波士頓物產 (BXP) 2012 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 conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg. G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.BostonProperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

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

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

Good morning, everybody, and thank you for joining us. I want to begin my remarks this morning with a summary of what I see going on in the macroeconomic front. As we have all, or most of you I am sure, have heard, the latest GDP number shows a negative 0.1% growth for the last quarter. I have to say I am not going to go through all the facts and statistics that lead me to my current thinking, since of course all of you I know would be happy to read them in my latest editorial in US News, which can be found at www.USNews.com.

But I think we are looking at the weakest economic recovery in terms of the growth in real final sales, employment, housing, and organic personal income, not to mention that every measure of consumer and small business sentiment is locked in recession terrain. I guess it is probably fair to state that I am having trouble seeing the roots of the recovery.

In my estimation there are not too many tools left in the government toolbox. We've had the most stimulative fiscal and monetary policies in our history, a deficit spending of about $1.3 trillion this past year, and monetary policies that by their own statements have put in $85 billion a month into the money supply. And yet these policies have failed to reignite the economy.

And whatever growth there is cannot be sustained without reliance on government steroids. This is an economy on major life support, with virtually zero economic momentum, and we still face the risk of a major bump from some unforeseen quarter.

I will say that I fundamentally believe that we are still the country with the greatest spirit, the most creative imagination and flexibility, which makes business cycles volatile, but brings them to an end. But we can no longer afford to happily ride the roller coaster to the next rise when the vehicle has so many loose rivets.

One of the more vexing trends of our current predicament is that hundreds of thousands of employers cannot find workers because the workforce lacks the skills in science, technology, engineering, and mathematics that they seek. The American public, of course, is looking for leadership in renewal.

We as a country have learned of how to develop the needs for an evolving economy -- one, in the form of incubating the future in graduate and undergraduate universities and labs and business schools that have attracted many of the world's best and brightest. We also have a unique business culture of individualism, entrepreneurialism, pragmatism, and novelty and a people who are a mobile physically and mentally, given to self-help, self-improvement, and self-renovation.

So we have been able to manage the ongoing revolutions in technology, information, and logistics and to marry a new economy and technology to an older economic culture as we fund the new and not the old. But I will quote Alexis de Tocqueville, who once observed that the greatness of America lies not in being more enlightened than any other nation but rather in her ability to repair her faults.

The issues that we face are not about our power and capacity. They are about our will and the quality of our character.

Obviously, what we need is a grand bargain at the level of national politics; but this is not possible without the leadership to formulate it and fight for it. So we cannot just continue to post or postpone this kind of an action, and it hasn't happened yet, and I think this is what is percolating through the economy, a sense of a country that needs leadership at the national level, but our politics are so partisan and so divided that we are not getting it.

We need something like that to break through what it seems to me is a level of declining confidence in the business community and the future of the economy. Having said that, Boston Properties, I must say, because of the nature of its assets and the location of its assets has really performed quite well in this environment and, frankly, justifies the basic strategy that we have followed for so long.

So without going into that I would like to turn this over to my colleagues. Doug, would you please take on the next conversational slot?

Sure. Thank you, Mort. Good morning, everybody. Happy new year.

I think Mort really did nicely of segueing into my thought process and what I'm going to talk about this morning, because when we think about 2012 we think we had a really great year, particularly from an operational perspective, and we finished the year with a flurry of major leasing activity. Some of it I think was described in our press release last night.

We signed two major law firm leases. We did a lease with Kaye Scholer at 250 West 55th Street for 246,000 square feet. And we did a second at the new development at 601 Mass. Ave. in Washington, DC, that will be getting started; that is a 376,000 square foot lease with Arnold & Porter.

We did a 244,000 square foot 12-year expansion and extension with Covance in Princeton; they are a drug development company. We did a 17-year 200,000 square foot extension with the Department of Justice at 1301 New York Avenue in Washington, DC.

We did a 250,000 square-foot expansion and extension with a company called Constant Contact at our Reservoir Place property in Waltham. And then early January came and we signed two more large leases. We did a 78,000 square foot lease with another pharmaceutical company called Otsuka Pharmaceutical in Princeton; and we scored another win with a 50,000 square foot lease with another nascent pharmaceutical company called Synagiva in Lexington, Massachusetts.

Finally, we finally received from the GSA a signed lease for the remaining 180,000 square feet at Patriots Park in Reston, and they did a 20-year commitment. So we have now re-let at Patriots Park 706,000 square feet of space that was let go by the NGA.

There were two specialized buildings. We gutted them and we rebuilt them for 523,000 square feet, and then we leased this last building. So we will have full occupancy on that Park as of the end of the second quarter of '13, and our Reston occupancy now stands at about 97%. Not too shabby.

In total, we finished 2012 with about 5.6 million square feet of signed leases, and that is more than our average over the past six years, where we have been averaging about 4.7 million square feet. So again, a good year.

We completed 2 million square feet in Boston; just over 1 million in New York City; 1 million in the quarter at DC; $0.75 million in San Francisco; and 440,000 square feet in Princeton. I do want to spend just a second on Princeton because we started 2012 talking about the difficulty we had in executing on our sale transaction largely due, quite frankly, to where we were occupancy-wise and where people's views of the Princeton market were. So we were at about 81%.

Well, we did a whole slew of long-term extensions as well as new leases. With the Otsuka tenancy, our occupancy now is at 88% in Princeton and our near-term lease expirations have been dramatically reduced. So it was a really, really strong performance over the last 12 months there.

In the fourth quarter, we did 2.3 million square feet of leasing, a big jump obviously from the other quarters, and it was really largely due to these large deals that I just described. There were 84 separate transactions versus 74 in the first three quarters.

If you look at our statistics this quarter in the second generation, they're really not very informative because so little actually came into play from a revenue recognition perspective on the second-generation side. So we went back and said -- well, let's look at the whole year and look at what the gross increase or decrease might have been.

The sample for the whole year was about 3 million square feet, and on a gross basis we were up about 7%, and on a net basis we were up about 9% for the entire portfolio. The average term of the leases during this quarter were about eight years, and the concession package was about $45 a square foot. Right now our mark-to-market on the portfolio sits at just over $1.00 a square foot.

I do want to spend a second on the Arnold & Porter lease because it means that we are going to be starting yet another development at 601 Mass. Ave. It is a 478,000 square-foot building; there is 25,000 square feet of retail space; and the current budget is about $355 million or $742 a square foot.

We are going to commence development during the second quarter for a delivery of the building in late 2015. We think that the stabilized cash return is going to be around 8%.

As a reminder, we purchased this site from NPR in September of 2008, and we have been earning 5% on that investment through a triple-net lease while we have been developing NPR's new headquarters building. NPR moves out of the building on April 1, and we start on May 1.

So with the addition of 601 Mass. Ave. we now have $2.1 billion of active developments which will be delivered between 2013 and 2015. Two Patriots Park is going to come online in the second quarter of '13. 17 Cambridge Center and our connector building with Google in Cambridge Center is going to open up this summer. The Avant, our new residential Reston named property, will start occupancy in the fourth quarter of '13. AJ7, the new building we are starting up near Fort Meade will be delivered in early 2014. 250 West 55th begins revenue recognition in 2014, 680 Folsom Street in the second quarter of '14, and now 601 Mass. Ave. in the fourth quarter of '15.

So all in all, again, it was a really, really solid year for Boston Properties from an operating perspective.

As Mort said we have remained true to our corporate strategy. We focus on select markets, submarkets and buildings, and we try and find unique and differentiated demand characteristics as well as limits on supply.

But quite frankly, we have to do a lot more than that at this point in the life cycle of what is going on in the real estate sector. It is simply not enough just to say -- well, we have A buildings in A locations. We see changes happening, and we have to react to them.

Traditional CBD office users are becoming more efficient with their space, and it is leading to organic supply increases. And in a lot of cases in these cities where they are actually shrinking their footprints, they are choosing to commit to new developments, which is exacerbating the situation and leaving older buildings and creating new net negative market absorption.

So it is really imperative that we have to do whatever we can to enhance the use of our facilities and ensure that our tenants view our assets as places where they can recruit and retain talented employees. We do this with design, with technology, with architecture, with third-party service providers, with creativity.

It means that for a project like Bay Colony, we create common areas inside and outside the buildings where tenants can interact in ways that are complementary to how they are using their own space. It means finding a way to activate the plaza and the concourse of 100 Federal Street in Boston in a way that draws people to the building as a destination, not just as a place for tenants and their visitors.

It means spending the time and capital to design and invest in a more inviting and a collaborative way to use the Lobby levels at our 3 million square feet at Embarcadero Center, not simply to improve the marketability for the retailers but to drive the utilization of that space for tenants in the buildings. It means working with cellular telephone providers to install distributed antenna services in high-rise buildings that allow for dramatically enhanced wireless service within the buildings and actually save our tenants the significant cost of installing their own networks, so that when you look at your phone you don't just see bars; you actually get service.

In addition, we are realizing that tenants not only are using space differently but the profile of the tenants that are anticipated to grow is changing. Job growth in the US today is clearly focused on businesses that are oriented, as Mort said, on ideas -- be they in technology, life sciences, or medical devices. The markets that have the largest concentration of those industries are going to be the strongest performers and are probably the areas where there is the most opportunity for growth.

Surprise, surprise. Silicon Valley and San Francisco CBD continue to experience the strongest absorption, availability reductions, and rising rental rates in the country. During the fourth quarter, Apple and Netflix and Global Foundries and a bunch of others absorbed 650,000 square feet of office space in the Valley, bringing the 2012 absorption there to 2.5 million square feet; and on the R&D side, another 675,000 square feet was absorbed, bringing that product type to over 2 million square feet for the year.

So, 4.5 million square feet of absorption in the Valley. There is as much as 8 million square feet of active space needs. And if you ask the brokers, they would say somewhere around 20% to 25% of that or 2-million-plus square feet is growth.

Rents continue to rise. On our product in Mountain View, we were doing deals around $25 triple-net in January, and we are now doing deals in excess of $32 triple-net.

The story in the San Francisco CBD continues to be the growing demand from the tech sector. 2012 had close to 3 million square feet of net absorption following 2011, which had in excess of 2 million square feet. The overall Class A vacancy rate has dropped another 300 basis points, so it is somewhere around 7.5%.

And while in the past there was lots of focus on the desirability of non-core cool brick-and-beam type space, the story today is that tech tenants are leasing in traditional high-rise office space. And that is making the biggest impact on the market.

Technology tenants now make up 26% of the CBD market in San Francisco and were more responsible for more than two-thirds of the activity in 2012, up from 35% in 2011. At the end of the year, Salesforce expanded by more than 1.2 million square feet in existing buildings like 50 Fremont and Rincon Center, as well as committing to a new development. Autodesk expanded at 1 Market; Yelp expanded at 140 New Montgomery. The Macys.com and the Riverbend leases that are at our development at 680 Folsom Street are basically 50% expansions in those buildings. These are all traditional office towers.

During the quarter, we leased another 140,000 square feet at Embarcadero Center, four more full-floor deals, 12 total transactions. Availability at Embarcadero Center is about 4%.

Our near-term opportunities are now limited to the three of the top floors at EC4 where I will tell you the one soft spot of Embarcadero Center and the market in San Francisco is, which is the high-high-end. So when you're asking $70 or $80 a square foot, it tends to be a little bit slower; and there is not a lot of activity at the moment there.

The Boston area life science industry is the East Coast's corollary to the technology sector in San Francisco. The life sciences are clearly concentrated in Cambridge. But with, quite frankly, the lack of available sites and existing product, companies are growing in Boston and in the Route 128 suburbs.

This quarter, Ariad Pharmaceuticals announced another major deal in Cambridge where they agreed to take 350,000 square feet, so there are now seven buildings under construction in Kendall Square totaling over 2.0 million square feet. That, combined with the Vertex construction in the Seaport District of South Boston, means that there is close to 3.5 million square feet of biotech lab construction right now going on in the Greater Boston area.

We are effectively 100% occupied in our Cambridge Center portfolio, and we have begun to engage tenants -- and actually tenants have begun to engage us on their 2014, '15, and '16 renewals. We are also working with the city of Cambridge to figure out a way to increase the Kendall Square zoning to allow for additional development at Cambridge Center in the future. It is going to be a long process, but we think it is going to be one that is fruitful.

The expansion of the life science industry is also impacting the other Boston markets. I described the lease that we signed with Synagiva, a biotech company. They are going into 33 Hayden Avenue in Lexington.

This is a three-story building that was built in the '80s and was the home to Mercer Consulting. It is now a laboratory building with some other traditional office space.

The Route 2/128 interchange in Boston is now home to Shire Pharmaceutical, AMAG Pharmaceutical, Cubist Pharmaceutical, and Synagiva. A lot of biotech pharmaceutical activity.

And at Bay Colony, we are in discussions with a Waltham-headquartered life science organization for a 55,000 square-foot expansion. Lots and lots of activity on the life science/biotech side in Boston.

In the City in our core portfolio, we signed two more leases at 100 Federal Street, and we are asking about $60 a square foot. The City really has seen quite a few major transactions in the quarter that will clearly have impacts going forward.

The first is the relocation and expansion of Brown Brothers at 185 Franklin Street. They are moving out of three smaller buildings and expanding there actually, a surprising development of expansion of a financials services company.

Goodwin Procter is moving out of 53 State Street -- or they have announced that they are -- into a new development into the Seaport in 2016. Converse has announced that they are moving from North Andover into the City.

So lots of activity in the City, lots of low-rise space being let up.

We actually recently received interest and are talking to a tenant about our development at 880 Boylston Street at the Prudential Center. This is a tenant that is in a downtown high-rise that is struggling to find an acceptable building alternative in the market. So they are now looking at new construction.

We completed another 120,000 square feet of long-term extensions to Hancock Tower. So overall in 2012 we did 363,000 square feet of extensions and expansion of leases that were set to expire '14, '15, and on at the Hancock Tower.

In DC, the impacts of the federal negotiations on the deficit and spending reductions and the continued threat of sequestration is not going to go away in the short term, as Mort described. In 2012, DC experienced really no net absorption, and the suburban markets continued to experience some negative absorption.

Yet in that environment -- and this is important because it really homes in on -- it is not necessarily just the market but the operator in the market. Boston Properties had an extraordinary year. Our DC portfolio is 96% leased. We delivered 500 North Capitol, 82% leased, and we have commenced a pre-built program on the remaining floor, and we are seeing really good activity on that.

We are taking a similar approach to the modest amount of available space we have at 2200 Penn and Market Square North. We did a long-term extension with the GSA at 1301 New York Ave.

We completed the lease with Arnold & Porter at 601. We signed the 20-year lease with the GSA for the rest of Patriots Park, and we did another 12 leases in our Northern Virginia portfolio totaling 165,000 square feet.

And we continue to achieve rents around $50 a square foot in our Reston urban core portfolio, while a quarter mile away rents are somewhere in the high $20s to the low $30s. So while DC may be facing some headwinds in the short term, Boston Properties continues to dramatically outperform the market and create significant value even in a market that is seeing negative absorption.

We were happy to get the 246,000 square foot lease with Kaye Scholer completed at 250 West 55th Street. By the way, we also completed our first retail deal with TD Bank at the corner of 8th and 54th Street. So now the remaining space at the building is located at the top.

We have floors 25 through 38. Floors are about 24,000 square foot each, and our leasing strategy is to go after tenants looking for a single floor or more, but under 75,000 square feet. We can deliver space immediately for tenants that are looking for occupancy as early as the very end of 2013.

While leasing velocity at the upper end of the market still continues to be slow, we have had some good successes there as well, including at 399 Park Avenue where we leased virtually the entire 150,000 square foot block of space that came available on July 31 of 2012 in six months. We have one 5,000 square foot suite left, and we just completed a deal on the suite next door in excess of $100 a square foot.

So just to give you a little bit of a perspective on the high-end market, though, in 2008 there were 105 leases that were signed over $100 a square foot. That dropped to 17 and 19 in 2009 and 2010; and it moved up to 44 leases in 2011; and 2012 was basically a flat year, with 41 similar transactions.

The average high-end relocation -- so as we talk about 510 Madison Avenue, we are looking for obviously tenants that are prepared to move -- those relocations average about 6,000 square feet. So it clearly suggests that our strategy of looking to do these prebuilt suites is the right strategy.

We did four more in our prebuilt portfolio this quarter. So 510 Madison Avenue now stands at 56% leased, and I will be the first to admit it is slower than we would like and we are disappointed with it. But we do have two more floors in active discussions and we are making headway.

Overall, New York City midtown leasing really is -- I describe it as stuck in neutral. There is availability of around 12%, and the challenge is there is just not much in the way of visibility on major users with any growth objectives.

I guess the one nice thing that has come out recently is that as Sony sells their building, and the building is converted into a non-office use likely, Sony will be looking for somewhere under 400,000 square feet, but a good block of space, as they relocate from 550 Madison. But effectually, large-block leasing in New York City really at the moment is a game of musical chairs and efficiency.

So as we head into 2013, as we think about investments our activities continue to be focused on our core markets. In addition to our Transbay development, in terms of stuff that we are working on that we haven't announced, we are working on an additional San Francisco CBD development opportunity; we are in discussions on another site in Northern Virginia that could support both office and/or mixed-use, mixed high-rise residential, very close to our existing portfolio in Reston; and we are also working with Delaware North in Boston to advance the North Station million-plus square foot mixed-use development. That could be retail, it could be office, it could be residential, it could be hotel.

So that is what our, quote-unquote, pipeline looks like on the development and new investment side. And we continue to obviously look at all the transactions that are, quote-unquote, going to be marketed for sale.

On the other side, we also have looked at our portfolio; and in fact we expect that this year we will be doing some selected markets sales beginning in the early part of '13. That could approach somewhere in excess of $1 billion.

So that is our view on investments on the going-in and the going-out side. With that, I will turn the call over to Mike and he will talk about our earnings, and then we will bring it up for -- open it up for questions.

Great. Thanks, Doug. Good morning, everybody, and happy new year. I just want to start by adding to what Doug touched on a little bit with our development pipeline, because we have had great success.

I mean, we continue to grow the pipeline. Last quarter we added 680 Folsom Street in San Francisco; it is 85% pre-leased. As Doug mentioned, we just added another -- we just started another building in our joint venture at Annapolis Junction Business Park.

And with the addition of 601 Mass. Ave. in DC, which is 79% pre-leased and we expect to start in the second quarter, our pipeline will grow to $2.1 billion of total investment. That is nearly 70% pre-leased, delivering between now and 2015.

We have approximately $850 million of equity remaining to fund on these projects.

So although we have significant cash balances of $1 billion at quarter end, we have highly productive uses for the cash over the next couple of years. We also have $600 million of debt that comes due in 2013, most of it in the second quarter, with an average GAAP interest rate in excess of 6%.

Given our funding requirements, we anticipate that we will tap the capital market sometime in the first half of the year to, at a minimum, refinance our expiring debt. The debt markets have continued to strengthen in the past few months; and despite an increase in treasury rates, credit spreads have compressed and our potential borrowing costs have remained relatively steady.

We believe we could issue 10-year bonds today in the 3.25% to 3.5% area, and we could also access the longer-term market with 30-year or perpetual money available in the high 4% to mid 5% range.

The mortgage market is also very competitive. Life insurance companies, banks, and CMBS issuers are all active in the markets. We expect to refinance our 540 Madison Avenue joint venture, where we have a $120 million 5.2% mortgage expiring in July. With 10-year mortgages available in the 3.5% to 4% range and floating rate bank loans in the LIBOR-plus-200 basis point area, we expect to reduce our borrowing cost for this mortgage significantly.

We have not issued new equity under our at-the-market equity program over the last two quarters, and we still have $300 million available to issue in the program. Our leverage today is in line with our target operating range; though, as Doug touched on, we are also considering selective asset sales as an equity-raising tool to maintain balance as we grow our investment program.

In November, we increased our dividend by 18% to an annual rate of $2.60 per share. The increase is designed to keep pace with anticipated growth in our taxable income. In 2012, our taxable income was $2.37 per share and, as we have discussed before, we expect it to increase in 2013.

As we noted in our press release, the servicer for our Montvale Center loan failed to properly complete its foreclosure. As a result we have restored Montvale Center on our balance sheet; we reversed the $15.8 million gain on sale we recorded in the first quarter of 2012.

Now, the gain is non-cash and it is excluded from our FFO. We expect to record it in 2013 when the sale is ultimately approved.

So turning to our earnings for the quarter, last night we reported funds from operations of $1.27 per share, which is $0.04 per share or about $7 million above the midpoint of our guidance. In the portfolio, our revenues were up about $1 million.

A portion of this was related to termination income. We negotiated two full-floor early terminations this quarter, one in Reston and one at the Hancock Tower, to make room for expanding tenants. This has a dampening effect on our 2013 cash rents due to the free rent provided during buildout for the tenant expansions. These transactions that totaled 58,000 square feet both result in longer-term lease commitments and higher rents.

We also had $2 million in net operating expense savings. About half the savings were in real estate taxes as we've started to finalize our fiscal 2013 property assessments with various municipalities. Some of the new assessments were below our projections, but they still reflect an increase over the prior year. The remaining savings were mostly driven by lower utilities expense.

Our 2012 same store performance ended up the year basically flat on a GAAP basis and down less than 0.5% on a cash basis. Now, given the significant rollover that we dealt with, including Embarcadero Center and Gateway, 111 Huntington Avenue, 399 Park Avenue, and the Patriots Park vacancy that NGA left, we are thrilled to have successfully exceeded our original projections. In the fourth quarter, the same-store portfolio was up 1.7% on a GAAP basis, and 2.3% on a cash basis, reflecting the improvement as some of the transitionary downtime is behind us.

Our development and management services income came in about $1 million ahead of our projections due to higher than anticipated service-related income. Our G&A expense for the quarter was about $2 million below our budget. Over $1 million of this was from higher capitalized wages due to the productivity of our leasing teams this quarter. As Doug mentioned, we signed over 2 million square feet of new leases this quarter, resulting in capitalization of a higher than normal percentage of our leasing personnel time.

The remaining variance to our budget was in our interest income line, where the interest income on our $1 billion of cash and from our mezzanine loans to our value fund were about $1 million above our budget.

Looking forward to 2013 our portfolio projections remain generally in line with our comments last quarter. Several of the leases that Doug mentioned that impact 2013 were included in our prior 2013 guidance range, although clarity around timing was a little less certain. These include a floor-and-a-half of deals at 100 Federal Street; a 50,000 square foot lease with a biotech firm for vacant space in suburban Boston; and the two significant deals in Princeton, including renewing and expanding Covance in 244,000 square feet and a 78,000 square foot lease for vacant space with Otsuka. We also signed the 180,000 square-foot GSA lease at Patriots Park in Reston with rent to commence in April.

The only real variance to our model in these deals is higher straight-line rent in 2013. Our current portfolio occupancy is 91.4%, and we project improvement through 2013 averaging between 92% and 93%.

The majority of our opportunity for picking up occupancy is in the suburban markets in Boston, in San Jose, and in Princeton, though we also meaningful blocks of space at 510 Madison and 540 Madison Avenue in New York City and at Embarcadero Center 4.

Our 2013 lease rollover exposure is relatively low. We have less than 2 million square feet expiring, which is about 4.5% of the portfolio.

In the same-store portfolio, we project growth in our NOI from the improvement in occupancy, combined with a full year of our 2012 leasing success in Cambridge, Embarcadero Center, and at 399 Park your Park Avenue. We project our 2013 GAAP NOI growth of 1.5% to 2.5% over 2012, which is in line with our guidance last quarter.

On a cash basis, our growth over 2012 is even higher, as much of our more significant 2012 leasing contained free rent periods that will burn off during 2013. In addition, the free rent period for MFS, in 305,000 square feet at 111 Huntington, and for Bechtel, in 220,000 square feet at Reston Overlook, both ended in December 2012.

We project our 2013 cash same-store NOI to increase by 5.5% to 6.5% from 2012. Now this is 50 basis points less than our guidance last quarter for a couple of reasons.

First, our fourth-quarter portfolio results were ahead of our budget, so the starting point for the year-to-year comparison is higher. Also, we have three situations where tenants have elected to take a portion of their lease concession in the form of free rent. This results in higher than projected straight-line rent and lower cash rent, but is neutral to our FAD due to the leasing cost being lower.

Lastly, we had the two full-floor terminations I spoke of earlier that reduce our cash rents, but increase straight-line rent during the new tenant's buildout. So as a result, we expect an increase from our prior projection in non-cash straight-line rent and fair value rent, now projecting $50 million to $60 million in 2013.

The contribution from our development deliveries in 2013 is in line with our prior guidance. The delivery of 500 North Capitol Street last quarter, Patriots Park 2 in May, and both 17 Cambridge Center and the Cambridge Connector in July constitutes $211 million of total investment with a weighted average stabilized annual return that is in excess of 10%. In aggregate, these development are currently 94% leased.

The projection for our hotel is in line with last quarter. It is expected to generate 2013 NOI of $10 million to $11 million.

In our joint venture portfolio, our near-term opportunity is in the 10,000 square feet of high-value available street-level retail space at the GM building as well as the lease-up of the recent vacancy at 540 Madison Avenue, where our occupancy has dropped from 90% to 66% in the past two quarters due to lease expirations. We continue to have productive discussions on the retail space, and we are also having preliminary discussions with several office tenants at the GM building for early renewals and potential expansions. We project the contribution of our NOI from our joint venture portfolio to be $115 million to $120 million in 2013, which is a modest increase from our guidance last quarter.

In the development and management services income, our 2013 contribution is expected to be $26 million to $30 million, which is about $1 million higher than our projection last quarter. And in our G&A line we have refined our 2013 budgets and reduced our expense projection slightly to $82 million to $84 million for the year.

Our interest expense projection assumes that we refinance our 2013 debt maturities at expiration with 10-year financing at market rates. We have reduced our interest expense projection due to the anticipated capitalization of interest on our 601 Mass. Avenue project. So our projection for 2013 net interest expense is now $385 million to $392 million.

Capitalized interest is projected to be $58 million to $65 million. Now, our estimate could be impacted by changes in any timing or amount of financing we may complete.

So to summarize, we are modifying our guidance range for 2013 funds from operations to $5.06 to $5.18 per share. This is an increase of $0.06 per share at the low end and $0.03 per share at the high end, reflecting the successful leasing activity we have achieved in the past quarter, the projected improvement in services income, and lower interest expense and G&A. We haven't incorporated any additional acquisition, disposition, or development activity in the projections.

For the first quarter, we project FFO of $1.19 to $1.21 per share. Now, the first quarter is projected to be down from the fourth quarter of 2012 primarily due to the seasonality of our hotel and the first-quarter G&A, which is typically higher as it includes some accelerated vesting and payroll tax expense.

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

(Operator Instructions) Josh Attie, Citi.

Thanks, good morning. Given the value that was paid for the Sony building, as you look at your own portfolio does it change how you think about how some of the space might be used at the GM building or any of the other buildings as leases come up, if there could be alternatives to office space?

This is Mort. Really, no. We do have some space in that building, as you may know, that is used for retail. But beyond that, no; the answer is no. We haven't changed our attitude to that building.

The Sony building is an interesting sort of experience, not only in terms of the price and the price per square foot, but as you point out, the real possibility that they will be introducing a hotel use into that building. That was possible in that building because of the floor sizes etc. etc., but that doesn't work at all for the General Motors building, which we are intending to maintain as the most preeminent office building in New York City.

Thank you.

Jordan Sadler, KeyBanc Capital.

Thanks, good morning. I wanted to just maybe hit on the potential dispositions that you are teeing up and what the nature of these assets might look like. Is this a function of markets? Or is it a function of assets that may not be as easy to refit to meet modern standards of density, etc.?

I would describe the review that we are doing as not either of those. The tack that we are taking is -- are there assets in our portfolio where the cash flow characteristics of the building may be such that there are investors in the buildings who value the buildings in a way that would allow us to redeploy our capital into other assets with a more meaningful contribution? I.e., a higher overall return in the future.

So some of these buildings are buildings that you might consider -- think of as core buildings. Some of these buildings are buildings that are on the periphery, but where we don't think there is much in the way of additional growth, but where there is really strong cash flow. So it is really much more asset-specific than conceptual, Jordan, in terms of how we are approaching them.

Okay. I guess sticking with the modernization or densification theme, you went through some of the things you may look to do to your portfolio over time and some of the things you are currently doing to make your buildings more attractive to tenants in the market. I am kind of curious if you have thought about what the cost is on a CapEx basis conceptually to fit out buildings, which is obviously not necessarily a TI, but almost a building improvement, just across the portfolio.

There is no easy answer to that. The answer lies in what we are going to do -- what we're doing with a particular building. Interestingly enough, in some cases we believe that we can actually achieve revenue from the improvement. In other cases we think it will improve the velocity and the overall revenue that we can get from the rest of the space.

We have generally been spending somewhere in the neighborhood of $1.00 to $2.00, depending upon the year, on our assets with these types of improvements. When we purchase an asset we generally build in the capital in a more meaningful way.

So as an example, at Bay Colony, we said to the world -- look, we are buying this building, these buildings, for $180 a square foot; and we expect we're going to put in between $25 and $30 a square foot or $25 million in re-doing all of the common areas and changing the configuration of these buildings to create the types of environments that I am describing. So in some of these assets it is part of our plan when we buy it.

In other cases, as an example in Embarcadero Center, we got 3 million square feet of office space, and I would expect that we are going to be spending somewhere in the -- close to $1.00 a square foot on that type of an experience change in the retail over the next year or so. So it is that magnitude.

Sometimes we are able to find vendors who are prepared to put the money in. So in some cases we are working with AT&T and Verizon in buildings where they have strong needs for helping their own portfolios to put in these gap services. And instead of us having to invest $4 million or $5 million, the service provider is investing the $4 million or $5 million. But we are negotiating and setting it up, and it's in a way where we can take advantage of what they want to do as well as inform our tenants and prepare tenants for the opportunities there and get them to sort of be our partners in these types of transactions. So it is very much varying.

Last quick one. You mentioned Princeton and you highlighted it being 88% leased. Any particular driver you would highlight? And you think that's going to continue in '13?

The vast majority of the leasing has been in the biotech/life science industry. There is a cluster of companies that still believe in the New Jersey area from either a drug development or from a marketing perspective.

The growth there has been significant. And for the most part they have been foreign pharmaceutical companies in our portfolio that have expanded. And we are optimistic that we are going to see more of that.

Thank you.

This is Mort. I just want to add one thing to it that we are thinking about in terms of buildings. That is, if we find a way to provide the infrastructure of technology that almost every tenant is going to be needing, so that every tenant doesn't have to put it in but connect into our central facility there, I think that would not only add value to the building, it would make it much more attractive to a lot of smaller tenants who don't want to get into the cost of putting in a major connection to any kind of online network. So that is something I think that is going to be a part of almost every building, major office building in the country over time, and I think people are going to be putting that in.

One of the things that we have looked at, for example, is a global service in terms of the technology of just visual connection with other parts of the world. So that whether they be board meetings or private conversations that this is a technology that is available in some of our buildings. I think that is something that we are going to be looking at fairly carefully, really in terms of adding to the value of buildings over time, our theory always being that we have got buildings that should be enhanced over time even though we think that they are very, very good buildings today.

Thank you.

David Toti, Cantor Fitzgerald.

Good morning, guys. I just have a couple questions on the Transbay Tower. I know it is early days for that, but we have heard from some of our affiliates on the ground that the proposal may not cater to tech tenants as much as some nearby developments. Have you guys -- how far along is that relative to the specific tenant mix that you are targeting for that asset?

Ray, do you want to take that one?

Well, Bob and I are sitting here in San Francisco, and focusing just on that. We are looking at the base of Transbay to be not only conducive to traditional office users but specifically attractive to the tech tenants that are dominating the demand for space.

Many of the same dynamics that attract tech tenants are attracting the same professional tenants. We are looking at -- it's aside from the buildings -- the strategic importance of the location. It is at the transportation hub of the City; it provides tremendous access down to the employee base in the Valley.

We're designing these floor plates to have really good base spans, column-free. We have a clear height, slab to slabs of over 14 feet. We are positioning this building not only to be the number-one building for professional users but the tech tenants as well.

We see also the possibility of putting in a building within a building. So if a major tech user comes, we could lease them the base with a separate arrival experience, separate elevator cores; and then put traditional office space on top.

So we are looking at both sides of the market. We are exceedingly optimistic about it. We think it is going to be the defining building in San Francisco for many generations to come. And we are exceedingly confident about the development.

I might add that we recently received a Request for Proposal for 300,000 feet from one of the major tech tenants in the marketplace. So I think that's should answer your question whether or not it appeals to tech.

Yes. Well, I think you guys know I am a little bit biased here to your architect selection. But Ray, do you think that some of those amenities that you're adding are raising construction cost potentially over a typical office building of that size?

And secondarily, is there any impact to the square foot per-user ratio? Sort of a reversal of some of the recent trends that we have seen relative to consolidation.

No, just to the contrary, I think the amenities we are adding will be more than offset by higher rental rates and quicker absorption and longer retention of our tenants. So no; I see everything as a positive.

Again, we really like our basis in the property. We love the location and the lack of any really competing supply.

The other thing that really has us excited about Transbay is we are going to be delivering this in probably the best swing of lease expirations in the last 10 or 15 years for the City. We have, Bob, what, between 4 million and 6 million square feet rolling over in the '15 through '17 time frame?

Approximately 3.5 million to 5 million.

3.5 million to 5 million square feet. And all these tenants, this follows the same pattern we are seeing in all of our markets, where these existing tenants want to get a chance to move to a new building and restack. We think we are going to be in the ideal position to harvest a lot of that demand in that time frame.

Okay. That's helpful. Then my last question, and maybe I missed this, but I understand that you guys might be pursuing some expanded retail space at 100 Federal. Are there any definitive plans around that, or are these not true?

No, well, we are the ones who have -- when we bought the building we said we were going to try to figure out a way to reuse the concourse and the plaza level of the building. So we are in the process of our design [sheret] and our tenant investigation and our discussions with the Boston Redevelopment Authority. So we expect that something will happen during 2013 to advance those discussions and that we hopefully will be under construction towards the end of the year, early '14, and delivering something in '14 for the customer and for the whole financial district to enjoy and benefit from.

This is Bryan Koop. As we speak we have a team working on this. The thing that we're going to be very sensitive to is the security needs of Bank of America in this building. Because this plaza at one time was a very, very active place in Downtown Boston, and we think the demand is still there, with its proximity to Post Office Square.

So as Doug mentioned, we are working on this and we are going to be talking with the BRA about how we can do this. But the potential is we think really tremendous.

And then the support from the community, the Downtown community, has really been outstanding. We have also received some good demand and early interest from people that would like to participate in it.

Okay. Thanks for the detail today, guys.

John Guinee, Stifel.

John Guinee here. Thank you. Mort, a big-picture question. Sequestration, largely silent in the Wall Street Journal, but it is on page 1 of the Washington Post.

How do you think it plays out? And how does that affect the various markets in which you operate?

Well, I think some portion of that is going to get through the Congress. It will not be reversed by the Congress, let me put it that way, because that is already a law so to speak.

This is not in the same category as the debt ceiling, which would have had a whole other level of complications for the federal government. So I think some portion of the sequestration will in fact be put in place.

Now, obviously it is not going to be a positive for the economy in the short term. But the real question now is, sooner or later, the extent of our deficits and the debts that we are accumulating is going to become an increasingly larger consideration in the way people evaluate the economy of the future. And the future is not going to be that far away; we are talking three or four or five years.

So I think that one way or another there is going to have to be some program to address the accumulation of debts and the deficits that we have. Let me just put it this way. If you look at the projection of where our fiscal policies are bringing us, at some point the only thing the government is going to be able to afford is interest on the debt and it will not be able to afford any other programs.

Now of course that is just an unrealistic outcome. But it does suggest that there is going to be some pressure to do something about reducing expenditures and increasing taxes. If interest rates go up by 1% at this stage of the game it adds $150 billion to the debt, the annual debt of the government.

So we are an unsustainable and an untenable situation in fiscal terms, so I do believe that the easiest one politically for the Republicans to deal with is the sequestration. They have got to show the country, to justify their whole political approach, that they're doing something about reducing the annual deficits and therefore the national debt.

So I think in some form or another, a substantial portion of that will get through; and then we will just have to see what happens, whether or not there can be any kind of constructive dialog between the Republicans in the House and the Democrats in the administration and in the Senate.

And I don't believe anything on that level is going to look -- is going to be serious until we see what happens with the Senate election next year, and then you will see who controls the Senate. I think that is the next stage of what is going to happen.

The Democrats and the Obama administration are going to make a huge effort to see that they can at least reduce the Republican majority in the House, because that is the body that is going to be blocking their own programs. But at this stage of the game we have done nothing at all to deal with the debts or the deficits.

Now, you can argue that -- there is an argument that there is good reason for that, given how weak the economy is. So I will just reiterate two obvious things.

We have the most stimulative fiscal policies in our history, in which we are adding at this stage of the game $1.3 trillion to our national debt, or $25 billion a week, and have a monetary policy that is putting $85 billion a month of new money into the economy, according to the Federal Reserve Bank itself. So we are in a situation with the most stimulative fiscal and monetary policy, and yet our economy is growing -- if it is growing at all -- in the weakest terms that we have had.

So everybody is looking at very, very difficult choices to try and resolve these issues that we are now in the midst of and we are going to see. But I don't think that the sequestration portion of it is just going to be reversed.

Rob Stevenson, Macquarie.

Morning, guys. Doug or Mike, when I take a look at the '14 expirations, the big chunk is like 860,000 square feet in Boston CBD. Is that all in Pru Center and Hancock?

It is almost all in the base of the Hancock Tower.

Okay. So the $45 rents that are expiring, what is current market for that type of space these days?

At the base of the building it is probably right around there; and as you move up the building it gets higher and higher.

Okay. Then for 2013, what do you think portfolio-wide is shaping up to be the biggest leasing challenge? Is it the space at 250? 510? Is it some of the stuff in the suburbs?

I would say that I use the word challenge differently. I would say our biggest opportunity is to increase the leasing that we have at 510 Madison Avenue and 540 Madison Avenue, because those two things on a revenue basis will be the most accretive to our earnings, because of the rents that we are charging there. And then clearly the next is what we do in 2013 to impact 2014 with 250 West 55th Street. Those are -- that is clearly the largest hole we have and opportunity we have to dramatically increase our revenue.

Okay. Then, Mike, did I hear you correctly that the $1 billion of dispositions that Doug talked about is not in the current guidance?

That is correct.

Okay. Thanks, guys.

Jeff Spector, Bank of America Merrill Lynch.

Thank you. This is Jamie Feldman here with Jeff. Can you guys talk a little bit about the acquisition opportunities out there, and any change in your view of after the first of the year?

I would describe the acquisition environment as similar to what it was in 2012. There are a reasonable number of assets on an individual basis that are being sold across the markets that we operate in.

We are being exeedingly selective about what we are spending our time really chasing, because of the issues associated with what we perceive as the advantages and disadvantages of the types of buildings that are being sold. The Equity Office Properties portfolio appears to be leaking into the market in modest pieces, not as a large consolidated portfolio. So as an example, they are selling a couple of assets in suburban Boston at the moment without saying -- well, we are just selling the entire Boston area portfolio. Similarly I believe they are selling some smaller pieces of their portfolio in Northern Virginia -- excuse me, Northern California.

So we think it is going to be a lot of the same. A lot of the really large transactions that were being discussed in 2012 in places like Manhattan never seemed to get to the finish line. I think largely that was due to difficulty in the leasing characteristics of those buildings, matched up with an opportunity for tenants -- for landlords to really take advantage of some of the financing alternatives that were out there, particularly in the CMBS market.

So that may put a little bit of a governor on the activity level for asset sales, if in fact the financing markets continue to be as intriguing to owners of assets as they currently were in 2012. But I think it's going to be more of the same this year.

Okay. Then any update on your GM JV, potential sale that's in the market, or marketing process?

Obviously we're not marketing that interest. As I have described to people, we are interested to see how it all shapes up.

If we have the opportunity to work with a new partner we are happy to do that. If they are unable to achieve the pricing that they are looking for, we will certainly take another look at the valuations of the buildings to determine whether or not we want to increase our exposure to those assets.

We love our position in the buildings. We, as a 60% owner and with significant opportunities on the control side, feel really good about how we can operate the buildings and what we can do with regards to repositioning and retenanting and putting capital into the buildings.

So we are encouraging our partners to take their time and find somebody who would be interested in being a partner with us. And we hope it is a productive relationship.

Is there a deadline for the marketing period?

Like I said, Jamie, we are not marketing the property; so I can't tell you that.

Okay. Then, Mike, can you just tell us what your new guidance would be for AFFO?

Sure. I will go through some of the pieces on some of the big capital costs. I mean, we talked about the leasing and what our occupancy is expected to be.

So in order to achieve our occupancy numbers, the leasing in the portfolio has to be about 2.5 million square feet of leasing approximately, maybe a little bit more. So at our average leasing costs, our typical average leasing costs, that is about $100 million of leasing transaction costs that would be incurred.

Also on the non-cash rent side, we have got about $50 million of non-cash rents that are in the JV portfolio. I talked about the $50 million to $60 million of straight-line rents and fair value rents in the same-store portfolio. So that is another $100-million-plus that comes out.

Doug mentioned the CapEx. Our recurring CapEx is somewhere between $30 million and $40 million. We have nonrecurring CapEx that Doug talked about as well that is tied to our acquisitions and is underwritten in our acquisitions; and we don't typically include that in our FAD because it is underwritten in our acquisitions.

Then you have got some things that go the other way, like the non-cash interest expense and the non-cash compensation and the non-cash ground rents that we have, that total somewhere around $50 million. So if you lump all that stuff together it is probably adjustments of somewhere $190 million to $200 million off of our FFO. So you are somewhere around $4.00 per share plus or minus $0.10 on either side.

Great. All right, thank you.

Ross Nussbaum, UBS.

Mort, can you comment at all for your shareholders on if there is really any thought whatsoever going into whether or not you might run for Mayor of New York?

That's very funny. I don't know. I was quoted in the New York Times on this subject, and I said -- if there was such a thing as an appointed Mayor of New York I would consider it; but otherwise no. There is no chance that I will run for the mayoralty of New York.

And I am going to interpret your question positively, on the assumption that you think I could contribute more as the Mayor then I could in any other capacity. But no, there is no way that I am going to do that. But thank you --

Thank you. I am sure there is a joke in there somewhere, but I will move on.

Yes, the joke is running for the mayoralty.

Can you guys talk broadly about where you see the real estate transaction markets over the next year or two in terms of cap rates? In the context of what your view of longer-term interest rates are over the next year or two, as well as the flow of institutional equity capital we are seeing into the real estate sector, particularly the increasing amount that we are seeing from sovereigns.

Are you asking if we think cap rates are going to go up or down? Is that what you are asking?

Yes, more or less.

I would tell you that I am not entirely sure where cap rates are. I think that if you had to pick a number you would say that for high-quality, well-leased, institutional New York City CBD, San Francisco CBD, Boston CBD, the cap rates are somewhere in the high 4%s to mid 5%s. That is where our expectations of where things have been priced are.

And I don't -- I never feel comfortable talking about what people's overall return expectations are. Because I think that, quite frankly, that is more important than what the initial capitalization rate is on the asset when it is sold.

But when we look at what people are paying for assets and what their expectations are for the changes in rental rates, if they are looking to take leasing risk over the foreseeable future, then I think that their overall return expectations are somewhere in the 6% to 7% range at best. If they are looking to capture growth in rents over a prolonged period of time -- in other words, they are buying buildings where basically they don't have much in the way of rollover -- our expectation is they are looking for a similar overall rental rates; but their growth required in order to achieve -- excuse me, a similar overall return rate. But the growth necessary to achieve that return is probably a lot higher than what they are baking into those returns when they are buying buildings with vacancy or lease expiration issues associated with them.

Because what we have found and what I think is fair to say is that the transaction costs and the time it has taken to lease up space in nine out of 10 cases is more than what is sort of written into or projected in the analytics of people who are buying buildings, because of the situations that we are seeing from an overall supply and from an efficiency perspective in many of the markets that we are operating in.

So I don't think that is going to change much. The capital flows continue to be reasonably interesting from all of the sovereign wealth types of institutions. But I think there are fewer of those transactions that are being done than people expect.

The interest is there. But the ability to put your money -- make a hard deposit and go forward with something I think is a little bit stickier. So the frenzy and the activity is driving pricing based upon those people being around; but I am not sure that they are actively actually procuring buildings at the end of the day in terms of the winning bid.

Let me just add one thing. I mean, I think this is the obvious thing. The whole market in buildings, the transfer and the sale of buildings and the purchase of buildings, is to a larger degree than usual dominated by how much capital is available, the financing, at the rates that are available. That is what has sustained a lot of the values.

It is certainly not in most cases the demand for office space, which of course has been affected by the recession and by the concerns over the future. Only a very few selected buildings are doing relatively well. So I think it is driven primarily by the cost of capital.

Thank you.

Alex Goldfarb, Sandler O'Neill.

Good morning. Mike, on the disposition front, I guess, one, is Princeton part of that? And, two, would you guys be disposing of stuff as you would be acquiring? Or through your regular ability to manage taxable gains you would be able to manage the dispositions without having to necessarily offset them with 1031 acquisitions?

Alex, this is Doug. With regard to Princeton, we are not -- we don't have any immediate plans to do anything with Princeton other than continue to get the buildings leased up and to make more progress on getting rid of all of our early exposure and creating longer-term leases for the portfolio.

With regards to what we do with the capital and how we manage it, it is obviously a question of how big the gain is. Certain of the assets are assets that would have significant gains, and we would have to think real long and hard about the timing associated with those assets, and what we have on our pipeline in terms of use of capital.

Other buildings that we have may not have as significant gains, and so we may feel more comfortable not worrying about the timing and either being in a position where we have a modest return of capital or we, quote-unquote, figure out a way to do a smaller tax-free exchange with the proceeds. But we will think about it. It is a concern and a consideration. But we are going to do some asset sales in 2013.

Okay.

Just to reiterate, Alex, none of that is in our guidance. So we don't have any sales in our guidance.

And as we look at our investments and the cash that is going out and the liquidity that is going out in the development pipeline over the next two or three years, we look at asset sales as possibly a good way to help fund a portion of that liquidity and basically raise equity and keep our leverage in shape as we invest in new developments. So it is really recycling the capital that we have.

I guess I just should add one other thing on to the asset sales. When we say asset sales, selling an interest in an asset is also considered an asset sale. So we may -- that is part of our thinking as we think about the larger assets as well.

Okay. Then the second question is, if we just again focus on the tech tenants, which seem to be quite active, if you look at what happened with Microsoft here in the City, they went for a lower-cost option versus a clearly nicer space. If you look in Boston there seems to be a lot of interest from tech tenants at the base of the financial buildings, which is more cost-effective versus some of their other options.

Are we -- are tech tenants just culturally averse to paying the $80, $90 rents maybe on the East Coast? Or is it just a normal maturation of that sector and ultimately those tenants will get there? It is just we are just at the infancy and eventually these tenants will be taking those sorts of top-paying rent floors?

I think it would be dangerous to make any sort of a generalization associated with how tenants are thinking about what their cost considerations are for space. Interestingly, the tenants that are leasing space in Cambridge today are paying more than they are paying in the types of buildings that are available in the Seaport District or at the base of buildings. And there is obviously a lot more tech demand in Cambridge than there is in other places. So those tenants that are not prepared to pay Cambridge rents are considering less-expensive alternatives.

In San Francisco, we have found that the tenants that are taking large blocks of space are more interested in finding those blocks of space and are prepared to pay what is necessary to go in those blocks of space. So as an example, I think if you looked at the comps for what someone like Salesforce is paying in the various buildings that they have gone into, I don't think they are being shy about the rent they are paying relative to what a traditional office tenant would be paying in those buildings. And they're not just going into the bases of buildings; they are taking large blocks of space where available.

Even in New York City, interestingly enough, the tenants that are looking at some of the spaces below 42nd Street are in fact paying a significant premium to be there and to be in those types of buildings versus what they might pay to be in the base of a building on Sixth Avenue or on Third Avenue or even for that matter on Lexington Avenue.

So I don't think there is any ability at the moment to generalize as to what the price motivations of technology tenants are. I mean, I am told that SAP, as an example, is looking at one of the buildings at the Hudson Yards. I consider SAP a technology company, and they're looking to be at the top of the building.

So I really think it is very much dependent upon the business model of those technology companies, the brand awareness that they are trying to create, the overall location, and what they want to produce in terms of an environment for their tenants -- excuse me, for their employees as they move forward. So you can't really make much of a generalization.

Let me add -- this is Mort. I want to add one other thing to the way the tech tenants in particular look at space. They don't have a lot of separate offices for each of their individual employees. It is much more of a collegial atmosphere in which they have 8, 10, 12 people sharing a larger office space.

But what that means is the amount of rentable space per employee is actually quite a bit reduced. So in a sense that enables them to afford higher rents if it is the kind of building that they really want to be in for one reason or another, either for location or its access to surrounding amenities or what have you.

So it is a very, very different kind of culture in a lot of these technology firms compared to the traditional culture -- I mean in terms of space and in terms of the way they lay out space. But it does, from the point of view of those tech companies, really present them with opportunities to go into buildings that are in the right locations as far as they're concerned, even if they have to pay a higher rent per square foot, because they have much fewer -- quite a bit of a reduction in the amount of square feet they have per employee.

Okay. That's helpful. Thank you.

Steve Sakwa, ISI Company.

Thanks, good morning. Doug, maybe for you or Ray. Mort's comments about DC, the sequestration, obviously don't seem to bode well for the market. But you guys were successful in getting the DOJ to complete that lease; you did the Patriots Park deal; you started a spec building up at Annapolis Junction.

What do we read into those? Are those just very idiosyncratic deals? Or something about Boston Properties' platform, or something broader about the demand?

So I'll start and then I will let Ray finish. I don't want to be immodest here, but I think our Boston Properties' Washington, DC, region so grossly outperforms every other major owner of property in that area that we have been able to figure out ways to create a tremendous amount of value even in a negative-absorption difficult market. When you think about the negative absorption in Northern Virginia of 3 million square feet this year, and that we were successfully able to lease 720,000 square feet of what were effectively difficult buildings, that had to be basically gutted and rebuilt, and convince the Department of Defense, Intelligence Agency, and the ODNI to go into those buildings, nothing short of a terrific execution.

And being able to figure out a way to lease two years before a lease expiration the Department of Justice and get them to renew for 15 additional years again is nothing short of extraordinary. And getting Arnold & Porter to commit to 375,000 square feet of space in a market where, again, there has been -- for the first time in a long, long time there was no positive absorption, it is a real accomplishment.

And I really do think it is about our team. So with that, I will let Ray keep going.

Doug, Ray left to give a speech at a JLL function.

Oh, okay.

Okay, Doug. Maybe just moving on to Boston, you talked about the demand you're obviously seeing in Cambridge; some of that seems to be spilling over into Downtown Boston. But how does Bay Colony fit into this?

You mentioned that things are a little slower than you had liked. Are you able to attract some of that tech demand out there? Or are you really having to pull from the local tenant base?

I would say we are attracting tenants that are in suburban 128 right now. We are not pulling tenants from other locations at the moment.

Now, that has happened in certain instances in other years. But right now as I look at our portfolio of opportunities to do leases it is really a 128 expansion question.

So as an example, I described we are discussing -- we are in negotiations with a 50,000 square foot tenant that is located in Waltham that needs more space. And we are talking to another technology company that is in Waltham and is looking to expand by 50%.

And we have two other tenants in our portfolio that are expanding by 10,000 square feet and 15,000 square feet that are looking to look at -- one is looking at Bay Colony and another one is looking at 230 Citypoint. So it is really focused on the tenants that are in that market.

But I will tell you that the number of biotech and life science companies that are in fact in and around 128 in Waltham and Lexington has expanded dramatically over the past five years, and they are a big, big driver of demand. It was rumored that Biogen was going to be looking to relocate out of Weston and back into Cambridge; and I think that in a perfect world that is what they would like to do. I am not sure they can find enough space in Cambridge to do that.

So we will see what happens with Biogen. And those types of things are reducing the overall inventory of the market because of expansion, not because of musical chairs.

This is Bryan Koop. As Doug mentioned we had a good year last year. It actually could have been even better.

As we went into the third and fourth quarter, there were several large deals that just got put into a, call it a stall as they reassessed the horizon on the economy. And as we enter this year we are seeing the ice starting to break in the suburbs and renewed activity.

Doug mentioned also that there is a couple customers out in that market who had space for sublease that have pulled back and have decided to take that off the market. So those couple things I think bodes incredibly well, and along with what Doug mentioned with bio entering this market.

The other thing that is really great is when you look at the existing base out there, the tenants out there are in good financial state. They have cash in the coffers, and they are just being incredibly thoughtful about their expansion. I think that is what took place in the third and fourth quarter.

So we are encouraged for this year as we kick off.

Just one last comment on suburban Boston, because I talked about this before, but it is just part of the life out there. What happens in Boston typically is that we create technology companies; and then bigger companies tend to buy those companies and merge them into their existing organizations, which effectively creates available space.

So as an example, last year Oracle purchased Phase Forward. We had a building at 77 Fourth Avenue that was 100% leased to Phase Forward, and they moved all those people to an existing inventory of spaces up in Burlington. And we were about to do a deal with a Company called Rocket Software at one of our buildings in Bay Colony for 85,000 square feet, and suddenly there was sublet space available and they jumped into our building at 77 Fourth Avenue.

So there is that dynamic that is continually going on in suburban Boston. So if you looked at the overall amount of inventory that is currently leased, there has actually been some pretty significant growth over the past decade in 128; but we continue to have this organic changing of companies by they get developed by VCs, they become very successful, and then they are zapped up by larger companies. Then they get reduced in terms of their total headcount as the products gets merged in and some of the employees get moved off.

Okay, thanks.

Jim Sullivan, Cowen and Company.

Good morning. Thank you. Follow-up question on Princeton. Doug, the leasing in the quarter was very impressive, as you noted, given the sluggish absorption otherwise in that market. What can you tell us about rental rate and concession pressure in the sub-market?

It has been pretty consistent. Overall rental rates are in -- for a full transaction of a package which is $35 to $45 a square foot rental rates are in the mid $30s. If you are doing a deal more on an as-is basis or a very small concession package, the rents are in the high $20s.

Operating expenses in that marketplace are somewhere between $11 and $14, depending upon what township you are in.

Okay. Then switching over to 510 Madison, as you talked about in your prepared comments, progress has been slow and now you have the increased vacancy at 540. I just wonder; to what extent are you concerned that demand for upper-end small floor plates in that sub-market has been set back, perhaps on more than just a cyclical basis?

In other words, is it a case that the tenants are just not there, the demand isn't there? Or is it that there is demand but not at that price point?

I honestly don't think it is about price. I think it is about the demand.

And I think that we are in an environment in the financial services sector where there is a lot of unease and a lot of questions about where people are going to be and how they are going to be funding themselves. As I said when I talked about the statistics, 2007 and 2008 there were over 100 deals in excess of $100; and it dropped to 20 in 2009 and 2010; and then it popped to 41-ish to 45 in 2012 and -- excuse me, 2011 and 2012.

We are seeing lots of activity at 540 as well as at 510 Madison. But when you're leasing space, unfortunately, in between 2,000 and 7,000 and 11,000 square foot increments it just takes a lot of time.

While I think we were hopeful that there were going to be more one-floor and two-floor deals when we entered the market, and that's how it appeared when we started out, that size transaction has become the exception not the norm. So I think it is slower.

I will tell you that the level of activity on the high-end side for tenants below 11,000 square feet is significantly higher than those who are looking for 50,000, 60,000, 100,000 square feet. So I think that is where at the moment the market really has fallen off.

Sure, okay. Then finally on the TD Garden Tower project, the reported mixed-uses here, very extensive. Significant retail, residential, as well as hotel. I am just curious.

In that particular location, do you perceive a particular natural tenant constituency on the office side? Is it possible, given where it is located, that some of the spillover in demand from East Cambridge could find its way there? Or do you see it as some other kind of tenant that would be looking at that location?

I will tell you that -- so Converse is talking to the owners of a project called Lovejoy Wharf, which is, I don't know, 500 yards closer to the water than the sites that we are talking about at the Garden. And they were looking, interestingly, in East Cambridge as well as in Boston for a location. So I think that there is some applicability between that particular location and Cambridge, given the closeness and the shortness of the bridges.

The issue with that part of the market has traditionally been that the inventory has been pretty old and difficult to get comfortable with if you are a growing, larger tenant. So as we think about office space there, it is not obvious to us what the market will be in terms of where the demand is.

And it's a relatively small market. There is probably 4 million square feet of space in that Garden district of Boston to the west -- to the north of Government Center.

So we are being cautious about how much of the buildings will be office and how much of it will be other uses. But as that environment changes I think the chances for success become much greater on the office side.

Does your hurdle rate go up on this project given the extent of the mixed-use and the nature of the sub-market?

No. I think it might go up for the office side, but the demand that we have been seeing and that Delaware North has been seeing, and the interest for the retail users and the restaurant and the entertainment side has been significant. As well as there is an apartment building that is currently being developed by Avalon Bay on the far side of the Garden; and you have the former West End buildings that are owned by [EUR]. So there has been -- there is a significant amount of residential demand and inventory right in and around the Garden already as well as better infrastructure.

The one thing that I think that you have to recognize is that the changes to the Artery and the improvements on the transfer from the North Station area over to the North End and that plaza and that arcade system that is now there, in terms of the public spaces, has really been a phenomenal change to that area of the City. So if there were product there, it might be very enticing to certain types of tenants.

One of the things or a couple things that are really attractive to the office users that we have been speaking with in the early stages is the transportation here. You have got a train station that supplies the northern and western suburbs, and then also a T stop that was built by Delaware North. So the site is in really fantastic position right now to really fill in the last piece of this neighborhood that is really established on both sides -- the West End with a strong residential neighborhood and also the North End.

And what we are finding from office clients is that as the rents have gone up in the Seaport and Innovation District, they are increasingly looking at this location. The big piece that is really important to them is this transportation ability, that it's already there, and also with parking.

We have had comments from several users and also from hotel groups that have come in that they are seeing real similarities between this neighborhood and call it the Meatpacking District and what is taking place in New York City. So we are really encouraged about that.

Okay, very good. Thanks for the color.

Tom Truxillo Bank of America Merrill Lynch.

Hey, guys. Thanks for taking the question. Mike, you talked about refi opportunity coming up this year and the cost of 10-year debt, which seems significantly lower than what you are going to be refi-ing. Because of the lower rates on the 30-year and the perpetual, has that enticed you any more to look at that product, or do you still see the 10-year as a more attractive bucket?

I think that we look at a combination of things. We really look at our debt maturity schedule and looking to stretch that out and ladder that out.

So when you look at the attractiveness of current coupons on the longer end today, it is not a bad time to be starting to use that part of the maturity scale. But we are still attracted to doing 10-year paper as well or maybe 11-year paper. If you look at our maturity schedule, we still have something in 2023 right now, but 2024 has nothing.

So I would say we evaluate all maturities. Unlikely that we will do anything shorter. I would expect in the current rate environment, as long as we can go is great.

And the thoughts about signing up for the typical covenants that come with a REIT bond for 30 years, has that changed at all?

Again, I think this is something we evaluate. There are certain other products that you could use that have the ability to modify those covenants or prepay that debt, being like a 30-year baby bond where you have the ability to call it up for five, or even a perpetual preferred type of instrument that doesn't have covenants at all. And that is something that we are going to think about as we evaluate our debt needs this year and beyond.

Okay, great. Thank you.

There is no doubt but that the interest rate environment, particularly for the longer-term debt, makes us look much more seriously at the longer-term financing than we have more recently. The market is so remarkable and so attractive that it is inevitable that we are going to be looking at it seriously.

Okay, great. Thank you for your commentary.

Michael Knott, Green Street Advisors.

Hey, guys, on the GM building you said you would be happy to take another look, which implies that you had already passed. If so, how did you think about that conclusion? One would expect that you would be the natural buyer, given your cost of capital advantage, the value of a 100% stake, and also the opportunity to create value at the retail.

Michael, we get to create and participate in 60% of the value that we create right now. And we have partners who have a very lofty view of what they think the value of those buildings are. We felt that we were better served by using our capital in other places, being able to get the operating leverage associated with all we are doing at the buildings that are part of that portfolio.

And if in fact they are unsuccessful at the valuations that they suggested that they would be able to sell their interest at, well, we will take another look.

Okay. Then on Transbay, the RFP comment was interesting. When might we see you sign an anchor lease there? How quickly could that happen, or maybe how long might it take?

Bob Pester, would you like to answer that question?

Yes, we are still in the very preliminary design phases of this project and just starting to think about construction drawings. So I don't think it is going to be something you are going to see in the next month or two.

The proposal that we have on the table right now actually would be tough for us to make the occupancy based on when they want to occupy. But there is activity out there looking at the building, and hopefully we will have something to announce here in the near future.

Doug, speaking of San Francisco, can you or Bob provide any more color on the other San Francisco development opportunity that you referenced and maybe just what sort of magnitude?

It is in excess of a couple of hundred million dollars, and it is something that we are working feverishly on. We hope it happens; and if it does, we will be able to do something in the short term as opposed to waiting for a couple more years.

Okay, thanks.

David Harris, Imperial Capital.

Good morning. Forgive me if I missed this in your prior comments. The dividend increase, how much of that was driven by the increase in taxable income? And how is that going to play out this year?

On the dividend side, our objective with the dividend is to have it be relatively close to what our taxable income is. Our policy has been to raise it when we believe our taxable income is going to increase and we're basically going to be forced to increase it, and put it in a place where we think that it is going to stay at that level for a period of time.

So I would suggest that the increase that we have put in is in line with where we expect our taxable income to be in 2013. So we wouldn't expect to be coming back next quarter or the quarter after that and having an every-quarter type of an increase.

As we get closer to the end of the year we are going to be looking at our taxable income projections for 2014 and 2015 and thinking about what that means to what our dividend policy will be, going forward at that time.

Let me put the question another way. Is your taxable income rising faster than your projections of FFO?

I will try and answer the question in an offhanded manner. We expect that our taxable income will continue to go up. We only provide projections for our funds from operation for a year in advance.

So, Mike, I think suggested that we're going to need to look at our taxable income again prior to the end of the year. And for this period of time I would say that our taxable income is certainly going up higher on a relative basis more than our FFO; but we are not going to -- we just can't go out further than that because it would be inappropriate for me to comment what my FFO growth rate is.

Okay. Let me go back then on something else. Did I miss this? Did you throw out a mark-to-market on the portfolio? I think last quarter you said it was positive 2 to 3.

It is about $1 a square foot, slightly above $1 a square foot.

Save me doing the math. What is that in terms of percentage? Higher?

I think our average rent is somewhere in the $50 a square foot.

Yes, on 40 million square feet.

On 40 million square feet.

Okay, so it is a little lower. I think, Mike, you made reference to you're flat this year. So this is kind of a wash on the mark-to-market for this year's lease roll; is that right?

2011 to 2012, our GAAP FFO growth was relatively flat.

No, on this year's rent roll; we're flat on the roll?

Yes, we are kind of flat on the roll this year, and then it actually grows next year. Next year when we start to have some of the rolls, like at Hancock that Doug talked about, in '14 and '15 we have some positives.

Okay. Again, forgive me if you went into this detail, maybe I missed it in your prior remarks. (multiple speakers) on an individual --

This is really consistent with last quarter.

Okay.

Last quarter, Doug had mentioned that it was about $1. He'd didn't mention $2.00 to $3.00. He mentioned it was about $1.00. And we had talked about it being flat in '13 and growing in '14.

Just remind me, which markets in particular spread around that flat roll? I.e., which markets are going to be positive? Which markets are going to be notably down?

None of our markets are going to be notably down. We -- if you look at our rollout schedule in our supplemental you will be able to see the overall amount of square footage that is rolling over on each market basis.

If you want to -- we don't have it in front of us right now; so if you want to call back, Mike would be happy to go through it with you.

No, I can figure it out myself. Okay. Thanks, guys.

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

Okay. I think that's it from Boston. Mort, I don't know if you have anything else you would like to add. We thank you for your participation and we will talk to you again in about 90 days. Mort, anything? Okay. Thanks, everybody.

This concludes today's Boston Properties --

Hello? Hello? It's Mort. I just want to add one thing. I don't want to lose the context of what we are working in, okay? Basically, again we will emphasize the overall economy which slipped at a 0.1% annual rate. That is the first decline since 2009 in the second quarter; and the consensus estimate was plus 1.5%.

Now, if you want to call it a 1.5% growth economy, I would also point out that the pace is usually more than double that in the fourth year of a recovery. So the headwinds are really formidable.

And I think what we have been able to do in that context is really quite remarkable. We cannot predict just how this is going to permeate even the markets that we are in; but it is something that we always think about and it will, frankly, affect us in terms of what we do not only on the plus side in terms of leasing, but also on the other side which is in terms of financing. Because we think the financial markets are really going to be very attractive for quite a period of time, and the economy is going to remain very weak. And there is no way that the feds are going to do anything other than what they have promised to do, which is to keep interest rates low for at least another couple of years at this stage of the game.

So we are looking at a very attractive financing market because of the weakness of the economy, and we will just have to measure how we do in the context of that economy as we go forward. It is something that we have, by and large, shall we say -- I don't want to say we have avoided it completely, but we have really been able to avoid the brunt of what it is in terms of the economy. But we will be definitely able to take advantage in longer-term financing what that has produced in the financial markets.

So I just wanted to put the weakness of the economy back on the table. Because it is definitely going to affect everything we are doing.

Okay. Thanks. Thanks, everybody. We will see some of you in Florida in about a month, and we will talk to everybody in 90 days. Thanks.

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