波士頓物產 (BXP) 2013 Q4 法說會逐字稿

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

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

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

The press release and supplemental package was 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 these forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday's press release and from time to time in the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statements.

Having said that, I would like to welcome Mort Zuckerman, 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 team 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. This is Mort Zuckerman speaking.

As you all probably know, and as you read in all the newspapers, there is a general sense that our economy is still moving forward, but at a slower than expected pace. What is interesting for Boston Properties, frankly, is that we still seem to be quite active, perhaps not to the same extent with large tenants, but certainly the combination of large tenants and small tenants is very encouraging to our basic strategy of having the best buildings in the best locations in the best markets. And that strategy, I think, has helped us, I think, do relatively and perform relatively well in the atmosphere of what a couple of firms have called the great recession, because we have had a very subpar period, a very long period of subpar economic growth in macroeconomic terms.

And yet, in the markets that we are in and in the locations that we are in in those markets, we still continue to have a lot of activity, and I think this is going to continue, from all that we can tell, in terms of our interaction with the various tenants in the various markets we are in.

Nobody can quite predict what the overall economy can do, because we are four or five years into an attempt on the part of both fiscal and monetary policy to stimulate a stronger rate of growth than we are experiencing now, and in particular, we are seeing, according to various surveys, one of which was just published this past week in the Financial Times, that American business is constraining its capital spending on plant and equipment to a fairly low level, going forward. Now, nobody knows how accurate these assessments will be, because a lot depends on whether or not there is a perception of a stronger growth in the economy, and if that happens, I think we will see an even more active investment policy on the part of a lot of American business.

But in the buildings that we are in and in the markets that we are in, we continue to see an encouraging amount of activity and we are comfortable that we are going to continue to see this going forward.

We have relatively little vacancy in our existing buildings. We have a number of additional building projects that we will describe, and in particular, I urge you to listen to the folks from our Boston office talk about some of the projects that we are doing there. We had a review of one of them this past day or two, and it's really going to be an extraordinary project and one of the best projects in the history of Boston, much less in the history of Boston Properties.

So with that, if I may, I will turn it over to my colleagues, who will fill in and expand on where we are in our various markets. And I thank you for your attention.

Thank you, Mort. This is Owen Thomas. Good morning, everyone. I am joined here in Boston by Doug and Mike, as well as our team here.

I will touch on our overall performance for the quarter, provide an update on our capital allocation strategy, and discuss some organizational changes that we made as a Company last quarter. Doug will then discuss our markets and operational performance, and Mike will provide some more color on our financial results for the fourth quarter.

Just quickly, building a bit on Mort's comments, despite the economic weakness overall that Mort described, our market exposure to technology companies, to healthcare, and small-scale financials has continued to serve us well, and we continue to experience very favorable market conditions in a number of our core markets, including San Francisco, Cambridge, suburban Boston, and, to some degree, midtown Manhattan.

Now switching to performance in the fourth quarter, I believe we performed well, overall. Three things I would highlight. First, and specifically, we executed 97 leases, representing [1.3] million square feet, with reasonable balance across our portfolio nationally. However, San Francisco and Boston were the largest contributors.

Our in-service properties, in the aggregate, are now 93.4% leased, and that's up 60 basis points for the fourth quarter and up 200 basis points for calendar-year 2013.

Second, on the leasing side, we also continue to make significant progress leasing our development pipeline, and as Mort touched on and Doug is going to describe in greater detail, we have made some substantial and exciting progress on a number of new developments, which, again, we're going to talk about further later in the call.

And then, lastly, and you're going to hear more about this as well, we were able to complete in the last quarter several planned asset sales that were part of our strategy and plan.

Now, second, turning to capital strategy. Interest rate increases, as all of you know, have been fairly benign over the past quarter. It's our belief that it is likely that interest rates will continue to rise. But the timing and the pace of such increases are, obviously, difficult to forecast. We're finding private capital for real estate remains plentiful and continues to aggressively pursue real estate investment, particularly for high-quality office in our core markets.

Our capital strategy remains consistent with what we have communicated to you in the past. And specifically, number one, we continue to actively monetize assets and, in fact, sold two suburban assets in the fourth quarter. For 2013, in the aggregate we sold seven assets, raising $1.25 billion in proceeds, which created a $2.25 per-share special dividend, which we announced at the end of last year. You should expect our selected monetization activity to continue.

Second, we have and will continue to actively pursue acquisitions. But we continue to find that either our underwriting assumptions and/or our return requirements are not aligned with the pricing being offered by others for high-quality office assets in our focus markets, and therefore, we have been less active making acquisitions over the last few quarters.

And then, third, we continue to see interesting opportunities and developments where we believe we can deliver new properties at lower cost per square foot and higher yields than were existing older properties at trading. Our development pipeline remains robust, as you know, with $2.5 billion in active projects, plus a number of additional high-quality developments under consideration.

Then lastly, I want to touch on a few organizational changes. As you know, our New York regional manager, Robert Selsam, retired after 33 years with Boston Properties at the end of 2013. We engaged last year in a search to find Robert's replacement and we are absolutely delighted to have hired John Powers, who commenced his duties at the beginning of the year. John is a 27-year veteran of CBRE and has been a key advisor to Mort, Doug, and Boston Properties in the New York market for over 15 years. Given that John is well known within Boston Properties and has extensive knowledge of the Company, particularly in New York, the transition has been seamless and he has been able to get off to a great start overall.

Lastly, on the organizational side, this past quarter we announced that we will merge our Princeton operation into the New York region under John. We think this makes more organizational sense for us going forward, because Princeton is not of the same scale as the other regions of Boston Properties and all of the regions of our Company, except New York, have both a CBD and a suburban component. Boston Properties is now organized into four significant regions -- New York; Boston; Washington, DC; and San Francisco.

Before turning it over to Doug, I wanted to ask John if he would join the call, introduce himself, and perhaps make a few comments.

Thanks very much, Owen. Yes, I've worked with Mort, Doug, and all the people here in New York for many years, numerous transactions, three major developments, and millions of square feet. So my ramp-up has been very quick, and I'm now fully engaged with every aspect of our operations in New York and Princeton. I'm very excited to be here. Thank you.

Terrific. We are excited to have you, John. Over to Doug.

Good morning, everybody. I am going to start with a couple of comments on our divestitures, because I want to give you a context of how we are thinking about things.

So our asset sales fall into two buckets. The first of those assets that are located in submarkets where our expectations of achieving long-term cash flow growth are really suboptimal relative to the rest of the portfolio, and in 2013, I would characterize those as the sales of 303 Almaden, which is the building in San Jose; our two Mall Road assets, which are legacy Boston Properties pre-IPO assets; and then One Preserve Parkway, which is in Rockville, Maryland. And those are just markets that we -- our view is that really are not part of the same growth profile as our other markets.

And then, there's a second group of assets which are really what we consider to be core assets for the Company, but where we have been very successful at populating them with really terrific long-term contractual cash flows, and they are just an ideal mechanism for harvesting in the current capital markets environment, and those are the buildings like 125 West 55th and 1301 New York Avenue and Times Square Tower. So that's how we are thinking about our asset dispositions, and we continually review the portfolio. And I think, as Owen said, we're going to be marketing additional assets for sale or recapitalization, a.k.a. the way we dealt with Times Square Tower, in 2014.

I also want to spend some time talking about our development activities today. And I'm going to do a little bit of that upfront, and then I will intermix it with my remarks on the markets.

So this is clearly an area where we have a distinct advantage, and really what it does is it avails itself of our platform and our operational expertise. It just does, in fact, make us a different kind of a Company.

As we closed out the year, we received formal entitlements for two new development projects in Boston. The first is in Cambridge, where we received approval for a new 200,000-square-foot residential building on an underutilized parcel at Cambridge Center. That is about a $100 million project.

We are actively designing that project with an eye towards breaking ground early next year. This will be our fourth residential development. The project may have up to 20,000 square feet of street-level retail, adjoining our other Cambridge Center assets.

Additionally, we received approval for a 1.8 million square-foot mixed-use development at North Station in Boston, and I know there has been a lot of press on this and people have asked questions, so let me try and give you a little bit of color on what the project potentially is going to look like.

The project was approved for 235,000 square feet of a retail podium, so that's a basement in one, two, or three levels of retail at the ground floor and rising just in front of the North Station -- Boston -- TD Boston Garden today. There will be 142,000 square feet of what we refer to as low-rise office space, which will be on the same plane as that retail space. And then, there are going to be three towers on top of that platform.

There is a 200,000-square-foot parcel which is zoned for a 300-room, plus or minus, hotel; a 560,000-square-foot residential tower, which right now looks like it's around 497 units. Obviously, that's the number that was just in our approvals. And then, a 668,000-square-foot tower, an office tower. And all of that is on top of about 800 below-grade parking spaces. So that is the sum total of the 1.8 million square feet.

Now this is a project that we are doing as a venture with the owners of the land, which are Delaware North, the owners of the Boston Bruins and the Boston Garden, and we don't expect much to be going on in 2014, but based upon some preleasing and some interest we are having, particularly on the retail side, we're optimistic that something will happen early in 2015.

Our share of the asset will be determined largely dependent upon what Delaware North's desires are in terms of how much equity and desire they have to go forward on the development piece vis-a-vis just running the land. So I can't really give you a sense of what our interest is going to be versus theirs, but it's -- overall, it's around a $1 billion project (technical difficulty) in terms of costs.

Let me switch to the operating environment now. So I think I would characterize the operating environment, really, it's pretty unchanged from where we were in October when we went through our market activity and we put forward our 2014 earnings guidance. But let me give you some color on what we see going on.

If you look at our second-generation statistic, just a couple of thoughts. In Boston, there is one transaction which skews things. There is a 41,000-square-foot lease where we actually relocated a tenant to some vacant space and backfilled that lease on an as-is basis. And if you knock that transaction out, because the tenant that moved to the vacant space is not included in those second-generation statistics, the increase in rents in Boston was about 7.2%.

In New York City, the number looks pretty large, but it's skewed by a small deal at the General Motors Building, about 7,500 square feet, where the rent went from $83 to $100 a square foot at the low portion of that building.

And then, in San Francisco, most of the deals this last quarter were in the retail side, but if you pull out the retail and you just look at the office leases, the jump is about 11% on a net basis, which is probably a lot more consistent with where people, I think, are thinking what rents are and our mark to market is, particularly in Boston and in San Francisco.

In the greater Boston region, Cambridge clearly is still the strongest submarket that we are part of. We are effectively 100% occupied, but that doesn't mean that we're not going to see some meaningful gains in our cash flows in 2014 and 2015. But this quarter, we did our first large renewal. The mark to market on about a 67,000-square-foot lease was over 70% on a net basis.

We are now in negotiations on an additional 225,000 square feet of 2014 and 2015 lease expirations, and there we think the mark to market is going to be somewhere between 45% and 50% on a net basis.

Office rents in Cambridge are now in the mid-60s, and that's about a 30% increase year over year. Now in addition to our new residential developments, we're actively working right now with the City of Cambridge on entitlements for another 1 million square feet of density on our Cambridge Center project. That would be in two parts, about 600,000 square feet of office, 400,000 square feet of residential, so that's another 1 million square feet of development in Cambridge Center.

Going across the river to the Back Bay, rents in the towers are now in the mid-70s. In the bottoms of the buildings, in the Class A buildings in the Back Bay, they're in the mid-40s, which, by the way, is a real shock -- this is actually a shock to us sort of historically. It is a big discount to Cambridge. And the question is going to be as Cambridge get hotter and hotter, how much of that activity will migrate into the City of Boston?

At the Hancock Tower, we completed 40,000 square feet of renewals during the quarter. We signed a 67,000-square-foot relocation in January and we have four more leases, involving another 141,000 square feet, that are expected to be completed in the next couple of weeks. So thus far, we have done about 500,000 square feet of early renewals or relocations related to our 2015 lease expirations.

275,000 square feet of those transactions, the good news is -- the bad news is that they're not -- they're done, but they won't actually impact our revenues until 2015 because the space is currently leased to Manulife, the former owner of the building, and when they become direct leases of Boston Properties, we will get the rollup.

On average, that rollup is about $15 a square foot at 27% on the average in-place rent in the building. As a crew, we leased our last four at 111 Huntington Avenue. That's this transaction I was describing before.

And we are now in lease negotiations with an anchor tenant for our new development at 888 Boylston Street at the Pru Center. That's a 425,000-square-foot 17-story building that we received approvals on a few years ago. It's got 365,000 square feet of office space and about 60,000 square feet of retail space. That's basically going to be an expansion of our highly productive Prudential Center retail complex, so that's very, very productive retail space.

If we sign a lease, we would begin construction in late 2014, with the completion in mid-2016. That's about a $225 million development.

At 100 Federal Street in downtown, we did two new renewals this quarter in the top third of the building, with average starting rents just above $60 a square foot, which is just on -- in line with our target when we purchased the building a few years ago. We did get a 52,000-square-foot floor back. Part of the lease would be -- that we negotiated, they had the right to give a floor back, which we expected, and we're going to experience a little bit of downtime on that floor this year; again, that's all baked into our guidance.

The downtown market is not nearly as hot as the Back Bay, from a rental rate perspective, but it is showing some modest improvements. Rents there are from the low 40s at the base of the buildings to in the low 60s at the top of the towers.

The suburban Boston market continues to be very, very active. Large lots of space have all but disappeared, and rents in Waltham are up 10% to 15% over the last few months, not year, months. We completed another 80,000 square feet of leases at Bay Colony during the quarter, bringing our total in that project to 245,000 square feet for the year.

We are in negotiations with four additional tenants, involving another 132,000 square feet. These include a 55,000-square-foot lease with our fourth biotech life science company that would come to Bay Colony, as well as expanding software company moving not only from another part of the city, but also from another state. We continue to see strong activity in our Waltham assets, with much of it stemming from the life sciences and the technology companies, tenants that we are now referring to as TAMI.

We responded to two build-to-suit proposals for blocks in excess of 160,000 square feet during the quarter for the next phase of our 420,000-square-foot City Point development in Waltham. We are not in lease negotiations, but we are in active discussions.

Going to New York City. Our fourth-quarter New York City activity on the in-service portfolio was really a continuation of the activity again that we described last quarter. We did 11 transactions with about 102,000 square feet in the operating portfolio, three deals at 540 Madison, which brought our total in that building to 16 for 2013.

We did two more full floors at 510 Madison, so we did five full-floor deals at 510 Madison. 510 Madison now sits at 80% leased, and that's a little different from what you're seeing in the supplemental because the supplemental only shows leases that have commenced. But it's actually 80% leased at this point.

Our acting and our taking rents at 540 Madison at 510 really haven't changed over the last year, and we don't foresee any increases in 2014. We think we have priced them appropriately and we will do deals where we expect the rents are today.

Demand from our high-end financial services firms continued well into the year. Just giving you a perspective on the high end of the market in Midtown, so in 2013, in total there were about 54 transactions totaling 760,000 square feet of leases that were over $100 a square foot in the city. So this is a pickup from 2012. In 2012, there were 38 transactions for 550,000 square feet, but it is still way off the 2008 highs when you had 105 deals totaling almost 2.5 million square feet.

As Owen and Mort suggested, our predominant user and the target tenant for the available space in our high-end Midtown buildings are hedge funds and asset managers, advisors, and other entities involved in the financial services industries, but these are smaller tenants. And while the tenant activities for this market segment continues to be very encouraging, the breadth of the demand has its limits, which in fact leads us to the reason why it has been slower than we would have liked getting the leasing completed at 510 Madison. It's just the tenant sizes are relatively small.

When we discussed 250 West 55th last quarter, we said we had a number of multi-floor prospects that were considering the building. We signed a lease with Soros Fund Management for 95,000 square feet, and we're in lease negotiations with four additional tenants for space totaling over 175,000 square feet. So we have currently leased 571,000, and if we do all the deals that are currently in negotiation, it will bring us to 745,000 square feet of leased, or about 75% leased, on the building.

We continue to have active pipeline of one- and two-floor prospects that continue to tour the remaining space, and we are -- we have lots of users now looking at our pre-build product, which is on the 16th and 25th floors.

At Carnegie Center, we continue to gain occupancy and extend leases. During the quarter, we did seven more leases, for 187,000 square feet, and while the life science sector is clearly at the core of the expansion, we also, as we outlined in our press release, completed a 15-year lease with NRG for a build-to-suit. NRG is an energy company, and they're moving from 90,000 square feet today to 130,000 square feet when we deliver that building in 2016. That is about a $40 million development. It should be noted that 18 months ago, our occupancy rate at Carnegie was 82%, and today, we are over 90%.

In Washington, DC, the short-term resolution of the budget and the modifications to sequestration are clearly a positive development. Now it hasn't resulted in any significant increase in GSA requirements, but the atmosphere is clearly much more constructive for office owners.

Now I do want to point out that our exposure in the DC market is limited, particularly in the CBD. In 2013, 21% of our NOI came from our DC region, DC region being defined as northern Virginia, Montgomery County, as well as the district. But only 38% of our income in the DC was generated from our CBD portfolio.

Now why is that? The first thing -- reason is that our strategy in DC has always been to do development, and doing development in DC has generally been entering into joint ventures with landowners. So while we control 4.2 million square feet in the district, our Company's NOI as a percentage from the DC CBD, so our in-city buildings, is only 8% of our total portfolio.

Consistent with this approach, we have entered into negotiations with another landowner on a parcel that would support another 520,000-square-foot development, based upon some leasing. We have no 2014 lease exposure, but we will have some legal firms relocating and we're going to have to backfill some space in 2015 and 2016. Our DC team is out in front of the transactions and we are actively working on replacement tenants now. Currently, the DC CBD portfolio is 96% leased.

Now, the other reason why our DC CBD NOI is relatively low is because the bulk of our regional activity is concentrated in Reston, which is unequivocally the strongest submarket in the entire DC region. We cover the vast majority of our Town Center expirations last quarter with the renewals of L-3 and the relocation of Leidos from Tysons Corner to Reston. That was 368,000 square feet of transactions. And our largest near-term exposure in Reston, which is in 2015, is with the GSA, and they have already given us notice that they intend to extend on a 261,000-square-foot lease.

Interestingly, we are in the awkward position of having 4 million square feet of space and no inventory. In fact, we are actually working with a tenant that wants to expand and we are canvassing our larger other users in an attempt to take back space to accommodate their growth. Rents in Reston Town Center continue to be between $15 and $25 a square foot above the market on the toll road.

Finally, going to San Francisco. In San Francisco, the CBD continues to be the strongest urban market in our portfolio, led again by the growth in demand from tech users who continue to expand into traditional office buildings. Google expanded and renewed at Hills Plaza, Salesforce took additional space at Rincon Center, Visa moved into [One Market Place]. Neustar took space at 505 Howard, which is Foundry III, the new building from Tishman. Supercell and Microsoft leased space at 555 Cal, the former BofA building. In the last few weeks, Twitter, Dropbox, and Zoom have all expanded, and LinkedIn and Trulia and Pinterest are all in the market, looking for 100,000 square feet or more of expansion.

The pace of activity in the city in 2013 was right in line with 2012, did not (inaudible) of change, 8.2 million square feet of additional activity. Activity from the technology industry actually as a percentage of the market went down in 2013, from about two-thirds in 2012 to 50% in 2013, yet the tech activity actually didn't decline, but there were more traditional users back in the market and there are more traditional lease expirations in the 2015 to 2017 timeframe, which are hitting the market today.

At Boston Properties, we leased all of our available space at 50 Hawthorne, 56,000 square feet, to Athenahealth for occupancy during the second quarter of 2014. And this quarter, we completed another 100,000 square feet of leasing at EC, three more full floors, one of them at EC 4 in the middle of the building at starting rents in the mid-$70s. View space rents in the city continue to be running from the mid-$70s to over $90 a square foot.

Our 2014 to 2016 mark to market at Embarcadero Center runs between 15% and 25% on a lease-by-lease basis.

The construction of 535 Mission is on schedule, and we are in active lease negotiations with a technology tenant for the lower floors of the building, somewhere between 80,000 and 100,000 square feet, with an expected occupancy in the fourth quarter of 2014, contemporaneous with the building delivery. When we commenced the development, we expected to start to see demand as the building structure and the skin began to take form, and this is exactly what is going on. We are very encouraged by the inquiries, and it fits plans the tenants are putting forth in the building.

If we average leases with starting rents in the mid-$60s, that's on a gross basis, this investment will generate a low 7% cash NOI return. And I want to compare that to the latest building sale in the city, which is at 101 2nd Avenue, a high-quality building built in the late 1990s. It sold for $767 a square foot, a sub 4% current return, about a 20% availability, some below market rents. But it doesn't get to a stabilized number for three or four years, compared to this building, which we are developing for about $700 a square foot, and our building at 680 Folsom Street, which we are developing for about $620 a square foot and is going to yield somewhere in excess of 6%.

The subgrade work at Transbay is progressing and our marketing program is in full swing. We are in active discussions with a number of tenants and could deliver the building in late 2016 or early 2017, based on our current schedule, but we have not made a decision yet to move forward on this structure out of the ground.

As we head into 2014, our investment activities obviously are now focused highly on our development pipeline. Just to summarize, 680 Hawthorne and 50 Folsom (sic - see Website -- "680 Folsom and 50 Hawthorne"), $340 million is going to deliver in the second quarter. 535 Mission, a $250 million investment, is going to deliver at the end of 2014. AJ 7, which is fully leased to the GSA up in Annapolis Junction, $18 million of our share of that is going to be delivering in the second quarter of 2015.

601 Mass. Ave, which is leased to Arnold & Porter, $350 million investment, is going to deliver in the fourth quarter of 2015. 804 Carnegie Center, fully leased to NRG, $40 million investment, is going to deliver in the first half of 2016.

And now, our potential future developments include 888 Boylston Street, $225 million; our Cambridge Center residential, $100 million; North Station, which is our $1 billion investment I described; and at 20 City Point, which is about $150 million investment; and the Transbay Tower, $1 billion. We also have active projects in DC and Reston, and our New York City team is in active discussions on a number of new projects.

I am going to stop there and turn things over to Mike.

Great, thanks, Doug; good morning, everybody.

As Doug talked about, we had a pretty busy quarter. We closed on three sales. We raised about $760 million in proceeds, and all three of these sales had significant gains, aggregating almost $400 million, and demonstrating the value creation we bring through the development and the management of our properties.

Our cash balances now total almost $2.4 billion. As a reminder, we announced the $2.25 per-share special dividend that totals $385 million. That actually gets paid today. We also plan to repay our $748 million of exchangeable notes that mature on February 15.

So after these payments, we will still continue to have substantial liquidity, and because of that position, we don't necessarily project raising any additional debt capital or equity capital in 2014, though, as Doug and Owen mentioned, additional asset sales remain a possibility.

Our portfolio continues to generate really strong performance, and as we anticipated, our fourth-quarter 2013 cash same-store NOI growth was 5.9% over the fourth quarter of 2012. For the full year 2013, we generated over 5% cash same-store NOI growth from 2012, and our same-store occupancy improved by 210 basis points during the year to 93.2%.

For the fourth quarter, we reported funds from operations of $1.29 per share. That was $0.05 per share, or about $8 million, above the midpoint of our guidance range.

Our portfolio was about $3.5 million ahead of our budget. This was mostly due to lower than projected operating expenses. Part of this was in our real estate taxes, where we have received actual assessments for several of our municipalities that were lower than our projections were.

We generated $2.5 million stronger fee income than we projected, with better-than-expected services income, tenant improvement, and development fees. And then, we just completed our annual compensation process and our G&A expenses came in at the low end of our guidance, reducing the expense by about $2 million from the midpoint.

Looking forward to 2014, our projections will be impacted by the sale of One Preserve Parkway and 10 and 20 Mall Road, which were not included in our prior guidance. These two properties were projected to generate $6.5 million in 2014, so the sales impact our FFO guidance by about $0.04 per share.

As Doug talked about, we continue to have good leasing activity, particularly in the Boston region. The strengthening activity in Boston is outperforming our prior expectations and is projected to offset the loss of income from the sales during 2014.

As we discussed on last quarter's call, we have a few large lease expirations at the Prudential Center in Boston and in suburban San Francisco that is built into our guidance. This will temporarily reduce our occupancy by over 300,000 square feet at 101 Huntington Avenue at the Prudential Center until Blue Cross Blue Shield commences their lease in early 2015.

Overall, these vacancies will cost about 100 basis points of occupancy in the portfolio and $12 million of revenue loss year over year. We have positive absorption, though, elsewhere in the portfolio, and overall, we continue to expect our occupancy to remain relatively stable through 2014, averaging between 92.5% and 93.5%. The lost revenue from these moveouts will temper our NOI growth, but due to strong growth at other properties that include Bay Colony, 510 Madison Avenue, Reston Town Center, Embarcadero Center, and others, we are projecting same-store GAAP NOI will grow in 2014 by 1.25% to 2.5% over 2013. This is a slight increase over last quarter's guidance.

In line with what we guided last quarter, on a cash basis we project our 2014 same-store NOI to be up substantially, by 5% to 6%, over 2013. That equates to $60 million to $70 million of additional cash net operating income. Some of the improvement emanates from the burnoff of free rent at buildings like the Hancock Tower, at Cambridge Center, and at 399 Park Avenue, with the rest coming from leasing activity.

Our non-cash straight-line and fair-value lease revenue for 2014 is projected to be $80 million to $90 million. That's up $5 million from last quarter's guidance, and it includes $30 million from our developments.

We improved the pre-leasing in our development pipeline this quarter with the signing of 56,000 square feet at 680 Folsom, bringing the project to 96% leased, and the signing of 95,000 square feet at 250 West 55th Street, where we are now 58% leased. Both of these projects, as well as the Avant residential building in Reston, will be in lease-up during 2014 and they will only contribute a fraction of their fully stabilized run rate.

The contribution from our development delivery to 2014 is in line with our prior guidance and is projected to add $28 million to $30 million of incremental NOI from last year. When stabilized, these projects that total $1.5 billion of investments are projected to generate an aggregate return in the low to mid 6% range and contribute meaningful earnings growth.

The projection for our hotel is in line with last quarter. It is expected to generate 2014 NOI of $12 million to $13 million. The contribution to FFO from our unconsolidated joint ventures is also in line with our prior guidance, and it is projected to be $29 million to $34 million in 2014.

We project our fee income from development and management services to be $19 million to $22 million in 2014. Our outperformance in fees generated in the fourth quarter were primarily nonrecurring in nature, so our 2014 quarterly run rate is expected to be lower than the fourth-quarter 2013 performance.

For our G&A line item, we are projecting expense of $100 million to $104 million for the year. Our interest expense projections are in line with last quarter. With the payoff of $748 million of exchangeable notes that have a GAAP interest rate of 6% in February and a $63 million 5.5% rate expiring mortgage loan in October, our interest expense run rate will drop significantly in 2014.

The expense reduction from a lower debt balance will be partially offset by a decline in capitalized interest that several of our developments deliver. We are projecting ceasing capitalized interest on the Avant project in February, 680 Folsom mid-year, and 250 West 55th Street in October. We currently project net interest expense of $448 million to $452 million, and that includes capitalized interest of $54 million to $58 million for the full year of 2014.

Combining all of our assumptions, we are projecting 2014 funds from operations of $5.20 to $5.33 per share. After accounting for the loss of $0.04 per share from the sale of One Preserve Parkway and 10 and 20 Mall Road, our guidance represents an increase of $0.03 per share at the midpoint of our guidance from last quarter. All of it is emanating from stronger core portfolio performance.

For the first quarter, we project funds from operation of $1.21 to $1.23 per share. As you probably recall from previous years, the first quarter is projected to be down from the fourth quarter in 2013. It happens every year due to the seasonality of our hotel and the first-quarter G&A, which is typically higher, that includes higher vesting and payroll tax expense. This year, we also have the lost income from our property sales that we sold in the fourth quarter, and that's partially offset by lower projected interest expense.

Once again, our projections do not include the impact of any potential acquisition or disposition activity. As we have discussed today, we anticipate we will be marketing additional properties for sale in 2014, which, if we execute on them, will reduce our funds from operations until the proceeds can be reinvested, which would most likely be in our growing development opportunities.

That completes our formal remarks for today. Operator, if you can open the line up for questions, that would be great. Thanks.

(Operator Instructions). Jeff Spector, Bank of America Merrill Lynch.

This is Jamie; I am here with Jeff. I thought your comments on DC were particularly interesting, that there has been a bit of a change in tone and sentiment. Ray, do you mind talking a little bit more about what you are seeing in the market and what you see going forward, given the more cooperative environment on Capitol Hill?

It's still -- it's very hard for us to comment, Jamie, because we don't have a tremendous amount of vacancy. As was mentioned, we did get a notice from one of our major defense contractor agencies at Reston that they plan to renew and extend their lease there, which is very positive. We're obviously making similar plans to renew and keep many of our R&D tenants down in our Springfield development, VA 95.

Just anecdotally, hearing from our friends in the other buildings, there is activity, but no real major commitments. The Rosslyn-Ballston Corridor still is pretty challenged. I think Vornado is doing a great job backfilling their vacancy, but still not the big GSA deals we anticipate. We're hopeful that FBI is going to come out. We're in the finals for that. That would be a tremendous boon not only for us, but to the entire northern Virginia market.

So while there is an uptake and good vibes, still no real go-to leases we can point to as really changing the tide in the market.

Okay, thank you, and then just a follow-up. Can you talk a little bit about how we should be thinking about Citi's space and, given their lease renewal downtown, what you think will happen in your portfolio? Then I think we also heard maybe Reed Smith would be signing somewhere else. Can you talk about that?

And then I think you also -- I thought I heard Doug mention you are in active discussions over a few potential new development projects in New York. I just want to make sure I heard that right, and if so, can you provide a little more color?

So you asked three questions. I will try and hit them sequentially in reverse order.

We are talking about a number of developments in New York City. There is nothing that we are at this point prepared to talk about specifically in terms of the location of the site.

With regards to our law firm tenants that -- in our portfolio, we are in active discussions with each and every law firm tenant that we have that has a lease expiration between 2015 and 2020, and we are not aware of any tenant that has made a decision to leave any of our buildings.

With regards to Citibank, there is no question that Citibank is going to be relocating out of 399. That in fact -- that headquarters requirement has hardly been used on a relative basis in terms of the efficiency of the space for them for a number of years. Much of it has been sublet. Some of it is retail, and I think we said last quarter that of the 500,000 plus or minus square feet, about 350,000 square feet of that is Citibank office space that we're going to get back sometime in 2017.

At 601 Lexington Avenue, Citibank has a large requirement. They have the right to give back a floor or two in, I think, 2016 or 2017, and the rest of it is for lease until 2026. And I am sure that as they think about how they are going to handle the various users they have in Long Island City and downtown and in Midtown, that is going to be part of the equation and we're going to have conversations with them about whether or not they want to use that space. And if they don't want to use the space, how we both might profit from their decision to no longer want to pay rent there.

Okay, great. Thank you.

Jordan Sadler, KeyBanc Capital Markets.

Just like to hear if you could elaborate a little bit on (technical difficulty) generally. It seems that there is quite a bit of availability still downtown. Hudson Yards developments, potentially, [approaching] tenants, 7 Bryant Park was just mentioned the previous (technical difficulty)

I'm curious about the (technical difficulty) development that you would be considering. Would it be office, and just general thoughts on the market and tenant demand outside of maybe the high-end financial service tenants?

Sure, I'll start, and John Powers, if you would like to make some comments, feel free to add on. So the developments that we are looking at are, I think, what we would consider to be in sync with our views on where we think the demand is going to be coming from in the short to medium term in New York City, a.k.a., buildings that would be more apropos for the growing technology companies and the media companies and the content delivery companies, not the large financial institutions.

And so, obviously, to the extent that those locations are slightly different than where those tenants currently -- or our portfolio currently is tilted, obviously those are the types of places we are looking at.

I think we have also been pretty clear that we think we have a residential expertise that we are now capitalizing on in New York, Boston, and in Washington, DC, and there are a number of sites that have been identified to us and that we have made inquiries on on the residential side, as well, in New York City. I don't think those would be considered to be mixed-used centers. They would be residential projects where we think we have the competency and the capability to execute at a highly attractive return.

So, those are the kinds of things that we are talking about on the development side. John, if you want to comment on the amount of new construction that is potentially going up and the environment, feel free.

Certainly, the downtown market has a lot of availability in large blocks. There is about 6 million feet that is available or will be available shortly there. Obviously, we don't have any product downtown.

Also, the Midtown South market is very, very hot right now. There has been a number of deals that were just done over the last couple of months there, and rents have really started to spike in some of those buildings. So there is going to be tenants in that Midtown South market that are going to be squeezed out because many of those tenants went there because their businesses did not have the margins to be in Midtown. So there is a transition with technology expanding in New York, and I think that there will be some tenants that move from Midtown to downtown to take advantage of the new product or the repositioned product with large blocks and attractive prices.

But the Midtown market and the Manhattan market overall is very, very large, so when you're dealing with a market of over 350 million square feet, even a few million here and a few million there don't change the aggregate supply and demand ratio. And Midtown, the market is still solid. We wouldn't say -- I wouldn't say it is moving up tremendously, but it is -- there is very little downward pressure on it on rents.

That's helpful. Thank you. And then, a quick follow-up for (technical difficulty). Ray, I saw the Lerner's project in Tysons get announced. I am curious, given the availability to accommodate expansion, because you are full in Reston, are you concerned about migrating into the (technical difficulty) getting a little bit more traction?

You know, it's interesting, Jordan. The tenant that was -- the Reston tenant that was referenced earlier is one of the highest profile tenants in the United States currently in Reston Town Center and are literally begging us to buy out existing tenants so they don't have to go to Tysons. And we have seen absolutely no departures from Reston to Tysons.

And in fact, the major deal we secured earlier this year was the Leidos deal, who was a mainstay of Tysons, who came to Reston at probably about a 50% premium in rent to move just the six miles out to Reston. And this was before the Metro even came. In other words, they left Tysons with Metro to come to Town Center, pay more without Metro. So I think that's a very strong indication of how we feel about the Reston versus Tysons dynamic.

Thank you.

Josh Attie, Citi.

On Transbay, can you elaborate on the activity you are seeing in terms of the size of the tenants you're speaking with, their industries, and also, from a timing perspective, can you remind us when you need to move forward on construction in order to deliver in early 2017?

I apologize that my answer is not going to be as forthright as you would like it to be, but it's the reality of the situation. We are talking to a number of tenants that are in a broad range of industries. We are clearly talking to technology tenants and we are clearly talking to traditional [fi-re] tenants, i.e., financial institutions and law firms and other sort of money manager/advisor types, about the building.

Obviously, anybody who we are talking to is in excess of 100,000 square feet. That is -- we are not prepared to enter into any conversations with smaller tenants at this point.

The building is currently on a program, as I said, to be completed, if we were not to cease construction in 2016 or 2017, and the decision as to when we stop is a decision that gets made in the middle of 2014. We can obviously delay that even longer. There are just some cost implications associated with that.

If and when you decide to move forward, have you given thought to bringing in a capital partner, and have you decided internally whether that is something that you want to do or not want to do?

Josh, this is Owen Thomas. I don't think our posture on that question has changed since the last quarter. We, I would say, firmly believe it's an option that we have, given the quality of the building and the capital that's available in the marketplace for real estate. But we haven't made that decision yet. But it's an option that we may elect to hit at a future date. But again, no decision has been made.

Okay, thank you.

David Toti, Cantor Fitzgerald.

I just want to follow up on Josh's questions, just a quick one on Transbay. Are there any tax incentives from the city or the state around this project? And if there are, do they impact timing and construction and does this put any constraints on the marketing process?

Unfortunately, there are no tax incentives that are egging on demand. You might appreciate, given the amount of absorption that the City of San Francisco has seen and the amount of activity in the marketplace and the desirability of being in an urban area, the city doesn't really have much in the way of incentives.

The interesting thing is that, as I think we've talked about in the past, we are subject actually to an additional tax because we're in an area where there are Merrill loose bonds that were -- had to be floated to pay for the Transbay terminal, so it's actually in the opposite direction. We have a slightly higher tax base than a traditional office building, not one, obviously, that is being sold at $800 a square foot, since our cost is not going to be there. But overall, there are no tax incentives that would incentivize tenants to move forward.

Okay, and then, this may be a bit premature, but I was just curious. Are there standards that you are designing to relative to the occupancy per person on a square foot basis? I would think you would have to begin to incorporate some of that into egress and elevators and bathrooms and so forth. And does that impact the -- I guess my question is does that impact the tenant type that you can really target through the marketing process?

This building -- and Bob Pester, if you want to comment -- this building is being designed to probably be -- maximize the identity with which one can populate a floor in a high-rise building. There are three exit stairs. There are a number of extra capacity HVAC and electrical supplies in the building for cooling and for power usage, and we have a Miconic destination elevator system that we believe will be able to push people through the building as rapidly as you could possibly find.

So our view is it is at the cutting edge in all of those indices and it is about as good as it can get.

Okay, thanks, Doug. And then, one final question, more of a big picture. Given the timing on this project, which is quite long on a relative basis, are there any reasons for caution, in your view, relative to your employment expectations a couple of years out or do you feel that the strength of the market is really -- is still quite broad and is a relatively safe zone for you guys to market this project?

(multiple speakers). This is Mort, go ahead.

Go ahead, Mort.

When we go and explore the possibility of starting a building like this, we have extended meetings with the brokerage community, which I was fortunate to attend, and I will tell you that -- and I am not exaggerating -- in all the ridiculous number of years that I've been in the real estate business, I have never heard from the brokerage community a list and a detailed list of the kind of action that there is in the San Francisco market in terms of tenants who are not only new tenants coming into the market, but tenants that were in the market and are growing, and way overwhelming the amount of new space coming in.

And since this building, we believe, will be the iconic building in San Francisco, we have found that the kind of interest that we are receiving to reflect that kind of activity. So we didn't start it just in a vacuum. We started it within the context with the most bullish description of the market, based on specific information about tenants that were growing or tenants that were making new commitments or new tenants coming into the market.

I can recall at that point when I was asked to comment on it, I happened to have a sore throat, and I said the sore throat I got was from privately cheering when I listen to this kind of report.

So I think we -- we've had a lot of experience in terms of making these kinds of judgments in various markets, but I will tell you this was the single, by far, the single most, shall we say, enthusiastic or bullish, you name it, if you would like, description of active tenants, specific tenants in the marketplace in units of demand that made us feel very comfortable about going ahead with the buildings. And I think we will be able to justify that to you in reasonable time zones so that you will understand why we are as enthusiastic about it as we were and made the commitments that we did.

Great, thanks for the detail today.

Michael Knott, Green Street Advisors.

Just one more question on Transbay and then 535 Mission. On Transbay, just curious if you can give us any color on maybe how intense or numerous your leasing discussions are versus maybe three months ago. And then, also, just curious on 535, how activity is there and will success or not there still translate into your decision on Transbay?

I will repeat what I said previously, and I hope this is more satisfactory. 535, we are in active lease negotiations with a major tenant, a technology tenant, for the bottom of that building. And assuming that lease gets signed, we're going to be over 100,000 square feet committed, and they are not the only tenant we are talking to. We have single-floor and multi-floor tenants that we're in negotiations with, and there is great demand for that building right now.

So I guess, net net I would say the optimistic end of our expectations in terms of where we thought rents would be and where we thought the overall demand would be are being realized in a consistent manner.

With regard to the Transbay Tower, we are now working in the ground, pouring our footings, digging -- doing our foundation work, and there is a consistency of conversation both within Boston Properties and direct tenant negotiations, as well as Boston Properties brokers and other brokers asking for information on a pretty consistent basis.

And I would say that the overall tone of the market in the first quarter of 2014 is probably slightly better than the tone of the market was in the fourth quarter of 2013. That doesn't mean that we feel like we are going to announce a major lease in the next three days, but we -- like I said, we're feeling good about the overall market demand, as Mort just described.

If you see what the statistics look like in the first quarter, you are going to see a number of large users that have committed to expansion in San Francisco. The Transbay Tower is very much a building and a project that is on anybody and everyone's radar screen when it comes to looking to fulfill their growth needs, because there is just relatively little other demand in the marketplace. And Bob, you can describe some of the other buildings that are being discussed and where the demand is.

So we're feeling as good as we did last quarter, and the market is feeling a little bit better.

(multiple speakers). And two quick ones on the last question. 250 West, you still going to hit 90% by the end of the year? And then, 88 Boylston has always struck me as a home run waiting to happen, but curious if you can just talk about the dynamics of maybe competing with yourself there versus Hancock, and maybe you feel better about that now?

Sure, so on 250 West 55th Street, like I said, if we get all the leases that John and his team are negotiating right now, we will be at 75%. Do I think we will get to 90% by the end of December of 2014? I think it's a stretch. Do I think we will get to 80% or 85%? I hope. That's where our goal is.

And a lot of those tenants obviously are going to be in occupancy not in 2014, but in 2015, so leases that have commenced and leases that have been signed are slightly different.

With regards to 888 Boylston Street, it is a building that we have been very patient about in terms of starting, given our -- the profile of the building, where it sits, and the fact that there is both retail and office demand. The tenants that we are talking to -- the tenant that would be taking the lower portion of the building, which would leave us with the better space, relatively speaking, from a view perspective, and the space that we now have available at the Hancock Tower, as we looked into our leasing expirations in 2015 and beyond, are at the base of the building. So since the actual mix of where the product is in the marketplace actually works well together, and puts us, we think, in the best position to be successful at both projects.

Vance Edelson, Morgan Stanley.

So given that some of the approvals you are getting for development have the multi-family component, and you mentioned the residential expertise, how do you view this long term? Would you say there are plans to increase the multi-family mix meaningfully as something that is complementary to office and less cyclical, even in strong office markets like San Francisco? Do you have any evolving views on the target mix?

So I will answer the question in the following manner, which is Boston Properties has a development expertise which we believe is wholly transferable to urban residential development projects.

And so, as we think about utilizing our knowledge of the markets and our expertise in identifying sites and our credibility with public officials where you need approvals for residential, we think it aligns significantly well with our other competencies and capabilities, and so that's where our focus is.

I would not want to give you the impression that we are suddenly becoming a residential company or that we are trying to effectuate our mix, but I think the reality is is that there are a number of sites that are better utilized for residential development in these urban markets that we happen to be wholly involved in, and we think we have the capabilities to take advantage of those marketplaces and we think we should do that.

Okay, that makes sense. And then, the lower G&A, it helped a bit during the quarter and you gave a guidance range for the new year. And it's going to be seasonally higher in the first quarter, but do you think we could see additional efficiencies if you are successful monetizing assets? In other words, what do you think the sensitivity is on the G&A line if the portfolio shifts going forward?

It will depend on if we become a recapitalized partner of those assets or a seller of those assets, in terms of creating additional management fees. But I think on the margin, it is not going to make much of an impact because we don't expect to do anything that is going to dramatically change our overall [ORAD].

Okay, got it. And then, Mike had mentioned real estate taxes in general. Can anyone share the latest thoughts on working with Mayor de Blasio in the new year and which way you think property taxes are headed in New York?

I will make a comment on that, now that I doubt if there is going to be a special tax on those people whose incomes are in excess of $500 million or a net worth of in excess of $500 million or whatever his criteria is.

I certainly think that, like all other cities, there is going to be some pressure on the real estate tax basis, but I don't think it is going to be anything dramatic. I think it will be just within the normal range of expectations, in part because I think the idea that there is going to be major increases in city expenses that is unprecedented or unanticipated, I think, has been narrowed by the, shall we say, the experience that the mayor has had with the governor on these issues.

And not to be able to go too far, as the governor said, the major program that he had, which was pre-K education, is now going to be funded by the state government and not by the city. So I think the city is going to be in better shape financially and able to handle whatever the increase in expenses will be.

Okay, appreciate some thoughts, Mort, thanks.

Alex Goldfarb, Sandler O'Neill.

Two questions for me. First up, as you guys look at potentially doing some development in New York, would all this be market rate or are you underwriting some degree of incentives. If we just think about some of the big developments that are underway right now, they are clearly benefiting from attractive financing, whether it is the far West Side or downtown that allows them to price new construction below where market rate in new construction would price. So if you could just give some thoughts on that.

Alex, it is Owen Thomas. I think the types of things that we are looking at are all over the map. I wouldn't say they are necessarily driven by the incentives that you are describing.

Okay, I appreciate that response. The next question is just as you think about disposition activity and capital retention, can you just break out how you think about the development activity, how much capital you will need, and then as you look at dispositions as a source, clearly the smaller ones you can retain that -- the cash, but the bigger assets, like Times Square Tower, you have to dividend out. So if you can just walk us through how you think about using dispositions to fund versus the potential to see another Times Square Tower like disposition where we would see a special dividend?

This, again I apologize if this answer doesn't wholly satisfy you, but we actually don't link the two things together. The decisions that we're making to sell assets, when we are selling assets, as I said earlier, are in those two buckets and they are wholly unconnected to our capital needs.

One of the more interesting things about our portfolio is that as we deliver all of these developments over the next three or four years, our ability to have capacity to increase the overall debt capabilities and capacity of the Company actually increases pretty dramatically because we have a lot more income coming online, as well as to how we are currently funding ourselves.

And so, we don't look out over the next three or four years and say, geez, in order to fund ourselves at a comparable leverage position as we are in today, we need to sell assets and have to retain that capital. So the decisions are really not linked together.

I would also add that our liquidity position today is more than sufficient to complete what is left to fund on the pipeline. There is [nearly] a $2.5 billion pipeline with about $750 million left to go over the next few years. So if you assume we pay off the exchangeables, we pay the special dividend, we pay all of those development dollars, we still have significant cash balances to fund some of these future developments that Doug talked about, in addition to the cash flows generated by the portfolio on an annual basis.

Okay, so Doug, if I hear you correctly, it almost sounds like a Times Square Tower type situation where you would get -- where shareholders would get a special -- it would almost be sort of like a reverse inquiry or where you just saw just cap rate demand in the market so strong that it was too good to pass up. It almost sounds like it that way. Is that fair?

Yes, I wouldn't characterize it as being that reactive. I think Owen and Mort and I and the rest of the managers are spending time looking at our assets and saying, geez, let's look at the cash flows in a particular building over the next decade or so, and how do we feel about the growth in this cash flow and had we feel about how the market might value this asset? And should we think -- is this the right time to, in some way, shape, or form, liquidate that investment? And if we can put that capital into a better use, and/or if we have to return it to shareholders, we will return it to our shareholders relative to what our own expectations are.

And so, it's that type of a mental process that is going on with regards to how we are thinking about our dispositions, not one where we are saying, okay, we have X million dollars of development and we have a limited resource base, and therefore we have to sell some assets in order to invest assets in other buildings. Because, as I said, the cash flow profile of all the activity we currently have going on in our development pipeline is pretty significant in terms of the overall cash flow growth, and it really allows us to feel very comfortable about what our overall capitalization is and our leverage ratios and our coverage ratios on a going-forward basis, without having to really be too concerned about what the impacts of reducing our overall balance sheet are in terms of selling assets and being in a situation where we may have to provide a special dividend.

Okay, thank you.

If I may, I would like to just add one other comment to that. In 2006, you may recall we sold a number of buildings, actually 14 of them, to be exact, and we did that because we thought it was the right time to establish the values that we had created.

And we didn't do it in terms of, as Doug said, because we were looking forward to having the money to spend on new developments. We really do feel that we have that financial capacity in the ordinary course of life, and when we do decide to sell, it's because we think it's the right time to sell the assets that we are selling.

And I think this is -- given, as we all know, the level of interest rates today, there has been a dramatic appreciation in the value of the kind of assets that we have, and we get a lot of inquiries. And so, it's something that we feel is appropriate to respond to in exactly the terms that Doug has just described, just as we did in -- let's say six years ago.

Okay, thank you, Mort.

Vincent Chao, Deutsche Bank.

Just wanted to follow up on the disposition side a little bit. Just curious if the environment has changed much over the last 90 days in terms of buyers being more aggressive? You had mentioned that it's still hard to make the acquisitions pencil for yourselves.

Are people -- is there more demand for those core assets than there was 90 days ago, and maybe the same question on the suburban assets. I know you sold the two this quarter, but are you seeing an increasing demand for those types of assets?

It's Owen. I would say that for the core CBD assets, I think the market interest in those assets and the capital that is interested in pursuing those types of assets has been pretty consistently high and it has been pretty consistent from 2013 to today.

As you know, interest rates, the 10 year has risen substantially from its lows in the middle of 2013, and I think that's had pretty minimal impact on cap rates, except for what I would describe as highly leveragable assets. But for the types of assets that we own -- core, multi-tenant real estate in urban locations -- I think the intensity of the capital has stayed pretty consistent.

For suburban, I don't think that the level of market enthusiasm for suburban office is certainly as high as it is for urban office. I don't think that the cap rates for suburban office are, relative to history, are as interesting to us as the seller as they are for the CBD, if you look at the cap rates versus history.

But that being said, I think if the economy improves, I think investors will do what they have done in the past. They will look for -- they will take additional risk and chase higher yields, and my guess is if the economy continues to improve, the interest level in suburban office will increase this coming year, would be my guess.

Okay, but it sounds like there hasn't been (multiple speakers).

May I add on to that, hello?

Sure.

This is Mort. Look, one of the unique features of the inventory of buildings in Boston Properties is that a lot of them are iconic buildings that are known not just in the markets we are in, but literally across the country and, in fact, in many other international markets, okay?

So we get an interest from investors who are really outside the United States because they understand and recognize our buildings, and we don't have to, in a sense, shall we say, persuade people as to the quality of the buildings we have. We have such an array of iconic and high-quality buildings that are recognized everywhere that there is a demand for that that is not totally independent of interest rates, obviously, but much more dependent upon, shall we say, and compared to many other purchasers, just the recognition of the assets and the understanding that these are iconic assets with great long-term values.

Okay, thanks. And if I could add one more question on the North Station project, as you think about start to finish after factoring all the phasing of the different components, how long a development process does that look like?

You are asking me to look at a crystal ball and describe what the demand is going to be for all the various product types. I believe that our current plan is as follows, which is we are going to try and get as much leasing as we possibly can on the retail and the low-rise office, and we're going to commence on either one or two of those phases, and they are two different sizes of sites, hopefully sometime in early 2015, knock on wood, tenant demand being with us.

And then, the other -- the three towers, I think, are going to be predicated on market conditions at that time. We are creating the structure for the towers in the building, so we will be in a position where we can actually get going whenever we want to on the vertical portions of the site. But look, it is going to be $1 billion, plus or minus of investment, is going to take a minimum of five years to get out the door in totality, and it could take longer than that.

(multiple speakers) Doug's point on the phasability of the key attribute of this particular project, but we are also blessed with having a partner with the Jacobs family and Delaware North that has the same type of perspective we have, which is long term, and then also making sure that it is absolutely the right product at the right time. This is a legacy project for them, and property, and they have been very patient in the development of putting in infrastructure into the site, and we couldn't ask for a better partner that has the same type of long-term perspective that we do.

And if I may say, when you get a sense of the quality of the -- and integration of all the different uses and the quality of the design, I think this will be recognized almost instantaneously as another iconic development that as we hope being our hallmark. So I think this is just going to have a unique appeal for all the reasons that have just been mentioned.

Okay, thanks everyone.

[Aaron Islaxin], Stifel Nicolaus.

I wondered if you could -- you already hit on this little bit, Doug, earlier, but if you could just walk through the development costs for your major developments that are underway on a per square foot basis, which I guess we can calculate there in the supplement. But then, also what you think those costs will be relative to the potential stabilized value of each of those projects.

That could take 20 or 30 minutes to do, Aaron.

I don't want to take that much time.

I will just say -- I will say the following. For the most part, the developments that we have, where we haven't articulated what the per square foot costs are, are interesting for the portfolio because our land basis is relatively small, and what we are -- how we describe the returns on these assets is predicated on what a market value for the land is, so at the end of the day when you look at what the cost that we put into the building is from a GAAP perspective, and the return, it is going to look higher than what we are describing because the market land value is a figment of our internal imaginations. It's not reality. It's not what we actually pay for these things.

In general, we are building our buildings today on a leased basis, hopefully with a starting cash-on-cash return in the high 6s to low 7s, include that's the market value of land. And somewhere that we believe is $100 or $200 a square foot below where other people are currently purchasing assets at lower returns. And that's the logic for why we are developing as opposed to, as Owen said, beating ourselves up, trying to buy low-yielding assets with operating cash flow risk associated with them.

And each and every one of our assets is on that spectrum in one place or another, and there are some in every single one of the leases that we are negotiating, so those early returns, obviously, go up over time, so on a GAAP basis, they are higher. And we think we are creating significant value each and every time.

I have said from day one and I'll say it again, at the end of the day, after all of this starting and stopping, the cash-on-cash return at 250 West 55th Street, which I don't consider to be our strongest performer, is going to be in excess of 6%, and that includes rent on 1 million square feet that are going to go up by $7 or $8 a square foot every five years. So you can figure out what the average returns are. And in general, we are signing 15- or 20-year leases.

That was a, in my opinion, underperforming asset in terms of where we intend to be when we started it, and everything that we are doing now, we have a higher expectation of where we think we are going to come out on a return basis.

I would just add that, as Doug mentioned, we're using a market value for the land, which is driving some of those return numbers that you quoted, and some of these developments -- for example, at 888 Boylston Street and others that we have, we have owned this land for a long time, so there's a pretty significant difference in some of these cases between the market value of the land and what we actually have in the land.

Right, that makes a lot of sense. Thank you.

Ron Perrotta, Goldman Sachs.

Just real quick, given this emphasis on development, anything that we should think about as far as leverage targets or where you see the balance sheet going over the next few quarters or years as that pipeline continues to ramp up? I know you touched on it a little bit about the debt repayments coming this year, but anything else to add on that front?

As Doug started to mention, as we look forward, we are talking about increasing our cash NOI. We're talking about putting $2.5 billion of development pipeline into service without raising additional debt, where a big portion of the cash is already out the door. So our leverage is going to naturally go down as that happens.

Right now, if you look at a net cash EBITDA, we've been in the high 6s, the low 7s. That will come down as that occurs. And I would not expect that we are going to modify the leverage policies that we have, which is somewhere low 6s to low 7s on a net debt to EBITDA over time, as we continue to make investments in our development. Or dispose of assets.

Okay, great. Thank you.

David Harris, Imperial Capital.

In your prepared remarks, you made reference to your expectation that rates would be rising. How difficult is it to underwrite developments with that expectation in mind? Are we talking to rent projections in those numbers today?

We do factor it in when we think about returns that we would like to achieve, and any financing that would be used for developments, we don't use the current rates. We assume some level of increases. So we are -- again, as I mentioned, it's very hard to predict interest rates. I think the general feeling we have and the market has is they're going to rise.

Given some of the mixed signals that we are getting from the marketplace economically, the pace of that rise and when it is going to occur and how large it will be is the hard part to predict. But we are factoring in rate rises into our development analysis.

So David, when we provide information to the Street and when you look at our supplemental, we obviously have a cost of capital in every single one of our developments. There is a cost of equity and there is a cost of debt, and those numbers as interest rates move up, obviously move up.

Overall, we also look at our -- we don't look on things on an incremental basis. We look at what our average cost of capital is and what our average cost of debt is and what might happen to that on a portfolio basis over time. And interestingly, we went through a strong long analysis of where our overall debt has been, and we're basically funding on an overall basis right now just under 5%. And we have a modest amount of maturities that are going to actually bring that number down slightly over the next two to three years, assuming no dramatic increase in rates, and we don't have much in the way of rollover during that period of time.

So the good news about our balance sheet is that we have done, I think, a pretty good job of timing our exposures to the marketplace and extending out our maturities over the past two or three years to really put ourselves in a pretty good position, certainly for the next seven to 10 years, and so I think we have a good handle on where our fundamental cost of capital is on the debt side.

And so as we do these developments, there is no question there is a potential being -- there is a squeeze that could happen if you say, well, you are developing to a 7% return and interest rates have gone from 4% to 7% on a, quote unquote, incremental basis, but that's not how we are looking at these investments and that's not how we look at our balance sheet.

Let me ask you this, on a more precise basis, if you were contemplating a development today, would you be looking for higher returns today than you would have been 12 to 9 months ago when rates were in the -- with the warrant handle on the 10 year, the 10-year treasury yield?

I will answer the question in the following manner. I would say that every conversation that our senior management team has with our development people, we say to them, hey, guys, interest rates are going up. And if interest rates are going up, we need to think about what our return levels are going to be because, obviously, our cost of development and our cost of capital is a factor in that transaction.

Okay, are you including rent projections in these calculations today?

We never include rent projections in our development deals, in terms of increases in rent projections. We only assume where we think rents are today and where we think we are going to be able to lease the -- if we're doing a build-to-suit, obviously the rent is going to be what the rent is, and where we think the rent is going to be on the other space.

And there are so many other factors associated with the other spaces. Where is it located in the building? Is it going to be encumbered by a right of first offer or is it going to be space pocketed? Is it -- which means if it has a shorter duration. There are just lots of factors that impact that, but we don't generally say, well, we're going to do this development and we're going to assume rents go up by 5% a year, so that makes it all cancel out.

Okay.

That is not the way we approach things.

Okay, I have a question on the common dividend. It is not -- it has remained unchanged now for five quarters and still actually is below the level at which you peaked out in 2008. Are you ruling out or is there any comment perhaps you more can make with regard to the prospects for any growth this year?

Let me answer (multiple speakers). Let me just answer the question in the following manner. So in 2008, during the aftermath of the meltdown, we brought our dividend down to our taxable income. And we said, you know, that's probably the appropriate level for our dividend to grow at.

As we look out forward, on a going-concern basis, as I think we have tried to allude to, we're going to have a lot of cash flow growth. And as our cash flow grows, our taxable income is going to go up, and therefore as a REIT that pays out effectively 100% of its taxable income, our dividends are going to grow.

We're not doing that artificially, David, so we are not saying, well, we think our dividend should grow by 2.3% a year, every year, and we are using -- establishing that. We have established a taxable income metric to move our dividend up, and that's the way we have planned for it. And obviously with the special dividend that we are doing this year and the reduction in the income that caused on a going-forward basis, it has given us a little bit of room.

Okay, is it set for the year or is that something that could be reviewed by the Board during the period of 2014?

We review the dividend policy in our taxable income with the Board a couple of quarters a year, generally as we move towards the middle of year, and we say, here is where we think our dividend likely will be on a taxable income basis. What do we all think about the timing might be for announcing a dividend increase is dependent upon where the taxable income is.

Okay, thank you. Keep warm.

Jeff Spector, Bank of America Merrill Lynch.

It's Jamie Feldman again with just a quick follow-up. Mike, based on the updated guidance, what are your thoughts on AFFO for 2014?

So our AFFO FAD has shown pretty good growth. From 2012 to 2013, it went up 8%, and as I mentioned, we expect our cash NOI to go up by $60 million to $$70 million, I think I said. So I would expect that our AFFO is going to show a pretty good increase again.

I talked about what our occupancy projections were expected to be, so if you look at what our rollover is, we're looking at doing somewhere between 3.5 million and 4 million square feet of leasing to achieve those occupancy projections. And I think that our CapEx, recurring CapEx, is going to be somewhere in the $40 million to $50 million range, so I think we're at [362] in 2013. I would expect the AFFO to be something like [385] to [395] or something like that in 2014. So, pretty good growth over 2013.

Okay, great. Thank you.

Josh Attie, Citi.

It's Michael Bilerman. Just a quick follow-up on the asset sale program. Maybe Doug or Owen, as I think back to this time last year, or even a little bit before that, before you embarked on this most recent round of asset sales, you prepped the market a little bit in terms of sizing, and I'm just curious as it sounds like you are teeing up a number of assets for sale, where should the market be thinking about, both in terms of the suburban asset sales and the more core asset sales either as a recap, in the case of Times Square Tower, or just outright sales? How should we think about the potential size overall of proceeds that you potentially could generate?

It's Owen. I don't think we would be prepared to discuss a size level at this juncture. I would like to step back for a minute and describe again the philosophy around the asset sales.

I think as Doug and I and Mort have been describing, the assets that we've been selecting for sale have really been in two categories. One, which Doug was talking about earlier on the call, which is where our views of the growth in the cash flows may be just different from the marketplace, and therefore we feel that the price that we are able to attract for the asset is very interesting for shareholders over the long term. So that's one category.

And then, the other category are assets where that characteristic may be the case, but also it is in an area that is just non-strategic for us as a company going forward. So a couple of the suburban assets that we sold at the end of last year were clearly in that category, despite the comments I made earlier about cap rates in the suburban market.

So again, I don't think we would be prepared to make any specific remarks about sizing at this point.

I think the other interesting aspect that you touched on in your question is, are these sales or are these, quote, recapitalizations? And what we found in the case of Times Square Tower was that we thought the best outcome for us is to do what we did, which is to actually sell only 45% of the asset and retain the leasing and the management, and based on the options that we were considering, we felt that was the best outcome. And as we consider additional monetization activity going forward, that could be also a model.

But I guess there is just an element of if you have two different types of investor, some people that focus on earnings and earnings growth and a large percentage that focus on NAV, these sales and capital-raising activities have been diluted to current earnings. Arguably from an NAV perspective, I think they have been enhancing, but from a prepping the market perspective, I think we're all just trying to understand the capital side of the equation, both in terms of potential new financings, but also capital raising in the form of asset sales and what that can do, at least in the near term, to earnings. Arguably over the long term, they're going to be accretive as you reinvest those proceeds.

But just trying to understand those dynamics, and if you think back to what happened last year, it clearly weighed on the stock, amongst other things. And that's where I'm just trying to get my arms around, so at least we can be prepped for what may occur.

Understood.

Okay, thank you.

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

I think we appreciate the Q&A and the opportunity to not only explain our general strategy and our general experience these days, but in response to your questions, I think we've tried to give you a more comprehensive and more detailed analysis. There is never a single principle that explains everything that we do because, frankly, the markets change and the interest rates change and the general economic environment changes, and we try and be responsive to it. And we have, I think, shown that we can be responsive to it for as long as we have been a public company and we intend to continue to do that.

But that's all possible because we have a very good interaction with all of you and we appreciate it, and we look forward to our next conversation after our next quarter. So I thank you all very much.

And Mort, I would just add to what you said, just to maybe recap a couple of things from the call that are important. As Mike mentioned earlier, we bumped our guidance for 2014 when factoring in the small asset sales that we did in the end of last year. Hopefully, we have been able to demonstrate, I think, very strong leasing momentum in our existing assets and our development pipeline, and I think also we have made great progress over the last quarter identifying a longer-term investment pipeline with some exciting new developments. So again, thank you all for your attention and your questions and look forward to next quarter.

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