波士頓物產 (BXP) 2014 Q1 法說會逐字稿

Good morning and welcome to the Boston Properties first-quarter earnings call. This call is being recorded. (Operator Instructions). 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' 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 statements.

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. This is Mort Zuckerman speaking. There is a little bit of a construction job going on behind me, so you're going to hear a little bit of noise, somebody breaking up the sidewalk. But it's a noise that we have always enjoyed in a way, because that's what we do.

We basically have had a long-term strategy, which we continue to focus on, of building long-term values and -- assets that we can hold for the long term because we believe they will appreciate over the long term, and we try and create a certain core value in terms of being at the very upper end of the quality of the assets in each market that we are in.

And we're involved, therefore, in two things. One is maintaining and owning for the long term a lot of investment assets, which we can go over, but the ones that really continue to grow the Company are through the development programs that we have always had on our agenda and which we have today in a very strong way in all of our markets, virtually, Atlantic Wharf, [Block 5], 601 Mass Avenue.

The ones that have gotten the most attention recently are 535 Mission Street in San Francisco, where the activity is very strong and where we believe we will be creating significant value and a long-term investment pool, and Transbay in San Francisco as well, which is probably the most challenging and attractive opportunity that we have had, where we are building 1.400 million square-foot building. Both on the 535 Mission Street where we have very strong activity, we have signed leases for over 80,000 square feet, and we have very strong activity that is on the verge of being expressed in signed leases, and with the Transbay, as we call it, although we are now going to rename the building, we have had a very good experience in terms of having a signed lease now with a tenant who is going to take slightly over 50% of the building, and the space that we will have remaining will be the upper sectors of the building, every floor of which will have great views and great identity.

And I do believe that building will be the iconic building in San Francisco for generations to come, since it is going to be a couple of hundred feet taller than any other building. It's going to have great views and will become, we believe and hope, the iconic building that will symbolize San Francisco and its re-emergence as one of the great innovative cities in America.

I could go through a lot of other dimensions of our business, but I will just mention that, again, the long-term strategy of having high-rise, high-quality, highest-quality where we can, buildings in every aspect of our business continues to pay dividends in that we are continuing to lease up whatever limited amount of space we have. The large tenants in those kinds of buildings simply -- we do not have the space for them, but we have a lot of smaller tenants, and those buildings, therefore, are constantly being filled up in the niche spaces that we have remaining, and we are frankly very pleased with the performance of all of our particular heads of the different regions. We will be covering that in detail, but I think you will come to the conclusion that we are still in a very difficult environment, which I think we are in on a macro basis, continuing to do well.

Partly, of course, it is because we have specifically focused in on certain markets -- Washington, New York, Boston, and San Francisco, all of whom have the kind of urban ingredients, particularly those capacities and attributes that attract the high-tech, high-quality companies into those markets, and so we have been able to participate in the growth of those cities in terms of the kinds of tenants who want to go into the very best buildings, and those continue to work for us.

I am not going to go through every development that we have on our agenda, but I think you'll get a feel for it as we go through our different offices, but suffice it to say that in the area of the city -- of the country, rather, that we made our biggest commitment, which was San Francisco, we landed Salesforce for a 714,000-square-foot lease and we are doing extraordinarily well in 535 Mission, and as you will hear through the reports that we make, we are continuing with developments in our various markets, not only development we have underway, but developments that we are working on and planning for the future so that we can continue to grow the Company in the context of what is clearly and may continue to be, and I believe it will continue to be, a much more sluggish economy than most people have been predicting, although I have to say we have been very conservative about our estimates of how the macro economy will work.

But we believe we are in the best markets for office space and we have the best buildings in these markets, and we are continuing to build and develop in these markets and lease up our space and keep our buildings at the cutting edge of quality.

So with that, if I may, I will just end my comments and turn it back over to Owen, if you don't mind, Owen.

Okay, thank you, Mort. Good morning, everyone. This is Owen Thomas.

I will touch briefly on the operating environment, building on some of the remarks that Mort made, and also I will touch on our overall performance in the first quarter. I will then provide an update on our capital allocation strategy and execution. Doug is then going to discuss our markets and operational performance, and we will finish up with Mike LaBelle, who will provide more color on our financial results for the first quarter.

So starting with the environment, which Mort touched on, I think demonstrated by this morning's weak and likely weather-related GDP numbers, the US economy continues to experience in the aggregate uneven growth characteristics, though I do think overall business sentiment seems to be improving slightly.

Traditional tenants are not growing rapidly, and in selected cases, they are reducing their space needs. However, this has been counterbalanced by explosive growth in many creative industries that we serve, such as technology and life sciences.

As a Company, we continue to experience very favorable market conditions in San Francisco, Cambridge, suburban Boston, and, to some degree, midtown Manhattan. Overall employment in Washington, DC, however, continues to be reliant on government related and legal industries, and we have not yet seen a strong catalyst for incremental demand in that market.

Switching to performance highlights, in the first quarter we had several significant accomplishments. Mort touched on this as well, but certainly the most exciting news for our Company in the quarter was the execution of a 714,000-square-foot lease with Salesforce.com at the now-renamed Salesforce Tower in San Francisco. With the Salesforce.com lease, we have now agreed to commence the full development of this 1.4 million square-foot tower at a total cost, including capitalized interest, of $1.1 billion.

You recall in our efforts to manage the risk of this large-scale development, we were seeking to secure an anchor tenant and considering introducing a joint venture capital partner. With a large anchor tenant now secured, we are no longer considering a joint venture capital partner to complete the development.

Now more broadly in our portfolio, we executed 97 leases, representing 1.6 million square feet, with the Boston and New York regions being the largest contributors. Our in-service properties in the aggregate are now 92.4% leased, down 100 basis points from 93.4% leased at year-end. This reduction is due primarily to the forecast tenant rollover at 101 Huntington, a space that has already been re-leased, but will have downtime until early 2015.

Further in the quarter, we also continue to make progress leasing our remaining development pipeline, which Doug will get into in greater detail. And in terms of operating performance for the quarter, we were slightly below our FFO forecast, due primarily to weather-related expenses, so we are modestly increasing the bottom of our guidance range for full-year 2014, and Mike will cover these items in greater detail in his remarks.

Now turning to capital strategy, as all of you know, interest rates actually declined over the last quarter and year to date. Specifically year to date, the 10-year US Treasury has dropped 30 basis points, approximately, to 2.7% and the prospects for rising interest rates appear to be more benign, at least in the short to medium term. Private capital for real estate in our core markets remains plentiful and, if anything, has gotten more aggressive over the last quarter, as evidenced by specific completed transactions.

Our capital strategy remains consistent with what we have been communicating to you over the last several quarters. First, we have and will continue to actively pursue acquisitions, but, as mentioned, we continue to find the market very competitive. Notwithstanding this environment, year to date we have made a small number of targeted acquisition proposals totaling just under $250 million on buildings in our core markets, and several of these situations remain fluid.

Second, given the robust private capital market, we continue to actively monetize assets. In 2013, as you know, we sold $1.25 billion in total assets and expect our monetization activity to be at least $1 billion for 2014. Assets that we've targeted for disposition are in one of two categories. They are either buildings that are non-core to our ongoing business strategy or assets where we believe the investment market will aggressively underwrite future growth prospects.

In terms of our current sales pipeline, we have received an unsolicited offer to buy a portion of our Mountain View single-story product and we're in active negotiations. We're also in discussions with a purchaser for The Avenue, our Class A apartment building in Washington, DC. The outcome of these negotiations is unclear at the moment.

We're also in the market with Patriots Park, which is a 706,000-square-foot suburban office building located in Reston, Virginia, which is 100% leased on a long-term basis to the GSA.

Lastly, we are exploring a recapitalization of Carnegie Center in Princeton and considering JVs on several additional assets.

Now, lastly, on capital strategy, as discussed in prior quarters, and Mort touched on this as well, we continue to make the vast majority of our new investments in development. In our core markets, we are at that point in the real estate cycle where new properties can be delivered at lower cost per square foot and higher yields than where existing older properties are trading.

With the delivery of The Avant, a 359-unit apartment building in Reston, Virginia, and the commencement of full development of the Salesforce Tower, our active development pipeline now consists of seven projects, with a total projected cost of $3.2 billion, up from $2.5 billion at year-end.

Further, as described last quarter, we're in the predevelopment stage on another set of projects with strong potential, and these include North Station and 888 Boylston in Boston; a residential building at Kendall Square; 10 and 20 City Point in Waltham; additional sites in Reston; and 501 K Street in Washington DC. In the aggregate, our share of these projects represents an additional future pipeline of over $1.5 billion in gross development costs.

Lastly, a quick note on a personnel matter. Micky Landis announced his retirement from Boston Properties in the last quarter, and we are very appreciative of Micky's many contributions as the leader of our Princeton office during his 16 years with our Company.

With that, let me turn the discussion over to Doug.

Thanks, Owen. Good morning, everybody. It's Doug Linde speaking.

I want to start off with a couple of comments on Transbay and put a little bit of meat on the bone so you have a perspective of what's going on there. Interestingly, it was about a year ago that we actually announced the 95%/5% JV with Hines. We're the 95%, obviously.

And you may remember there were many, many questions from investors and analysts regarding what our plans were, how much preleasing would we need, and would we start the building on spec, and I think we were noncommittal and vague, to put it mildly, but we basically said, look, we like the market. We think the market is going to get better, and lo and behold, we are now sitting here with a building under construction with a 714,000-square-foot lease.

So as soon as we released the news a few weeks ago that we had signed that lease, lo and behold, we started getting lots of questions about the size of the Salesforce commitment and were we concerned about Salesforce. So we actually have spent a lot of time with the Salesforce leadership, and Mike and his team have done a very thorough credit analysis, and so I actually have asked Mike to spend a few minutes about Salesforce and their business in his remarks so we can, hopefully, provide a little bit of color on what they do and how we think about them and what the issues are regarding their commitment to the building.

We have included the total cost of the Salesforce Tower in our supplemental materials, and it is about an $800 square-foot development. That includes an imputed cost of equity and debt, which is our typical method for quoting our development returns and our yields on cost, but in fact it actually overstates the overall cost, so the cost is going to, at the end of the day, be lower than that on a GAAP basis when we actually close our books on the transaction.

Salesforce is going to be accepting space in various blocks commencing in April 2017, and their final block is going to be delivered in October 2018, so at that point, in 2018, the annualized rent that Salesforce will be paying on that entire block of space will be in the low $50s.

We expect to achieve a higher return and a higher rent on the remainder of the available space, which, again, is floors 32 and above, and we expect that our pro forma cash return, again on that $1.1 billion, will be in excess of 7%.

Again, the rents that I just quoted are what the starting rent will be, and in San Francisco, the market typically has either $1 or $1.50 bump, or 1% to 3% bump, per year on those leases. So again, on a GAAP basis, the numbers will be higher than what they are on a cash basis.

It has really been a pretty extraordinary beginning to the year in San Francisco in 2014. We had Twitter and Dropbox and Everbrite and Practice Fusion and Bare Escentuals and Trulia and Salesforce all expand. And with the recent announcement that LinkedIn has signed a lease at 222 Second, all of the competing new construction pipeline has been committed, with the exception of 420,000 square feet at 181 Fremont, which has a 13,000-square-foot floor plate, so it's a building more suited to the demand that we are seeing at 535 Mission. And then, there's been a recent announcement that Lincoln Properties is supposed to start construction at 330 Bush, which is a 370,000-square-foot building just on the backside of 555 Cal off of Kearny Street and Bush, more in the north financial district.

The San Francisco CBD continues to be obviously the strongest market, urban market, in our portfolio, and it is really this growth in tech that is expanding into traditional office buildings that's leading the growth and the strength in the market. We still have Pinterest and First Republic and Splunk and Uber, who are all in the market looking for over 100,000 square feet or more.

The pace of activity in 2014 is ahead of where it was in 2013 and in 2012, and there are also a lot of traditional users who are now conducting searches as the wave of lease expirations between 2015 and 2017 hit the market. Now those aren't necessarily expansions, but there are likely to be some musical chairs and some movement, and we hope the Transbay -- the Salesforce Tower, excuse me, is going to be the beneficiary of a bunch of those tenants.

As Mort said, we signed our first lease at 535 Mission with Trulia for 80,000 square feet, and they are at the base of that building and will be moving in in the fourth quarter of 2014, so less than six months from now. We have strong interest from single- and multi-floor users and we expect to sign our next lease in a few days.

We're about 15% above our pro forma rents, which were in the mid-$40s triple net, and we again are projecting a low 7% return on cost. Here, the cost is about $700 a square foot. Just to give you a reference point, the last major sale in San Francisco was 101 Second, which sold for $767 a square foot, a sub-4% NOI return.

Activity at Embarcadero Center is pretty limited, given that we are 95% occupied. We did about seven deals this quarter, totaling 50,000 square feet, and a few more over the last few days in April to add 20,000 square feet of additional leasing. We continue to market the three full-view floors at EC4. Those are at the top of the building, and while we're in discussions with a few tenants there now, we don't expect any 2014 revenue impact. Most of the tenants will have rent commencement in 2015.

Net rents in our second-generation statistics in the supplemental shown an increase of about 18% on leases that commence during the quarter, which is in line with what we have anticipated, which is about a 15% to 25% markup on any individual lease.

Down in the Valley, our activities in Mountain View have continued to be very strong. At Mountain View Research, we signed 169,000 square foot of tenants. Rent is in excess of $32 triple net, and we have another 60,000 square feet in active negotiation. And we have leased all of the available space at our El Camino office building in Mountain View, where rents are over $43 triple net.

Activity at Zanker Road in north San Jose, however, has been limited, and that's where our largest availability is today with its 437,000 square feet.

Shifting to DC, we purchased a 50% interest in a future development site at 501 K Street from the Steuart family and we have commenced design and permitting on a 520,000-square-foot office building. We have actually taken a different approach to the building by responding to the high-performance workspace needs of both the traditional DC users, i.e., law firms and the GSA, but also technology and non law firm users, by adding large collaborative gathering areas throughout the building. We have four or five different two-story spaces that we've been able to create, which could or couldn't be used, depending upon the various uses of the tenant, that really make the building a different kind of building.

The city is aware that it needs to expand its job generators, and we are designing a product that might attract this new user.

We're also moving forward with the permitting of a 276,000-square-foot office/retail building in the urban core of Reston Town Center, the strongest market in the Reston area and the strongest market in the DC area, as well as two additional residential buildings. We have about 25,000 square feet of additional retail space that will tie right into our Reston Town Center retail. That's the site that we purchased last year called the signature site.

The earliest construction commencement will be in the third quarter of 2015 for any of these new Reston transactions. We're in the midst of leasing at The Avant in Reston, which opened in December, and as of the end of last week, we have leased 100 out of the 359 units there.

The bulk of our DC regional growth has been concentrated in Reston, which continues, as I said, to be the strongest submarket in the region. Our largest near-term lease in Reston is a rollover with the GSA, and they have already notified us that they intend to extend that 261,000-square-foot lease, which expires 12/31/2014.

We're in this awkward position of having 4 million square feet of office space and no inventory. We actually have a few tenants within the portfolio that have, for various reasons, put some sublet space on the market, and much of our activity is actually responding to inquiries on this space from tenants that are interested in direct deals or sub extensions. Again, rents in Reston are $15 to $25 per square foot above what you can get on other buildings on the toll road.

The downsizing of the legal firms and the GSA densification continues to be an issue in the DC market. We talked about it before and we will continue to talk about it. We have limited 2014 exposure, but we do anticipate some churn in our DC assets with large law firms that have entered into discussions with our -- and we have entered into discussions with our legal customers for our 2015 to 2019 expirations about some space takebacks and long-term renewals. Some of these transactions could affect our earnings in prior years for the actual lease expirations, a.k.a., potentially next year, 2015.

I also want to reiterate what we discussed last quarter, which was 8% of our total Company NOI comes from the CBD DC portfolio. The majority of our Washington, DC, regional NOI is generated in Reston. The CBD portfolio continues to be 95% leased.

Turning to New York, our first-quarter New York City activity on the in-service portfolio was really a continuation of what we have been seeing over the last year. We completed 24 transactions, totaling 537,000 square feet in our operating portfolio, which, by the way, now includes Princeton and there were three deals in Princeton, totaling 239,000 square feet.

We did seven more deals at 510 Madison during the quarter and we are currently in lease negotiations with two more tenants on two full floors and two more prebuilt suites. If we complete these deals, knock on wood, which we hope to do, we will have one available full floor to be 95% leased at 510 Madison. The information in our supplemental, by the way, only shows leases that have actually commenced, which is why the number is a little bit different.

Rent doesn't necessarily commence until 2015 on some of these floors, so much of the leasing we're doing right now really won't impact our 2014 revenue.

At 540 Madison, we have completed three more deals, leaving only 33,000 square feet of availability at the base of the building. Demand from the high-end financial services firms continues into 2014, which is what Owen was referring to when he said we were feeling good about the midtown market, and the best spaces are becoming more limited, allowing us to maintain or marginally increase our pricing on some of the smaller suites.

We completed three office extensions at the General Motors building this quarter, including one expansion in the upper third of the asset. In July, we will be getting back the 26th floor, and we intend on demolishing it and offering it as a full floor on a -- or a partial floor basis. We are now documenting a 15-year extension with Apple, taking their lease out until 2031 down at the retail. They will also be expanding their concourse space by adding some currently landlocked units that really are not in service, which may allow them to expand their selling area as well. Cartier is now open.

In total, the retail space at the General Motors building, including our stores on Madison Avenue, currently generates $61 million of revenue on 100,000 square feet, including the Apple concourse and the FAO second-floor and concourse spaces. FAO's lease expires in early 2017.

Morrison & Foerster moved into physical occupancy at 250 W. 55th a few weeks ago, in addition to a few prebuilt tenants on the 16th floor. Last quarter, we reported the signing of our lease with Soros Fund Management. This quarter, we completed five more deals, totaling 55,000 square feet, and last week, we signed an 85,000-square-foot lease with Al Jazeera Network for some of the ground floor space, the entire second floor, and a tower floor.

We have four additional transactions in lease negotiation, totaling another 25,000 square feet. To date, we have leased 721,000 square feet, and with the pending transactions, we get to 746,000, or 75% leased. We continue to have an active pipeline of one- and two-floor prospects that continue to tour the remaining space, as well as users that are looking at our few remaining prebuilt suites.

At Carnegie Center, we continue to gain both occupancy and extend leases. As I said, during the quarter we did three more leases for 239,000 square feet. In New York City, not unlike DC, we were actively engaged with a number of our large law firm tenants regarding space utilization, redesign, and extensions. We have five such discussions underway, which could involve transactions well before lease expirations in 2015 and beyond.

In addition, we have received notice from Citibank that they are terminating 174,000 square feet at 601 Lexington Avenue in 2016 with the right -- and we have begun to market that space today.

Our development activities in the Boston region are continuing to advance. At the Prudential Center, we're negotiating a lease with an anchor tenant for the base of 888 Boylston Street, our 365,000 square feet of office space, on top of 60,000 square feet of new retail space at the Prudential shops. This is a $275 million project, including all carry and land at current market value, that we expect to commence in the third quarter. In addition, we are planning a complete renovation and modest expansion of our quick-serve food operations, a.k.a., our food court, and potentially adding a 17,000-square-foot second-story addition to a portion of our Boylston arcade.

These two retail projects have a combined cost of between $30 million and $40 million. We anticipate temporarily closing down portions of the retail during the latter parts of 2014 and most of 2015, and that will impact our revenue and is built into our projections.

In Waltham, we're negotiating an anchor lease for 10 and 20 City Point, our 446,000-square-foot two-phase development. 10 City Point is a 230,000-square-foot office building with 16,000 square feet of retail and a project cost of about $108 million, and the tenant will take more than half of the office space.

Just down the street, we have also completed entitlements for a 16,000-square-foot standalone retail building with future residential or hotel capacity that we are not planning on for a while. We have two restaurant leases under negotiation for that small -- what we refer to as the stack. While this is a small $12 million project, it's an important element in creating a stronger amenity base and sense of community for City Point, where we currently have 516,000 square feet of existing office space; over 1.2 million square feet of additional office density, including 10 and 20 City Point; as well as our other 1.3 million square feet of existing assets at this critical interchange in Waltham, Massachusetts.

In Cambridge, we are busy designing our new residential building likely to start in the first or second quarter of 2015. In addition, we have -- to our new residential project, we're working with the city on our 600,000 square feet of additional office density and 400,000 square foot of residential density at other sites in Cambridge Center. In the meantime, we have completed additional early renewals at 5 Cambridge Center and 10 Cambridge Center, totaling 223,000 square feet. The combined markup on these leases is 50% on a net basis.

In the Back Bay, we completed 50 -- 90,000 square feet of renewals at the Hancock Tower and 82,000 square feet of renewals at the Prudential Center during the quarter. And over the last few weeks, we've completed another 140,000 square feet of long-term relocations and renewals at the Hancock Tower.

The suburban office market continues to be really active, as Owen suggested. Large blocks of space have disappeared, forcing larger tenants to consider new construction, such as our anchor tenant at 10 and 20 City Point. Rents in Waltham were up another 10% during the last few months and are over $40 a square foot for any new construction. We completed 290,000 square feet of leases in Waltham and Lexington this quarter, and we continue to see strong activity in our Waltham assets, with much of it continuing to be from expanding life sciences and tech companies.

You might have noticed the negative second-quarter stat in our supplemental for Boston, and there is a simple explanation for this. Included in these figures is a 75,000-square-foot 10-year lease extension that we actually completed in 2010 at 111 Huntington Avenue that is just commencing. If you eliminate that transaction, the net goes from a negative 13% to a positive 4%.

So as Owen stated, as we head into 2014, our investment activities continue to be focused on our active development pipeline. It was a great, great quarter in advancing our development activities, and we look forward to additional announcements in the quarters ahead.

I will end my formal remarks and I'll turn the call over to Mike.

Thanks, Doug. Good morning, everybody.

As Doug mentioned and Owen mentioned, we are delighted with the opportunity to expand our relationship with a tenant of the quality of Salesforce.com. Whenever we are engaged with a prospective tenant, we conduct a thorough credit review to ensure our comfort with the ability of the tenant to perform over the term of the lease and with our tenant-specific capital investment.

In the case of Salesforce.com, we have a company that has matured into a force in the customer relationship management software business. CRM software is utilized by companies to manage their sales process, client communication, and marketing. It is an integral component of sales platforms. It creates a sticky annuity-like revenue stream for companies like Salesforce.com.

And Salesforce.com has increased its market share significantly over the past few years and is now a clear leader in the industry. They have hundreds of thousands of unique customers across the globe. The company's sales have been growing at a 30% annual clip and last year totaled $4 billion, with revenue guidance given for next year of over $5 billion. Although GAAP profitability is below breakeven as they reinvest in R&D and they're growing their headcount, the free cash flow has been growing and is in excess of $500 million a year, and they maintain a strong balance sheet.

As we track the leasing activity in San Francisco, many of the technology companies that are driving the demand for office space are more mature, higher credit companies, which we think bodes well for the continued strength of the office market. In addition to companies like Salesforce.com and LinkedIn, whose expansions have been widely covered, others, including Google, Adobe, Autodesk, Macys.com, Riverbed, Trulia, Amazon, athenahealth, and Visa, have also expanded in the city.

Clearly there continue to be startups and other early-stage companies in the market as well, but the plethora of more mature companies differentiate this cycle from past cycles.

During the first quarter, we repaid our $747 million of exchangeable notes and paid a special dividend of $2.25 per share. Our cash position is now $1.2 billion and is the primary source for the funding of our growing development pipeline. With the addition of the full cost for Salesforce Tower, our development pipeline now stands at $3.2 billion, with $1.4 billion of costs remaining to fund over the next few years. With our strong cash position, we do not anticipate raising additional debt or equity capital this year, although, as Owen mentioned, raising capital through asset sales remains likely.

We do expect to extend and reload our ATM equity program this quarter, as it expires in June, although we have no immediate plans to use it. As our development pipeline comes into service over the next few years and we gain the revenue contribution from the assets, our operating cash flow will grow significantly.

Our portfolio continues to demonstrate strong performance, with first-quarter same-store cash NOI up by 5.6% and GAAP NOI up by 2.3% from the first quarter last year. The improvement is across the portfolio and is the result of free rent burning off on a few large leases, as well as over 60 basis points of portfolio occupancy improvement, mostly in Boston and New York City.

As we anticipated and discussed on our last call, our occupancy dipped slightly from last quarter to 92.4% today, due to the move outs that Owen mentioned in Boston, as well as Lockheed Martin moving out of 165,000 square feet at Zanker Road in north San Jose.

Turning to our earnings, we reported funds from operations for the quarter of $1.20 per share, which was $0.01 below the low end of our guidance range. Our revenues were in line with our expectations. The driver of the variance was approximately $2 million of higher utilities and snow removal expense related to be unusually cold winter in the northeast with above average snow.

In addition, our G&A expense for the quarter was above our guidance, due to some staffing changes that accelerated compensation expense into the first quarter. In the quarter, we reorganized our Princeton region to report under the New York region, and as a result, we no longer will have a regional manager in Princeton. For the full year, our G&A guidance is unchanged.

As we look at the rest of 2014, and as Doug described in his comments, we have pockets of high-value available space in Boston at the Prudential Tower and 100 Federal Street. In San Francisco, we have three full floors at Embarcadero Center, and in New York City, we have available floors at 250 West 55th Street and in our Madison Avenue building. While marketing of the space is active, most tenants are looking for space for 2015 delivery, so we don't anticipate an economic impact from leasing the availability this year.

In Washington, DC, and in Reston, we're virtually fully leased.

In the suburban portfolio, we have good demand in suburban Boston and we are now 86% leased, up from 78% a year ago. We have one large block of space left at Bay Colony, which is under negotiation for a 2015 occupancy, with the remaining availability in smaller units. In suburban San Francisco, we have good activity in Mountain View, but the majority of our availability is in north San Jose and south San Francisco, where the market is slower.

Similarly, activity in the suburban DC markets in Maryland and in Springfield, Virginia, are slow, and we don't project positive absorptions this year.

So based on the timing of our lease-up projections, we're really not anticipating meaningful improvement in our occupancy for the rest of 2014.

The renewals that Doug discussed in Cambridge, as well as a 100,000-square-foot renewal in the upper half of the GM building, all with positive mark to market, will show up in our straight-line rents and positively impact our same-store GAAP NOI. Our projection for 2014 same-store GAAP NOI is an increase of 1.75% to 2.5% over 2013. This is an increase of 50 basis points at the low end from our guidance last quarter.

Our non-cash straight-line and fair value lease revenue for 2014 is projected to be $88 million to $98 million. Our 2014 cash NOI projections are unchanged from last quarter, and we've projected strong 5% to 6% improvement from 2013. This growth equates to $60 million to $70 million of incremental cash NOI for the Company.

In our development pipeline, we have made progress in our leasing. Our 4 million square-foot pipeline now stands at 67% leased. The incremental contribution to NOI from our developments in 2014 is projected to be $28 million to $30 million.

Now, the 2014 contribution is muted by the timing of our deliveries that come into service later in the year. And in addition, 250 West 55th Street and The Avant are still leasing up. The contribution in 2015 from these properties will be significantly greater.

When stabilized, we expect our pipeline to generate meaningful earnings growth, with a projected first-year stabilized cash return between 6.5% and 7% on $3.2 billion of total investments.

We project our hotel to generate modest improvement from our prior guidance and project its contribution to our 2014 NOI to be $13 million to $14 million. The contribution to 2014 FFO from our unconsolidated joint ventures is in line with our prior guidance, at $29 million to $34 million. We project development and management fee income for 2014 of $19 million to $22 million, also in line with last quarter's guidance. And as I mentioned, our full-year G&A projection is unchanged. We anticipate 2014 expense of $100 million to $104 million.

We expect a reduction in our interest expense in the second quarter, reflecting the payoff of our $747 million exchangeable note issuance. However, our interest expense run rate will increase in the third and fourth quarters as we cease capitalizing interest on 680 Folsom in the second quarter and on 250 West 55th Street in the second and third quarters.

Overall, we project net interest expense for the full year to be $446 million to $450 million and include capitalized interest of $52 million to $56 million. This is modestly better than we projected last quarter.

In summary, we are modifying our guidance range for funds from operations to $5.25 to $5.33 per share. This is an increase in our guidance of $0.025 per share at the midpoint and reflects a combination of improvement in projected same-store portfolio NOI and lower interest expense.

For the second quarter, we project funds from operations of $1.32 to $1.34 per share. We have not included the impact of any potential acquisitions, dispositions, or new development starts in our guidance. As Owen mentioned, we are likely to execute on the sale of multiple assets later this year that would result in a loss of FFO, but the exact timing and magnitude are still uncertain.

In addition, we anticipate being in a position to commence the development of a couple of new development projects in Boston that could impact our capitalized interest projections.

That completes our formal remarks. I would appreciate it if the Operator would now open up the lines for questions.

(Operator Instructions). Michael Knott, Green Street Advisors.

Doug or Owen, just curious if you can talk about, in the context of flat occupancy for the rest of this year, just your thoughts about reaching where you guys normally are in, say, the mid-90s as opposed to where you are at today over the next couple years?

You mean, the total portfolio?

Yes.

Honestly, I think that given the churn that we have within our portfolio on some of the larger transactions in Washington, DC, and the transactions I described in New York City, where for the most part the majority of the these large law firms are going to be giving back space, I would expect that the ability of us to push occupancy in the short term, i.e., 2015/2016, is going to be challenged, and I think we're probably going to be pretty close to where we are today, which is, what, 93% to 95%?

[92% to 93%].

Yes, 93% to 95%. I think that's where you're going to see us cap out at. You're not going to see 96% or 97%.

And then, can you also talk about the prospects for the rest of your space at Salesforce Tower and what the timing might be on when we might see you ink additional deals there?

I will just make the following comment, which is we have an active group of tenants that are in the market looking for space. As I said, we have one of few blocks of available space that has -- now has a certain delivery date. We are adjusting and thinking about our approach to the market vis-a-vis pricing and timing, and we have proposals outstanding, but there is no other transaction that we would consider imminent.

Okay, and then last one for me. It sounds like San Francisco is still on fire with lots of demand. Are you guys at all concerned with the recent [thaws] in the NASDAQ in some of the high-flying tech stocks?

I think, and I will let Bob describe the leasing activity, and as Mike suggested, the majority of the demand right now, Michael, is from what I would refer to as non-high fliers. These are companies that have pretty solid revenue opportunities and actual business on their books.

As an example, LinkedIn being the largest new user in San Francisco, that is a pretty -- what I would refer to as a utility right now for corporate America. And with some of the other larger requirements that are out there, these are not companies that are creating business models with lots of ideas and relatively little revenue. There is lots of revenue and lots of reinvestment. And that is what is driving their need for space and their R&D.

Bob, I don't know if you have any other thoughts.

Yes, I would just add that the activity that we are seeing both at 535 and at Transbay is pretty much evenly split between tech and financial services and law firms, so we are not just dependent on tech to keep this market drive.

Thank you.

Jordan Sadler, KeyBanc Capital.

I wanted to just come back to a comment, Owen, that you made in your opening remarks about interest rate expectations and how they are shifting, or at least the prospects for rising rates seem a little bit more benign, I think you said. Is that shifting at all your view of the environment in terms of what you are looking to do, be it on acquisitions versus dispositions?

I think forecasting interest rates is a perilous duty, needless to say. But I do think that the common logic that interest rates are going to rise as they did last year in the short term, I do think that concern has abated somewhat.

I would say our overall view at Boston Properties is that we will someday face rising interest rates. It's just it seems like that has been put on hold, given what has occurred this quarter and given the sluggish economic growth that continues.

I wouldn't say that it has shifted our approach. We -- our capital strategy, as I described, hasn't really shifted.

I would say one thing that perhaps has shifted over the last quarter, I think in the private market for assets in our core markets, that has probably gotten more elevated over the last quarter. We are seeing the pricing for trades going up and certainly the number of investors that are trafficking in the market, we think, is going up as well. So I don't think -- to answer your question in a sentence, I don't think we have changed our approach.

And Jordan, I would add the following, which is Boston Properties has not traditionally been what I would refer to as a spread investor.

We have had a long-term perspective on all of the assets that we've purchased, and so we really look at the overall economic characteristics of the rents in the building and how that building is being positioned and what spaces we're buying or building that building into. And the fact that lots of folks are looking at the opportunities to invest capital in real estate today because they can finance very cheaply is driving that, plus the lack of yield anywhere in the world economy is driving dollars being allocated to our kind of real estate and the kind of things that we would want to buy.

So I would say that, to be consistent with Owen, it's becoming more competitive and more difficult for us to underwrite acquisitions today, and so I guess the tit for tat on that is that we are probably a little bit more inclined to be sellers than we are buyers, largely due to where interest rates are, and we have seen, as Owen said, the bids for high-quality real estate, and particularly the large bulky assets, continue and get stronger, not weaker.

Okay, and then as a follow-up, the discussions surrounding the law firms in your portfolio, both, it sounds like, in DC, as well as maybe Boston, or DC and New York, I think, can you maybe just give us a little bit more color in terms of what the potential impact might be, how they are looking to -- and how they are looking to shrink, and where we are in this -- the evolution of what law firms are doing? At least within your portfolio?

So I guess I will answer it in two different ways. Any law firm that's installation is more than seven or eight years old probably has had a different view on how that space should be laid out, as well as how they are organizing their workforces.

And so as those leases are expiring, they are looking to become more efficient and change the utilization, and that's creating some incremental additional capacity or organic supply to come onto the marketplace.

I also think that there are certain areas of the legal industry that are seeing less in the way of growth opportunities, a.k.a., bankruptcy, right? So there are fewer transactions, and that is leading to some shrinkage in some law firms just to what their overall business is. So both of those things are going on.

I think that we are probably in the fifth or sixth inning of the densification portion of this, and some law firms, in fact, are actually growing on a marginal basis because they are getting bigger from a number of partner perspective because they are taking partners from other firms or there is still consolidation going on, but net net, there are more firms that are getting smaller than are maintaining their same size.

I would just add, Doug -- this is Ray Ritchey, that we've also been very much the beneficiary of this movement. Arnold & Porter coming to 601, the activity at 250 West 55th, 500 North Capitol, 2200 Penn, obviously Embarcadero Center with some recent moves there, we've been very much the winner in that dynamic, as well as facing challenges in our existing portfolio. So it's also been a good thing for us.

Okay, thank you.

George Auerbach, ISI Group.

Doug, Owen, just a question to your platform about asset pricing. How meaningful is the impact of more foreign or cross-border buyers on IRRs in your market? It seems like on recent tours of DC and the west coast, it has been surprising how much greater the cross-border activity is today versus in past cycles. Just wondering how you think these and other all-cash buyers are influencing IRRs and cap rates?

I think it's meaningful. The buyer interest in assets in our core markets is not exclusively offshore buyers, but I think the flows are certainly increasing from non-US buyers, sovereign wealth funds, pension funds, other pools of capital, Asia, Canada, Europe, Middle East. I think it's a major force in the marketplace.

I hate to ask you to ballpark it. Last six months, all-cash return hurdles were down 50 basis points?

I just want to say one thing, which is that not all of these buyers are all-cash buyers. I think they're prepared to make all-cash bids, but many of them are low leverage buyers, and whenever we have a conversation with one of the advisors, a.k.a., the Eastdils or the CBREs or the HFFs or the JLLs, name your advisor, they are always quoting the leveraged returns that they believe that these various capital pools are expecting to achieve with a low leverage loan.

So while there are certainly some that are prepared to do it on an all-cash basis, most of them, I think, are still looking at using and utilizing the opportunities in the debt side to enhance their returns, and I think those numbers on a leverage basis are somewhere in the low 7s to the low 8s, depending upon the asset itself.

Helpful. Last one for me. I know you build projects when it makes sense to, and not in terms of investment dollar amounts, but given the pipeline of new opportunities that you laid out in your comments, Doug, how should we think about a reasonable amount of new starts for the Company over the next six to 12 months?

I think in the next six to 12 months, there is probably somewhere in the range of $500 million of new starts.

Thank you.

Michael Bilerman, Citi.

I just wanted to come towards funding in terms of the pipeline, so you have the $1.4 billion that you now have committed for the current development pipeline, $1.5 billion of potential future development, Doug, which sounds like $500 million would start potentially this year. You are obviously in an unbelievable capital position with $1.2 billion of cash, potentially $1 billion of sales underleveraged. You can go tap construction loans if you wanted to.

I'm just trying to get a sense of does common equity ever enter the equation at all in your mind? I know LaBelle said that there is no debt or equity this year, but I'm just trying to get a picture of what the future may hold in terms of funding what will be $2.5 billion of future development.

I will answer the question in the following way. Our current pipeline and our current business plan in terms of the asset activities that we have on the table don't contemplate the need for raising any additional equity.

That does not mean that something different might not occur over the next three months, six months, nine months that would be a transaction that would be transformative in some way, shape, or form that would not necessarily require that we do have some sort of an equity component to it. So, the current business on the books does not necessitate any additional common equity.

The other thing I would point out is that I mentioned we have a $3.2 billion development pipeline with $1.4 billion left to fund. So we have $1.8 billion that's out the door not generating any cash right now. And that's going to delever us pretty significantly.

You mentioned our low leverage already, but it will continue to go down as these -- as 250 and The Avant and 680 Folsom start generating cash flow in the next six to 18 months, which provides us with capacity to use that if we need debt to fund the additional pipeline.

I guess the only other thing I would say is, because there are some deals that we are looking at right now, there are some potential sellers that would do things on a, quote unquote, OP basis that might suggest that we have a de minimus amount of equity that is associated with any one transaction, but that's really part of the structuring mechanism that we would use to be successful with the acquisition.

I think, Doug, you talked about it's more difficult to underwrite acquisitions, and so I'm just curious in terms of that pipeline, it sounds like, on a wholly-owned basis, but whether you would find that a capital partner would want the sponsorship and the operating expertise for you to come in in a joint venture where maybe they're a 45% owner or greater, but would want BXP to join them in a large-scale acquisition of a portfolio. Is that something that we should think about that you would be interested in doing?

Look, we're open minded about acquisitions in our core markets and in, obviously, other places that would have this -- a similar profile from an operating-platform perspective. I think there are relatively few large portfolios like that.

There's a lot of talk right now about the portfolio in Boston that is being considered to be sold, which is somewhere, I guess, in the neighborhood of a $2.5 billion to $2.6 billion portfolio, and it's not something that we've spend much time on because we like our position in Boston, we like our pricing in Boston, and it's not a portfolio that we necessarily think will be additive to our business plan. So, it would have to be something that would be very unique.

And then, just a last question, you talked about the occupancy trends. Can you talk a little bit about mark to market on the rollovers if you look at the remaining 2014, 2015, and 2016 rollovers, both from a price per foot that is expiring, but the mix is very different? So if you look at your 2015 roll, 30% is in New York and San Francisco, and you look at the 2016 and all of a sudden that jumps to 60%. I am just curious as we think about what is expiring over the next almost three years, how should we think about the potential upside in those rents?

So as I recall, and I don't have all the figures right in front of me, but that in 2014 and 2015, the majority of our roll is below market across the portfolio.

As you get into these transactions that we are going into that could be what I would refer to as early renewal and potential takebacks, some of those transactions are closer to market, and in certain cases in New York City, in particular, they are slightly above market. So I think that it's the 2017-ish area is a little bit more muted, and although we have a lot of San Francisco exposure in 2016 and 2017 and all of that exposure is somewhere between, as I said before, 15% and 25% below market, so it really enhances that.

And we just went through our Cambridge portfolio. The mark to market was 50%. We do not anticipate a 50% markup on a net basis. We were anticipating a markup that was 20% to 25%. The market just exploded. And so, if we have continued -- continue to see those types of changes, I think we will be in a terrific position.

Thanks for the color.

John Guinee, Stifel.

I'm just going to -- get your pencils out -- I will give you a bunch of real quick questions. First, Patriot Ridge and Zanker Road were two examples of when the primary tenant moved out, gutting it, the buildings, down to the steel, I think, and starting again. Do you have any more of those functionally-challenged assets in the portfolio? That's question one.

Question two, what you have implied here with the asset sales and redevelopment dollars redeployed into development is either a special dividend or a dividend increase, assuming the tax basis is fairly low. Can you discuss that?

And then, three, can you briefly discuss just the capital staff on the Transbay? Are you putting up 100% of the dollars for effectively 100% of the economics, or is it 95%/95%, or how does that all lay out?

I'll start with the third one first. So, we are 95%/5% partners, and we are responsible for 95% of the capital and Hines is responsible for 5% of the capital.

Right now, our view is that we are going to fund it with internal proceeds from our cash flow and our existing capital, and so there is no change in that. It is fair to say that it's a building that we could put a construction loan on, but it's really -- it's not something we're thinking about at the moment.

With regards to the second question, or the first question, which is regards to assets that are, quote unquote, repositionable, I think the one area that we are looking at where there might be some additional stuff like that is, interestingly, our single-story stuff in VA 95. That's a park that has primarily been leased to the GSA and contractors of the GSA for, I don't know, Ray, 25 years?

At least.

And so, as those buildings roll over and the GSA consolidates and densifies, some of those buildings probably have a repositioning opportunity and may need it in terms of being, quote unquote, acceptable to the market because nothing has been done to those buildings for quite some time.

But interestingly, John, we have actually quietly gotten rid of a lot of our other similar buildings to the stuff at -- it's Patriots Park, not Patriots Ridge, and Zanker Road over the last few years, and the Boston portfolio, as well as in Maryland. And so, those opportunities are few and far between.

And then, the dividend question is one, unfortunately, I am going to have to take a pass on because the actual size of the sales, the various tax bases of the assets, are so different for the various things that we are looking at that it's too hard to give an honest answer to whether or not we would have a special dividend or we would have an increase in our dividend. I am assuming that most of the assets that we are considering selling have a relatively low basis, so that the pattern that we went through in 2013, which was at the end of the year, to see if there were opportunities to deploy that capital into new acquisitions or new developments would be the first alternative, and to the extent that we can't do that, we would have a dividend opportunity that we would announce towards the end of the calendar year.

Great. Thank you very much. Well done.

Vance Edelson, Morgan Stanley.

Terrific, thanks. On the pricing per square foot for Salesforce as a tenant in the new tower, how do you think the price point you mentioned in the 50s compares to what you would have achieved if you went through the longer and potentially more arduous process of leasing floor by floor? Presumably there is some sort of volume discount, so can you talk about what you were willing to offer in order to secure such a great tenant?

So, we think the low 50s on a triple net basis was a good market deal. Interestingly, the way the discussions went, the tenant grew over time, and as the tenant grew, they got higher in the building, and we felt as you moved up the building, it was worth more or had a higher price associated with it.

I honestly don't believe that we would have achieved necessarily a premium if we did it on a floor-by-floor basis. The one thing that we did do as part of the transaction, and you can think about how you might value this in lots of different ways, and I'm not going to try and put a number on it, is that we did offer Salesforce the ability to name the building the Salesforce Tower. And that was -- we viewed as a very important element for them and one that we think was baked into the overall economics of the transaction.

So I would say that there may not have been a discount, per se, associated with the rents that we were achieving on the lower 714,000 square feet of space, but that other attribute of the transaction was important to them and it was something we were prepared to throw into the pot.

Okay, that's helpful. And then related to that, have you noticed any uptick in the interest level amongst other prospective tenants since you announced the good news with Salesforce and since you named the tower? Is their very presence a key selling point? Does it create any sort of buzz for the remaining space or would you say that any uptick in interest is more related to the simple fact that you're going forward with the project now?

Bob, you want to take that one?

Yes, I would say that from a standpoint of perception in the market, the fact that we're going forward is a big plus and it clearly has generated interest from tenants that were not looking at the building previously.

Okay, that's very helpful. Thanks.

Jeff Spector, Bank of America Merrill Lynch.

This is actually Jamie Feldman. You guys are in a unique perspective that you can see what the different tech demand looks like across San Francisco, Boston, and New York. So I guess my first question is just can you talk a little bit about what they're doing in their space and how it differs by market? And along the same lines, as you look forward, where do you think you will see the best growth across those three markets?

Okay, I am trying to think about the best way to answer that question for you, Jamie. So why don't I do the following? Why don't I ask John Powers to talk about what's going on in New York City? And then, Bryan, you can give a quick summary of what you see particularly on the biotech and the life sciences side in Cambridge, and then, Bob, you can talk about San Francisco.

This is John Powers. Tech here has certainly grown in the last four or five years, particularly, but defining tech in New York is, I think, a little different than San Francisco because we have a lot of mature tech companies here, too.

Overall, they are not a big player in the market, the whole tech sector, but the growth has been very outsized. And it's been primarily in the midtown south area. So we have some conventional technology companies that utilize traditional space, but we also have the WeWorks and the other high-tech companies that are predominantly in midtown south.

Yes, this is Bryan speaking for Boston market. I think what we are seeing, which is really interesting, is we are seeing a little bit of a bifurcation of our tech tenants looking for different types of talent, and Doug mentioned earlier the growth that we have seen recently in Waltham, and I think that's really indicative.

They are looking for an engineer or programmer that could be a little bit more mature, call it in the family formation part of their life, and they are looking for those school districts, and that's been a big benefit for the Waltham market, where you have seen this big decrease in vacancy over the last quarter, and it's been really relatively quiet because there's been so much news about, call it, the drive for urban.

We continue to see our urban tech tenants in Cambridge, their talent that they are searching for is younger, more millennium, and we see it in terms of the types of space they are looking for as well.

Doug mentioned biotech. That's a sector that we are continuing to see strong, strong growth, great customers, for example, like Biogen, and yesterday, we were just at an event where we are opening up the Broad Institute building that we did with them, and I think it's indicative of what's to come.

In San Francisco, I think there has been a fundamental shift in the last five years as far as tech, where they used to be in the Valley and maybe had a satellite office in San Francisco to now where you're seeing them do a wholesale move and have a satellite office down in the Valley with their headquarters in San Francisco.

I think you also have to differentiate between what we refer to as mature tech tenants versus some of these startups. I would use the example of both Macys.com and Riverbed that wanted to be in a real office building with real amenities and has the power and the HVAC capacity to have a density of seven or eight people per 1,000 square feet, which in fact we have with both of those tenants in our building, versus the brick-and-timber building.

And I think both Trulia and Salesforce validate that these Class A newer office buildings will attract tech, as well as [firia] type tenants.

So just to conclude the comment, Jamie, I would say that you have to put it all together in terms of the way they are using their space and the way that the space is being built out or what is attractive to them.

I think the individual buildings share a few common components, which are they are adaptable to open-space usage with a limited number of impediments, i.e., columns. They have really great light and air, so they either have high-volume ceilings or they have high, large window exposures that will bring light into the space, because if you don't have -- if you have lots of people in there and you have got a very deep floor, you want to make sure you have lots of light and air.

And then, they are, for the most part, being amenitized with lots of food and eateries and other sort of smaller conveniences for those tenants on any individual floor.

But that in itself is not necessarily the most critical component. In some of these markets, it is a question of where it is physically located and where the cool happening place might be, which is why we see what's going on in midtown south occurring, and a lot of those buildings are not buildings that are ideally suited to high density, great space. These are all -- many of these buildings are older, prewar buildings that happen to be near Gramercy Park and near Union Square and they happen to be on the L line where all the people are living.

And so, it's a clear indication that the physical location is equally as important as the overall space, and honestly, I think if you said which one was the priority, it's where it is and then what it is.

Okay, that's very helpful. I guess what I'm trying to get a little bit more at is just the functionality in the different markets, so if Google is leasing space in all three, what are they doing in the different three markets, and then how does that help you think about where they may grow the most going forward? Or is it safe to assume if the companies are in San Francisco and they're going to grow, they're going to grow most in San Francisco?

I think it's a question of the maturity of the company and how they got to where they are. So Google in Cambridge, as an example, they acquired ITA, and ITA was a critical component to their travel business, and so it's also been a magnet for other types of acquisitions in the Boston area.

Similarly to what Google did in New York City, it's both an engineering hub, as well as a sales hub, and I think a lot of these younger companies over time will potentially run out of resources, i.e., the critical component, which is the human horsepower to run these businesses, and they're going to look for the places in the world where other people of a similar -- with similar characteristics are currently working, and those happen to be places like Cambridge and like Boston and New York City and San Francisco.

I have said this before. One of the things we watch on a quarterly basis is where the new capital is being invested on the VC side, and if you look over a long period of time, the two powerhouses have been the Silicon Valley in San Francisco, way above everyone else, and Boston/Cambridge second, and over the past five to six years, New York City has become the third critical hub of that venture capital investing, particularly in the technology and the biotech life sciences world.

And those three areas are where there is clearly a knowledge base of workers that are the horsepower behind these businesses' growth.

One further comment, Doug, is just your comment on place. Once the place is determined, you take an example like Biogen.

There is, we think, an increased conscious regard for the design of the space, and Biogen is a good example of -- a recent building we did with them. There is just a higher thoughtfulness on how the space was designed, how the associates are working together for just greater productivity and innovation. We continue to see that grow with the more, call it, tech sector and then the biotech, for sure.

Okay, thanks. And then, I guess, just finally on the same topic, if you think about what happened in San Francisco, which is first they wanted the brick and timber, and now they are more in the modern, urban campus type buildings. If you look instead New York where midtown south is obviously pretty full at this point, what feels the most to you -- which submarket feels the most to you like where they may want to expand next? Right now, they're looking at near Transbay and the urban campuses.

John, you want to take that one?

Sure. Clearly the midtown south market has been the hottest market, and as Doug said, the product there is not exactly, for the most part, the product that they want. So we have seen the few buildings in Brooklyn have a lot of activity and we think that will be leased up over the course of the year.

Pricing in downtown has also moved up significantly in the first quarter, and a lot of repricing in downtown, as tech companies or TAMI companies that are getting priced out of midtown south as the tech companies take the space are also moving to downtown. We have also seen some moves towards Midtown.

So I think the tech driver in the midtown south is forcing a lot of decisions as the prices have gone up in that market.

All right, thank you. That's all helpful. Just one more follow-up. You had mentioned Citi giving up space at 601 Lex. Did they say anything about 399 Park or is that still up in the air?

No, our expectation is that they will leave 399 Park. They did their deal downtown on Greenwich Street. They are in a planning mode this year to sort out where all the people go when it is all done. They will probably be in construction for two or three years there to move everyone, and our expectation is that they will leave 399, but not the branch.

All right, thank you.

Alexander Goldfarb, Sandler O'Neill.

Owen, if I heard correctly in your opening comments, I think you said you are looking at a potential of $250 million of potential deals. Just want to get a sense, is that a gross number? Is that just BXP's equity, or are most of those development sites so that's really land we are talking about, so it could be something more than that?

No, my comment on the $250 million was on acquisition. So what we have been saying, what I have been saying over the last few quarters is the acquisition market has been very competitive and we are finding it more challenging, although we are trying. And my point was is that over the last quarter or year to date, we have made proposals on various acquisitions that on a gross basis are $250 million. And those situations, several of them, are not resolved at this time.

Are those development sites, so those are (multiple speakers)

No, these would be acquisitions of existing buildings. The developments I dealt with separately with all the figures that I went through.

Okay, okay. And then for Ray, just a bit more color on 501 K. Are you getting more enthusiastic about putting more dollars to work in DC, or is this just a neighborhood play where you see there is likely to be a shift towards this neighborhood and therefore this is a good opportunity?

Alexander, as you know, this is the site directly across the street from 601 Mass where we are building Arnold & Porter. It's now a block away from where it looks like Venable is going to move their headquarters. It's clearly -- it's two blocks away from Hines' City Center.

And as Doug talked about, we have a full city block. We talked about a building that's 520,000 square feet. The density is actually closer to 560,000 or 570,000, and we're adapting a strategy there where less is more, and we are designing a building that we think is unique in the market, but not only can you address the space needs of our traditional tenants -- law firms, associations, but also can be exceedingly attractive to the tech tenants we have been addressing all morning.

So, we are very excited about it. We're excited about having a great partner like the Steuart family. Full city block across the street from where we have already proven tremendous success to the development community, and we couldn't be more excited about it.

Okay, okay, and does this -- does your activity here may heat up the competition more for the FBI site, as people think there is more potential, or they (multiple speakers) people view -- people are still skeptical or cautious on development in DC?

The FBI site is a completely different discussion. It's progressing. They are trying to pick the new site for the relocation, and then have a competition for the J. Edgar Hoover Building on the Avenue. That is many years away. 501 K is a much more immediate type of a development opportunity.

Okay, thank you.

Sheila McGrath, Evercore.

I was just wondering if you look at 55th Street leasing and also Salesforce Tower, how the rents have moved in San Francisco, if your return on cost expectation has improved, let's say, versus a year ago?

So I think that we have been pretty consistent that the return on costs on a traditional basis at 250 West 55th Street has been suboptimal, in our opinion, based upon when we can see the project, because of the start and stop on it, but net net, it's going to be somewhere just north of 6% on an NOI basis, a non-GAAP perspective. And I think our current lease-up is consistent with that type of a range.

The Salesforce Tower building, I think we have become more bullish on our expectation for what our overall return will be, because we have been able to achieve a more significant premium to the rents that we underwrote when we originally conceived of the project. I think when we started out a year ago, people said, where do you think you're going to be on this asset? And we said, we think it's going to be $800 a square foot. It is going to be somewhere between 6% and 7%. And today, what we are saying is it's going to be $800 a square foot and then we think it's going to be in excess of 7%.

Okay, one other quick question. You mentioned in your prepared remarks a new direction, perhaps, for Princeton and maybe Mountain View. Could you just be a little bit more specific?

Yes, Owen said two things. He said that we are doing -- we're recapitalizing Princeton, which is really a question of right now the property is 100% owned by Boston Properties and there is no debt on it.

And so, we're saying to the market, is anybody interested in being our partner? And if you are interested in being our partner, would we be interested in putting some debt on it if that was the right execution? So that's a process we're going through.

And then in Mountain View, Owen said that we have an unsolicited offer on a portion of our single-story assets and we are exploring that alternative.

Okay, thank you.

Ross Nussbaum, UBS.

A couple quick ones. First, when you guys recast the Apple lease, are all those overage rents going to get put in as fixed base going forward?

So let me -- I am going to give you an uninspired and probably not very committal answer, which is we don't really talk about how we structure any individual lease.

We have an interesting relationship with Apple right now, where there is a percentage rent and there is a fixed rent component, and there will continue to be a fixed rent component, as well as a percentage rent component, and it's not appropriate to talk about how that is going to work.

Okay. That's a segue into the broader topic of New York street retail. Your brethren in the REIT sector and the office space are pretty hot and heavy on New York street retail. You've got a couple of the retail REITs doing it. Is that something that you guys have thought about spending more time on? It has clearly been the hottest part of the New York market the last couple years.

I would say on a standalone basis, we haven't spent a lot of time on it. Clearly, we own some terrific street-level retail as part of our portfolio, and we continue to look at new opportunities in New York, primarily on the development side, a little bit less on the acquisition side. And some of them have retail associated with them, but in terms of a standalone strategy to pursue street-level retail, we are not doing that right now in New York.

So the only thing I would add, Ross, is that we have two large retail opportunities in front of us, actually three. Clearly if and when FAO Schwarz decides to leave the General Motors building, there is going to be a major block of space that can be accessed from Fifth Avenue, can be accessed from 60th Street -- 59th Street, can be accessed from Madison Avenue, and how we utilize that space, which is currently on three stories, will be an interesting opportunity for us to redevelop.

The second and third are over on Lexington Avenue. We obviously have the space on the ground floor of 399. John Powers suggested that Citibank would like to keep the branch -- how much of that branch they're going to keep and how you get into that branch and how you might access other space on either Lexington Avenue or on either of the streets is going to be a question.

And then, the third opportunity is once upon a time the retail at 601 Lexington Avenue was the new cool thing in New York City. I remember going to Conran's way back when in the early 1980s. And quite frankly, we think that there is an opportunity to really revitalize the retail at the atrium at Citigroup Center.

And so, those are the three major opportunities that we are going to be looking at investing capital and opportunity to really enhance the overall cash flow from over the next couple of years.

Okay. On the disposition front, can you spend just a minute talking about why a recap of Carnegie Center as opposed to an outright sale, which I know you guys tried to do a little while back? And then, on The Avenue in DC, is this the optimal time to be selling, given that the NOI growth has turned south on that asset?

Let me start with Carnegie Center. I think -- we debate it. We feel that we have had some terrific leasing activity at the property and it is approaching a more stabilized level.

I think the occupancy right now at Carnegie Center is in the low 90s, but we still see some upside in the asset. We have development opportunities. We are doing a build to suit right now for NRG, as you know.

So, we thought perhaps an ideal result would be to do a leveraged recap, possibly with a partner. We are very pleased with our management there and with the success that we've had with the property, and we found last year in our Times Square Tower exercise that we ended up doing that as a joint venture, given where we found a lot of strength in the capital market for our asset. (multiple speakers).

So on The Avenue, I think -- as I mentioned in my remarks, I think we don't know the answer to your question yet. Clearly, the execution that we are currently working on, we think, is attractive and fits into the categories of the assets that we are selling. But the outcome of that sale is undetermined right now.

Thanks.

Vincent Chao, Deutsche Bank.

Just wanted to touch base or go back to the comments on the VC centers, Silicon Valley, Cambridge, and more recently New York. Just wondering if you think there is room for or a need for a fourth center, maybe in DC, where Vornado is helping seed some tech funds and that kind of thing?

I think that we would all be enthusiastic if the brain power that is concentrated in northern Virginia and the technology-oriented organizations that are in the defense, homeland security, cyber security, whatever you want to call it, would consider locating portions of their workforce in the District. I think the District would think that would be a wonderful thing, too.

I think the interesting thing about DC is the commuting patterns and where people are living, and there has got to be a little bit of a change in the concentration of talent into areas that are not, quote unquote, traditional. I don't really want to comment on what Vornado is doing in Crystal City, because that's not where we have any investment, but we clearly would be exceedingly enthusiastic, and Ray has been working with the administration about ways to incentivize some of these companies to be more open to looking in the city through economic incentives that would encourage them to put roots down in the city.

That's kind of the motivation behind our 501 K acquisition, the site, to have a platform where meaningful tech relocations could take place in a location that is consistent with where they try to put their workforce.

Got it. And would you be interested in potentially doing some sort of side investments, as Simon has also announced some stuff along that front in terms of retail innovation? Just curious if you would have any interest in helping potentially spur that demand through some investments?

It's an idea that was in vogue in 2000 and 1999, and we decided that picking warrants was not a core competency of ours, so I think that it would be -- we would struggle to put together a portfolio of -- in the VC investments in order to entice tenants to come into a particular part of our DC market. I guess anything is possible, but I would not anticipate that it would be a core strategy that we would follow.

Okay, thanks for that. And then, just going back to Transbay, I know we spent a lot of time on it, but in the prepared remarks, you talked about some blocks of space expiring in the market overall in the 2017/2019 timeframe. Can you just maybe comment on some of the tenants that might be looking for some larger space in that timeframe?

I announced -- named a number that are currently in the market today, but between 2017 and -- or 2016 and 2018, I think there is, Bob, 6.5 million square feet of lease expirations in high-quality financial district buildings, the majority of them being law firms and traditional [firea] type of organizations.

And so, traditionally those tenants, as their lease expires, look at the marketplace and look at ways to become more efficient, look at the way they are utilizing their space, and more times than not, they choose to change their current location. And that's the market that we, I think, are looking at for some of the smaller blocks of space in Transbay Tower, meaning 150,000 square feet and down.

Some of the larger requirements that are out there are really going, we think, to be more tech oriented because those organizations are looking for larger blocks of space and they have growth that can't be met in existing assets.

Okay, thanks for that, and just one last question on the law firm discussion. In terms of densities at 250 West where you've signed up a few law firm deals, can you talk about the density there versus the 7- to 8-year-old leases that you have in the portfolio?

Sure, John, you want to take that one?

Yes, certainly there is a move towards increased density, and that comes from a couple of reasons. Law libraries are much smaller or nonexistent now. The ratio of support people to attorneys has changed. So part of it is density, but part of it is just sizing the space to the new characteristics of the law firm.

The two examples that we have, MoFo and Kaye Scholer, certainly have increased their density significantly, but certainly not what we have seen in other places.

I guess can you talk about what that is in terms of square foot per worker?

I don't have the specific numbers for MoFo.

Okay, all right, thanks.

Tayo Okusanya, Jefferies.

First of all, great quarter. Just quick question on the suburban portfolio, very meaningful lease-up both in Boston and also Princeton this quarter. Just wanted to get a general sense if that was very quarter specific. Are there some opportunities you were looking at that just happened to land, or whether those markets truly are feeling much better from a demand and also a rental pricing perspective?

I think I said in my remarks that the suburban Waltham market is very strong right now. It's probably as close to where it was in the early -- late 2000, 2001 timeframe than it has ever been -- than it has been since then. There is literally not a block of 150,000 square feet of quality space in Lexington or Waltham right now, which means the build-to-suits are part of the dialogue.

And we have seen rents go in the last year and a half from mid-20s to the low 40s for the best space in the marketplace, in those buildings like Bay Colony and Waltham Woods and City Point and Wellesley Office Park and Riverside, which are -- those are the higher-quality buildings, and none of those buildings has a block of space that is in excess of probably 40,000 or 50,000 square feet.

So, that market has just been a consistent, stronger market with better demand, and it's really been life sciences companies, some of them coming out of Cambridge and some of them being located in the Waltham/Lexington market and just expanding, Cubist Pharmaceuticals being the most significant of those.

And in Princeton, I don't think northern New Jersey in total has really had a strong recovery, but we have been the fortunate beneficiary, and we have worked hard at it, to attracting some pharmaceutical companies, particularly foreign pharmaceutical companies, that have gone through some explosive growth. And we did some things to entice them to come to Carnegie Center that have worked out, and so a company like Otsuka Pharmaceuticals, we started out and gave them 23,000 square feet of basically free space for six months, and now they've leased 140,000 square feet and they are talking about leasing another 80,000 square feet of space. So, good things happen when you establish a relationship with a great customer and you treat them right.

And so, we have just been the beneficiary of some really strong organic growth within the Princeton portfolio, and as those companies do well, they become more attractive places for companies that are like them, and so we have seen a significant amount of other foreign pharmaceutical interest in the Princeton and particularly in the Carnegie Center portfolio, and we don't think that is a quarterly phenomenon. We think it is a consistent trend.

Great, that's helpful. And then just one more for me, the negative cash mark to market on the Boston portfolio in the quarter, just was hoping I could get some details around that.

Yes, I think I said -- maybe you missed it, so we had a lease that was signed in 2010 for 75,000 square feet at 111 Huntington Avenue, if you are curious. The rent went from $78 at the time to $62.50, but there was a limited amount of tenant improvements and there was no free rent, so no downtime, and so it was on a net effective basis, it was actually a higher overall rent. And that lease actually landed this quarter, so the new rent commenced, and if you pull that out, it goes from a negative 13% to a positive 4%.

Okay, great. Thank you very much.

Brad Burke, Goldman Sachs.

Just one, looking at the $2.5 billion to $2.6 billion portfolio in Boston that's been discussed as being for sale, and you look at those properties and you see the pricing that's been discussed, and you make adjustments for quality occupancy submarkets, et cetera. How do you think about that as a comp for your current Boston portfolio? Is it better than what you would have thought or is it in line with what you would have thought, and if this transaction were to occur, does that make you any more optimistic about some of the potential development projects that you are thinking about in Boston?

Okay, that's a loaded question, so let me try to answer it without putting my foot in my mouth. The portfolio that is being sold is a combination of some what we will refer to as the jewels of the portfolio, as well as some more commodity-like real estate.

In total, the valuations that they believe they are going to achieve, and they very well may achieve it, would, I think, make our portfolio in Boston look like it was being priced -- it's currently being valued at $0.60 to $0.70 on the dollar relative to what those buildings are going to go for.

Wow.

If, in fact, the buildings do sell for what they are reported to being listed for, then I would hope that the expectations that those landlords have for where they think rents are are going to go up, and so that will be an indication that there is going to be more incremental pricing pressure in the overall Boston CBD market, as well as Cambridge -- one of the buildings is in Cambridge, which would clearly push rents and therefore make development more attractive because you have higher rents and you know what your costs are, and if your return on costs gets to a certain point, you're going to start development.

So I think that's all a positive opportunity for the development activity in our portfolio in Boston, which again currently is 888 Boylston Street sooner rather than later, and then a 600,000-square-foot building plus a low-rise building at North Station, and the other piece which we have alluded to, but really isn't on anyone's radar screen, is that we are working with the city to put some additional towers on top of what is referred to as 100 Clarendon Street garage, which is the site that is adjacent to the John Hancock Tower. But that's off into the future, so you shouldn't be putting that on your paper from a modeling perspective. And then, North Station is probably the one that is closest after 888 Boylston Street from a timing perspective.

Okay, that's helpful. Thank you.

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

Mort, are there any final remarks you'd like to make?

I guess not. Anyway, thank you, everyone, for your time and attention.

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