波士頓物產 (BXP) 2011 Q4 法說會逐字稿

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

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

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

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

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

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

The Company does not undertake a duty to update any forward-looking statement. Having said that, I would like to welcome Mort Zuckerman, Chairman of the Board and Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. Also during the question-and-answer portion of our call our regional management team will be available to answer questions as well.

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

Good morning all. Thank you for joining us for this discussion about the Company and the environment in which it works. I'm going to spend most of my comments just describing the general macroeconomic environment.

It is still a time it seems to me when we have to be very cautious about where the economy is going in general. The unemployment numbers are very weak. The housing prices continue to go down. Consumer sales are still weak. Inventory buildup is primarily accounting for a good part of the growth that we've had. We face the risk of a situation in which, while there isn't that much in the way of additional layoffs, although there are some, there is very little hiring going on across the country.

Nevertheless, within this context the basic business strategy of the Boston Properties still seems to be working out fairly well for the following reasons. Number one, we're in unique markets, in the markets that have by and large done relatively well in this weak economy. And those markets are cities, and cities which have certain characteristics, including the level of employment that requires, shall we say, a knowledge base for their flourishing and, indeed, survival.

And that is true the cities that we are in -- Cambridge and Boston and New York and Washington and its suburbs and San Francisco. San Francisco was the last city to really get its gear in forward, but in the last year, year and a half, particularly as the social media boom spread throughout that community, we have seen a dramatic turnaround in the performance of that city and in the performance of our real estate in that city and in its surrounding areas.

But in the other cities we have continued through this entire period to do relatively well. I'm not saying that it is the kind of exuberant experience that we had for many, many years, but still the basic strategy that the Company followed from day one, which was to be in certain markets that really had the best chance to continue to flourish even in difficult times, and to be in those buildings within those markets that would be the ones that would attract tenants. Not that our rents haven't gone down somewhat, but we own by and large the kind of buildings that when those companies that are doing well look for a new place of occupancy they look to our buildings.

So our basic occupancy has held up remarkably well throughout this period and our basic strategy, it seems to me, continues to hold up remarkably well.

So the question in a sense is are these cities going to continue to do well and, in particular, what is the national macroeconomy going to have to say about how well these cities are going to do? We think these cities are going to continue to do reasonably well, but it isn't to say that we think, and I certainly don't think, that this economy is going to continue to do very well. It has not been doing well now for quite a few years, and we have been bearish about this economy, as many of you will remember over the years that we have been talking about it for quite a few years. We're talking four, even five years.

And I do think that this is going to go on for a year or two or maybe even more. My own view, it is going to take a minimum of two years and probably between three to five years for us to work through the overhang of debt that now suppresses the economy.

It is also going to take us some time to see if after the next election we can develop national policies that offer a much better chance to re-stimulate our economy on a macro level than the ones we have had to date. And this is something no matter who comes into office, they're going to have to really think about and see whether or not they can fashion such policies and get them passed into legislation.

At this stage of the game it really -- when you think that you are in the middle of the kind of political campaign that we have witnessed, it is hard to believe that anybody is going to come out of this campaign with the kind of authority -- political authority and moral credibility to move the Congress and to have a Congress that is going to be very responsive to whomever the President is. But we're just going to have to wait and see on that.

In any event, I do think that the economy is getting somewhat better and not really getting worse. There is a chance that it will get worse, because at some point everybody is going to get exhausted with the fumes of optimism and really begin to think very differently about the economy. But for the moment that is a little bit away in terms of seeing it because the economy is growing, albeit at a very slow pace.

But in our markets, as I say, we find ourselves really dealing by and large with reasonably good markets, not great markets, but reasonably good markets. This showed up both in terms of the level of occupancy and in terms of the rents that we are obtaining.

And the real question is -- we do have a unique advantage at this stage of the game, which is the cost of capital. The cost of long-term capital for a company like Boston Properties has dropped dramatically. We have never seen anything like that, not in the -- I'm embarrassed to say 50 years that I have been in this business, we have just never seen anything like the kind of rates that we are now able to realize.

And this is going to give us an advantage on several grounds. One is we still can do a lot of leasing in a sense at somewhat lower rates, that if our financing costs have dropped significantly, as they have, our margins will be maintained in one form or another, even sometimes greater than they were before. So that is one thing that will help us mitigate the current condition of the economy, which while as I said, it is not going down, it is still relatively weak in terms of the fiscal and monetary policy that we have had trying to give it the kind of stimulus so that the economy would begin to self generate itself at a higher level of growth of GDP.

Anyway, that hasn't happened yet, but we think we reasonably well positioned to continue to grow, to continue to find assets that we can acquire and develop. And to continue in a sense as we turn over the space in some of our buildings -- these are buildings that are the highest quality within the markets they are in. They are, as we say, A buildings in A locations.

Their replacement cost continues to go up every year, and so it mitigates again the downward pressure on the space that we have, and we have kept a fairly high vacancy in virtually every market we're in.

So that is as much of a summary that seems to me I should give you at this point. My colleagues will fill you in with a lot of the other aspects of our Company's operations and particularly in the last quarter. Thank you all very much.

Thanks, Mort. Good morning everybody and thanks for joining us. Happy New Year to those of you who I haven't personally seen or talked to.

We finished 2011 with a total return to shareholders of 18%. We completed about 5 million square feet of leases. We delivered $932 million of developments, which we expect to have all stabilized by the third quarter with a yield of about 7.4%.

And we have another $1.8 billion of active developments, which are going to be delivered between 2014 and 2012. Those include two recent developments in which are the Reston Residential and 17 Cambridge Center, which I believe are in the supplemental as of this quarter.

In addition, as our operating earnings improved we increased our dividend in the fourth quarter by 10% to an annual rate of $2.20. So it was a really, really good year for Boston Properties.

As Mort described, our corporate strategy of selecting on select markets, submarkets and buildings with unique and differentiated demand characteristics and limits on new supplies, and we support that with a terrific operating platform, with an amazing group of associates, has really allowed us to be very successful in spite of I think what Mort would describe as an unpredictable macroeconomic environment.

So last quarter we talked about our baseline earnings for 2012, and Mike is going to update that, but I thought I would keep my remarks this quarter contained to the operating fundamentals in our markets and those expectations for 2012. So that is really where I am going to focus my time.

In 2011 it was the second time we surpassed 5 million square feet of annual leasing. It was about 1.3 million square feet in the fourth quarter, which was a pretty consistent pace through the year. We had about 85 transactions with an average of 90 over the first three quarters, so again very consistent.

Our second-generation rents were really in line with our previous guidance, and that includes the downsize associated with San Francisco. If you strip San Francisco out of our numbers, our mark-to-market second generation was actually up 8.5%. And remember you going to see the same trend throughout 2012 in California as we roll over the leases in EC4, many of which we have already actually commenced the leases -- the leases have been done on.

Our in-place rents in Embarcadero Center 4, which most of the rollover is from, was $63 a square foot as of December 31 of 2010. And it is now -- it was at the end of this year it was $54 a square foot, so you get a sense of the roll down that we witnessed.

As we look forward, our portfolio mark-to-market today is about $1.53. I am sure everyone noted that our concessions this quarter were significantly higher than traditionally, actually about $30 per square foot above our run rate in 2011, which actually was probably $10 to $15 lower than what we traditionally have seen. And it was really due to about 1.2 million square feet of new long-term leases versus the renewals that we traditionally do during the quarter. The average length of our leases expanded from 102 months -- to 102 months from 72 months for the prior three quarters.

As Mort said, the job growth in the United States today is clearly focused on businesses that are oriented on new ideas, be they in the technology or life sciences or the medical device industries. And if you look at venture capital as a leading indicator, it was up over 20% in 2011 versus 2010. And surprise, surprise, the Silicon Valley, New England and the New York Metropolitan areas were the top three areas for venture investing, with more than 60% of the deal flow.

And if you look at the industry focus, it was software, biotech, medical devices, energy and social media. So I guess it is not surprising that the Silicon Valley and the San Francisco CBD showed the most significant improvement in real estate fundamentals in 2011. There was 8.6 million square feet of office and R&D absorption in 2011 through the fourth quarter, although the pace did in fact slow as we moved into 2012.

After this very active year there still are in the Silicon Valley 20 active requirements over 100,000 square feet. For our portfolio we leased another 90,000 square feet, bringing our total leasing to 355,000 square feet down in the Valley.

And rents rose dramatically. In May we did a 50,000 square foot lease in Mountain View research, $15 triple net. Two weeks ago we signed a 25,000 square foot deal in the same park, $27 triple net.

Office rents in Mountain View have moved from $27 a square foot triple net in early 2011 to in excess of $42 triple net today. We purchased a building in November which is described in our press release. The rents that are in place there are about $33 a square foot. It was purchased at a projected 2012 GAAP yield of 7.5% and a cash yield of 6.3%.

There is speculative development underway once again down in the Valley and Sunnyvale and Santa Clara, and the momentum does in fact show that it is pushing forward into the North Peninsula, which is where our Gateway projects are. We have four floors of space that we got back at the end of the year. We have released one of them already and are in negotiations on a second.

Rents in South San Francisco are at about $20 per square foot triple net, again, very different than what we saw in Mountain View and Palo Alto.

But to just give you a perspective that it is not great everywhere, across the highway from our Gateway project is a 320,000 square foot brand-new building completed three years ago. It is yet to sign its first lease.

Our view is that rents are going to continue to rise in 2012 dramatically in the South, not so quickly in the North, but they will be rising as we look forward.

Growing demand from the technology sector has also been a very significant factor in the net absorption of about 2 million square feet in the city of San Francisco. Class A vacancy has dropped over 400 basis points, which is a dramatic number, in 2011 to somewhere around 10.5%. There has been a lot of focus on the desirability of the non-core office space in some markets like the multimedia Gulch and the China basin market for these technology companies. But the same tech companies are also interested in traditional high-rise office space.

In the last 60 days Medivation, which is a biotech company, that was actually in the Journal today about prostate cancer drugs, leased the 34th and the 35th floors in 525 Market, about 55,000 square feet. LinkedIn, took three floors in One Montgomery Tower. That was a space that was formally occupied by Charles Schwab.

And Salesforce has leased 400,000 square feet at 50 Fremont, and they did it on a long-term basis for over 17 years. And the space they took, that filled the space that Pillsbury Winthrop is leaving to move into our buildings at Embarcadero Center 4 in space that Ernst & Young once occupied before they moved to 555 Mission. These are all traditional office towers.

Embarcadero Center, we did 300,000 square feet of leasing, six full or multi-floor deals, including a full floor to a cloud computing company, bringing our total year-to-year leasing to 615,000 square feet.

Our asking rents at EC are in the low $40s on the smaller non-view spaces in EC's 1, 2 and 3 to over $7 a square foot at the top of EC 4. Rents are about 15% higher than they were last time this year.

Activity in Cambridge is what is leading the Boston region, as Mort suggested. There is over 1 million square feet of new construction, which is 100% committed to biotech and life science companies. One office building at Technology Square is actually being converted to a lab space. It is actually reducing the overall inventory in Cambridge and putting more pressure on office rents.

We're in discussions with tenants for almost all of our availability at Cambridge Center. And asking rents are up 10% to 15% from 2011 to over $50 a square foot. The surge of larger technology and biotech companies for space in Cambridge is continuing, and there are new entrants to the market every day.

As an example, Amazon.com, who doesn't have a presence in the Boston market, is now looking for 30,000 to 40,000 square feet in Cambridge as we speak.

Across the river in the Back Bay, which is where we sit, there is really limited short-term availability, but it is not preventing us from doing leasing on a forward basis. At the Hancock Tower we're in discussions with tenants, many of whom are subtenants at Manulife, on long-term extensions and expansions beginning in 2013, 2014 and 2015.

We have actually completed 100,000 square foot of forward releases and we're negotiations with tenants that occupy an additional 164,000 square feet on six floors. These transactions aren't going to impact our numbers until the original leases expire in 2013 or 2014, but we are creating strong, and I promise you, very strong contractual revenue growth.

Rents in our Back Bay properties range from the low $40s to over $70 a square foot at the top of the Hancock Tower. We completed one additional floor at the base of our Atlantic Wharf Tower this last quarter, where rents are in the low $50s.

When you think about our Back Bay portfolio keep an eye on 2014 and 2015, because that is when most of our major lease expirations occur. But we are actively working today, as I said, on new or replacement tenants for that space.

We continue to see evidence of modest growth from small and midsized Boston financial tenants as a number of the Hancock deals involve expansion. But at the same time, there are large traditional users in the city that are becoming more efficient in their space utilization, and that is leading to contractions.

As an example, one major Boston financial institution, which occupies about 1.1 million square feet, including space at the Hancock Tower and other buildings in the Back Bay, is expected to either renew or relocate into only 800,000 square feet without any job reductions.

This type of a factor is really impacting the net absorption in the city, so there really hasn't been much in the way of marginal improvement in the overall demand characteristics on a vacancy perspective. And we continue to have lots of space at the base of buildings that the city is dealing with.

The suburban market had pretty good activity in 2011, but again, absorption was tempered through sublet availabilities brought about by corporate mergers and acquisitions. We completed a half a dozen leases over 25,000 square feet that involved either relocation or expansion for tenants looking for more space in 2012. But companies like IBM and Oracle continue to purchase local tech companies and they consolidated operations. And while Biogen's decision to move into our building in Cambridge from Weston was a great opportunity for us, as a new development it hasn't helped the overall dynamics of the 128 market.

We are about 90 days away from completing the first phase of our Bay Colony repositioning, and we finally completed a lease with a new technology company, 40,000 square feet, and they're already looking for new additional space.

During the fourth quarter we completed almost 200,000 square feet of leasing, and we have pretty good visibility on leases for a similar amount of activity during the first quarter 2012. Availability is still in the mid-teens, however, which means that in our view the rents may be pretty flat year-to-year after a pretty significant growth in 2011. Rents were up about 15% last year.

In DC the impact of the deficit negotiations and the spending reductions in the President election are going to mute any significant improvement in overall market conditions. In the District we really don't see the government expanding in 2012.

The GSA procurement process has become more prolonged. And it is interesting, as we have witnessed for many years in our other properties, a lease expiration really isn't an issue for the GSA, they simply continue to pay at their old rent and they let the leases expire. They don't really have any motivation to do anything.

Over the last few quarters additional large blocks of space have come onto the market due to loss from consolidation, and that has increased the choices for tenants. So in the short term we think private sector leasing is going to continue to be slow. And there really isn't much in the way of large law firm lease expirations before 2014 that are going to drive much in the way of large leasing in the city.

However, the good news for us, again, is that our portfolio is 97% leased. We have 160,000 square feet of expiring and uncovered 2012 exposure. So while we may not see much in the way of lease economic improvements we also don't think we are going to be impacted over the short or the medium term.

Market rents for the best space are in the high $40s and may touch $50 on a triple net basis. But the bulk of the leasing in the city that we see as happening in 2012 is going to really be in the high $30s to the mid-$40s triple net, with little expectation for much in the way of change.

Just to give you a perspective, the GSA perspectives cap for large leases for 2012 is $49 gross, which really limits the activity from the GSA to the older buildings and secondary locations. Operating expenses bottom line are somewhere between $17 and $20 a square foot for those buildings, so you're talking somewhere in the high $20s, low $30s for where those rents are going to be on a triple net basis.

Government contractors are also delaying their leasing decisions, while completing short-term extensions because contracts to start -- you know, they're very much in the air. There is going to be a $500 billion to $1 trillion of defense spending reductions that are going to kick in over the next 10 years, and it is clearly going to have an impact on the overall region.

If you look at the Dulles corridor, depending on how you slice it, availability is in excess of 20%. Yet when you look at our portfolio in Reston, vacancy is 1%, and we have completed over 300,000 square feet of additional leases in Reston in the fourth quarter, including a 190,000 square feet lease with Bechtel that absorbed 100% of the availability that we had in our Reston Overlook project.

During the year we leased 600,000 square feet in Reston with virtually no renewals. Many of you attended our investor conference and you saw our presentation materials on Reston Town Center. We have created a unique environment for users of office space in Northern Virginia, and our users have appreciated the value proposition, and that has translated into significant rental rate premiums over the market.

In the midst of a really, really weak Northern Virginia market there is still demand for premium product. So space in the Town Center is being leased in the mid-to high $40s on a gross basis, depending upon concession packages, whereas space outside the corridor is leasing in the high $30s, and space outside the town center is being leased in the high $20s to the low $30s with significant concessions.

Our one large exposure in Reston is a 182,000 square foot building, which is adjacent to the new DIA headquarters, the first building of which is going to be delivered in February. We are aware of interest for another agency that can -- is very interested in the infrastructure that is in that building. It is a seven-year-old BRAC compliant building, but the timing of the solicitation is being impacted by the budgetary issues that I talked about a few minutes ago, so we will see one that lease ultimately gets allowed to be -- to move forward, but we are optimistic that it is going to come to that building.

One area that the government continues to fund is the area of cybersecurity, and the nucleus of that is up at Fort Meade. We are quickly finishing our second building at Annapolis Junction just outside that base, and we have very strong leasing activity for that product.

As we discussed last quarter, the limited activity in our New York City operating portfolio stems from a lack of availability. We are somewhere between 97% and 90% leased. And our decision last quarter was to start doing prebuilds in 510 Madison. I would note that we did do one 50,000 square foot expansion at 125 West 55th Street, but our prebuilt suites are close to being done. Again, we have seven of those at 510 Madison, five at 601 Lex, four at 599 Lex and two at 540 Madison.

Tenant interest on those spaces is good, but again the deal size is going to be smaller than our typical deals, and tenants want to be see the finished product. We have leases in negotiation on three suites that are done at 599 and two suites at 510 where construction should be completed in the next couple of weeks.

In addition, we actually picked up two additional floors of space at 510 Madison where we were working on leases right now. Our big exposure in 2012 is going to be at 399 Park, where we are going to have availability beginning in the third quarter. That space is being priced at around $90 a square foot. And we have just started to mark that space to full floor and multi-floor users, and I'm not going to be surprised if we don't decide to do some breaking up there and do some prebuilds as well. We don't expect to have rent commencement in that space until sometime in 2013.

At the upper end of the market, just to give you a perspective of why we're doing what we're doing, in 2008 there were 105 leases signed at over $100 a square foot. That dropped to 19 in 2009 and 2010, and it moved up to 44 in 2011. The average high-end deal was under 20,000 square feet, which really reinforces our strategy of delivering small prebuilt places to attract those types of tenants.

We also do sense that the changes that are occurring at the large financial institutions are starting to lead to the growth and formation of lots of new boutique firms, smaller firms, which we think are going to be excellent candidates for this type of space.

Today when you look at 100,000 square foot blocks of space in midtown and you compare it to last year there are significantly fewer number. And it is interesting, because there is a sort of a bar belling of them. There is an abundance of lower space options in older buildings, east of Lexington Avenue, where rents are in the $60s or below. And then there is a group of blocks that are above $90 a square foot.

Well, the low lower levels of 250 West 55th Street is being priced in the mid-$80s, and we believe is an excellent alternative in the market. We continue to have discussions with larger tenants with lease expirations in 2014 and 2015 for the space at 250 West 55th.

Users do feel less pressure to make decisions and transactions are taking a longer time to complete, but they are occurring. So that is my summary of the current operating environment. I will let Mike talk about earnings and then we will open things up for questions.

Great, thanks, Doug. Good morning everybody. Before I jump into our earnings for the quarter I want to mention what we completed in the capital markets. In early November we issued $850 million of senior unsecured bonds for a seven-year term at a yield of 3.85%. The seven-year term fit nicely into maturity schedule, and the deal represents the lowest coupon we have ever issued in the bond market. This capital is dilutive to our earnings in the short term until we repay other debt maturities.

Last quarter we bought back $50 million of our 2012 exchangeable notes. We paid off $50 million of mortgage on our Reservoir Place project in suburban Boston, and we extinguished our Atlantic Wharf construction loan.

For the rest of 2012 we have about $810 million of debt expiring with higher GAAP interest rates than the new bonds. As we stated in our press release, we will be redeeming the remaining $576 million of our exchangeable notes in February that have a GAAP rate of 5.63% and a cash coupon of 2 7/8. We also expect to repay $144 million mortgage on Bay Colony, with a 6.53% interest rate, and a $65 million loan on One Freedom Square that has a 7.75% interest rate.

Also, as we noted in our press release, despite substantial efforts to work out a resolution for our Montvale Center property, we expect to transfer the property during the first quarter to the lender, a servicer for a CMBS trust, extinguishing a $25 million loan that is accruing interest at 9.9%.

The property's annual FFO was negative $1.2 million and the transfer will result in a gain of approximately $18 million. This is reflected in our first-quarter and full-year 2012 net income guidance, but it is excluded from FFO.

Upon completion of all of this refinancing our annual interest expense will have been reduced by approximately $15.6 million or $0.09 per share. In addition, we will still retain just over $1 billion of cash on our balance sheet, which is sufficient to fund all remaining costs for our development pipeline, as well as provide capital for new investment opportunities.

The health of the capital markets has improved over the last two months, and particularly since the first of the year, as positive domestic economic data and high levels of investor liquidity are resulting in a more bullish sentiment from credit investors. Our outstanding 10 year bonds are trading at spreads in the 170s, and we could likely issue new 10 year paper today under 4%.

In the past four weeks alone our bonds have traded in by 40 basis points. This compares to the 10 year mortgage market where we see the life insurance companies looking for minimum coupons in the low to mid 4% range for large loans. The CMBS market has wider credit spreads and is not currently competitive for loans on properties like ours where are the life companies aggressively compete.

We're also seeing continued demand in the bank market, primarily for five years or shorter terms, with attractive floating interest rates on term or construction facilities. This quarter we closed two construction loans, aggregating $126 million, with LIBOR spreads in the high 100s, and a nonrecourse three-year term loan for one of our value fund properties in the mid-200s.

Now I want to turn to our earnings results. We announced fourth-quarter funds from operations of $1.21 per share. This is $0.02 per share above the midpoint of our guidance. And it would have been $0.04 per share above the midpoint if not for the dilution from our bond offering that was not included in our guidance.

For the full year 2011 we reported funds from operations of $4.84 per share. If you exclude the loss from extinguishment of debt we incurred in 2010, we improved our FFO year-over-year by $0.44 per share or 10%.

For the quarter, our portfolio generated approximately $5.5 million more than our projections, including $2.5 million of higher rental revenues. Much of the revenue -- rental revenue came from outperformance in San Francisco, where we signed 340,000 square feet of leases, several of which commenced rental income in the quarter. And we also generated $500,000 of unbudgeted income from a little over a month of ownership of 2440 West El Camino Real, our acquisition in Mountain View.

Other areas where the portfolio performed better than our expectations include parking revenue that was $500,000 above budget, and net operating expenses which came in $1.3 million under budget. In addition, we generated $1.2 million of termination income that we had not budgeted.

The two largest terminations related to a 30,000 square foot deal at 230 CityPoint in suburban Boston and 25,000 square feet at One Freedom Square in Reston. In both of these instances we took back space from a vacating tenant prior to their lease expiration, and immediately released the space to an expanding tenant in our portfolio.

Our development and management services income came in $1.3 million above our budget, with virtually all coming from higher than normal service and overtime HVAC income from our Boston and New York City regions. And we also generated a sizable leasing commission with the completion of a 50,000 square foot expansion by a tenant in our 125 West 55th Street joint venture property in New York City.

The contribution from our joint venture portfolio was about $1 million better than expected. The majority came from higher than anticipated percentage rent received from the Apple store at the GM building, as their sales have outperformed our budget. And similar to the wholly-owned portfolio, we also experienced better than expected service fee income in the JV portfolio.

Our hotel continued to show strong improvement with a 7% increase in RevPAR from 2010. For the quarter it performed slightly above our projections. Offsetting the performance of the portfolio was the dilution associated with our $850 million bond deal we closed in early November. We had not projected this financing to occur until mid February of 2012, and it added $4.3 million to our interest expense for the quarter. Our capitalized interest came in better than we expected, so in total our interest expense was approximately $3.8 million higher than we anticipated.

We incurred $1.5 million of unbudgeted losses from early extinguishment of debt as well. This related to the acceleration of amortization of finance charges for our Reservoir Place mortgage and our Atlantic Wharf construction loan that we extinguished. In addition, we repurchased $50 million of our exchangeable notes at close to par that also contributed to the charge.

As we discussed last quarter, we closed on the sale of Two Grand Central Tower in New York City for $401 million in late October. We booked a gain on the sale of $46.6 million, which shows up in our income from unconsolidated joint ventures. We back this out when we calculate our FFO, as we exclude all gains on sale from our funds from operations.

Our FAD for the quarter was lower than typical due to the unusually high second generation leasing cost that Doug discussed, and the fact that 60% of our recurring capital expenditures occurred in the fourth quarter. Our FAD was still more than sufficient to cover our increased dividend with a payout ratio of 88%. And our FAD for the full year 2011 provided strong coverage of our dividend with a payout ratio of 62%.

Before I go into our 2012 projections, I just want to remind you of our discussion last quarter on the transition period that a portion of the portfolio will experience in 2012 and its impact on our earnings projections. This includes $25 million of lost income from the downtime associated with redeveloping Patriots Park in Reston, the downtime and roll down of our now expired space at Four Embarcadero Center and Gateway Center of $12 million, and the 145,000 square feet being vacated midyear by Wilmer Hale at the top of 399 Park Avenue, where we project downtime to cost $6 million in 2012.

As we anticipated, our occupancy ended the quarter at just over 91%. With a reasonable 2012 rollover that we have of 2.4 million square feet, which is 6% of the portfolio, we expect to gain occupancy during the year and average between 91% and 93%.

Our same-store projections reflect the portfolio transition. We project our same-store NOI to be down 1% to 2% on a cash basis and down 1.5% to 3% on a GAAP basis. This is improved from our view last quarter. We have executed a number of leases at Embarcadero Center in San Francisco, as well as a major lease with Bechtel, and an expansion by another tenant in Reston, giving us better visibility on the absorption of some of our available space.

Our acquisition of 2440 West El Camino Real in Mountain View will contribute to our earnings with a projected NOI of $5.4 million in 2012.

Our development projects are showing consistent leasing progress in line with our projections. We signed additional leases at Atlantic Wharf, and are now 93% leased, while at 2200 Pennsylvania Avenue we are at 94% leased, demonstrating the strong success of both of these projects.

The residential components of these developments are also leasing well with the Lofts at Atlantic Wharf at 91% leased, and The Residences on the Avenue at 78% leased, each at rents that are among the highest attained in their markets.

At 510 Madison Avenue we executed only one lease in the quarter and are 42% leased. But as Doug noted, we are in lease negotiations with multiple tenants for both full floors and for some of our smaller prebuilt suites so activity is good.

In the first quarter of 2012 we will deliver the first building at Patriots Park, which is 100% leased to the Defense Intelligence Agency, and later in the year our 120,000 square foot Annapolis Junction joint venture development where we are seeing increased activity. For 2012 we expect these developments to contribute $65 million to $70 million of GAAP NOI, which is in line with our expectations from last quarter.

We expect that our straight-line rents for the consolidated portfolio, including our developments, will total $67 million to $72 million for 2012. This is higher than last quarter, reflecting quicker absorption of space, primarily in San Francisco and in Reston Town Center, combined with our Mountain View acquisition.

We are projecting our hotel to contribute $8.5 million to $9.5 million of NOI to 2012, which is approximately 9% above 2011. We recently opened a new restaurant in the hotel and are also in the process of completing significant common area upgrades in the plaza areas of Cambridge Center, both of which we expect will positively impact the hotel performance. Due to seasonality the hotel is projected to run at breakeven NOI in the first quarter.

Our joint venture portfolio is improving on a cash basis as we roll leases to market rents. And we anticipate a same-store cash NOI growth of 5% to 7% in 2012.

This quarter's leasing statistics demonstrate that our second generation leasing in New York City was up 16% on a net basis, part of which was from a transaction in the GM building. On a GAAP basis the roll off of $16 million of non-cash fair value rental income results in our joint venture FFO contribution declining year-over-year. In 2012 we are projecting FFO contribution from this portfolio of $122 million to $127 million, which includes $54 million of fair value lease revenue and $7 million to $12 million of straight-line rents.

Our 2012 projections for development and management services income is $25 million to $30 million, and is unchanged from last quarter. For our G&A expenses we project between $83 million and $85 million for 2012. We announced the second of a series of annual outperformance plans in our press release. The plan was disclosed in our proxy statement last year and is included in our G&A guidance.

Our interest expense will be higher than our previous projections in the first quarter of 2012 due to our November bond offering. We are earning only nominal interest income on this cash, while we wait to redeem our exchangeable notes in February and prepay $210 million of mortgage debt at the end of the first quarter, which are the first dates these loans are open for prepayment without penalty.

Upon completing these payoffs our interest expense will be lower for the remainder of 2012. For the full year we expect our net interest expense to be $390 million to $395 million. Capitalized interest for the year is projected at $40 million to $45 million. And in the first quarter our net interest expense is projected at $101 million to $103 million.

So if you combine all of these assumptions it results in our projection for 2012 funds from operations of $4.65 to $4.78 per share. The increase in our guidance from last quarter is the result of the contribution of our acquisition in Mountain View, quicker than projected absorption of a portion of our available space, a modest increase in the contribution of our joint ventures, offset by higher interest expense from our bond offering. We have assumed no new acquisitions or other new investment activity in our projections.

For the first quarter we project funds from operations of $1.12 to $1.14 per share. The first quarter is projected to be down from the fourth quarter of 2011 due to the seasonality of our hotel, as well as a decline in our portfolio NOI from our fourth-quarter rollover, the removal from service of the second building at Patriots Park, and $2 million of non-cash fair value lease revenue burn off in our joint ventures.

Thanks very much. This is Mort Zuckerman again. I am going to have to excuse myself. I have to attend a funeral service for the former Mayor of Boston, and I hope I will be able to catch up with you on the next go around. Thanks very much.

Operator, you can open up the queue. Again -- so I apologize that Mort can't be here for the Q&A, but the former Mayor of Boston passed away on Friday and the funeral starts at 11 o'clock. And the good news is in terms of Mort's attendance here that the funeral is literally down the street, so he was able to stay as long as he could.

But we will endeavor to answer all the questions that you ask of us. Hopefully, you won't be asking me political questions, because I am going to refrain from answering those. Go ahead, operator.

(Operator Instructions). Jeff Spector.

I guess the first question, we did not -- and I'm here with Jaime -- we did not hear any details on your acquisition from the quarter on 2440 West El Camino Real. Could you just discuss that acquisition please?

I think I did mention that it is a 7.5% GAAP yield and a 6.3% cash yield. The building is fully leased. I also said that the market rents were $33.25 in a market where rents currently are about $42 a square foot. So I don't think -- I want to make sure that you did hear that.

It is a good, solid Mountain View building. We view Mountain View/Palo Alto as the premier area for office ownership in the Silicon Valley. This is a multitenanted building that is likely to have users of between 5,000 and 100,000 square feet. No real lease rollover until 2014 and beyond. It is just at an excellent intersection. It is pretty close to Caltrans. It has got retail and high-end housing around it. And we thought it was -- it allowed us a good entry point into a market that we feel pretty good about the long-term prospect of.

Doug, did you say how you sourced the deal?

The deal was out in the brokerage realm. I would say we had a pretty unique way of acquiring it. From the time that we entered our contact period in terms of negotiating the P&S the closing was seven days.

Then I just had one more question before I pass it on to Jamie. I think in the introductory comments Mort was talking about some of the -- that you are in reasonably good markets. I guess of the markets you are in, which one or two are you most concerned about?

This is another one of those trick questions, right? So you are asking me to tell you what I like least. But I like everything, so I will just -- I will start that way.

I would say in the short term I'm glad I don't have a lot of availability in Washington DC, and I'm glad I don't have commodity product in Washington DC, because I think that is probably in our portfolio where the weakest amount of demand will come from.

I think after that everybody has, I think, recognized that the financial services sector in New York City is not in a mode of growth at the moment. And so it is putting some degree of pressure on the question of where our tenants are going to be coming from.

We, again, are fortunate to have a unique product availability, and we are marketing it towards what we think is a relatively attractive demand generator in the form of smaller financial institutions, a.k.a., hedge funds and money managers and small law firms and small business services companies, not larger users of premium space.

But clearly at 2012, I think, as I said in my comments, is going to be a pretty flat year in midtown Manhattan and likely in other parts of Manhattan given what is going on in the financial services side.

This is Jamie. If I could just back ask a quick question for Mike. Based on your higher guidance and the higher CapEx spend in the fourth quarter, what is your outlook for AFFO for 2012?

If you look at -- let me just go through the pieces a little bit. Our projection for occupancy is 91% to 93%, so we expect it to improve through the year. Our rollover is about 2.5 million square feet, so -- I mean, we expect that we're going to do somewhere between 3 million and 3.5 million square feet of leasing next year.

So if you look at transaction costs on average I would expect that it would cost us $120 million to $140 million, if you assume $35 to $40 per square foot, which I think is what we traditionally or typically average. Which actually lines up pretty well with what Doug mentioned, where he felt our average was as well.

On the CapEx side, we have got -- I would expect our recurring CapEx to be $30 million to $35 million. Now we do have what we call nonrecurring CapEx, which is the money that we are spending at Bay Colony and money that we are going to be spending at the Hancock Tower, primarily on the garage that is adjacent to the Hancock Tower. And we expect that we are going to spend somewhere between $20 million and $22 million on those two projects next year. But those were underwritten in our acquisition, so that is why we separate them.

The straight-line non-cash rent I mentioned was $67 million to $72 million, and $60 million to $65 million in the JV portfolio. And then offsetting that we had non-cash interest expense and non-cash compensation that is somewhere between $50 million and $60 million, and some non-cash ground rent.

So you add up all those adjustments and you get somewhere between $210 million to $240 million off of our FFO. Somewhere in that range would be where we would call our FAD.

Great, thank you.

Jordan Sadler.

I just wanted to follow up on New York. Doug, you obviously went through the market commentary a little bit; I was trying to keep up. But I am just curious. I know you said big blocks are down year-over-year. But what are your expectations given what is going on in the financial services sector, and what seems to be happening with the restive tenant demand, meaning some going downtown, some going to Hudson Square? What is your expectation for market rents now?

And I know you had discussed in the past couple of quarters that you saw a little bit of a slowing, but I am just curious what you have seen in the last 90 days.

What we have seen in the last 90 days has really been a continuation of what we saw through the larger portion of the year, starting in July when things start to slow down from a velocity perspective, which is the high-end deals in the premier buildings are still achieving in excess of $100 a square foot. And there is -- as I think I tried to illustrate, the demand isn't anywhere where it was once was, call it back in 2007, 2008, but it has increased significantly from where it was in 2010 and 2009.

That being said, there are not a lot of high-paying big block users currently in the market today. So as we think about what our pricing is for 250 West 55th Street we have priced it accordingly. We have priced it in the $80s, because we think that is a price point for new construction that is very attractive to the tenants who are interested in continuing to locate in midtown Manhattan and are not interested in being in a secondary location or a secondary building prewar or east of Lexington Avenue. So we think that is a pretty good pricing point.

And it is really a question of lease expirations. There is not a lot of incremental growth from large institutions. I have been talking for two years about what has been going on in the law firm economy with a reduction in the overall footprint of the legal industry firm by firm. But there happens to be consolidation that is also going on, which is increasing the size of certain firms and other firms are just no longer doing very well.

So we continue to have tenants in the market list, the TIMs list as we call it, that is not insignificant for blocks of space in excess of 100,000 square feet at 250 West 55th Street. It is just these tenants are taking their time making decisions, but they do have lease expirations and so they're going to act, it is just a question of how quickly they act.

So that is where we think rents are. I think that they're trying to get $100 a square foot on a block of space. A big block of space on Park Avenue in the first or second quarter of 2012 given where the economy is and where financial services employment is, is not going to be an easy thing to do, when quite frankly we are not pricing big blocks of space that way. That is why, in fact, we are going into the prebuild market to get some velocity and be able to achieve what we think are a fair rent for the type of products and locations we have.

Do you think net effective market rents are up, flat or down in New York from here by the end of the year?

I think they're flat.

Separately, on the investment market, can you talk a little bit about maybe the opportunities you're seeing? Has the pipeline started to build a little bit? Obviously, you've got this deal done in Mountain View, which looks like an opportunity, anything else behind it you could speak to?

Sure, I obviously purposely spent my comment on operations and the operating platform issues -- I expected the question. I would say where we are today versus where we are three or six months ago, the pipeline is more significant, largely because there is a lot more better product that we're looking at today than what we were looking at in the second and the third quarters of 2011.

We knew there were some better stuff that was going to hit the market. It has hit the market. Some of it is off market or transactions where there are relatively few bidders or people being talked to about the acquisitions, and there are others that are going to be these fully optioned broker type solicitations. Some of the properties are ones that we might be interested in.

And I would articulate that by saying they are in all of the markets we are in. So there is stuff in the CBD of San Francisco. There is stuff in the CBD of Boston. There is stuff in Washington DC. And then there is stuff in New York City that we are looking at on a pretty continual basis today.

And we continue to explore other places. And we are endeavoring to put ourselves in a position where if the pricing makes sense and the opportunity is there, we have the capital and the opportunity to close in a very efficient manner and use that as a quiver in our -- an arrow in our quiver.

Thanks for the color.

Ross Nussbaum.

I'm here with Gabe Hilmoe. I want to follow up on Jordan's question, and specifically about the investment market, Doug. Do you think that -- following what the Fed said last week, do you think that there is any probability here that the market takes the bait, if you will, and drives cap rates lower in response to a view that interest rates may be anchored here for a couple of years?

I think that the overall interest rate environment is clearly impacting people's perspectives on what their return expectations are. I would endeavor to say that it is highly unlikely that a high-quality premier office building is going to be trading at anything above a 7-ish type of an IRR on a long-term basis, assuming a moderate view on where rental rate growth might be.

If you want to pretend that there are going to be spikes or that there is going to be significant inflation in rates at some point in time, you can drive those numbers much higher. But our sense is -- and that has clearly been affected by interest rates and the view that people are saying, look, I can -- and you see it -- people can borrow money on a five-year basis if they choose to at somewhere between 3.25% and 3.5%. And you can get a very satisfactory yield on a private basis for that. And there is a lot of capital that is prepared to step into that particular type of a transaction and hold on for what the long-term might be in terms of interest rates.

There is also, I think, clearly this sense that there is no yield available in very many types of investments, and it is clearly driving people to real estate assets, particularly the types of buildings that we own and the type of buildings that we would like to own, which is impacting pricing again.

I can't tell you if I think the overall cap rate is going to be going down much more than it already is, because if you look at the deals that have been done in the better markets, if you have available space in those buildings people are bidding those assets at below 5% going in cash-on-cash returns.

If the buildings are stable, and there is not much in the way of lease expirations, the going in returns in our estimations are somewhere in the mid 5s to the low 6s. And depending upon where those market rents are that may -- the lower the market rents are versus what is in place, the better the yield is going to be and vice versa.

So I have a sense that is sort of where things are. And the fuel that the Fed has put on the fire in terms of saying that they think interest rates are going to be lower for a longer period of time, I think is just adding to people's appetites.

Are you targeting 7% unlevered IRRs, or do you expect to be doing better than that?

I think that our expectation on a long-term basis is higher than that. We are looking for assets where we might be able to do something that is not quote unquote underwritten in the asset from a cash flow perspective, because of our portfolio and because of our experience where we can churn buildings and do things that you have to take a little bit of leap in faith in that will get us the returns that are significantly higher than 7%.

But if you said to me, what is our typical pricing view of where buildings are -- if we're assuming very little in the way of rental rate growth and very little in the way of appreciation, that is where the numbers are. I think that we have other ways of skinning the cat in terms of our underwriting, and where we can create value in the assets that allow us to convince ourselves with some degree of accuracy that we can do better than that.

Jay Habermann.

Doug, you mentioned a firm downsizing in the Back Bay, I think, by roughly 30%, but obviously keeping jobs about the same. Can you give us some sense of what sort of activity? You mentioned some of the forward leasing you were doing and the strong rent growth. Can you give us some sense of perhaps that growth that you are seeing in rents there?

It is -- the growth in rents is really because of the products that we have. So, as an example, the average rent at the Hancock Tower on the high-rise floors is in the mid-$50s, and we are going to end up doing deals in the high $60s to low $70s. That is where the renewals are going to end up being done in our predictions. So that is pretty strong embedded growth.

The growth from a tenant demand perspective is coming from those smaller financial institutions. So there is an asset management company, for example, at the Hancock Tower, who is currently in 45,000 square feet and is looking for 90,000 square feet. There is another one that is in 60,000 square feet -- excuse me, 30,000 square feet that is looking for another 15,000 square feet. It is those types of -- that is where the incremental growth is on the demand side.

On average what sort of terms are you using for those transactions?

We are doing -- your lease length terms or market terms?

Lease length terms.

So, generally, the leases that we are doing are forward 7 to 8 years after 2013 to 2015.

And just switching gears -- sorry, go ahead, if you are --.

This is Bryan. The other thing that has been the benefit of the Back Bay has of course been the supply side. If you take a look from year-to-date last year where the vacancy -- direct vacancy for the, call it, the pure class that we focus on, 30 some buildings, it has dropped from 7% to 3%. So that has been a big benefit as well.

Okay, that is helpful. Then on Silicon Valley, Doug, you mentioned some risk of supply. How quickly could you see this ramp up?

So there is new construction as we speak. And there is probably 1 million square feet of buildings that are on the docket. And there is probably, I would say half of that is pure spec and part half of that has got tenant commitment. And the buildings that are going up are generally three to six story suburban office buildings that probably have a total development period of between 12 and 15 months.

Then, lastly, just on 399 Park, you mentioned the rent of $90 a foot. What is your expectation there, and I guess which floors roll in 2013?

There is 140,000 square foot block. It is in the mid to high rises building in the $20s, I believe. And we're hoping that we are going to be able to achieve rents in or around $90 a square foot -- in the $90s depending upon the size of the block and the amount of capital we put in. If we were doing prebuilts, I think we will try and get more. And if we're doing multi-floor deals with traditional concession package, which today is probably 9 to 12 months of free rent and $60 a square foot for a 10 year to 15 year commitment, we will be in the low $90s. That is my expectation.

Great, thank you.

Michael Bilerman.

It is Josh Attie with Michael. Doug, you gave some really good color on rents for large blocks of space in New York. Can you also talk about the lease economics at some of the smaller prebuilt spaces, including 510 Madison -- maybe how has that changed, if it all, relative to your initial underwriting and also relative to the first half of 2011?

I am going to date myself. Our initial underwriting, we were underwriting rents at the top of the building in the high $90s, low $100 a square foot, and at the base of the building in the high $70s, low $80s. And we're asking for $125 plus or minus at the top of the building. And we are achieving rents that are in the low $90s at the base of the building on both our prebuilt suites as well as our quote unquote floor by floor deals where we are providing a tenant allowance. And I think those are very consistent with what we were pricing the space at last year, in the second, third and fourth quarters.

Thanks, that is helpful. Can you also give us an update on the 601 Mass redevelopment. I know you have some time before NPR moves out, but where are you in the process of finding a tenant for that project?

Mr. Ritchey?

Well, NPR doesn't move out until the first quarter of 2013. That construction is going along very well. And we have got three different proposals out -- two major law firms and another entity for anywhere between half the building to about three-quarters of the space.

One would be occupancy immediately upon completion in 2015, the others go out into 2016. But you look around DC, while the existing portfolio may be on the soft side, the availability of sites to build first-class buildings is very limited and we feel really great about the 61 Mass site.

Thank you.

John Guinee.

John Guinee here. A few very quick questions. First, Doug, on the prebuilts with startup companies do you get any personal guarantees on that, or is it just essentially a month-to-month?

Second, I think your $450 million of exchangeable notes due in mid-2013 are now in the money. Will you change the accounting on that?

Third, you have gone from very little in terms of ground leases to about $5 million a quarter in ground lease expenses. Can you give a little more color on that situation -- which building, if you look at that as an implicit leverage?

And then, last, if Ray can comment on the Springfield, Virginia submarket.

This is Mike. I will try to cover most of those, except for Springfield. On the prebuilt deals with smaller companies they are not necessarily startup companies, obviously. But with all of our leases anywhere where we are making any kind of investment we are getting security deposits. And those security deposits for companies that don't have strong balance sheets are generally somewhere between six months and 12 months of rent.

I would say when you're doing a prebuilt space where you know what is going into the space, and you feel confident that on a second generation basis that it is going to be releasable with minimal additional improvements -- and we have not seen this because we did a bunch of prebuilts at Times Square Tower that have rolled over, and we brought new tenant in those spaces and it has is costing us $10 or $15 a square foot to get those new tenant in. We may -- the security might be a little bit less and maybe towards the six months. Because again they're not doing any kind of specialized improvement. Don't typically see personal guarantees, but certainly security deposits.

On the exchangeable notes, we do have additional share count that leaks into our equity side every quarter. And you will see that in the last few quarters whenever the stock goes above that strike price, which is in the high $90s.

$99.

Yes, $99. So you will see that go in. So when we quote our diluted FFO per share, it includes the additional shares for the quarter based upon where our stock price is in that period.

And then the ground leases, we actually started pointing out the ground leases, I think, two quarters ago. And it is all about 2200 Penn and the Avenue in DC, where we -- that building is on a ground lease with George Washington University. That ground lease has steps to it. So there is a big non-cash portion to it. So those buildings are pretty close to stabilization now. So the amount of quarterly ground lease payment that you are seeing this quarter on our highlights page, which I think is $7 million? -- should be stable going forward.

And then you will see on our FAD page that we back up the non-cash piece. So that non-cash piece over the 65 year term of this ground lease will change. But that is how we handle the ground leases. And we don't really have any other meaningful ground leases in the portfolio. This is really the only large one.

Ray, do you want to comment on Springfield?

Sure. John, as you probably know, NGA is now fully in place and operational. In fact, I went for a tour last week at that facility. It is an extraordinary facility.

The one thing that is clearly evident when you go there is the lack of parking. And while the defense contractors are on the sidelines just in terms of trying to take down space in response to demands coming out of NGA, the contractors may be forced out of their headquarters just because they ran out of parking.

So while we are not starting, we're having discussions with some contractors and with NGA about future requirements, but clearly we're not going to go on a spec basis, unless we feel a little bit more comfortable about the market.

One surprise about Springfield is the fact that there has been greater supply potential there than we anticipated, because people are converting old 1950s suburban residential projects into office space and knocking down old hotels and going vertical with office. So there is some supply there.

Lastly, one interesting thing about Springfield, for those of you who are familiar with the Washington area, is the FBI is being considered to move off Pennsylvania Avenue -- its headquarters. And they're working to identify a government-owned site that can support up to 2.2 million square feet. For that is -- one of the winning candidates is the GSA warehouse that nearly is adjacent to our buildings down in Springfield, and was the one motivation we did when we bought the site about seven, eight years ago.

So Springfield in general is flat, nothing really specific in any site. But we still have long-term optimism about the success of the development.

Great, thank you very much.

Alex Goldfarb.

Just going back to the New York market for a minute. Doug, it sounds like on 250 West 55th did you guys reduce the asking rents that you are -- for that property?

Where I am coming from is there has clearly been a pause on new leases or leases for the new developments that are scattered around the city. I am just trying to get a sense for what jump starts that market. Is it purely landlords cutting rent or is it offering increased leasing concessions to compensate tenants who would have to pay the cost of first generation space?

Let me try to answer that question delicately. The rents that I have been discussing have been for the base of the building. We have -- I don't think you could say we have reduced our rents. I think our expectations for the building was that we were going to be in the low $80s at the base of the building and in excess of $100, hopefully, at the top of the building, which is pretty consistent with where we have been for the last 12 months.

Has the concession offering increased? We aren't close enough with a deal that I want to describe that we are -- we have put on the table more or less concessions. I think that the overall concession packages, if you are signing a 15 or 20 year lease you are getting 12 months or free rent and you're getting a tenant improvement allowance off somewhere between $65 and $70 a square foot, depending upon what is defined as the base building.

I think that the opportunity for new construction in these large platform type opportunities that the folks have on the far west side, are going to have to follow what we're doing in at 250 West 55th Street because I think they're going to need a larger tenant commitment to get those buildings going. And I think that the overall pricing/value equation is going to have to be more expensive from the tenant's perspective to go into one of those buildings and what it is and what we are offering at 250 West 55th Street.

So I am not sure you can use the two sites and opportunities as a good catalyst for talking about how we're thinking about it versus how other people are thinking about it. Overall our view is that there are not a lot of large, large users in the market today that are looking for 400,000 or 500,000 of 600,000 square feet. And I believe that is sort of the type of dialogue that at least others have talked about in terms of what it would take to get one of those other developments going.

But just even on the existing, it sounds like for a tenant to either renew in their existing space or move to another existing building, the rent differential and the fit out differential is meaningful enough where people are happy to pay the $80 or $90 on maybe an existing asset, but not the $100 plus moving to a new one. I am just wondering does it just take an improved economy or is it something else that can help fill up whether it is at 510 Madison or 250 or even some of the other existing developments.

I don't think it is going to take an improved economy to do the leasing that we are doing at 510 Madison. I think we have a unique product and we have a new unique product offering, and our market target from a demand perspective is strong enough that we feel very comfortable with our ability to lease space under traditional market conditions, as I have described today and in previous calls.

With regards to the base of 250 West 55th Street, as I said, we are pricing our block in the middle of the stuff that is available midtown on the east side and what I would deem to be the high-quality expensive blocks like 9 West 57th Street, where I think they're asking $125 or $175 a square foot for the big block of space there. It is a totally different market decision in terms of a tenant who is looking at that versus looking at our building.

The efficiency associated with what we are building at 250 West 55th Street and the ability to use that space in a manner that is cost effective, particularly for law firms and other smaller financial institutions, I think is very, very attractive.

I believe the value we are offering to tenants is something that is enticing them to spend a lot of time and a lot of energy thinking about how that building might fit into their own overall operating profile from a profit and loss perspective.

So we're getting good activity on that. And we are confident that we are going to be filling the building up at our current pricing. And I don't -- but I don't think we're going to be offering the same type of transactions at the top of the building. But the market for the top of the building is a different market than the market for the base of the building in terms of what our expectation is for the types of users that are going to be up there.

Just the second question is if you think about the next generation of the $100 rent payers for New York, you guys do not -- you don't own anything in Midtown South. That has not been a market that you have traditionally been focused on, but clearly there have been a lot of tenants flocking to that area, especially in media and tech. How do you -- do you have to own something in that submarket to cultivate relations with those tenants or is it just simply through the broker network, you actually don't need to own assets in that market?

I don't think you have to own buildings to have good relationships with tenants. We have relationships with loss of high-tech tenants. The more mature high-tech tenants in either Cambridge or in San Francisco or in Reston or in Chevy Chase that allow us to have good dialogue with those tenants and understand what they're looking for.

I think the most interesting question to ask yourself is whether or not there is going to be a migration of the more mature tech tenants as they grow into more traditional, higher-quality office buildings because the products that is located south of 20th Street is a unique product, but it is not the type of product where a 300,000 or 400,000 or 500,000 square foot tenant can be. It is where eight 20,000 or 30,000 or a 40,000 square foot tenant can be.

And as we are witnessing in San Francisco, there is a limited amount of better quality space or a brick and beam cool space that these types of tenants can go into. And over time the more mature ones migrate to the traditional office buildings. And if the building has the right image and it is marketed appropriately, and it is positioned appropriately, it can be a very attractive place for a tenant that is not a traditional financial services firm to create the image that it wants to create and the cool factor that needs to attract employees over a long term.

So we will see what happens with Midtown South in terms of how the supply and the growth of those tenants move. If for the next four or five years the growth in that market is based upon new venture capital startup companies that are 5,000 to 10,000 square feet and they're going to grow at 2,000 or 3,000 square feet per year, and they don't -- and none of them take off, I don't think they're going to migrate to Midtown. And I don't think they're going to migrate downtown to the new inventory there.

But if some of those companies really explode and become larger, mature companies I think that is the question that will be where will they go away then. And they have opportunities in both places.

Thank you.

Rob Stevenson.

Doug, can you just talk a little bit about, given your comments on the various markets, which projects on your $9 million and change of owned and optioned land might make sense to start in the next 12 months?

I don't think that there is an expectation that we are going to start anything on spec in the next 12 months, other than if we are successful at leasing up this 120,000 square foot building outside of Fort Meade. And if the leasing activity really is as strong as we think it might be, the building could be filled by the end of 2012, and we would start another building if that were the case. I think that would be the one place where we would consider a speculative building.

Other than that, it is going to be based upon finding a tenant to be a lead or a significant occupant in one of our assets. And I can't tell you where that might occur, but there are conversations that are going on in Waltham and there are conversations that have gone on in some of our product in the Washington DC area, but there is no specific site that I can point to and say that is the one that is going to go next.

Then your land bank has been relatively stable for a while now. How aggressive are you guys these days on pursuing land for future development given those comments?

We are aggressive about looking at sites. So as an example, if we could find another couple of sites in Cambridge, Massachusetts, I think we would be aggressive about taking a land position there.

We are looking for additional sites in Midtown Manhattan and other parts of that city. Obviously, just simply buying land and hoping the market is going to improve over the next 10 years is not a terribly ideal structure, so to the effect that you can option land or you can put yourself in a position where you can control parcels, that sort of would be more attractive to us.

There are a number of sites in Mountain View that our San Francisco team is in discussions with that might be long-term development opportunities or redevelopment opportunities. And Ray and the folks in Washington DC continue to figure out where the next area of opportunity from a new development growth perspective is going to be.

And these are not traditional sites that you look at and say, oh, there is a parking lot and we're going to put a building up there. It is how do you reposition a building, or how do you take a building down, or is there a particular public action committee or a lobbyist or entity that owns a particular piece of property that might be prepared to move and have a higher density product put on that current piece of ground. We are constantly engaged in those types of conversations.

Then one quick for Mike. After you've got $1.8 billion of cash on the balance sheet and you talked about the debt -- the $800 million or so of debt that you're going to take out in this year, what is the optimal cash balance for you guys to be running at on a go forward basis, given the financing needs for the current development pipeline, as well as any -- being able to find acquisitions on the spot?

I think that we are comfortable with where we are today. Our development pipeline has a little under $800 million to spend, but it is going to take three years to spend it. So after we refinance our 2012s we will be just over $1 billion. We've got probably $300 million to spend in 2012 under development approximately. So we should have a pretty decent cash balance throughout the year.

And we are constantly looking at what the opportunities are on the acquisition side, so that we have the liquidity to be able to act quickly on any type of acquisition.

And given our line of credit that has $750 million, and our cash balances, we have more than sufficient liquidity today to be able to act on anything that we could imagine on the acquisition side.

So do we have too much liquidity today? I don't think you could ever say you have too much liquidity. But we are certainly comfortable with where we are. And if we had a little bit less than this, I think we would still be comfortable with that level of liquidity.

So currently you are comfortable with whatever the dilution winds up being on running at that sort of cash balance, given the inability to invest that in any meaningful manner -- I mean from a cash management standpoint at 10 basis points or whatever you are getting.

We are, because we think that we are going to have the opportunity to put that money to work in the relative near term. If you look at the last couple of years and our success in making acquisitions, in 2010 and 2011 it has been pretty strong.

And I think we will continue to look at our cost of funds and our opportunities, because as rates continue to be low and borrowing costs continue to be low, if we are successful in spending some of this capital, or we feel our opportunities are stronger, there is certainly the possibility that we would raise capital at these rates on a long-term basis again to, as Mort said, take advantage of that so that when we do find these opportunities, which we believe we will, the margin will be that much better on those opportunities.

Okay, thanks guys.

Chris Caton.

I just wanted to follow up on a comment you had on the investment environment. I think you said that last year you expected better opportunities in 2012. I wonder, was there anything specific you were watching in terms of catalysts that would drive asset sales?

If you are talking about a macro trend, the answer is no. If you're talking about discussions that we have been having with various owners of pieces of property and institutions that we expected would likely sooner rather than later do something with their assets, I think that those conversations led us to believe that the sooner was coming in 2012 and probably was not going to be delayed further than that in terms of their own expectations, and today that is what we are seeing occur.

I guess I meant thematically, is it fund sunsetting or debt maturities, is there anything thematic that you're watching?

I think most of the entities that are doing this are doing it for different reasons. Most of the funds that own assets still have three to four years of debt extensions to go. But quite frankly, they're looking at the interest rate environment today and saying -- jeez, 2014 is interesting, but expectations of 2014 interest rates going up are probably better managed with a longer period time between now and then. So that the value that we think we might be gaining from that interest rate environment is heightened today versus what it might be if we hold on.

I also think that a lot of owners of assets are becoming less enamored with this prospect of growth in the cash flows from their assets over the next couple of years, particularly if they're not on the ground, and they don't have an operating team that can actually do something creative about improving the cash flow characteristics of those buildings.

So they look at the underlying interest rate environment and they look at their own opportunities set to increase cash flows and say -- aside from the fact that we are borrowing money at a very low rate, however it may be, and we are gaining a good yield on a relative basis from a spread investing, if we have to exit, now is probably not a bad time to exit.

Thanks. Then a quick one for Ray just on 601 Mass Avenue. The added availability that Doug noted in the market, is that affecting rate negotiations or discussions that you are having on a forward basis?

One of the great things about having a build-to-suit situation is we don't have to lease the building. In other words, we will do deals that make sense to start it.

There are a couple of large blocks, especially in the Metro Center area, the Howery space coming back, the relocation of McDermott Will & Emery by us over to Capitol Hill, the spec space at City Center, all of that has to respond to the market.

The fact we haven't put a shovel in the ground means that we can only -- we here at liberty to do a deal that only makes sense to us. So we don't have to respond to the market and build something that doesn't make any sense.

I guess then asked in a different way, timing-wise, would be the added availability has kind of delayed your expectations?

No, actually, the availabilities I just identified now are currently in the market. We are not going to deliver this building well into 2015. And if you look -- and we talked about this at the investor conference, we have a huge bubble of law firm expirations coming in 2015, 2016 and 2017. And we think 601 is ideally positioned to knock off one of those major law firms in that timeframe.

Virtually every major law firm is going through a re-stacking and a downsizing, which is very hard to do in-place. And as we demonstrated here at 2200 Penn, even though we maybe charge higher rents, if we can get them in space that is 30% or 40% more efficient than their current facility, we can be very, very competitive even at rental rates are higher than existing buildings.

Thank you.

Caitlin Burrows.

My first question was already answered, but I am also wondering why did you increase your 2012 guidance? Was it because of greater acquisitions, better operations or something else?

We did have an acquisition, which was not in our guidance before, so that added about $5.4 million. And as I mentioned, both in our joint venture portfolio, which we are seeing some modest improvement, and in our core portfolio where we have had signed leases, and lease starts going quicker than we had previously anticipated, is driving the leasing that we did anticipate to happen in 2012 just starting to be rent paying sooner than we had anticipated.

So it is really those three things. And then you offset that by the interest expense, which is only the first couple of months of the year, which is higher and then it gets to a pretty stable run rate.

Okay, thank you.

Steve Sakwa.

Doug, I had one question on dispositions. You guys marketed the Princeton portfolio maybe six months ago, nine months ago. It didn't happen. I guess, given the continued low interest rate environment, the improving employment outlook, I'm just wondering is your sense that there is an increased appetite for suburban assets, and is this something you guys would like to take to market in 2012?

I think there is an expectation that there is going to be an increased appetite for suburban markets. Remember that one of the big issues that we had with Princeton when we sold it, and I think we were pretty forthright about this, was that there is an enormous gain associated with that. And we really not looking to create an opportunity to have to reduce liquidity of the Company through huge one-time dividend payments at the end of the year at this moment in time.

So to the extent that, again, we are acquisitive and there are some 1031 reverses that we could do, I think that we would consider looking at some of our suburban assets. In fact, we have identified two or three buildings that are currently on the market in suburban Boston that are sort of matched up with the purchase of the Mountain View asset. So that is in the vein of your question.

With regards to Princeton, we really want to get a higher level of occupancy and a better set of cash flows going before we think seriously about the disposition there again. Because our view is that there is an opportunity to dramatically improve the occupancy at Carnegie Center. Right now it is running in the low 80s and we should be able to get it into the high 80s to mid 90s over the next year or so, and that would clearly improve our desirability of selling that building -- those assets, if we got there.

Do you see enough demand drivers in Princeton to actually get that done in the next 12 months?

It is all a question of the pharmaceutical and biotech companies, because they're the ones that are -- I think they're the ones that could give you the big pop. There are two or three large deals that were done last year. There is pretty good activity in terms of market demand. A lot of it is musical chairs with incremental growth.

We are optimistic that we're going to see improvements over the next year or so in the Princeton portfolio. And our team down there is very motivated to get the occupancy up.

Thanks.

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

Thank you all for your patience and listening to all the questions and their answers. I hope we were able to provide you with some insight. We will be talking to you -- many of you in Florida in a couple of weeks. And, again, we will see you at the next NAREIT event in June as well as a conference call in April. Thanks.

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