Yes, Doug, I wasn't specifically mentioning 250 W. 55th. I was just talking more general, giving the financial firms, because of their size, can be sort of rent setters. So it was more just sort of a tone in the market as folks are looking at some of those big blocks of space and how that's driving rent. It was from that perspective, not 250 W. 55th.

Having spoken to a number of New York City leasing professionals over the past couple of weeks about sort of what level of activity feels like, I'm not aware of any major tenant, meaning more than 100,000 square feet, who is looking to move at the moment. But at the moment is October/November of 2011. As I think we all know, if there is one thing that has been for certain, that the way the New York City leasing markets have changed, the rate of change has been a surprise to everybody on both the downside, in 2008 to 2009 and then on the upside in 2009 to 2011. I would not want to make any predictions about what these financial institutions are going to be doing.

That's helpful. The next question is, following up on the residential, I don't think at the DC investor day you spoke about New York in residential, but just sort of curious. Given that you still have the W. 46th St. site and obviously you guys are well attuned to the market to know what other sites are a possibility, is residential in New York a possibility or should we think about residential more being in DC or Boston, some of the other markets?

When I answered the question at the investor conference about sort of what our view on the residential side was, I was inclusive of New York City in that, in that, look, we're realistic enough to appreciate that the number of office buildings that may be getting built over the next five years, even in a city like New York, may be relatively de minimis. If there is a site that our team thinks has strong residential potential, we certainly have the expertise in our New York City staff to design, permit, and build a great residential tower in the city. It would be something that, if we thought the use of capital was appropriate from a return perspective, that we would consider doing. I don't think we are in a position to say, well, we've identified three sites and we're starting something tomorrow, but it's certainly something we think about.

Okay, thank you.

Jordan Sadler, KeyBanc Capital Markets.

Thanks. I just wanted to come back to Manhattan quickly on the prebuilt suites that you're doing. I noticed on the schedule that -- on the development schedule -- that you pushed back the stabilization date on 510 Madison a few quarters into 2013. So I suspect some of that may be a function of doing this prebuilt space, but you also mentioned that some of this space can be taken very quickly overnight. Can you maybe sort of bridge the thinking, what's changed on sort of the underwriting on 510 Madison and if that's going to affect your stabilized yield at all?

Sure. I don't think it's going to affect our stabilize yield. I think that the only thing that has "changed" regarding 510 Madison is that our view is that the number of leases that we are going to end up doing is probably increased. Therefore, the amount of time that it's going to take to complete all of those leases has gone up. When you're leasing space in 2000 and 3000 and 5000 square foot chunks and you have basically 200,000 square feet to lease, you've got to do a lot of leasing. There's only so many transactions that we're alternately going to be able to accomplish in a 12-month period of time, so we've extended out our stabilization date. I think the tenants we are targeting, which are, to be fair, our tenants who are prepared to pay a premium relative to a generic building in Midtown Manhattan to be in a building like 510 Madison Ave., are prepared to do that if they get the right prebuild type of an environment. That's what we are trying to build to and design to. We're sort of doing it in the context of maintaining the same rental rate structure that we decided to be part of when we underwrote the building and then when we were surprised at how much stronger the market was than we had originally thought.

The demand you're saying is holding up, essentially, and it's just a smaller type of tenant.

Demand for smaller spaces is holding up at premium rents.

That's fair. Then on guidance, I was just curious. The big swing factors for 2012, at least a couple of them, seem to be the exchangeables, the $626 million and how you deal with that. I'm curious. What's embedded in guidance as it relates to that refinancing? Then are there any additional development starts contemplated at all?

With regards to the exchangeable notes, we are assuming that we refinance them. We are assuming that we refinance them when they expire or when they are puttable. As I indicated in my comments, we believe that, currently, we can borrow ten-year unsecured debt at about 4.75%. We don't know exactly where spreads have gone, or will go, I'm sorry, because they've been quite variable. So for our model, we are using a little bit more than that, about 5% for our model for refinancing the $626 million. As I mentioned, on the other two debts, we're assuming we pay them off.

With regards to development starts, we are anticipating the building in Cambridge, which we've described before, the 190,000 square feet building for Biogen which is going to really commence later this year -- we're having our groundbreaking this week, but it really won't full-fledged underdevelopment until 2012. Then in December, I would be -- hope that our folks in Washington are going to tell me that we're having a groundbreaking for the residential building in what was referred to as Block 16 in Reston, and that will be underway as well. Depending upon leasing success, there would be a chance to build another building in suburban Washington DC, either at our Annapolis Junction project or something in Springfield, but that's really going to be leasing-dependent. At the moment, I don't expect that will happen in 2012.

Mike, just on that bond deal, is that a $500 million size, did you say? (multiple speakers)

We have assumed that we replace the existing financing, so $626 million.

Okay, thank you.

Jay Habermann, Goldman Sachs.

Good morning everyone. You've talked about sort of the opportunities you see and obviously being prudent with capital at the same time, and you mentioned that the sale of Two Grand Central. Can you talk I guess about some of the potential asset sales you might consider, just given your sort of low growth, low rate outlook for the near-term?

You mean in our own portfolio?

In your own portfolio, yes.

Honestly I -- it's hard to give you specific assets, but there is a group of assets, primarily suburban assets, in Boston and Washington DC that are low-growth assets that are nonstrategic vis-a-vis the tenants that we are aggressively courting and trying to work within our marketplaces that are really I think the assets that, if we thought the price was right, we would prune. Those are not probably the assets that are at the forefront of investors' desire in terms of being aggressive about what they're paying for assets today. So at the right time, if we have a use the capital -- and most of them have a significant gain embedded in them, I think we would try and sell some of those assets and redistribute the proceeds into something else. I don't think we are in a position where -- and Mort, please feel free to agree or disagree -- that we are looking to sell any of our core TBD trophy assets at this time.

I agree with that completely (inaudible). I doubt if we'll be selling assets unless we get very -- I mean won't be selling those assets no matter what. But even some of our other assets, I doubt if we'll be sellers unless we get very attractive prices for them that really exceed where I think we might be able to sell them today. That's always possible but, frankly, we're in the market for acquisitions. We're not in the market as seller.

Maybe just on that point, can you talk about the Bay area, just given the strength you're seeing and potential opportunities that you might see emerge there?

So I would hope, and I am crossing my fingers and knocking on wood, that some of the sites that we have in the Bay area, particular on North 1st St., would be in a position where we might consider building something in the next year or so, or hopefully at least putting ourselves in a position where we would be marketing those buildings for tenant demand. There is some speculative development that is actually underway in the Bay area. As I described in terms what we're seeing in Mountain View, there's been a 50% increase in rents on a net basis. That's sort of across the spectrum, so if this continues to hold, we would hope there would be demand for that type of asset. We are looking at some other assets in the Bay area, predominantly in the Valley. Whether it's the right time to buy is a question we'll have to face over the next couple of months.

Thank you.

Rob Stevenson, Macquarie.

Good morning guys. Can you talk a little bit about the 2012 expirations in the New York portfolio? It's a little bit under 480,000 square feet. Is that -- a big chunk of that in the GM building? Is that what was driving the commentary earlier about lease roll-overs there and the joint venture income?

The largest lease expiration we have in New York City in 2012 is 190,000 square feet, 170,000 square feet at the top of 399. Then I think in 125 W. 55th St., we have the space that is rolling over with a law firm that hasn't been in occupancy, and I was describing an increase in activity and a renewal in expansion, and that's where that's going on right now. So that one is basically covered. Then at 510 Madison Avenue, we will have -- 540 Madison Avenue we'll have SAC moving out when they move into 510 Madison Avenue, into that expansion, in the middle of 2012.

That's really where the big piece is. One floor, I think it's the ninth floor of 767, where there's an expiration that's 30,000 square feet.

Then on to 510 Madison, Mike, what are you assuming the lease -- the incremental contribution is there in 2012 guidance? It's 39% leased today. Is there any incremental lease-up in guidance, or basically what are you assuming there?

We're assuming that we're leasing it up over the next seven quarters. I think we've said that we expect it to stabilize now in the third quarter of 2013. We're seeing consistent kind of proposals, prospects, etc. We've got this prebuilt program that Doug talked about, and we're going to continue to use that prebuilt program so we always have inventory of it. So our expectation is that we're going to continue to have a reasonable lease-up. Most of those leases will probably have some amount of free rent to them, three to six months, maybe a little bit less if it's a prebuilt. If it's not prebuilt, it may be a little bit longer.

The one issue we do have is capitalized interest on that asset. Capitalized interest will be ceasing on that in April or May of 2012, which is basically 12 months after the date that we completed construction, completed the development of it. So that is having a bit of an impact. The lease-up will continue to go a little bit further than that date.

Okay. Then one last question on guidance. If you think about the '12 guidance as you sit today, what's the most likely area that could be an upward surprise? If I told you that, looking out in the future, you guys did $4.90 or $5 next year, is it going to come from bigger positive leasing spreads, earlier lease-up of expiring space, transactions? Where do you think the sort of upward bias could wind up coming from, if there is any?

It's tough, a little bit tough answer that question, but I will say and we talked about a couple of these things -- the building at Patriots Park, which is 180,000 square feet, where we haven't assumed anything for 2012, we do have prospects we are talking to. So if we are able to hit a big prospect -- and some of those prospects are big prospects -- that could be meaningful.

The space -- the Wilmer Hale space, the 399 Park Ave., that space is available. We're not assuming we have income in 2012. If we're able to sign some leases, they'll probably in free rent, but they certainly could commence in 2012.

Then, as Jordan mentioned, the exchangeable debt that is coming due -- if interest rates and spreads go down, we might be able to do better on that than what we've put in our model. So those are some of the things I think that could drive it. The stuff at Embarcadero Center, we've covered 75% of it. It's going to have the downtime that we expect. Patriots Park is going to have the downtime that we expect, so it's not going to come from those two things, or really anything. In Boston I guess we could do a little bit more leasing in Cambridge at 4 Cambridge Center. We still have some space there that we could lease a little bit quicker than we project.

The other thing is, between now and the end of next year, I would be various prized if we haven't made at least one serious acquisition.

Okay. Thanks guys.

John Guinee, Stifel.

Thank you. Two quick questions. First, Mike LaBelle, $18 million of FAS 141 burn-off in 2012. I think you still have about $60 million of that income. How many more years will it take for that to burn off?

It's $53 million left. There's two big pieces of it which are the roll-over in 2019 and 2020, which is the [Wauel Gaton] Estee Lauder roll-over. Between then and now, I don't have it in front of me, what's going to happen between. There's some roll-over obviously between then and now.

But not much.

It's Mike Walsh. That would be the vast majority of it. Those are two large tenants in the General Motors building that are well below market, and that was assumed and included in our acquisition and in our accounting.

Then the second question, just quickly, Patriots Park was $36 million of NOI in 2011, which is a little over $50 a foot. So the holdover rent plus the lease term fee was incredibly advantageous. It looks to me from back of the envelope as you take those buildings and gut them all down to the studs, to the steel frame and start again, you're going to put about $120 a foot into each of those three buildings. Should we look at that as a once you gut them down to the studs and redevelop them, is that a $15 net building, a $20 net building, a $25 net building for underwriting purposes?

I think the rents in the building are in -- the buildings that are under construction are in the mid $30s and we think the rent on the other building, building -- what is referred as Patriot Park 3, which is a 180,000 square foot building, will be closer to $40 a square foot.

With what sort of OpEx?

I want to say $9, plus or minus, including taxes.

Do you think $120 is a good number to -- for the demolition down to the steel frame and rebuild?

I think -- is it -- The first building is in the supplemental

(multiple speakers)

The second building should be similar.

I think it's $250 a foot. It's $130 million for the 523,000 square feet. The third building isn't having the same type of renovation, so it's just a relet of an existing office building.

So basically to tear it down to the steel frame and rebuild is a $250 number?

Yes.

Wow. Thank you.

Michael Knott, Green Street Advisors.

Doug or Mort, Doug, I know you said you didn't want to opine on the direction of New York office rents. I'm curious of your guys' take on sort of the next three to five years, maybe New York versus DC. Which one would you feel better about in terms of market rent growth and then maybe how would the winner of that compare to Boston or San Francisco?

My own view is that both markets are going to be very strong. New York is I think going to be very strong and I think Washington is going to be very strong. I suspect that if you disaggregate Boston from Cambridge, I think Cambridge is going to be extremely strong. I think Boston will be solid. I don't know it that will be quite a strong as Cambridge, but in terms of those overall markets, I think they're going to do very well. What we're seeing in San Francisco now is a huge resurgence in that market. Nobody can predict exactly how long it's going to go but it's certainly going to go well for the next three or four years. So in general, we're very comfortable with the markets we are in.

Would you say you're more conservative on sort of the government issues in DC relative to the finance tenant issues in New York?

The Boston market is not just the government. We're always conservative about everything. Of course, I know I didn't have to say that, but basically the Washington market is very strong in part because there's going to continue to be a considerable, shall we say, outflow of money from the government into a lot of different uses and users. There's a lot of private-sector activity that feeds off of that. So you have a real --

You know what our problem is in Washington? Our problem in Washington is getting enough sites to really take account of what we think is going to be happening there. That's really a major effort that we're working on as we speak. That, to us, is the major challenge. You look and see what we did with 2200 Pennsylvania Ave. We leased that building up in a moment and at rent about our projections, both on the -- or all -- not only on the office space but on the retail space and on the residential space. And so that is an example. We did that. If any of you have seen that building, we did that building at such a level of quality and that it's a widely recognized community that, frankly, it's going to help us in terms of developing and [firing] other sites. So that formula has worked out fabulously well and is exactly in the sweet spot of what we're about as a company.

Then one last question if I may? Just curious how your prospects at 250 W. 55th are viewing that location relative to new space on the far West Side or downtown?

So the far West Side is sort of not part of the equation for any of the tenants we're talking to because, quite frankly, those are -- in order to build a building of the far West Side, you need to be a lot bigger than the types of tenants that we're talking to at 250 W. 55th St. In other words, a 200,000 square foot tenant is not going to get a 1.8 million square foot building at the West Side, the rail yards or the Brookfield properties or any of those sites going. I don't believe they will start with that size of a tenant. So the tenants that we are talking to don't really work within that context.

Some of the tenants we are talking to are considering the space downtown. Ultimately the question is whether or not the economics and the geographic differences between being in a Midtown even if it's on Broadway or 7th Avenue or 8th Avenue in the 50s are more compelling or less compelling than what it's going to cost to both get to and live in space down in Wall Street. The rents that we are talking about are not that much of a premium to the rents that have been done recently downtown. So, we think that the likelihood of the tenants that we are talking to going downtown is a possibility, but it's not going to be a trend.

Thank you.

Steve Benyik, Jefferies & Company.

Good morning. Thanks very much. I just wanted to touch base on the Two Grand Central Tower sale, obviously pretty strong pricing. I was just wondering if you could discuss a little bit about the number of bidders that participated in the process as well as what types of bidders were most active there.

This is a traditional marketed, widely marketed building where we had dozens of people sign confidentiality agreements. We had probably somewhere in the neighborhood of 20-plus people actually tour the building. We had two rounds of serious bidding before we narrowed it down to two or three. The profile of the bidders was traditional New York City families, pension fund managed money by advisors, both on sort of the large institutional side as well as a separate account. We had a couple of the "sovereign wealth entities" look at the building. Ultimately, I think that the building was considered to be a "core plus", because there is a reasonable amount of leasing to be done both at the base of the building and at the top of the building over the next year or so, and a lot of the "core money" was looking for more stability of and certainty of yields in the short term and so this was a "core plus" deal.

Okay. I was hoping you guys could provide a little bit more color on what you're hearing from your government (inaudible) ahead of the Super Committee decision, what your expectations are for the remaining defense contractors in the portfolio and whether you think decision-making could accelerate post the Super Committee decision.

I must say I don't know that, at this stage, is a serious issue in terms of the tenants that we're talking about. The Super Committee is undoubtedly going to have some function in terms of cutting "government expenditures", but I had a meeting just yesterday with a whole group of people who are experts in the budget process and people who (inaudible) three of them -- pardon me, being a head of the budget committees in one form or another, and nobody expects that that's going to be a great success in terms of where we go. Nobody really knows but there are all kinds of ways in which they think and most of the commentators think those, the budget cuts are going to be put off in real terms and it's not going to have much an effect as we see it in terms of our office markets.

I would just add to that, Mort, that we're still seeing deals being done up at Annapolis Junction outside of Ft. Meade. Patriots Park 3, which is really a state-of-the-art only six years old building that is the sister building to the two -- one we just renovated for DIA -- is getting tremendous interest at very high rental rates from those seeking to be next to DIA and/or wishing to take advantage of the infrastructure already in place. Those are two specific circumstances, but the broader market, I would say that there is some holding back until it gets resolved, but defense spending does not seem to be -- especially those in support of cyber security -- those do not seem to be in any way affected by the budget impasse at this time.

Then just lastly, a two part question related to guidance. I guess, first, what's the new year-end cash balance expectation for 2011.

Then second, on the 2012 side, when you look at guidance for occupancy of 91% to 93% but you mentioned Patriots Park and 399 Park, assets that could potentially lease out, do you think there could be a meaningful delta between what the occupancy number could be at year-end '12 versus what the leased number could be?

I think with regards to the cash question, which is a little easier one to answer, I think our cash is going to be roughly equivalent to where it is right now. We don't have anything large to deal with from a cash outflow perspective, and we will have some cash inflow from our portfolio.

Then in addition, as I mentioned, we'll have the (technical difficulty) $30 million approximately that we already have that we just got from Two Grand Central. So as I mentioned, it's a little over $1 billion, $1.1 billion, something like that.

With regard to our occupancy percentage, again, I kind of pointed out the big items. Our portfolio is about 38.5 million square feet. So in order to move our occupancy by 1%, that's 380,000, 400,000 square feet, something like that. So we've got the 170,000 square feet at 399 Park. We have 180,000 square feet at Patriots Park. We've got about 80,000 square feet in Cambridge. We've got some suburban occupancy, like in Bay Colony where we have a lot of vacancy, 400,000-plus square feet. But as Doug mentioned, we're going to do some leasing there, but our expectation there is more to the back half of '12 and into '13 as we complete the CapEx. So I guess, as you think about those numbers in regard to our overall portfolio, you can think of what it might do to the occupancy.

Thanks very much.

Mark Biffert, Bloomberg Research.

Good morning guys. Doug, I was wondering if you could comment on the Two Grand Central asset sale in terms of the unlevered IRR that you guys achieved over your holding period, taking into account the impairment charge that you recorded on it?

I'm happy to do it for you. I haven't done it yet.

Okay. Then back to your commentary on the acquisition market when you had mentioned that you thought the underwriting was too aggressive, I'm just wondering what your view is of their expectations for IRR for those assets and how far of a spread you guys think you are relative to the bidders that are winning?

All I can tell you is what we are currently seeing, which is that based upon the numbers that the other people are underwriting, they are trying to achieve unlevered IRRs in the low 7% range. That's what the numbers would tell you.

Our view of where the pricing is, based upon what our underwriting is, is that it will be significantly less than that. So that's why we just haven't been the winner at the end of the day. We are, as Mort said, we are absolutely positively not concerned with what the [going mean] return is or what the three year return is. What we really are I think directed by what the overall unlevered return is based upon a realistic expectation of market growth and a realistic expectation of capitalization rates.

You can agree or disagree with where interest rates are today in terms of how long it's going to be like this, but you have to I think at least recognize that there is a probability that, in ten years, interest rates may be significantly higher than where they are today, and so you have to really think long and hard about what proportion of the valuation of the building is residual and how that residual is being calculated. Is it being calculated based upon an unrealistic view of where cap rates are in out years or is it being viewed based upon an unrealistic expectation of where you think there's going to be a significant amount of growth in underlying cash flows?

We've just been -- we've struggled, and believe me, we try hard. We're really good at doing financial analysis and doing [Argus] runs and [Dinah] runs and all sorts of permutations. So it's not like we don't get it. We do get it, and we just struggle with the underlying assumptions to get us to the places -- to a point where we can (inaudible).

Do you have a feeling that some of these assets are (inaudible) back, because just relative to what you're seeing in the markets, you're not going to achieve what they had initially expected and they would be pushing to sell the assets at some point, say, in three years, two years?

(multiple speakers)

Let me say one thing in that regard. Thanks, Doug. We think all of the assets that we buy are underpriced and all the assets we don't buy are overpriced. Just as a way of looking at it.

So I honestly think that there are two points to that question. The first is people may have very different expectations of what they want to pay for a building not necessarily because of what the return is but because of what their alternatives are. So it may very well be that the people who are buying these buildings or the institutions that are buying these buildings have a perspective that you know what, if I only get a 4% IRR, it's not the end of the world because I have a different perspective on the world.

I do think that most of assets that are being purchased are being purchased by buyers who are not using leverage to finance these assets in any meaningful way. So, the sort of perspective that, well, the reason these buildings are coming back to market is because there is a financial distress associated with the capital structure is unlikely to happen, whether or not because of the overall return expectations and where they could put their money from an alternative perspective in three years has changed, that's a hard one to sort of handicap. But I don't think these buildings are going to be coming back because, simply because they have underperformed.

Okay. Then just related to the Bay Colony discussion, you had mentioned that you were talking with a tenant that sees your vision for that property. I'm just wondering what type of tenant is that? Are you planning to do an a tech type of center where you have more tech-related tenants, larger tenants in that facility?

So the first tenant is a tenant that does mobile phone applications, and it's grown from 3000 to 8000 to 12,000 to 20,000 and it took 39,000 square feet. Probably it's going to be looking for more space. We are trying to appeal to tenants that look at space collaboratively, that look at it from a brand perspective, that look to try and create areas where they can create "commonality of experience", and are using space in a manner that allows for really productive interaction amongst the users of those of those companies. And so we are trying to do wide open space plans. We're trying to create common areas. We're trying to create open areas. We're redoing amenities. We're doing outside spaces. We're changing glass lines. We're really trying to open those buildings up and make them really feel fresh and new, even though they were built in the mid '80s, because it's a spectacular site and it really offers all sorts of opportunities from a visual perspective. And it also offers growth because it's a 1 million square-foot campus and there's actually an ability to potentially build more buildings up there. So we think it really sort of is in the sweet spot for the technology, life sciences, biotech tenants, not from an R&D perspective but from a G&A perspective and from a sales and marketing perspective in the clinical current age of technology.

Michael Bilerman, Citi.

I appreciate this call going on for so long, but Mort, just one quick question for you. In your comment about responding to a question about 2012 guidance, you said between now and the end of next year, you would be surprised if you haven't made at least one serious acquisition. My question is what's the probability that's domestic versus being abroad, and how would you define "serious" in relation to your $25 billion of assets?

"Serious" would be a building that would be between 0.5 million and 1 million square feet. I would say that would be my definition. I don't necessarily define it in terms of dollars because that will all depend of course on what the market is. As you probably have read, we have looked at several other markets, including we've looked seriously at London, for example, as a possibility of another market opening up to us. We're going to be very careful about how we go into markets that we're not in at this stage of the game. But we're very open to shall we say expanding at least to one other market if we could find the right investments. We're not rushing in is all I can say, and we are definitely sort of open to other markets.

So is this stuff that's in the pipeline today or that you think will come into the pipeline over the next 12 months that you think you'd be able to buy?

There are some things "in the pipeline", but let me define what the pipeline is. Until you have a purchase and sale agreement, I mean, we don't consider it in the pipeline, and we don't have any purchase and sale agreements outstanding as we speak.

Okay, thank you.

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

Thanks everybody. Some of us will see you in beautiful Dallas in a couple of weeks. I won't be one of those people. I have a previous required engagement at -- that I agreed to 2.5 years ago, so you'll definitely see Mike and you may see Ray and you'll see the other Mike, and we will talk to you again on our next call. Thanks.

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