波士頓物產 (BXP) 2013 Q1 法說會逐字稿

Good morning and welcome to Boston Properties' first-quarter earnings conference call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. At this time, I'd like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

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

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

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

Having said that, I'd like to welcome Mort Zuckerman, Executive Chairman, Owen Thomas, Chief Executive Officer, Doug Linde, President, and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchey, our Executive Vice President of Acquisitions and Development, and our regional management teams will be available to address any questions.

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

Good morning everybody. We are, I think, very pleased to be able to report to you on this last quarter, because I think it still demonstrates what we have reiterated on previous calls such as this and in many other interactions with the public shareholders. And that is that the quality of our assets and the location of our assets and the markets that we are in and the basic strategy that we have followed serves us very well in more difficult economies as well as a very good economies. And I think the performance of our assets is once again I think quite reflective of and indicative of the strategy and the assets and the management that we have pulled together. So I think we are still doing fairly well in, as I said, what is a weak economy, an economy that is growing at about 1.5% a year in the context of the biggest and most stimulative fiscal and monetary policy in our history.

And nobody quite knows where this economy is going. There's just a lot of vulnerabilities to it, but we still feel and think and believe that that's the kind of assets that we have and the markets that we are in, the locations where these assets are and the management skills that we bring to the markets that we are soliciting and servicing in each one of our offices, be it San Francisco or Washington or New York or Boston as our principal markets.

I think we will continue to do relatively well, but we are not dealing in very strong general macroeconomic environments. And each of these markets does well for one reason and or another. We think we can continue, as I said, to do relatively well, but it's not going to be an easy gliding path. We're going to have to work hard and we're going to have to work intelligently. We're going to have to make sure we continue to do what it takes to make the different deals that we are involved with and to close the leasing programs that we have. And by and large, I think we have done it and I think we will continue to do it.

Now, let me just say this. We also intend to maintain this strategy that we have followed from the founding of the Company. And that is that we will concentrate in, as we say, and it's a bit of a cliché, but it is a lot more than that, we are going to concentrate on A buildings in A locations. And these are the buildings that we find have perpetually done relatively better in good times, but much more importantly, it also does very well relatively in more difficult times, which is the way I would describe the current macroeconomic environment.

Now, we do have a couple of things that I think I would like to touch upon, and one of them is, in the last quarter, we have brought in Owen Thomas as the CEO. Now, I was previously the CEO, as you may know, but I have not been the CEO for the better part of I'd say 98% of the time that I've been with the Company. Ed Linde, the late Ed Linde, my wonderful partner, had been the CEO. And I think that the feeling was that we were a three-man team when Doug joined us, Doug and Ed and myself. And we were all, believe me, working pretty hard to bring the Company to the level of that it is currently, and we felt it was absolutely essential that, if we bring in a third person after Ed unfortunately passed away to take over that job. I took it on on a more interim level, but it's a full-time job. And we all have full-time jobs and we wanted to make sure, with a much larger company, that we have enough talent at the top to handle everything not only we are doing, but that we expect to do as we go forward because we are going to continue to grow the Company.

So I'm delighted that we were able to persuade Owen to join us as the CEO. I think he has both the skills and the personality to work well with all of the key executives of the Company and with the publics and tenants that we have to deal with. And I think this is going to be a major value added to the Company and enable us to continue growing without putting everybody into a stretched out -- short of, shall we say, working day to the point where we are not as effective as we could and should be. So we are back to the three-man team that we were for so long before, and we think that this will be the best way to nourish our growth. And I think we are fairly confident that when the -- even in this relatively difficult economy, I think we are doing quite well, but as soon as this economy really begins to turn up, I think we will be in a position to even accelerate our growth in the various markets that we are in. So, I think that has been a major addition to the Company, which we needed, and I think this is something that we will all, over time, appreciate. And I think this is what is going to be the leadership team of the Company, and I'm delighted to be able to share that with you. And I think we will all be able to appreciate the benefits of having the three-man team back again to lead Company as we not only go through relatively more difficult times, but as well when we get into, shall we say, stronger economic times.

The one market that I want to focus on briefly that we are more bullish on relatively, frankly, is San Francisco. The general environment in that market is dominated by and led by the online world. And when you have companies there that are -- two or three years ago were simply unknown companies taking over 1 million feet of space, which was the case in San Francisco last year with at least one company, it is clear that there is a genuine groundswell of demand from these new companies who are doing extremely well, and so that is the one area where we are being a little bit more aggressive in terms of both the assembly of sites and the development of new buildings.

I will tell you one story, if I may, because we were down in San Francisco for the groundbreaking of a project we call Transbay, which is a major project in San Francisco on a wonderful site, one of the last major sites in what broadly speaking is the financial district. And the mayor was there, and we had basically put forth something on the order of $190 million for the land on this site to build 1.4 million square feet. And the mayor said this is a fund. This check would be used to continue to pay for improvements to the region and to the area. And he said I want to thank Mort Zuckerberg for this money. Everybody in the audience recognized he got the names a little bit mixed up so that when I got up there to speak after him, I said, I just want you to know, Mister Mayor, that Mark Zuckerberg will be paying for the rest of this development. So that's not entirely true, but we do have and are very happy with the kind of relationship we have developed with the leadership in San Francisco where we are going to be building on the order of over 1.5 million feet over the next several years. So this is something that I think will enhance our position in San Francisco where we already have major developments like Embarcadero Center and several other buildings, all of which are doing extremely well. So we look forward to the growth of that market and to the leading role that we will be able to play as a participant in that market.

We did start a 500,000 square foot building in Washington DC, but there we had a 396,000 square foot tenant in hand with us when we started that building, so that one is relatively sort of shall we say satisfactorily released. But we are not -- we are being very cautious in terms of how we develop assets in these other markets where we will be doing, we will be building new buildings, but we will be very careful of what our pre-leasing is and what the market is in those particular locations. But we will still concentrate on building the highest level of quality in the real estate because we believe that this is the best platform for not only short-term growth but for long-term growth.

And with that, I will end my comments and be happy to answer any questions after several of my colleagues add to the comments that I've just made.

Thank you Mort. This is Owen Thomas. Good morning everyone. As I think many of you or all of you know, I had started at Boston Properties slightly less than a month ago, actually started on April 2. And let me just say here at the outset that I have long admired the people and franchise of Boston Properties, and I am honored and excited to be joining the Company in a leadership role. In this role, I look forward to working closely with Mort, Doug and Ray as partners in leading Boston Properties in the years ahead.

On the question of strategy, which Mort touched on, I believe Boston Properties has a well articulated and very successful strategy of focusing on high-quality buildings in attractive locations, and this approach will continue to guide our activities.

My primary initial goal has been to immerse myself in all aspects of the Company and to just generally get up to speed. More specifically, I focused on meeting our team, seeing as many of the Company's assets as possible, understanding the Company's systems and procedures.

Over the past four weeks since I started, I've been able to visit all of our major offices except one, which I am visiting next week. During these trips, I've seen or toured a large number of our assets and I've met a great number of Boston Properties employees. Overall, I've been very impressed with the experience, the tenure, and the commitment of our employees, as well as the quality of the Company's real estate assets and systems. Clearly, it will take me more than a month to get fully up to speed, so my initial immersion efforts I think, while off to a good start, are still very much work in progress. And let me just say, in closing, that I look forward to working and interfacing with all of you in the years ahead.

With that, I am here in Boston with Doug and I will turn it over to him.

Thanks Owen. I too want to add my welcome to Owen. We've been spending lots of time together in person, at dinner, at lunch with a number of the executives in the various regions. And we are getting to know each other and more importantly, in my perspective, we are also getting to know how each other think. We are sharing lots of information and ideas and perspectives. I think it's fair to say that Owen is a pretty quick study, and we are endeavoring to get him into the flow of everything that is going on around here. And I look forward to working with him over the coming weeks and months and years.

So, with that, let me get sort of into the nitty-gritty and the heart of our call and sort of what's going on out there. I thought I'd start this morning sort of where I left off last quarter, which was with the statement that we are in the market selling assets right now and that, in 2013, we could be selling assets that approach $1 billion more.

Since we last spoke, we have signed our first two deals. The first is at 125 W. 55th Street, which is a building in New York City. And the second is a building in downtown San Jose, 303 Almaden. And in total, those assets have a sales price of about $510 million, but I want to make it clear that we are not done with our efforts to sell assets. 125 W. 55th Street is a 588,000 square foot building. It's 98% leased, and it has no rollover until 2021 and the two major tenants roll in '21 and '27. The major leases today are slightly or significantly above market, and the asset is encumbered with a $200 million 6.1% mortgage until 2020. And the loan can be repaid or prepaid for a cost of approximately $60 million. So, if you ignore the above-market financing, the cash NOI for the next 12 months is about $27.4 million, so that gives you an NOI cap of about 5.8%. The 2014 annual GAAP FFO contribution was projected to be about $12.2 million. It's a JV, remember, so that's why it's slightly less. And we anticipate that the transaction is going to close during the second quarter.

125 W. 55th really is a core asset. It's got a cash flow profile with no short or medium term growth opportunities. We've now taken care of all of the available space, extended all of the major leases and really we really felt as a partnership that, given current capital market conditions, it was really an appropriate time to exit the asset. When we think about other assets that we are going to be looking to sell, I think the profile of 125 W. 55th Street is a good indication of the things that we are thinking about.

303 Almaden is really a very different type of a situation. This is a 158,000 square-foot building that is located in downtown San Jose. The major tenant in the building is an accounting firm with about 110,000 square feet and they have a February 2006 lease expiration. You may remember that we purchased the development site adjacent to this building in 2000 before we purchased 303 Almaden in 2006. And frankly, the downtown San Jose market has just not experienced the level of activity that we had hoped for when we started making these investments in this market, or this submarket. We just haven't been able to get anything going on our new development and we are really now rethinking our plans for that site. So as E&Y, the accounting firm, which is E&Y, came up to us to talk about their future tenancy, we started thinking about our releasing assumptions. And quite frankly, we felt that, given our view of the submarket, it probably made sense to consider a sale. So we are selling 303 Almaden for $253 a square foot and a projected 2004 cash NOI of $3.1 million. This building is unencumbered.

I want to make it clear that we are not exiting the Silicon Valley. Far from it. We've actually just increased our exposure to Mountain View with the purchase of our partner's interest in the Mountain View Research and the Mountain View Tech Parks at a valuation of $233.5 million. Quite frankly, we view Palo Alto Mountain View submarket as the strongest submarket in the Valley with the most opportunities for transaction volume and ultimately rental rate growth. The Mountain View assets are currently 88% leased. They have a projected 2013 NOI yield of about 7.4%, and the rents in all of the buildings are about 10% below-market and they have relatively short term lease expiration profiles. So generally that's a three- to five-year market, so there's pretty good rollover.

We are in the initial stages today of marketing additional assets in Washington DC and Boston, and we are also considering other assets across our regions. Again, the assets that we're thinking about leasing -- selling -- have long-duration leases with strong credits and very little short- or medium-term opportunities to grow cash flow. They are ideal candidates for long-term secured financing and will be very attractive in the current investment climate.

I also want to provide a little bit of an update on where we are with the sale of the 40% interest in 765 Fifth Avenue, the General Motors building, which is being conducted by our partners. We believe that there is a deal that has been made with a valuation that is in excess of the 96.5% of the $3.4 billion value which was the [ropo price sets]. We have actually seen what the final deal is, but that's what we are told.

As a reminder, the asset was purchased in 2008 for $2.8 billion, and is currently financed with a $1.6 billion mortgage at a rate of 6% with a 2017 maturity. Without adjusting for the current above-market debt structure, this works out to a 50% increase in the equity value of the asset over the last 4.5 years.

Let me give you a little bit of commentary on sort of what's going on in the markets now and shift away from the asset side -- the sales side. As Mort suggested, from a macro perspective, things continue to be sluggish. But as we think about the world, we are really thinking about where the tenants are that are going to grow and where the foreseeable future likely increases in jobs are going to be. Job growth in the US economy today is clearly focused on businesses that are oriented toward new ideas, be they in technology, media and information distribution, life sciences, or medical devices. In a general sense, the markets that have the largest concentration of those industries, San Francisco being one of them, are clearly going to be the strongest performers, and those are the areas that have the most opportunity for occupancy improvement and ultimately rental rate growth.

So, let's start with San Francisco. The technology industry has become a major user of CBD office space, taking up more than 23% of the available inventory in the CBD, which is a market of about 58 million square feet. Tech demand in the city continues to be very strong. Uber, Microsoft, Google, Yahoo!, [We-Works], Square and AppDynamics are all looking for large blocks of space right now in the CBD of San Francisco. Tech tenants continue to lease more and more space in traditional high-rise office buildings. They've taken space in 50 Fremont, in Rincon Center, in One Market Plaza, in One Montgomery, in 199 Fremont, and 333 Bush and more recently, many of the newly announced developments, including our asset at 680 Fulsom Street.

We have now begun responding to offers on our remaining availability at 50 Hawthorne, which is the three-story building directly behind 680 and 690 Fulsom. And the rents that we are putting out there are generally 5-plus% higher than our initial underwriting, and our transaction costs are about 15% lower than our budgets, and we're seeing pretty strong activity.

Tenants in San Francisco are now entering a market where there is very little sublet availability, the direct vacancy for Class A space is under 8%, and many, many tenants are coming off leases that were done during the last downturn 10 years ago. In fact, we just completed a 40,000 square foot early renewal, 2014 expiration, with a tenant that came to the (technical difficulty) Embarcadero Center in 2004. The new rent is 23% higher than the expiring rent, and there were limited transaction costs.

In a second transaction, we completed a full floor deal that was last done in 2009 with a 10% bump in the marked-to-market, again with limited transaction costs. Our 2013 to 2015 marked-to-market at EC is really running between 15% and 25% on a lease-by-lease basis.

We've commenced construction on 535 Mission Street, which is a speculative building. It's 535,000 square feet, and it's going to be delivered in the middle of 2014 with occupancy by end of 2014. We introduced the product to the market about two weeks ago and made it clear we would be responding to leases of two floors or more. The square footage is actually 307,000 square feet, not 325,000 -- or 335,000.

We're very encouraged by the initial reviews and the inquiries. The building has 13,000 square-foot floors, so we anticipate that it's really going to be leased to a broad range of small or medium-size technology and legal and financial services and other tenants. And if the average leases in the building hit our pro formas, we expect in the mid-60s% the investment will generate about a 7% cash NOI return and if it's higher than that, obviously a much higher return on costs.

We did, as Mort say, close on the 95% position at the Transbay site during the quarter. We originally contemplated the transaction as a 50% partner. And at this time, we are considering whether and when we might want to bring in a capital partner for the transaction, but really we are focusing our time at the moment on working as expeditiously as possible with Heinz on our initial construction activities with an objective of spending the incremental capital necessary to shorten the project's delivery schedule. That's what we're focusing on right now.

The pace of activity in the Valley and the Peninsula continues to be strong, although there was a pause from the last quarter, and actually a little bit of negative absorption as a bunch of speculative office buildings have come on the market. But again, things have started to pick up in March and April. Apple and Google are once again looking for incremental growth out there. There have been a significant number of other medium-sized tech tenants that are making commitments and signing leases.

There's a healthy level of activity and rents for new buildings are basically in the 325,000 to 375,000 area. That's a triple net monthly number for markets like Santa Clara and Sunnyvale. And we have seen, again, a pickup of activity in Mountain View where our asking rents were in the $2.50 range. And again, our buildings are one-story buildings. Our last deal was -- completed during the first quarter was for 30,000 square feet at $2.63 monthly, which worked out to $31.56 triple net.

Boston, which has its life science industry, continues to exhibit some really strong growth. Tenants are expanding into lab and office space across Cambridge and Boston and the Route 128 market. And while the epicenter of the life science community is still in Cambridge where we have a number of the sort of nonprofit institutes and think tanks like Broad and Whitehall and MIT, we continue to see great activity across the overall market.

Over the last decade, a number of traditional office buildings in Kendall Square in Cambridge actually have been converted to lab space. And while that has reduced an increase -- reduced the amount of office square footage and reduced the ability for tenants to grow there, there still happens to be the most concentrated technology demand in the Boston area in Cambridge. And it's really become a critical location for a number of large technology companies putting office space at a premium. Surprise, surprise, we are effectively 100% occupied in Cambridge Center.

Now, last month, the city of Cambridge gave MIT the rights to develop about 1 million square feet of commercial space across from our Cambridge Center development. There are no definitive plans at the moment and that could be lab space, it could be retail space, or it could be office space. In addition, the city is working with us on changes to the Kendall Square zoning that could allow us to build up to 1 million square feet on our parcel at Cambridge Center in the future. Where does it go? It probably goes on top of garages or potentially knocking down some of our smaller buildings. Finally, the city is also examining the Department of Transportation owned site on the north side of Cambridge Center for additional commercial event space, so there will be some additional office and lab opportunities in Cambridge in the sort of medium-term, but nothing in the short-term.

So, today, what are we doing in Cambridge? We are trying to engage tenants with either '14, '15 or '16 expirations about renewing, and quite frankly, in some cases, we are actually encouraging some of our tenants to consider opportunities in our properties in Back Bay, or on 100 Federal Street or in the suburbs. So at the Hancock Tower, which is our largest medium-term exposure in Boston, we've focused on widening the user market and have creative effectively a white-box showcase on one of the floors which really we hope is appealing to the technology-focused tenants. The space is actually priced at lower rents than the opportunities in Cambridge today. Tech tenants are finding their way into the Back Bay and the financial district. It is happening. We are showing the Hancock Tower to Cambridge brokers and tenants on a pretty consistent basis. The only challenge we have, quite frankly, is we don't get most of the space back until 2015, and many of the tech companies have a much shorter duration window than that.

Now, while many of the real estate pundits are focusing on urbanization of businesses in the Boston market, we continue to see really, really strong activity in our Waltham assets. And much of it is stemming from the expansion of the life-sciences industry. During the quarter, we completed 88,000 square feet of leasing at Bay Colony, which included 76,000 square feet of new demand, and we are in negotiations with two more tenants for another 55,000 square feet of current availability. We completed more than 77,000 square feet of deals at 230 City Point, including 45,000 square feet of new demand from expanding and new tenants. And overall, through the beginning of April, we have done more than 375,000 square feet of new leases in the Waltham market. More than a third of the demand is from growing life science companies. So again, the Boston markets, led by the biotech and life science industries, are really feeling very good, not just in Cambridge but in the city of Boston where Vertex is growing, as well as in Suburban 128 and Lexington.

In New York City, the first-quarter leasing activity was pretty slow, but since the beginning of March, we have seen a meaningful pickup in demand from high-end, smaller tenants. Our predominant user and target tenant for our available space today at 510 Madison and at 540 Madison and at 767 Fifth, the General Motors building, are small hedge funds and asset management companies, advisors and other entities that are involved in the financial services industry. But what we're seeing is that, given the current bull market and the amount of new allocations that seem to be coming out of the pension fund management community, there is aggressively -- that is aggressively being invested, there are new funds being formed and existing funds are starting to grow again.

We signed five prebuilts during the quarter, two at 510, two at 540, and one at 599, and we have a total of five deals totaling 40,000 square feet done or in the works at 510 Madison right now. We have eight deals totaling 32,000 square feet in the works at 540 Madison. We signed 53,000 square feet of leases at the General Motors building, and completed the transaction with a world renowned luxury retailer for the ground floor space, and we are out to lease with the full-floor 38,000 square foot tenant.

We have to deals on the three of our -- two of our three remaining suites at 601 Lexington -- that's the old Citigroup Center building -- and filled our last two suites at 399 Park Avenue. We have really, really good activity across our portfolio in Midtown.

Our pricing at 540 is from the mid-$70s to the low $90s. The pricing at 510 is from the low $90s to the mid-$130s, and our pricing at the General Motors building is from the low $90s to the upper $190s. Again, strong rents, smaller tenants, prebuilt suites in our portfolio across our Midtown assets.

Now, the large tenant market in New York City is a bit of a different story. We continue to see headcount reductions from the large investment banks, and as leases expire, these institutions are shedding space. The universe of large lease expirations in 200,000 square feet or more, sort of how we categorize that, is pretty limited between '13 & '16. And as we just saw with Simpson Thatcher, which just renewed about 500,000 square feet at 425 Park a few weeks ago, they had a 2018 lease expiration. So, the window now for large tenant blocks is 2016 to 2018 and beyond.

Fortunately, we have no available space other than our new development. Our focus at 250 W. 55th is on full and multi-floor users under 100,000 square feet which, is really the deepest part of the market. We are showing space on a consistent basis and are optimistic that, in addition to that 46% that's already leased, we will have additional deals signed before the building opens early next year.

It should be noted that, in spite of the slow market, as evidenced by the sales I described earlier, the demand for New York City real estate investment is as strong as it has ever been.

In DC, the reality of the sequestration and the lack of any progress on a real grant bargain are really having an impact on the market more than anywhere else in the country. The first quarter was really a continuation of the end of 2012 where there really wasn't much in the way of net absorption. You have to remember that the GSA makes up about 25% of the square footage in the market there, and if they are not growing -- and in fact, today, what they are working under is a mandate of increasing the densification of space, i.e. getting into less space with more people, the market is going to struggle.

Second-generation space is plentiful, and in some cases, landlords have expanded the concessions in the way of either tenant improvements or free rent to encourage tenants to relocate. Fortunately, thanks to our DC team, we just don't have much in the way of available space. We are 96% leased, and where we do have availability, with one exception at Met Square for a block, we are marketing prebuilt suites to expand the target market, and we are taking advantage of two things. One is our building locations, and two is our property management strengths. And when you're talking to small tenants, both of those things matter. We've started construction, as Mort said, on 601 Mass. Ave., which is 75% leased, and expect to deliver that building in the fourth quarter of 2015.

The most significant deal in suburban DC this quarter was our lease, our 20-year lease, with OD&I, which is a GSA entity, at Patriots Park. We continue to have great success at attracting tenants to Reston Town Center and this quarter, we did another six additional leases in our Town Center portfolio totaling about 47,000 square feet, and we continue to achieve rents in the high $40s to the low $50s in the urban core. A quarter-mile away, you're lucky to get $35 a square foot.

We are currently negotiating a number of early renewals and extensions in Reston, following our practice of getting way ahead of our lease expirations. We've closed on the last remaining parcel in the urban core, which is currently zoned for about 250,000 square feet of office space, and we are in the process of determining the highest and best use for that ground and how it fits within our long-range plans for our urban core portfolio.

In Princeton, we completed the 78,000 square foot deal with Otsuka Pharmaceutical that I talked about last quarter, and they have actually continued to expand, taking another 10,000 square feet of short-term space. We are now working with two other tenants totaling about 350,000 square feet on long-term renewals and expansions, and we have a number of other active discussions underway.

So overall, we completed about 1 million square feet of leases in the first quarter, which was about 25% greater than the first quarter of 2012 on a comparative basis, but 81 transactions versus 76. Our second-generation rent trends were slightly down, and there were really two factors for that. The first was we actually did an 11-year deal early renewal in Princeton with $10 of tenant improvements which served to lower the rent but greatly increased the net effect of rent. Finally, we did a four-year deal on a piece of space at 111 Huntington Ave. that was encumbered but where the tenant agreed to put in significant capital with the hopes that the encumbrance would last. And that impacted our second-generation numbers as well. If you think sort of going forward, our second-generation marked-to-market is really going to be probably in the mid-single digits over the next few years, on a quarter-by-quarter basis.

So with that, I will let Mike talk about the earnings. It's a little bit complicated this quarter. Then we will get to questions.

Doug, just before you start that, I want to make one other comment here, and that is to announce that Boston Properties has been designated as the owners representative of providing development management services for the new health and life science facility in Allston, Massachusetts for Harvard University, a project that will cost approximately $480 million. I think this is just an additional testimony to the quality of work that Boston Properties does in developing world-class buildings for leading clients. That is a huge and very important transaction for us, and I just think that it's something that should be added to our mix of today's information to the shareholders.

Thanks Mort, Doug and Owen. I'm going to quickly touch on our activity in the debt markets and then go through our earnings and our projections because, as Doug mentioned, there's quite a few things to cover. I'll try to go quickly though because I know the call is going a little long.

In the capital markets, we had two successful transactions. We issued $200 million of perpetual preferred equity at a 5.25% coupon and we completed a $500 million 10.5 year bond issue at all-in yield of 3.3%, which equated to a credit spread of 133 basis points over the ten-year treasury. A portion of those proceeds will be used to redeem $450 million of exchangeable notes in mid May of this year. Based upon our current stock price, the exchangeable notes are in the money and we expect to issue common shares for the premium. At our current share price, the premium is approximately $36 million, which equates to roughly 330,000 shares. Now, 237,000 of those shares are already reflected in our diluted share count based upon the average stock price for the first quarter.

We have two additional financings in the works. They include the refinance of our $120 million mortgage on 540 Madison Avenue, which we own a 60% share of. The mortgage has a rate of 5.2% and it expires in July. We anticipate closing the new loan in June, which will be a floating-rate loan priced at LIBOR plus 150 basis points.

We are also in the process of refinancing our construction loan on 500 North Capitol Street now the project is complete, and sometime in June, we expect to close about $105 million ten-year fixed rate mortgage at a rate of under 4%. Once we complete these two financings, we will have no other debt maturities to refinance in 2013, although we do have $750 million of exchangeable notes maturing in February of 2014.

So after redeeming our exchangeable notes in May, our cash balance will be approximately $700 million. We expect to use $325 million in our development pipeline through the remainder of 2013. The proceeds from the sale of 125 W. 55th Street and 303 Almaden are expected to increase our cash by $200 million. And as Doug stated, we are considering several additional property sales that could raise significantly more capital, and could be redeployed in our development pipeline, fund acquisition opportunities, repay maturing debt, or, if required, fund a special dividend.

Now, turning to our first-quarter earnings results, we reported funds from operations of $1.06 per share. That was $0.14 per share below the midpoint of our guidance range.

Our earnings were negatively impacted by a couple of unbudgeted charges. The largest was a $19.5 million or $0.12 per share charge to our G&A, the result of implementation of our succession planning. The G&A charge has two pieces relating to our Chairman's transition agreement. First, we took a $12.9 million charge this quarter associated with accelerating outstanding unvested long-term equity compensation. This compensation was previously scheduled the best MB expense over the next four years.

Second, we booked an expense of $6.6 million for the first-quarter vesting of the $17.8 million transition benefit payable in cash and stock on January 1, 2015. The remainder of the benefit will vest over the next 14 months and we project expensing $17.2 million in the last three quarters of 2013, and $4 million in 2014.

The other unbudgeted item for the quarter was an impairment charge related to our holdings in downtown San Jose, California. We are taking a $3.2 million charge to net income this quarter relating to the pending sale of the 303 Almaden building as our book value is higher than the sales price. As Doug mentioned, the building has a major tenant with a lease expiry in 2016, so the leasing was a little bit uncertain going forward into the future in a market we see as fairly weak. Now, this charge does not impact our FFO as it's excluded per NAREIT's definition. In connection with the sale, we are reviewing our strategy for the adjacent land parcel that can support 840,000 square feet of office development. Based upon a shorter likely hold period, we booked an $8.3 million, or $0.05 per share, impairment expense, writing the land down to $29 million, which did negatively impact our FFO. After adjusting for these two unbudgeted items, our core operations were about our guidance for the quarter by $0.03 per share, or about $5 million. The portfolio was up approximately $4 million with rental revenues and parking revenues up by nearly $1 million each. The most significant piece of the rental revenue performance was due to the early delivery of the second Patriots Park building to the DIA. The remainder of the outperformance was just over $2 million of lower net operating expenses.

Our joint venture portfolio also outperformed, contributing $2 million above our projections due to the combination of better-than-projected percentage rent from the Apple store at the GM building, and lower operating costs. These positives were offset by the modest amount of termination income we booked this quarter, which was $1 million below our budget.

I want to spend a few minutes now on our full-year projections and clarify the impacts from the events in the first quarter, as well as the property acquisitions and dispositions that we've announced. Looking at our FFO projection for 2013, excluding the impact of the changes to our G&A and the impairment, we anticipate stronger FFO than our prior guidance and in fact would be increasing the midpoint of our 2013 guidance estimate by $0.09 per share.

The portfolio performance continues to improve, given the leasing activity we're seeing in our vacancy in suburban Boston, Reston, Virginia and in New York City that Doug talked about. Our occupancy moved up by 30 basis points this quarter to 91.7%, and we expect it will continue to move up through the year and average between 92% and 93%.

In our same-store, we project our 2013 GAAP NOI to be higher than 2012 by 2% to 3%. This is a 50 basis point improvement from last quarter's guidance due to projected occupancy improvement from new leasing activity.

On a cash basis, we project our 2013 cash NOI to be up from 2013 by 5.5% to 6.5%, which is in line with last quarter as most of the new leases had some amount of free rent.

Our non-cash straight-line and fair value rents are projected to be higher than our guidance last quarter. The uptick in our portfolio performance is expected to add to our straight-line rents, and the addition of the Mountain View properties that have below-market rents increase our fair value rent by about $1.2 million. In total, we project our 2013 non-cash rental revenue to be $57 million to $65 million.

As Doug described, we announced two new dispositions this quarter as well as the acquisition of our partner's interest in the two office parks in Mountain View. Net-net, the impact of these transactions will be about $2.4 million positive to FFO in 2013. The acquisition of the Mountain View properties is projected at $14.7 million, while the sale of 303 Almaden is anticipated to result in the loss of $2 million of 2013 FFO. The FFO contribution from our joint ventures is projected to be down $5 million to $6 million due to the sale, the anticipated sale, of 125 W. 55th Street and the consolidation of Mountain View. These two events are expected to result in the loss of $10.3 million of FFO from our joint venture portfolio.

Now, offsetting this loss is $4 million to $5 million of projected incremental FFO for the year from new leasing at the GM building, including our leasing of the ground floor retail space, plus other leasing activity at both the GM building and 540 Madison. Our projection for the full-year FFO contribution from the joint venture portfolio is $110 million to $115 million, which includes $55 million of non-cash fair value rental income.

We expect the contribution our development deliveries to be in line with our prior projections. This quarter, we fully placed in service and ceased interest capitalization on 500 North Capitol, Annapolis Junction 6, and Two Patriots Park. In July, we expect to deliver 17 Cambridge Center and the Cambridge Center Connector building, both of which are fully leased. At stabilization, we project these five projects to deliver an aggregate cash return of over 10% on $225 million of invested capital.

Our other developments that are nearing completion include the Reston residential project, 250 W. 55th Street, Annapolis Junction 7, and 680 Fulsom Street, which we will deliver in late 2013 through early 2014. We are not projecting any meaningful income generation in 2013, and we expect to continue to capitalize interest on these projects until 2014 when leases start to commence.

Our hotel property was up slightly in the first quarter. We expect it to be in line with our prior guidance for the full year, contributing NOI of between $10 million and $11 million to the year. We project our 2013 development and management services income to be $27 million to $31 million. This is up slightly from last quarter's projection.

As Mort mentioned, this quarter, we signed an agreement to be the key developer for the new health and life science facility with Harvard Planning and Project Management. This is a six-year project and we expect to start earning income next quarter. The impact is partially offset by the loss of fees from the Mountain View properties where we've previously been generating management and leasing fees relating to the joint venture, but we now own 100%.

Our G&A in 2013 will be significantly higher than previously projected due to the management's succession plan put in place in the first quarter. The net impact on 2013 from the plan will be an increase in our G&A of $24 million in 2013 and $4 million in 2014, the majority of which are non-cash equity compensation vesting expenses. The charges will be fully expensed by the second quarter of 2014. If you pull out the transition compensation, our 2013 G&A run rate is in line with our prior projection of $82 million to $84 million. Inclusive of all the charges, we project our 2013 G&A expense to be $106 million to $108 million.

We are executing on our financings at better-than-projected interest rates, which reduces our interest expense projection slightly. In addition, during the quarter, we added 535 Mission Street in San Francisco as a new development, and we increased our ownership share of the Transbay Tower project. We are capitalizing interest on both of these projects. And it results in approximately $8 million of higher projected capitalized interest.

Our interest and other income is in line with our projections and in aggregate, our net interest expense is projected to be $374 million to $380 million for the year. Capitalized interest is projected to be $67 million to $73 million.

This quarter, we completed our first perpetual preferred equity issuance, which was not in our projections. So we will have an increase in our preferred dividend of $7.9 million in 2013.

Our prior FFO guidance for 2013 was $5.08 to $5.16 per share. Excluding the earnings impact of our succession planning and the first-quarter impairment charge, we would be increasing our guidance by $0.09 per share at the midpoint to $5.16 to $5.26 per share. The improvement includes $0.08 per share of better projected performance in the portfolio and $0.01 of lower interest expense net of the preferred dividend. The charge associated with our succession planning in the first-quarter impairment combine for a loss of $0.19 per share of FFO and results in our new guidance range for 2013 funds from operations of $4.90 to $5.07 per share. For the second quarter, we project funds from operations of $1.25 to $1.27 per share.

I do want to mention one other thing, which is the potential impact that the sale of the minority interest in the GM building could have on us going forward. As part of the transaction, we have been asked to make accommodations to the new partners and in return have negotiated enhanced operational control rights which may lead to our consolidating the asset on our books.

If we consolidate, the counting will reflect that we have sold our interest in the joint venture, resulting in a substantial gain. And then we would record the asset as an acquisition on our consolidating balance sheet at the new higher market valuation. In addition, we would recalculate the fair value accounting for the building, including both the leases and the debt. We anticipate that this will result in a decline in our non-cash fair value rental income and a decline in non-cash fair value interest expense. The net effect on our FFO will likely not be significant in 2013, but the geography of the changes will reduce our revenues and our interest expense. None of this impacts the cash economics of our investment, only the accounting.

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

(Operator Instructions). Josh Attie, Citigroup.

Maybe one for Mort. As you think about the CEO succession and then choosing Owen, how important was sort of the international experience that Owen brings to the table, whether it be Asia or London, and the characteristics that you were looking to bring on an executive?

It was one of many diversified talents that Owen brings to the table. I think, for the shorter-term, we are going to focus pretty much on the United States as the main market for not only our current assets, obviously, but for growing our assets.

But as you may know, we looked and spent a good deal of time looking for investments in London, and we actually had signed an agreement to buy a building, an agreement which we terminated when it turned out the seller did not own all of the buildings as he had represented. But setting that aside, it's still an interesting market for us and I think that will be something that we would consider.

But I have to say, we still think, by far and away, the vast majority of all our activities will be here in the United States. We are in very few markets in the United States for specific reasons. We will be continuing to look for other markets where we will find the characteristics that we have previously found work so well for us. And I think that's where Owen's time and my time and Doug's time in terms of expanding our efforts and focusing on new acquisitions and new developments, I think that's by far and away where the main focus will be.

Thank you. And Doug, a quick one for you. You mentioned in your prepared remarks that you are working with Heinz to shorten the delivery schedule on Transbay. Can you just talk a little bit about how you will likely proceed on that project, whether how much capital you're going to put in before having any leases in place? Do you envision this going spec? And I guess how much can you short this delivery schedule in terms of timing?

So what we're -- the plans we are currently working on, Michael, are to go into the ground, and then go up to grade. And that probably eliminates somewhere between 10 and 14 months of time, depending upon when we get started. And once we get there, we will have an interesting question to ask ourselves, which is how do we feel about the activity at 535 Mission? How we feel about the other activity in the city? What preleasing commitments might we be able to make or have we made? And we'll sort of go from there. And it's a work in progress.

Then total dollars spent to get to that point is --?

It's probably another $120 plus or minus million.

Okay, thank you.

Michael Knott, Green Street.

Hey everyone. Mort, can you help me understand how the Board thought about the nearly $20 million in exit payments to be paid to you?

Well, I'll give you my best version of it. Obviously, I think that this was something that was anticipated to ensure a well-managed transition and also to recognize -- if I may say this, I hope this doesn't come across the wrong way -- but the kinds of services that I have previously rendered to the Company may continue to be rendered to the Company as we go forward. That's certainly my intention. So I will continue to focus primarily on expanding the Company's either sites or buildings for the next several years. And then we will see where we are at that point. But I think that was basically the hope and the idea, that I would continue to perform in that role, not just by myself but at least taking the lead in all of this. That, I think, was the rationale.

Okay. Thanks. Then just a capital allocation question, can you -- can you just update us on how you're thinking about acquisition opportunities in the marketplace as you recycle capital? Obviously, have a big development pipeline and that could grow significantly over time. Is it still the case that you significantly favor development over acquisitions?

Yes, I think that's still our principal focus because we frankly -- that is the core competency of this Company. It doesn't mean that we won't be looking for acquisitions because that, again, is, as we have demonstrated with a lot of buildings from the General Motors building to buildings in Washington to the John Hancock building, even to Prudential Center, there are a lot of situations where we feel we can go into an existing building and improve the building and improve its attraction as a building to be occupied, and therefore, over time, to really do very, very well.

Secondly, to be very blunt about it, because we have the financial resources and the credit to buy buildings and to actually lease buildings and to finance buildings, we think there will still be the opportunity for us to buy buildings with an appropriate spread between the yield at which we buy the buildings and the yield at which we can finance the buildings. And this will, it seems to me over the long-term, if we pick the right buildings, as I think we have done for most of our history as a company, both as a private company and a public company, that this will continue to enhance the asset base of the Company. Obviously, it's a mix between acquisitions of existing building and development sites, and that's still going to be the basic approach.

The strategy that we have always followed and will continue to follow is to really focus again on the certain critical markets where we think we have the best long-term demand, and to end up with buildings that are in extraordinary locations and that are extraordinary buildings or can be brought to that level by reason of our ownership. That is what we do the best, and what we have done well, and we will continue to try and focus on that. It's not easy to find these sites or these buildings, and I think this is something that a lot of us have spent a lot of time on, and I particularly have spent most of my time on, and that's, I think, going to be the continued focus for the next several years.

Thank you.

David Toti, Cantor Fitzgerald.

Thank you. Doug, I want to ask you a couple questions relative to your comments on tenant concessions. How would you quantify these specifically in relative to some of the strong demand you're seeing in San Francisco in the large block space, particularly the suburban kind of Waltham assets? Are you seeing material reductions in TI requests from tenants at this point?

So in a market like San Francisco, on renewals, we are seeing a dramatic shift in the concession packages that are necessary to convince those tenants that they should stay, because the alternatives they are looking at are having to come out of pocket because the market concession packages for new tenants hasn't really gone up at all, with a likely significantly higher rent. So to the extent the current installation works for them with relatively short money, they are in pretty good shape.

In the suburban Boston market, we've seen I'd say a modest change in the concession packages for new tenants. It's stickier at sort of $40 to $50 a square foot for a seven- to ten-year lease, but the rental rates have probably gone up by $2 or $3 a square foot or somewhere between 7% to 10%.

If you look at Washington DC, I'd say that's where the concession packages are probably most the weakest and there's been the most significant change. And that's largely due to the relatively modest amount of growth that there is, particularly in those marketplaces. So, in order to effectively attract tenants and convince tenants to leave, landlords are putting pretty significant CIs on the board.

We've chosen, in the case of our prebuilt suites, to really basically build the space out for tenants, which is costing us somewhere between on the low end $75 a square foot and the high end $90 a square foot. And -- but we are -- obviously we are leasing that space sort of on an immediate basis, and these are smaller tenants who are looking for immediate occupancy. If you're talking about a 40,000 or 50,000 square foot block of space in a building that is a 1990s or 2000s era building, a second-generation, the concession package could be well in excess of $90 a square foot and there could be a year or so of free rent associated with that as well.

Okay. That's helpful. Just one follow-up on the Transbay questions. Given you're accelerating the process in putting some of the structure in the ground up to grade, do you guys worry about limiting the design of the tower after that depending on the type of tenants you get, the insertions of other functions like hotels and residential? Does that limit you in terms of what you could do going forward despite the shortened time line?

I don't think it limits us. The volume of the building and the architecture of the building have been pretty much locked down with the city over the past 6.5 years of design that the Heinz organization moved forward with. So we sort of have, we effectively have the volume to work with, and how we use that volume I think is very much sort of what we're thinking about right now as we move forward with the design. And our perspective now is that this is going to be 100% office building, not a mixed-use building, not a collection of retail at the base and hotel above that and then office space, or high-end condos. This is going to be a 1.4 million square foot office building.

Okay, thanks. Just one last question. How do you tie the strong tech tenant demand in San Francisco today to your prospects at releasing at Embarcadero? Is there an overlap there from your perspective?

I would say that while we are seeing the tightness in the market, based upon the amount of tech demand in the market impacting Embarcadero Center, the physical nature of the tenants that are looking at Embarcadero Center today continue to be more traditional. We do have a handful of cloud computing and technology-related organizations, but not in the same -- with the same amount of activity that we are seeing at traditional financial services firms. There's just -- it's, quite frankly, it's actually not about the space or the configuration of the space; it's about the location. And over on the other side of Market Street -- and remember there's the south financial district and there's the South of Market, which is really where the focus of the technology tenants has been, which is, quite frankly, why we invested our money in 680/690 Fulsom and 50 Hawthorne, why we are investing our money in 535 Mission and why we are investing our money in the Transbay. Again, about 75% of the market still is traditional financial services, Phirea, "old world" if you want to call it that tenancy. So, we are not putting our backside to them, but for the most part, Embarcadero Center continues to be more of a traditional market.

Okay, very helpful. Thank you.

Jeff Spector, Bank of America.

Great, thanks. This is Jamie Feldman. I guess, starting out, a question for Ray. Now that we've seen the sequester take shape, can you give us your latest thoughts on the longer-term impact on Washington and the Virginia markets, and also your latest expectations for government and contractor leasing for cyber security versus the rest of the defense complex?

Good morning Jamie. Yes, I think the sequestration has already been baked in, and I think it's really relating now to just the operating fundamentals of each individual government agency. For instance, like as you mentioned Fort Meade seems to be getting demand. Cyber security, as Mort has often opined, is one of the leading areas of concern for our security, and thus that's where the money is going.

The NSA has just come out with a 165,000 square foot requirement that will probably be -- get comped for at, and our buildings up there with the Goulds. And -- but for Northern Virginia, we are seeing continued contraction on the government side. Even though sequestration may be already considered, the end users are looking how to become more efficient. And that applies not only to the public-sector GSA demand, but also to the private-sector defense contractor demand as well. That's why it was so important for us to get out in front and do deals like the Bechtel deal and the STG deal and the [Cytor] deal 1.5, 2 years ago. So that has minimal, if any, impact upon us in Northern Virginia.

I will say we are a little disappointed in the demand down in Springfield. We thought that, with the NGA moving down there, they would have longer coat tails and pull a lot of demand down there from the defense contractors. But we haven't seen it yet. And that has some impact on VA 95 and our Kingstowne assets.

Do you think you'll start to see a pickup in demand from government-related now that we've passed it?

The big question mark is how much capacity those tenants already have in their existing portfolio space in Northern Virginia. They're going to backfill that before they take any net new. We are sure hoping we get a shot at it. Fortunately, again, as we've stated before, we don't have much vacancy. I think there's others in the market who are hoping they have the opportunity to go out and make aggressive deals with defense contractors. We have just the option of making those deals because we have so little space.

Thanks. And then turning to New York City, I know a big theme on last quarter's call was just discussing the age of existing product versus new product. Can you talk about the latest thoughts on that front, especially given you've seen leasing pick up for your New York portfolio, and then maybe any change in tenant sentiment now that we've seen Coach, SAP, and L'Oreal sign space at the Hudson yards?

I'm going to try and answer your question, although I think you asked a bunch of questions in there. So the small tenant demand in Midtown Manhattan I think, as was pretty evident by my comments, has really started to pick up again from a velocity perspective, and rental rates are pretty firm. The large tenant demand in the city, when it is a forward market -- and as you are well aware, a number of large blocks of space predominantly downtown in the World Financial in the World Trade Center market, plus on Sixth Avenue in the bases of some of the older buildings, is not an insignificant impact on sort of overall demand in the city for large tenants. And as I said, most of the large users are probably '16 to '20 type of users in terms of when their leases expire. So, whatever you're seeing in terms of deal activity, deal activity that is forward-market, not current-market, and so the impacts of that would be sort of longer-term in terms of how they affect the city.

I think that you also continue to see a growth of smaller tenants in Midtown South, in downtown, and now in certain places in and around Times Square that are more technology related that are going to both Class A as well as some of the lower-quality buildings largely for price purposes as well as to some degree because of the environments that are being found there.

When you think about the Hudson yards, that's really a build-to-suit market. It took a long, long time to get that first tower going largely because it was a four-party deal with Coach and Related and SAP and L'Oreal. And so it just -- those again, those are long-term duration lease expirations that are being dealt with. And as I think -- as you think about what else will be going into that market, certainly in the medium term it is likely to be the build-to-suit market, and so the alternatives are staying in place and becoming more efficient, going to one of the large blocks of space that currently exist, either on Sixth Avenue or in lower Manhattan, or going into the new construction in the Hudson Yards or other places where, in the case of Hudson Yards, there's obviously an impact that you can take advantage of from the perspective of what the tax advantages are that the city is providing for users there. So those are the things that are sort of I think working to sort of firm up the city on the small side and, in our opinion, sort of create some sense of caution on the large tenant side.

Okay. Great. Thank you.

John Guinee, Stifel.

First, Mort, I've known Owen Thomas for about 20 or 25 years, great hire. Congratulations.

Second, a smattering of questions in no particular order designed just to kind of clear up some things. First -- and just give you all of them.

Ray, $108 or so per FAR foot sounds like a huge number for Reston Town Center. Perhaps you can comment on that.

And then second, probably Doug, whether the Transbay terminal works or not is -- may or may not be a function of whether the financial service guys migrate from California Street and Embarcadero Center. As you're looking at this, are you expecting Transbay to really hurt the traditional north-of-market part of the CBD or not?

And then three, probably Doug or Owen, if you look out the next two or three years, you're clearly increasing your disposition plans. Is this a company that will continue to grow on a square footage basis, or will recycle assets more aggressively and stay about the same size?

Let me start with that and then others can chime in. So just on the last question you asked, John, we don't think about growing the portfolio from a square footage perspective. We think about growing the NAV of the Company and earnings per share of the Company, and the cash flow of the Company. So as long as we can do those things, the overall size of the portfolios is really not a consideration.

And I think our view today and as long as we think that the macro economy is going to be where it is and in particular where the overall ability to borrow debt, i.e. where the Fed and the central banks of the world are keeping interest rates, it's going to be a strong market in which to sell and a difficult market with which to buy if you have the perspectives that we have, unless there are unique interesting opportunities on an asset-by-asset basis where we think we can do something to a particular asset that other people may not have the vision or the skills to do.

With regards to Transbay, the Transbay site and the location we believe will be a location that is very attractive to both traditional and technology-like tenants. It happens to have a floor-play that is an optimal size for technology companies, and a window line and emollient spacing and an overall configuration that is also terrific for traditional financial services companies as they think about redoing their space in the modern era. And we've talked ad nauseam quarter after quarter about the way people are using space, and it is a very different way of using space than it was 10 years or 15 years ago. And as you look at the lease expiration opportunities in 2016, 2017, 2018 in the city of San Francisco, we would hope that we will be a very attractive alternative to both those existing tenants that currently occupy space on Market Street or on California Street in the traditional marketplace, as well as growing technology companies.

And Ray, you can comment on our purchase of the Signature site which I think is where John was talking about his numbers.

Will do, Doug. So John, we bought the site and the associated density. And the associated density has approximately 240,000 to 250,000 square feet of commercial density associated with that site. However, in Town Center, that density is fungible throughout the entire 40 acres that we control. So, we have the ability to build an alternative use on the terra firma, the site itself. So, let's say we build, for instance, 500 apartment units on that site and then transfer the density elsewhere within the Town Center to other undeveloped sites that may have an existing building on it that we can scrape and go with an office tower. So, to have that kind of flexibility to increase the density elsewhere in Town Center and have that critical site to build upwards of 500 apartment units which, at a price of $60,000 per unit would be $30 million unto itself, not only do we think the price is justified but we think it gives us tremendous flexibility in terms of anticipating the future needs for both office and residential demand in Reston Town Center.

Great, thank you.

May I add something? This is Mort speaking. I just would remind you that, in 2006, in 2007, 2008, we sold an awful lot of real estate and we also bought an awful lot of real estate. That's when we were able to buy the John Hancock building in Boston, the General Motors building in New York, etc., etc. I could go on.

But the fact is that we do believe that we will be in a position to take advantage of whatever opportunities come up in the markets. And we have found, particularly the larger and the more complicated transactions, the more opportunity we have because I think the market sees us as a company with the sophistication and ability to pull together those kinds of transactions and even more importantly with the management skills and the financial resources to take on those assets. So we will keep our eyes and ears open for those opportunities. Nobody ever knows with certainty when they come up, but we want to be in a position where we can take advantage of what we think will happen over the next few years, which is that a number of people will feel that they have to sell some of their assets. So, we will be, I think, very open to buying additional assets, particularly if those assets are of the kind of outstanding Prime A assets that we have accumulated over the years. We have no particular ceiling or floor as to how many square feet the Company should have or what have you. We do think that there -- in the nature of the beast that we are involved with, there are times when buildings can and should be sold and can and should be bought, and never mind as well as developed. So this is going to be a business that we have been in for the last 50 years, and I think we will be able to be in it for a lot of years going forward. These opportunities will always be available and we will certainly compete with them. We are not the only people competing with them, as I'm sure you realize.

So, I think we just are going to be in a position to take advantage of whatever opportunities come up. And we've always been sort of players and whenever anything interesting does come up, and the market always comes to us when something interesting comes up, so I think we will be able to do things even though we can't specifically talk about them at this point.

Vance Edelson, Morgan Stanley.

Thanks for taking the questions. Ray, along those lines on the acquisition front, I'm just interested in how much is available. I think, a few months ago, you had referred to a reasonable number of assets being sold. Are you seeing any additional cap rate compression for coastal office assets in general? Is that, in turn, leading to any increase in properties being put up for sale?

I think there's a few landlords and owners that are trying to take advantage of the increasing capital flow into real estate and the lower interest rates. And I do see some additional assets coming for sale, and obviously we are trying to follow that lead. But I don't see a wholesale sell-off. In fact, I see several landlords reinvesting in existing assets to upgrade your current portfolio as opposed taking them into the market. So I don't see a rush to the exits in terms of sale. I see selective opportunities coming available, very hard for us to compete with the purchase of these existing assets, and that's why we focus on value add through development as opposed to going out and trying to compete, buying existing buildings.

I would add the following too, which is the reason that people are putting their buildings on the market today is that there is an exceedingly strong bid for those buildings from the institutional market, from sovereign wealth fronts, from high net worth individuals, from sponsors who are taking advantage of the current capital markets and quite frankly, looking out at the world and looking at what the yield opportunities are elsewhere and saying, geez, is real estate a good -- is this a good time to be putting money into real estate and is it an inflation hedge, etc.? And as long as that is the case, you will continue to see high-quality assets being sold and being aggressively bid. And we are experienced that, with assets that we have on the market, we expect to see it with the assets that we will be putting on the market, and we're seeing it with the stuff we are looking at. And as Ray said, we struggle to get to an acceptable return on a fully leased building in a coastal CBD that's got no rollover for the next 15 or -- 10 or 15 years. Quite frankly, that's what we're selling.

Okay. That's very helpful. And then, in DC, you have a nice leased rate and it sounds like you are well situated. But is the GSA densification and their focus on becoming more efficient? I'm just curious. Is that actually manifesting itself in nonrenewals, or is it more just lip service on the part of the GSA?

We are actually beneficiary with a major renewal. I think one of the reasons that DOJ renewed early and renewed for 15 years at 1301 New York was avoiding that restructure and avoiding that consolidation. And they're very happy there; they're very happy with the current configuration. So, they moved early and aggressively and renewed for 15 years to keep their current status in place. I think it has put a lot of people on the sidelines on other buildings and other landlords. Our position with GSA is in excellent shape. We were out in front and we were aggressive in our pursuit of both OD&I and DIA. And those are kind of the poster childs for the consolidation, because we are able to move into recently renovated buildings, become highly efficient, and make long-term commitment. So that move has actually been benefiting BXP as opposed to hurting us.

Okay. Thank you.

Rob Stevenson, Macquarie.

Good morning guys. Doug, I think you talked to us a little bit when you talked about possibly bringing in a money partner for Transbay. But what level of overall aggregate development is the Company comfortable with at this point in time?

I would tell you that we don't have a limit, given that the realities of the world and the number of projects that we could physically be involved with, given the size of the Company's platform, doesn't put any sort of cap on it. There was a point in time when we were a much younger public company, when we had almost 20% of our total portfolio in development and not leased, where there was a lot of speculative nature associated with that. We are now, what, a $30 billion enterprise, and our current pipeline is about $1.5 billion, growing to $2 billion. So it's a far smaller number. And the opportunities to do development I think are prevalent, but as Mort said, there are certain situations where we are going to be much more circumspect about taking leasing risk and being comfortable with significant preleasing prior to getting underway. And if that's the case, there's a significant amount of additional capacity not just in our balance sheet but in terms of what our appetite would be for.

Okay. And then one for Mike. You talked about the incremental $4 million to $5 million of FFO from leasing at the GM building. Can you talk about how much of that is the Cartier retail space and sort of where that revenue lines up being on a go-forward basis relative to what CBS was paying?

I really can't describe specifics of where it is. I can tell you that, at the GM building, we've leased three retail spaces, the Cartier space and two smaller retail spaces, on Madison Avenue, which are helping us. As Doug mentioned, there's a 38,000 square foot lease we have out for office space in the low-rise of that building. And then we are also talking to some tenants in the high-rise of that building about early renewals. So that's kind of where the growth is coming from in that space.

From the perspective of the CBS space versus the Cartier space, there is a decrease from the contribution of CBS to the contribution (technical difficulty) leasing. There's some third-floor space that is (technical difficulty)

(technical difficulty) an outstanding transaction completed with Cartier and we are very, very happy with the numbers. As was pointed out, we still have additional space to lease, but we will be are happy when we get that space done at the same kind of numbers that the Cartier people saw. The value of that space is really extraordinary. It's just a one-off kind of space in New York for high-level retail. So we are very, very enthused about it. It's not going to -- there's not too many people like that, but -- or companies like that, but, boy, if somebody comes into the market, they look at whatever limited amount of space we have left.

Is the press reports that that short-term lease, while they renovate their space on 52nd Street, accurate, or is that a longer-term lease?

The Cartier lease is a longer-term lease. That's not a short-term lease.

Okay.

No, they are going to be investing a lot of money and we will be investing some money in that space. And the traffic that is generated by the Apple store is unprecedented in the history of American retailing and it's unprecedented for Apple. And that just says something about the location and just the general prestige that building has in the retail space they have. Nobody's ever seen numbers like the numbers that Apple generated in that space, including Apple.

I just want to clarify. So, we are not suggesting that it's necessarily Cartier who's going into that space. And we haven't announced publicly who the tenant is. The tenant is putting a significant amount of money into the space. They do have an ability to go long-term on the space. They also have the ability to get out after a relatively short period of time.

Okay. Thanks Doug.

Ross Nussbaum, UBS.

Thanks. Doug, just following up on the disposition outlook for the remainder of the year, it's thought there that 140 Kendrick and 1301 in DC are on the market. Are these the only two assets that are currently on the market, or are there others?

You are referring to a story in Commercial Mortgage Alert one of these real estate alerts. We haven't announced what properties are on the market yet. We are looking at in excess of two buildings. As I said, we are looking at buildings in all of our markets. So the two that you described are buildings in two of our markets.

And then just on Transbay, can you talk a bit about your partner's decision to reduce their exposure there?

It's a long answer that's necessary. That's why I'm going to try and truncate it, which is effectively as follows. We went to the venture. Heinz thought they had the potential equity partner on their side of things. We had to all reach an agreement that that party was the right party for the deal. At the end of the day, we all came to the agreement that it wasn't the right party for the venture, and we had negotiated the ability to close on the deal as a 95% partner and to think about how we might recapitalize it if we want to recapitalize it with a large third-party institutional capital partner at a later date.

Thank you.

Jim Sullivan, Cowen Group.

Good morning. Thank you. Two questions regarding the Boston market. First of all, the TD Bank Garden site. Doug, I wonder what your thinking is on that site today and whether the increased densification in East Cambridge has any bearing on what you might do there.

So the Garden site, for those of you who want to picture it, there is a big, open area in front of the current TD Bank Garden which is the old Boston Garden site. And that site has a density envelope that is pretty significant, and on the base of that would likely be some type of retail and then there would be a series of towers that would go up on top of it. And there clearly is an opportunity for tenants that are migrating out of Cambridge to look at other places in the city of Boston. One of the issues, quite frankly, that many of those companies have had is price. And new construction in a location like North Station, because it's new construction, may not be as economically attractive as some of the other alternatives they might have in the short-term. But as the North Station gets better from an overall environment perspective and we start to do other things there, I think it's very possible that there could be an office component at that location that could be unusual space that could be very attractive to the types of tenants that are in fact looking for space in other parts of the city that would have, in the olden days when rents were lower, have preferred to stay in Cambridge.

So, does the increased densification in East Cambridge have a negative impact on the potential demand, would you say, for that site?

I don't think so. I think it's going to be about price. The new development that's going to go into Cambridge is going to be very expensive as well.

Okay. And then secondly, regarding the suburban markets, kind of a two-part question in the Weston suburbs. You talked about Bay Colony lease activity. I wonder if you could just give us a sense for how the pricing is coming in on that activity relative to underwriting.

And then secondly, the Biogen Idec space that I understand they are going to be leaving to go to East Cambridge to your site, is that going to be hitting the sublease market? Do you know the timing and what kind of impact do you expect it might have on pricing in the market?

Let me answer the Bay Colony question first. So when we originally underwrote the Bay Colony transaction, we underwrote rents that would be from the high $20s on what we refer to as sort of the Parkview space in the lower levels to the mid to high $30s on those other spaces. And we are achieving rents of $28, $29 a square foot on the Parkview space and we are achieving rents of $34 to $35 a square foot on the other space. So, we are achieving exactly what we pro forma-ed. But to be honest, intellectually honest, with you, we are 1.5 years behind. So we also built in some growth rate at the time and we haven't seen -- we haven't gotten the benefit of that growth. So we are delayed.

With regards to the space in Weston, our best understanding is that the performance of Biogen Idec has been so spectacular in terms of drug discovery and drug launches that they are growing at a rate that has suggested to us that they have rethought their short-term ability to get out of the space in Weston because, quite frankly, there's not enough space in Cambridge right now to absorb all of the people that they are hiring and would like to move. And so while there is some of that space that is still potentially on the sublet market, we are not aware that they are lock, stock, and barrel moving out of that building anytime soon.

Okay. Great. Thank you.

Jordan Sadler, KeyBanc Capital Markets.

Congratulations Owen and to you, Mort, on the successful transition. I wasn't necessarily anticipating the change when it occurred. So in that context, I have a quick curious question more about the nature of a specific provision in the agreement that pertains to the accelerated vesting of the outstanding awards. I guess in the event you were to terminate your employment. Should we expect any additional changes? Anything else we don't know about?

No. The only thing I think would affect my future as far as I'm concerned -- I am -- I just enjoy the work. I'm still fully engaged. I intend to be that way for a long time, unless I get married. And that's something which you can help me on, but so far, that's not a risk.

Had you appointed me CEO, I probably would've helped you out with that. Seeing as you overlooked me, I do table that.

We have a consultancy on this kind of an issue, which is a personal consultancy, so we can talk off-line whenever you'd like.

Thanks Mort. A quick one on Harvard. The total fees that are expected to be realized?

We are not going to talk about it. It's a six-year project. It will depend on how long it ultimately goes, and how they choose to change the overall concepts. And it's -- we believe we are bringing tremendous value to the University, and we are devoting significant resources to it, and we think we've achieved a compensation agreement that's fair to both parties.

Okay. Thank you.

Alexander Goldfarb, Sandler O'Neill.

Good morning. Thank you for taking the questions. My two questions -- first, just given the growing demand for office product, especially from the private side, do you think you would exceed the $1 billion and do you think you would be in a situation where you were going to do a special dividend the way you did previously, or your view is, with these dispositions, whether you 1031 or shelter through the regular dividend, you would not do a special?

I think it's going to depend on the circumstances. I don't want to get into sort of a magnitude of what we are talking about. As I said, it could be up to or in excess of $1 billion. Obviously, it depends on the collection of assets that we are selling. If we have places to put the capital and we can find ways to 1031 it, we would certainly do that. To the extent that the magnitude of our sales requires us to make distributions, I think we will make a special distribution in lieu of paying a 40% tax on the gains.

We did, Alex, set up the Mountain View acquisition as a 1031, so we do have some opportunity to utilize that asset to help the situation.

Okay, but essentially you were pleased with the special dividend last time, so it's something you may do. The only reason I ask is some of your competitors historically have done special, etc. They didn't feel like they got the bang for the buck, so they wouldn't do it going forward, but it sounds like you are pleased with it.

The next question is -- this is either for Ray or for Mort. If you look at what's happening in DC politics, it almost seems like where Congress is leading, whether it's the FAA or immigration, there seems to be some bipartisan folks working together. Should we think that there is some thawing among the two parties and that things are actually starting to happen, or are those sort of two exceptions?

My own view is these are more the exception than the rule. This doesn't mean that there aren't members in both the House and the Senate on both sides of the aisle who understand that there is a growing frustration in the country that our governmental system is not working, that we are not really addressing the major problems except in the worst kind of politics, there's a great gap between the Congress and the President in terms of how they work together. So the country understands it and there's a certain sort of anxiety over it. And I have a feeling that there may be, as the pressure grows, particularly as we get through to the next election, the congressional election next year, there'll be some desire to have some kind of achievements on their resumes when they go and face the public. So, I think that there will be some improvement, but I don't see a major improvement because, frankly, it can only happen with the level of -- when there's the right level of presidential leadership. And both sides of the aisle in the Congress feel that that is presently lacking. There are not very good personal relationships, and there is not a sophisticated understanding as how to work together. You can start taking some people to dinner, inviting some people to lunch, but it's very late in the game and there's a great deal of anxiety. And frankly, there is no real personal connection that so many presidents in the past have been able to call upon to bring legislation to fruition. But you never know.

Somebody could emerge with the ability to bring everybody together. We all hope that's the case. I am a little bit skeptical at this stage of the game, and I think the -- if I had to put it in a way that works in the Congress, there's one little phrase that I always use which is the following -- that the only time that the world beats a path to your door is when you're sitting in the bathroom. And in that kind of environment, they are all sitting in the bathroom waiting for someone to come to them, and they aren't coming to them.

It sounds like they need another copy of the Daily News.

I agree with that. That's a very good insight.

David Harris, Imperial Capital.

Good morning. Thanks for taking my questions. If I could go back to an observation that you made, Mort, in your opening remarks about new tech tenants taking -- looking for space in San Francisco. I just wonder how difficult is it to underwrite these tenants? And more specifically, is it causing you to be reserved about the TI spend?

We look at all of these things very seriously and on a one-off basis. I'll give you an example. The company that took 1.3 million square feet last year in San Francisco alone, one company, is Salesforce. It's not exactly an old company, as we all know, but that's the level of growth of some of these companies are having in that marketplace. And we'll just have to look carefully at the financials of these firms. I can tell you that these are firms that can raise huge amounts of equity through public sales of their stock if they want and also have a lot of availability, even on the debt side, particularly at the rates that are currently demanded in the marketplace. They are very manageable for these firms. So you have to choose. You are not going to put in a fortune in TIs to a company that really you think has any chance of going upside-down. But we've had a lot of experience with that in the Boston area in particular and also in the Washington area and previously in the San Francisco area. This is not something that's new to us. So I think we'll be able to make the right decisions.

We've never had any kind of major lease, to my recollection anyhow, that has gone upside-down. So we are very careful about that and we generally have space when we do the space and when we fix up space to the extent that we do it, we also take that factor in mind, that we may want to keep some of these TIs for another tenancy if necessary. And I think that's something that is very much within our sort of management capabilities.

And I do think that, look, you look at some of those companies. They have become giant companies in the last three or four years. And when I say giant companies, I mean companies with huge balance sheets, with a lot of credit and a lot of cash and earnings a lot of money. So, I think we will have no difficulty dealing with the financial aspects of those kinds of tenants when they come to us.

Is the lease-lend similar to that which you would expect to find with a more established credit tenant?

It varies from tenant to tenant. One of the things that is different in these companies is their rate of growth is so dramatic, and they really anticipate this, that you have to find a way not only to lease them the basic amount of space that they are interested in, but you have to provide them with some kind of expansion space. And so that kind of space you end up having to lease for shorter terms. And that's a different kind of challenge for us.

But frankly, there are also a lot of tenants in the marketplace that will take a shorter-term lease, particularly if that's the only space that we are going to make available to them, given the kinds of companies they are. So this is just the normal balancing that we have done over all the years we've been in business. I really don't think this is going to be a problem. And I also will say to you that these companies are growing at such an extraordinary rate and are so unbelievably profitable, it's really hard to believe that -- implicit in your question is it seems to be a fair concern. Yes, they're extraordinarily profitable, but can it last? And that's I think a very interesting question that you have to ask, and you have to be careful in terms of the kinds of money that you put into TIs and the kinds of TIs that you put in and pay for.

I don't think we need to think back too far before we saw the boom and bust in San Francisco around in the late to mid '90s of course.

No, I think we have to be very cautious and careful about that. But by and large, we've almost never had a tenant that's gone upside-down with us. We've been very careful about what we do, and we are not looking to make the last $0.25 on a lease. We are much more cautious in terms of whom we lease to and the security of that lease, and careful about the investments. So, I think we'll continue to be careful, and I don't want to say conservative, but at least prudent.

Let me just make a couple of comments on that. So the first thing that we do is the buildings that we build are the buildings that we buy are buildings that we believe are going to be most susceptible to re-tenanting in a down market. And so fundamentally, the best way that we can alleviate the risk associated with credits going the wrong direction is to know that we have assets that actually have a marketability to a significant universe of tenants in good times and, most importantly, in bad times. And Mort has been sort of expounding that view for the better part of the last 45 years at Boston Properties.

The second thing is, and you may recall that, in 2008, there were some terminations of leases in high-quality buildings in Midtown Manhattan in our portfolio. And we surprised both ourselves and the market by how quickly we re-let that space. And those were "credit tenants", A rated or A minus or AA rated companies that literally blew up.

And so while it's interesting to talk about sort of what the nature of the credit is, you never know anymore what is going to happen. I think that, in San Francisco, there are lots of companies that are looking now at more high quality, better built space and not necessarily looking at whatever they can find that's the most funky and unusual space. And typically, those tenants have a little bit more maturity associated with them, and so the overall risk profile of those companies, in terms of what their funding needs are, are probably higher than what you might have looked at in the sort of .com bubble where people were basically being funded by venture capitalists and as soon as the revenues ran out, they suddenly didn't -- couldn't raise round D, E, and F of their secured preferreds. And I think we are in a different environment today in terms of the companies that are being formed and the business plans associated with those companies and therefore what their revenue is. So overall, I think that we are in a better standing, but that does not prevent us from being exposed to the risks of the volatility of a huge macro downturn in the overall economy and how that impacts San Francisco. So, that is still there, but the way we protect ourselves is the types of buildings we are building, the types of buildings that we buy, those locations and the way the space is configured.

Okay. Thanks. I have a quick question for Mister Thomas if I may. First of all, congratulations and good luck with the new role. I am thinking back on your time at Morgan Stanley. You developed very extensive contacts with very large pension funds and sovereign wealth funds I'm sure. Is that something that we might see brought more into play in your role at Boston as we look forward?

Yes. I think my experiences at Morgan Stanley, both in real estate and also in various leadership positions and with the relationships that I was able to develop there, I hope to be able to use all of that experience for the benefit of Boston Properties going forward.

So, tangential to that, then, is what do you see as the biggest challenge in terms of becoming CEO of a public property company for the first time?

Well, as I mentioned, the first challenge for me is getting up to speed on Boston Properties. It's a large enterprise with lots of activities going on that you're very familiar with. And what I've been spending my time on is getting up to speed and making up for lost time in that many of our employees here are long tenured.

And once you're up to speed?

Once I'm up to speed, as I mentioned, Boston Properties is a well-managed and successful company. And my intention is to work in partnership with the existing leadership in the Company, including Mort, including Doug, Ray Ritchey, and others.

You survived the first earnings call, so I guess that's one thing you can put a tick by. Thank you.

Tayo Okusanya, Jefferies.

They've been answered. Thank you.

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

I'll take a crack at it. I want to thank everybody for taking the time to review all of our last quarter's activities and to have a first chance for some of you to meet Owen. We're all looking forward to working with him. And I think we are still realistic but optimistic about the future of the business in general but, in particular, I think we still feel we have a unique platform and a unique prestige in the world of commercial real estate that should continue to give us opportunities to both build and buy buildings. And we're still looking forward to doing a lot of that as we immerse ourselves in our various markets.

Thank you all very much for your time.

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