波士頓物產 (BXP) 2014 Q2 法說會逐字稿

Good morning and welcome to the Boston Properties second-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's second-quarter earnings conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K.

In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the investor relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the investor relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

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

Having said that, I would like to welcome Mort Zuckerman, 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 for his formal remarks.

Good morning, everybody. We are, as everybody else is in this wonderful economy of ours, basically operating in a fairly weak economy and a fairly low rate of growth, and particularly in a fairly weak increase in employment, where a large part of the employment comes from part-time work rather than from full-time work.

Having said that, though, the markets that we are in -- as you've all known and we've sort of underscored over and over again -- frankly, are -- if I could put it in popular terms, the top 1% of the markets in New York, Boston, Washington, and San Francisco -- they are the best markets we believe of any major cities in the United States. And it shows up in the activities that we are enjoying and working with.

In particular, in each one of these markets, we have a range of products and those products, frankly, are meeting with a pretty good response from the marketplace, to the extent that there is demand. And in each of these markets, there is demand. It's not an overwhelming demand, but it's a solid demand.

The strongest markets are, for example, in San Francisco, where they have the location there of the online world that's probably the headquarters or the leading city for the online world, and they are growing at rates that we have not seen ever in any particular market.

But Washington, New York, and, indeed, Boston are still -- and Cambridge -- are still additional markets in Washington. We, of course, also have a very, very substantial activity in Reston, Virginia, so we have a diversification even within these markets.

Nevertheless, the one advantage that we are, frankly, able to exploit -- take advantage of -- is the interest rate environment, which as you all know is almost at record lows over an extended period of time, but certainly been the longest period of low interest rates that we've had since the end of World War II.

And this gives us a chance to finance our activities and finance the Company and to be able to refinance our activities when necessary. So in that sense, the environment for the Company is actually pretty good in these markets, they're pretty good in the financial markets and in the markets that we are in and the buildings that we are doing, where we are sort of in the upper end of the office market, there is still a lot of activity in there. So we are all feeling pretty good about it.

We are kind of a little wary of the progress we've made over the past quarter, the past year, and with the progress that we foresee for the next period of time, as I say, particularly in San Francisco, which will be covered here.

It's just been an opportunity for us to do what we do and have done, which is to find good sites -- to build good buildings, to lease them well, to manage them well, and to hold onto a good number of our clients on a longer-term basis and to have built-up credibility in the marketplace that does make it easier for us to do all of what I've just described, both in terms of acquisition of sites, of building the buildings, are we getting the tenants, or financing the buildings.

So we are in a fairly comfortable place here. I don't want to overstate it, but I also don't want understate it. With that, if I may, I will just end my comments and turn it over to Owen.

Thank you, Mort. Good morning, everyone. As usual, I will touch briefly on the operating environment and our overall performance for the second quarter and then provide an update on our capital strategy and execution.

Mort covered some details on the environment. I would just reiterate that we believe the US economy continues to experience somewhat sluggish growth characteristics and the economic indicators are mixed. As all of you know, GDP growth in the first quarter was revised down to negative 2.9%, although the second quarter GDP numbers just came out this morning at 4%, which was certainly above consensus forecast.

Full-year JDP growth is estimated to be 3% and I think that will probably now be raised as well. And the payroll numbers in June, at least on their face, were more favorable. And published unemployment is dropping -- has dropped to about 6.1%.

Importantly, the impact of this sluggish and uneven growth on our business has not changed substantially from what we've reported to you over the last few quarters. Those markets such as San Francisco, Cambridge, and segments of New York City, which are driven by tenants and technology and other creative sectors, are experiencing very favorable growth characteristics in terms of rent increases and net absorption.

However, likewise, those markets that are more reliant on traditional tenants, such as government, financials, and law firms, are exhibiting lower levels of activity and growth. For us, those markets would be downtown Washington, DC and to some extent, Midtown Manhattan.

Now moving to results for the second quarter for us -- we performed well and made considerable progress in the execution of our business. FFO for the second quarter was $1.35 per share, which is $0.02 per share above consensus forecast. There is several recurring and nonrecurring items in the quarterly result, which Mike will cover in his remarks later in the call.

Also in the quarter, we completed 88 leases, representing 2.1 million square feet, with the San Francisco and Boston regions being the largest contributors to that result. The 714,000 square foot lease with Salesforce.com was obviously also a large contributor to our leasing results. Our in-service properties in the aggregate are 93% leased, up 60 basis points from 92.4% leased at the end of the first quarter.

And lastly, we also made significant progress executing our development pipeline and our asset monetization plan, which leads to my next topic, which is turning to capital strategy. As Mort referenced, interest rates continued to decline over the last quarter. The 10-year US treasury has dropped roughly half a percent, or 50 basis points, to below 2.5% since year end, despite the continued commitment by the Federal Reserve to taper its quantitative easing program.

Investor enthusiasm for real estate, particularly in our core markets, remains high. Our capital strategy remains consistent with what we've been communicating to you over the last several quarters. And that is, given pricing levels for assets in our core markets, we continue to find acquisitions challenging.

However, we do continue to evaluate new investment opportunities in all our markets for both existing buildings and new developments. Currently, we have the acquisition of a single building under letter of intent in Washington, DC for under $100 million and are evaluating several additional properties and development sites where we believe Boston Properties has the unique ability to add value and therefore compete.

Given low interest rates and attractive pricing for our existing assets, we continue to actively monetize selected assets in our portfolio. We've made significant progress in our disposition activities in the second quarter, having closed one deal and placed four additional sales under contract, representing $437 million in gross sale proceeds.

Yesterday, we closed the disposition of a portion of our Mountain View single-story product. We received an unsolicited offer and are selling a group of buildings comprising 198,000 square feet for $92 million. The sale price represents a 5.6% cap rate and $464 per square foot and we purchased the properties for $290 a square foot.

The buildings were initially purchased in 2008 pre-crash, and the sale generated a 23% unleveraged total return to shareholders. The portfolio is being sold to a user who is evaluating the acquisition as a development play.

Next, we also have under contract for sale Patriot's Park, which is a 705,000 square foot urban office complex located in Reston, Virginia. The sale price of $321 million represents a 5.2% cap rate and $455 a square foot, which we think is particularly attractive, given the buildings are in a suburban location outside of Reston's urban core and are leased to the GSA for 20 years with flat rent. This asset was purchased 16 years ago in 1998 and the sale generated a 11.5% unleveraged total return to shareholders.

We also have under contract two land parcels totaling $24 million in gross sale proceeds. As you know, we also attempted to sell the Avenue, a 335-unit Class A apartment building we built near Washington Circle in downtown Washington, DC.

We have been under contract and engaged with a single buyer for several months. At the present time, the buyer is unable to perform, which has led us to take the property off the market.

And then lastly, with respect to asset monetization, we continue to target at least $1 billion in sales this year and are evaluating the possibility of additional asset joint ventures similar to the transaction we completed with Times Square Tower last year.

Lastly, on capital strategy, we will continue to emphasize development for our new investment activities, given the opportunity we see to recycle capital from the sale of our older buildings into new projects with higher returns. We made significant progress in the second quarter advancing the execution of our development. Our active development pipeline now consists of 12 projects, representing 4.8 million square feet, with a total projected cost of $3.6 billion, up from $2.5 billion at year end.

We have added to the active pipeline this year the vertical portion of the Salesforce Tower in San Francisco, 888 Boylston Street in Boston's Back Bay, 10 CityPoint and a related retail building in Waltham, Massachusetts, and several other smaller developments.

We continue to be in the predevelopment stage on another set of projects with strong potential in all our markets. In the aggregate, our share of these projects represents an additional future pipeline of over $1.2 billion in gross development cost.

Let me now turn the discussion over to Doug for a more detailed review of our markets and performance.

Thanks, Owen. Good morning, everybody. I'm going to start -- just one brief comment on asset sales, because I think it's important to reiterate.

So last year, we sold about $1 billion of assets, and I would say we had some pretty robust discussions about the near-term dilutive impact on our earnings and the accretive impact on our NAV of those decisions. And from the notes that I saw this morning, I think there's clearly attention versus -- in our earnings and our short-term FFO numbers per share and the value that we are creating through the asset sale monetization perspective. As we move forward with these additional sales, I just want to reiterate why we are doing what we're doing.

So we believe that targeted sales today provide a greater asset level value creation opportunity than holding the asset, collecting the cash flow, and then timing and executing on a valuation at a later date, which, again, is subject to both risks in change of interest rates as well as future sale valuations.

It's an opportune time to create asset level value. That's what we're doing, even though it's going to come with some short-term earnings dilution. And we obviously have a timing issue, because most of our new investment opportunities, as Owen just described, involve development, not immediate property acquisitions.

So we will find ourselves, in all likelihood with an inability to quickly redeploy that cash and therefore we create another special dividend opportunity. But that's really the rationale that we're using for what we're doing on a global basis.

Let me talk a little bit about the markets now. It was an extraordinary three months in San Francisco. Year-to-date, there have been over 6.5 million square feet of leasing compared to about 9 million for all of 2013, which was a banner year.

And it's been driven by large blocks from technology tenants that have really been forced to transition from what I would refer to as sort of a just-in-time real estate mentality to a long-term planning and decision-making mode of operation. The top 10 tech deals totaled 1.2 million square feet in 2010. The top 10 deals to date this year totaled 3.2 million square feet, so clearly the tickets are much, much larger.

A few weeks ago, Google joined LinkedIn as a Valley headquarters firm that's made the decision to expand in the city with its lease at 1 Marketplace and the purchase of 188 Embarcadero Center to traditional downtown financial office buildings. Yelp, Splunk, Uber, and of course Salesforce all made major expansion commitments during the quarter. We saw the law firm Perkins Coie, who is a tenant in some subleased base set in Embarcadero Center, commit to Foundry Three.

And with Google's lease at 1 Market, I think the stereotyping of where tenants want to locate becomes more and more difficult to predict and the line between what I refer to as tech buildings and tech locations and the traditional financial district assets really has begun to blend in a much more significant way.

Activity at 535 Mission continues to be robust. We anticipate completion of the building in the fourth quarter and we will have physical occupancy before the end of the year. We have leased another two floors, we are at 100,000 square feet, and we have active proposals with three additional multi-floor tenants, all with 2015 occupancy. Way above our expectations.

We didn't have any additional leasing to report at Salesforce Tower, but I think the 700,000 square feet we did with Salesforce was a pretty good start.

Construction is progressing. Our marketing center overlooking the site is now open and we are making lots of presentations.

The competing new construction pipeline has effectively been fully committed, with the exception of the 420,000 square feet at 181 Fremont, which, again, is a small floor plate building -- 13,000 square feet of floor -- and now the activity has switched to land sales and the next wave of development. The purchase of Salesforce Tower's land a year and a half ago was $140 an FAR foot.

The current bidding on the two entitled Mission Bay sites -- so these are entitled sites sold by Salesforce -- being sold by Salesforce are rumored to be in excess of $260 per rentable foot. We are now focused on a number of next cycle developments.

With the increase in land prices, new construction costs are probably pushing toward $900 a square foot, and the one important factor that everyone now is going to start consider and is being written about in all the periodicals, and I'm sure it's being talked about on all the calls for people who have California interest, particularly in San Francisco, is that lo and behold, the voter 875,000 square foot PROP M limit on new commercial office developments is suddenly going to be a governor on additional supply.

While there is a deep prospective pipeline of additional projects that have been conceived, once the PROP M allocation bank is depleted, which everyone, I think, projects will happen within the next 12 or so months, future approvals are going to be severely limited. So depending upon growth and demand, this may create a scarcity premium in the market for office rents.

Activity in Embarcadero Center is pretty restrained because we are at 95% occupancy. We completed 10 more deals this quarter, totaling about 73,000 square feet. We continue to market the three great floors on EC4, and while we are in discussions with a few tenants, probably doesn't have a 2014 revenue impact.

I think the sweet spot in the market right now, for all transactions, financial center buildings, south of market buildings, is really with a starting rent between $70 and $75 gross. But with the lack of inventory, landlords -- including us -- are really seeking to try and push rents and we are asking in excess of $80 a square foot for our best base. We will see if we get it.

Incumbent tenants have adjusted to the market, given the inability of them to have to spend money and move if they make a capital decision to relocate. So we are feeling good about the prospects in rental rate increases in both California south of Market, California north of Market, California financial district buildings over the next couple of quarters.

Net rents at Embarcadero Center in the second quarter generate some statistics for the supplemental show a 24% increase on leases that commenced during the quarter, which is in line with what we've been talking about, which is the -- basically, a 15% to 25% markup over the next number of quarters and years.

Shifting to DC, our investment capital continues to be focused on new development. Construction at 601 Mass Ave is on schedule. We will be delivering that building to Arnold & Porter in October of 2015.

We are moving forward with the design and permitting of 501 K Street in the district as well as a 276,000 square foot office retail building and two additional residential buildings, with about 25,000 square feet of retail space in the urban core of Reston. The earliest construction commitment for the Reston development -- probably the third quarter of 2015? And the K Street building is really going to be tenant dependent.

Now the greater DC market is probably the softest in our portfolio, although, as Mort said, Reston Town Center, which makes up 40% of our DC NOI, is outperforming the rest of the region in a big way. When you think about our markets, Boston and San Francisco and New York City really have a more diversified tenant demand, while DC continues to rely on the legal industry and government and federal contractors for the bulk of its activity.

The sequestration and the budget deals from last year are actually still being felt in the contract community and the GSA through both the nonrenewal of expiring contracts and the densification mandated by the GSA. And if you read the various market reports that are coming out from the brokers, I think it's pretty consistent with this.

We completed about 75,000 square feet of early renewals in Reston and about 75,000 square feet of leasing in DC. But our critical DC activity right now, particularly in the CBD, is focused on retaining three major law firms that currently occupy about 800,000 square feet of space in our CBD portfolio, with 2017 to 2019 lease expirations. Now 70% of this portfolio is in JVs on a square footed weighted basis.

We have actually signed a letter of intent with the largest of these three tenants and we believe we have an excellent chance of retaining the others. In total, they're going to be reducing their footprints by about 100,000 square feet or 13%.

The good news is that the current in service rents for the three leases is about $61 a square foot gross, and we expect that the future rents are going to be 10% to 15% higher, each with their traditional DC 2% to 3% annual escalations built in.

Now in each case, the tenants are going to be rebuilding their space and we're going to be providing swing space at reduced economics until the buildout is complete. As we have mentioned in our previous calls, these transactions will result in some transitional downtime that's going to impact our 2015 and 2016 revenues from these bases.

In Reston, where we have no direct vacancy -- no real inventory -- there are a few tenants within the portfolio that for various reasons have put some sublet space on the market. So our leasing associates are spending most of the time responding to inquiries on how we can accommodate new tenants with direct or sub deals on these spaces. We are actually in the midst of a 40,000 square foot take back lease termination to accommodate a growing tenant in Reston Town Center today.

Turning to New York -- there were a lot of large transactions announced in New York City during the last quarter, with TIME and BONY downtown, SONY in Midtown South, and Neuberger and Berman at Sixth Avenue, and Blackstone's renewal at 345 Park. But I think the take away is that Blackstone was the only expansion.

There's been considerable velocity, but the overall availability, coupled with the activity which is still driven by lease expirations, has really not resulted in any real changes in lease economics in Midtown, with the possible exception of the very small high-end market where availability is much more limited.

At 510 Madison, we did four more leases, including two floor deals, at over $120 a square foot, and we are now over 91% leased with one floor and three of other prebuilt suites available. We haven't increased our asking rents, but negotiating room has narrowed dramatically.

Through the end of the second quarter, the level of leasing for space above $90 a square foot, which we refer to as the premium market in Midtown, is 40% higher than it was in 2013 at this time, with the dramatic pickup in the number of new leases versus renewals, which is a big change.

Our primary focus in New York, like DC, is on our tenant expirations between 2016 and beyond. We are actively involved with six law firms leasing over 1.8 million square feet on their possible renewals. While two of these firms are looking at possible expansion, the most are going to be looking for some kind of an occupancy reduction over the next four to five years.

So we have two transactions that are sort of in the documentation stage right now and they encompass about 350,000 square feet and the result is going to be a net give back of about 40,000 square feet in 2015. The space we are taking back, again, is going to be used as nonrevenue producing swing space for about 12 months as the tenants rebuild.

On a combined basis, these first two renewals are going to result in a 15% roll down on a cash basis and a 2% roll down on a GAAP basis in 2015. Now we actually expect that the other transactions will all result in positive cash and GAAP roll-ups and that in the aggregate, the total portfolio of 1.8 million square feet will see a significant positive mark to market as we get to the other three transactions.

At 250 West 55th Street, we completed 131,000 square feet of leasing, including the lease with Al Jazeera -- so at 760,000 square feet, we are now 77% leased. We have only four pre-built suites remaining, so in addition to focusing on the one and two floor prospects, we fully expect to break some more floors and continue our pre-built program in the high rise.

At Carnegie Center in the New York suburban market, we continue to gain both occupancy and extend leases. During the quarter, we executed four more leases for 75,000 square feet and we've got about 300,000 square feet of expansions and new demand under discussion. We expect to be under construction with our new development for NRG towards the end of the third quarter.

Turning to Boston -- overall, the Boston office market continues to improve, our development activities are continuing to advance, and we've included three new projects in our development section of our supplemental, which I will give you a little bit of color on.

At the Prudential Center, we signed a lease with Natixis for 130,000 square feet, and they have the right to go up to 150,000 square feet, at the base of 888 Boylston Street. So that's floors four through eight or nine. This is our new 365,000 square foot office development, which is on top of 60,000 square feet of new retail, which will be integral to the shops at the Prudential Center.

In addition, we are planning a complete renovation of our quick serve food operations and potentially a 17,000 square foot second-story addition to a portion of the Boylston Arcade. These two retail projects will have a cost of somewhere between $30 million and $40 million, and that's not included in our construction in progress just yet. Probably comes on into the program next quarter.

We've begun the temporary closing of a portion of the retail, which will eventually impact about 22,000 square feet and our food court and reduce our overall revenues in 2014 and 2015 before we reopen with an additional 17,000 square feet. Now current in line rents at the Prudential retail are in excess of $150 a square foot.

At the Hancock Tower, we are five months away from the expiration of our State Street lease, which is going to result in two blocks of availability at the building. We'll have 170,000 square foot block at the base, which we are rebranding as 120 St. James, where we are creating a second lobby and entrance dedicated to the low rise and designed to attract technology and other creative tenants with its larger floors and floor-to-ceiling glass.

Now the tight conditions in Cambridge and the influx of startups in the Boston area have really led to a rising new demand for office space from a nontraditional user in Boston. Wayfair, which is an online home shopping retailer, has expanded at Copley Place; Sonis has relocated from Cambridge to the financial district; Autodesk is moving from the suburbs to the seaport; WorldWinner, which is the parent company of the Game Show Network; and Rapid7, which is a security company, have expanded and moved to 100 Summer Street.

The Cambridge Innovation Center -- note the name -- opened a second location in downtown Boston and WeWork has now two sites with over 100,000 square feet and is looking for additional locations. Lots of untraditional demand in a Boston market at this point.

The other major block of the Hancock is at the top of the tower -- 145,000 square feet -- which we will get back once we move E&Y down into four of the State Street floors in the lower third of the building. And that's going to occur in the middle of 2015. So a little bit of extended downtime.

While we have a big pickup in vacancy, the average in place rent for those two blocks is about $40 gross and our expected starting rent is over $60 gross. This quarter, we leased 140,000 square feet of the Hancock Tower at an average starting rent of over $65 gross.

The suburban market in Boston continues to be very active, led by expansion of the life sciences and the tech businesses. Large blocks of space have disappeared, forcing larger tenants to consider new construction. Rents in Waltham continue to rise and average the mid-$40s square foot for new construction.

We completed just over 100,000 square feet of leases in Waltham and Lexington this quarter. And in addition, we signed a lease with Wolverine, parent company for a number of shoe brands, for 155,000 square feet at 10 CityPoint, which will kick off our 230,000 square foot office building and 16,000 square feet of retail space.

And just down the street, we are starting a 16,000 square foot standalone retail building with a future residential/hotel pad site. We've signed two full-service restaurant leases, totaling about 13,000 square feet, and while it's a small investment, it enhances the amenity base for City Point, where we have 516,000 square feet of existing office space, 1.2 million square feet of additional office density -- including 10/20 City Point -- as well as 1.3 million square feet of other space at this interchange.

In total, our new developments added this quarter are about $425 million -- not just the Boston stuff -- and are anticipated to yield in access of 8% on a cash NOI basis.

In Cambridge, where we are 100% leased, we anticipate making our formal permit submittal over the next few months for our new residential building, which we hope to start in the first half of 2015. In addition to the residential development, we are working in concert with the Cambridge redevelopment authority and the City of Cambridge on a 600,000 square foot office and 400,000 square foot residential density increase at our Cambridge Center project.

In the meantime, there are three major tenants looking for blocks in excess of 150,000 square feet of office and lab space in Kendall Square as we speak. Office rents, as exemplified by our recent early renewals, are in the mid-$60s square foot to low $70s square foot on a gross basis, which is an increase of over 50% since 2012.

To sum up, it's been one of the busiest summers we can remember and we are really encouraged by both the level of activity we are seeing across the portfolio and the development opportunities that sit before us.

And with that, I will turn the call over to Mike.

Thanks, Doug, good morning. I'm going to start with a quick recap of our performance for the second quarter. Our portfolio had a strong quarter. Same-store NOI was up 3.5% on a GAAP basis and 8.1% on a cash basis from last year. We have been projecting growth in our same-store and it's primarily related to occupancy increases in suburban Boston, in Princeton, and at 510 and 540 Madison Avenue in New York City, as well as strong rent roll-ups on expiring leases in Cambridge and in San Francisco.

We also have free rent burning off from prior period leasing that is driving some of the cash rent growth, particularly at the Hancock Tower at 510 Madison Avenue, 399 Park Avenue, and Patriot's Park.

For the quarter, we reported funds from operation of $1.35 per share. That was $0.02 per share above the midpoint of our guidance range. Our rental revenues were in line with our expectations and we experienced about $4 million of lower-than-projected operating expenses.

The majority of the expense savings were in repair and maintenance items and we expect to incur most of them in the second half of 2014, so the savings will not entirely flow into the full year.

We generated $1.5 million of better-than-projected development and management services income with stronger service income in our New York City building portfolio. And we brought online development fees associated with our two new joint ventures, where we started construction at Annapolis Junction 8, and we have commenced permitting and design work at 501 K Street.

We also had a little bit lower-than-expected G&A expenses due to higher capitalized wages associated with this quarter's leasing productivity and higher development activities. The combination of these items resulted in about $6 million, or $0.04 per share, of outperformance.

However, it was offset by $0.02 per share of nonrecurring items, including disposition transaction costs and an adjustment to our noncontrolling interest in property partnerships of $2.4 million. Next quarter, the run rate of our noncontrolling interest in property partnerships is expected to return to about $19 million per quarter.

As we look at the rest of 2014, we don't expect much change to our prior projections, since the majority of our current leasing activity involves transactions with revenue impacts in 2015 and beyond. The most significant change for the remainder of this year will come from our asset sales activity.

As Owen mentioned, we are selling some of our flex buildings in Mountain View, our long-term government-leased Patriot's Park portfolio in Reston, and two land parcels.

These assets are unencumbered and currently contribute annual FFO of $23 million or $0.13 per share. We anticipate closing these within the next 60 days and the projected impact to 2014 is the loss of approximately $8 million of FFO or $0.05 per share.

The in-service portfolio continues to perform, with solid same-store NOI growth coming from positive mark to market on expiring leases and occupancy improvement. Our occupancy improved this quarter to 93%. However, due to the anticipated lease expirations, our occupancy is expected to tick down in the second half and average between 92.5% and 93% for the rest of the year, which is slightly better than our prior guidance.

And just a few details -- we expect to lose occupancy at the Prudential Center with Arnold Communications, who is vacating 180,000 square feet, which will be backfilled by Blue Cross Blue Shield, but not until April 2015. We are also getting the 26th floor back at the GM Building at the end of this month and we are losing about 100,000 square feet of occupancy in our VA 95 R&D Park in Springfield, Virginia. These known move-outs total 75 basis points of lost occupancy and are partially offset by anticipated positive absorption elsewhere in the portfolio.

On a same-store basis, we project our GAAP NOI to improve from 2013 by 2% to 2.5%, an increase of 25 basis points at the low end from our last quarter's guidance. On a cash basis, we expect moderation from the second-quarter results due to the aforementioned lease expirations, but we're still projecting strong same-store cash NOI growth of 5% to 6% from 2013.

Our non-cash straight line and fair value lease revenue is projected to be $93 million to $99 million for the year, up slightly in connection with our -- in conjunction with our GAAP NOI guidance increase. We continue to enhance our development pipeline, both in terms of adding new projects and leasing up our existing projects.

This quarter, we added five new developments. They totaled 840,000 square feet and $425 million of total investment. In addition to 280,000 square feet of pre-leasing in these five new developments, this quarter, we also leased 95,000 square feet of space in our other office developments, which are now 70% leased in the aggregate.

Our Avant residential project in Reston had a strong quarter. It absorbed 95 units and is now 55% leased. Nearly all of the office leasing in our developments is for lease commencements in 2015, so the projected 2014 contribution from our developments is really unchanged from last quarter. We project an incremental contribution to 2014 full-year FFO from these projects of $28 million to $30 million.

The FFO contribution from our unconsolidated joint ventures is projected to be $29 million to $32 million for the year. We generated stronger than expected development and management services income this quarter, and for the full year, we are now projecting $22 million to $25 million, an increase of $3 million at the midpoint. And for our G&A, our projections were unchanged and we anticipate 2014 expense of $100 million to $104 million.

We project our capitalized interest to be higher than last quarter -- last quarter's guidance due to the commencement of new developments that were not included in our prior guidance. This will lower our 2014 interest expense and we now project 2014 full-year net interest expense of $444 million to $448 million, an improvement of about $2 million from last quarter.

For the remainder of 2014, our quarterly interest expense run rate is actually going to increase due to the cessation of capitalized interest for 250 West 55th Street and 680 Folsom Street by the end of the third quarter. Included in our second quarter results is $8.5 million of capitalized interest from these two properties.

In summary, we are modifying our 2014 guidance range for funds from operation to $5.24 to $5.29 per share. Adjusting for the $0.05 per share of loss FFO from our asset sales, this equates to a $0.03 per-share increase in the midpoint of our guidance from last quarter.

The increasing guidance is from a combination of better-than-projected same property NOI, higher development and management services income, and lower interest expense. For the third quarter, we project funds from operation of $1.36 to $1.38 per share.

I want to spend a minute on our outlook for 2015, because there are a couple of things Doug mentioned that are important as you consider 2015. The first item is the dilution related to our disposition activity. As I mentioned, our dispositions have a current annual aggregate FFO contribution of $0.13 per share. We lose a portion in 2014, so you can expect the reduction in FFO year over year to be approximately $0.09 per share.

The second item is interest expense. Assuming we simply refinance the $550 million of 5.5% yielding unsecured debt we have expiring next year at current market rates, our interest expense should decline. However, the projected reduction in cash interest expense is expected to be fully offset by a decrease in our capitalized interest, because our 2015 development spend does not ramp-up fast enough to make up for the development cost that we delivered in 2014. In total, we expect our net interest expense to be relatively static year to year.

The third item is the impact of transition in the portfolio that will have a short-term impact on our 2015 occupancy and our same-store performance. As Doug detailed, in Boston, we expect to lose 315,000 square feet of occupancy at the Hancock Tower and we are taking a portion of the high-value Prudential retail shops out of service in 2015.

In addition, we have another 100,000 square feet of vacancies coming at the Prudential Tower and 100 Federal Street. While this space is currently below-market and upon releasing should result in higher income, we expect downtime during 2015.

We also expect to complete early renewals with several large law firms over the next 12 months, which could result in 200,000 square feet of either vacancy or non-income producing swing space for a period of time. Again, this is all highly marketable space, but we anticipate some income interruption in 2015.

In general, we anticipate that we could experience an average same-store occupancy decline of 50 to 100 basis points next year, which would hamper our same-store revenue growth. On the positive side, the contribution of our development deliveries is projected to drive 2015 FFO growth. Even though 250 West 55th Street will not be fully stabilized in 2015, as some of the leases will not commence until later in the year, we project revenue recognition from an average of 75% of the building versus 25% in 2014.

680 Folsom is now 98% leased, with 440,000 square feet of leases that commenced this quarter, and the remaining 70,000 square feet commencing at the beginning of the fourth quarter. 2015 will be a fully stabilized year for the project.

We will also start to see a contribution from 535 Mission Street, with our first tenant taking occupancy at the end of 2014. And last, the Avant project in Reston is projected to complete its lease up by the end of 2014 and be fully stabilized in 2015.

I also would like to cover the impact that our disposition program may have on our dividend. The sale of the two office assets demonstrate the significant value that we are able to create through the development, repositioning, and releasing process. The projected gain is $140 million on an aggregate value of $413 million, which results in an unleveraged IRR in excess of 14%.

If we are unable to defer the gains through future investments, we could have a special dividend of approximately $0.80 per share later this year. And to the extent we sell additional assets, that special dividend could be larger. We are not currently projecting any changes in our regular quarterly dividend.

The only other item I would like to mention is that we are planning on holding our next investor conference this fall. With Boston having many of our new developments that we just announced, as well as exciting future pipeline deals, we will be having it in Boston on September 22nd and 23rd.

You can all expect additional information from Arista on this shortly and we certainly look forward to seeing everyone.

That completes our formal remarks. I would appreciate it if the operator would open up the line for questions.

(Operator Instructions) Michael Bilerman.

Owen, I think in your opening comments, you talked a little bit about pursuing some additional development sites and some acquisitions. You talked about $100 million in DC. I was wondering if you could elaborate a little bit on the development opportunities and where -- what markets they're in, are they more mixed-use space than just pure office development? And sort of give us a little bit of sense of size?

Michael, the answer to your question is varied. We are looking for a new development and acquisition opportunities in all of our markets. We're not focused on any one particular market.

I would say the -- in San Francisco, we've pursued multiple sites. I would say that the acquisition activity that we have in San Francisco has been much more focused on development as opposed to existing product. In Washington, I mentioned the smaller acquisition that we are working on.

In terms of developments, we've talked about 501 K Street, which -- where we have a joint venture on a site and we are seeking an anchor tenant to construct that building. We also have developments that we are considering related to the Reston Town Center.

In New York, we are looking at acquisitions and development opportunities. And in Boston, I'd say we are probably a little more focused on executing the robust pipeline that we're working on as opposed to identifying any new projects that we haven't announced.

Yes, it's a little bit all over the place.

Michael, just to reiterate what we said in past calls. So in Boston, we have the North Station development, which is in excess of 1.8 million square feet of which we are -- we presumably will be a 50% partner with Delaware North. And that's a 2015 start, which is not in our numbers anywhere.

There's been some reports about the conversations we are having regarding what's referred to as the 100 Clarendon Street Garage, which is a site that, in all likelihood, could support some additional development and we're working diligently with the Mass. Department of Transportation on figuring out a way to untap a couple of those sites. And those are in excess of 600,000 or 700,000 square feet a piece.

We've got another building at 10/20 City Point which we could build, and then there's another close to 350,000 square feet of permitting that we are going to be getting accomplished in August for another building associated with a site that we are selling. So -- and then as I said, we have the Cambridge developments. So that's a pretty big pipeline in Boston.

In Washington, DC, as Owen said, 501 K Street is the development that we are drawing right now and Ray and his team are making active leasing proposals. And we are optimistic that someone is going to step up and take a very significant portion of that and allow us to get started sometime in 2015 or 2016.

In Reston, we have the two major developments in the urban core, which is a 275,000 square foot building which I described as well as the signature site, which was another 500,000 plus square feet plus of residential, which, given our success at the Avant, we are very encouraged by.

And then we have the gateway site, which is another 2 million square feet plus of incremental development on top of the 500,000 square feet that we currently have at what's referred to as Reston Corporate Center -- or 250,000 square feet at Reston Corporate Center. So there's a lot of potential development right there.

In New York City, John Power, as we would say, is up to bat with a lot of pitches coming at him. And there are a few that we are moving forward with on -- in expedition -- expedited basis. We are not prepared to talk about where they are or what they are, but they're not insignificant in terms of size -- hundreds of millions of dollars.

And then in San Francisco, in addition to the Salesforce Tower and 535 Mission and 690 Folsom Street, Bob is in active discussions with a number of landowners about what I would refer to as next-cycle developments, which are developments that will be predicated on two things happening.

One, the central SoMa business district plan being passed by the city's planning authorities. And then the way the city has to go about allocating its development resources with regards to the PROP M allocation, assuming, as everyone expects, that we're going to get into a situation where it's -- there's going to be a limit.

So those are the short term things that we're looking at, which I think is -- is billions of dollars of development in its total capacity.

Right, and that sounds like certainly over the next 18 months that clearly, well over $1 billion could be added to the pipeline.

Those are your words, but I'm not going to disagree with you.

Thank you.

Jed Reagan, Green Street Advisors.

On the Trulia lease commitment of 535 Mission and then maybe just in general if you could expand on the types of tenants that are expressing interest in Transbay and 535 Mission these days and maybe what kind of timing you might expect for reaching 90% leased at those two projects?

So Jed, could you just repeat your question again? Because you got cut off at the beginning of it, so I didn't hear the earliest part of it.

The first part of it was just whether the Zillow/Trulia merger might have any impact on Trulia's lease commitment there at 535 Mission?

Sure. So Trulia was the first lease we signed and during their process of being acquired or merging -- depending upon your perspective -- with Zillow, they approved and signed a lease extension. And they are building up this space as we speak, so -- expansion, excuse me.

So our strong inclination is that, as they said, they're going to be running two brands. Zillow has a relatively small [off of Cisco] and that they will fully be occupying the space that they've taken at 535 Mission.

With regards to the other demand at 535 Mission and the Transbay Tower -- which, by the way we don't call it anymore; it's called the Salesforce Tower, which is the way we should be referring to it -- we are seeing what I would refer to as a number of the traditional legal financial services oriented lease expiration driven requirements -- you know, the major banks and law firms.

And then we are making presentations and having conversations with a lot of the -- what I refer to as the technology or the new economy companies that Mort was describing that are growing exponentially in San Francisco.

As I described, they are very chunky and they are very large and everyone is looking forward from a planning perspective, because they all see the day when there's not much in the way of lots of space available. And Transbay Tower happens to be the one place where right now, there is a block of space that is available for occupancy.

With regards to when we get to 95%, if all the leases that we are in discussion with at 535 Mission actually were to happen, we would be basically 95% before the end of the year. I can't tell you whether or not all those leases are going to occur, but we have active proposals out that encompass more than 100% of the available square footage, which is 207,000 square feet.

Although we may be able to sign those leases, it wouldn't commence rent until mid to later 2015, at best.

And Salesforce Tower, you feel like you might be able to reel in another bigger tenant this year?

We are optimistic about the market. We feel that Salesforce Tower is an incredibly exciting project and we are in no rush to lease the next space. But if a tenant comes along that is looking for a block of space and is prepared to have an economic discussion with us, we are prepared to doing another lease.

Okay, great. And just a follow-up. Some of your competitors have talked about the flattening of the Manhattan office market and sort of a general shift to the south and west on the island. Just curious if you can talk about the extent to which you're feeling that in your portfolio and then does it sort of change how you are thinking about your longer-term footprint in Manhattan?

Sure. John Powers, do you want to take that one?

So there is certainly a lot of activity in Midtown South. That's the hottest market in Manhattan and that relates very much to Owen's opening comment about the increase in tech and the more steady-state and some decline in the law firm, but steady-state and are unchanging in the financial service industry.

The high-end law firms or high-end financial firms are still very strong in Midtown and we see a very good market here in Midtown. We don't see the positive growth or the spillover that downtown is getting, because it is price advantaged.

All right, thank you.

Jeff Spector, Bank of America.

Good morning, I'm here with Jamie Feldman, too. Our first question is on the development pipeline and can you just talk to us a little bit about the size you are comfortable with versus the risks of development?

Sure. We've had this conversation, I think, from time to time during our history. And I'll start with the following, which is we are opportunity-constrained not capital-constrained. We are a $30 billion enterprise right now and at any one time, having a series of projects that are in different stages of development, from conception to leasing to coming and going into service of a $1 billion for $2 billion, is not something that we are at all uncomfortable with.

We have described the issues associated with development in the past regarding the issues with permitting, the issues with construction, and the issues with leasing, and we feel like we are really good at managing all of those issues and that -- on the leasing side, the issues associated with a new development and the issues associated with lease expiration-driven vacancy are not too dissimilar.

And often times, the advantages associated with new construction and the changes in the way people are using space and the attractive nature of being able to move into a new environment relative to -- in the example that we're dealing with right now, having to rebuild over a 12- to 18-month period of time and having to swing through it, actually create an incentive and an advantage to development.

So it puts us in a position where we feel even more comfortable taking leasing risk on certain developments, particularly when we have a major commitment for a portion of it -- a.k.a., 888 Boylston Street -- than we necessarily have with the risks associated with our quote unquote availability in our portfolio.

The other thing to recall, Jeff, is that these developments cycle through. So for example, we have a $3.5 billion pipeline today, but $1.7 billion of it is delivering in the next six months or has delivered, effectively.

And by the way, those are primarily leased. We are 77% leased at 250 West 55th Street and you are basically 100% leased at 680 Folsom Street, which are the two biggest ones that are delivering. So again, when you think about percentage of overall company size, we don't anticipate it increasing to a level that will be significantly more than what it is now as a percentage of the Company at any one time.

Okay, thank you, that's helpful. And then just wanted to focus, I guess, on law firms. Obviously, one of the tenants that has been downsizing; we appreciate your comments on next year.

With M&A picking up this year, we were hoping to maybe hear that some of the discussions have changed a bit more recently. Is that -- I guess that's not the case. The law firms you are speaking with, they are still talking about downsizing space in the coming years. Nothing has really changed there.

Jeff, there are two things that are going on. So the first is that any law firm -- and I don't care whether they are in M&A business or the patent and trade business or the litigation business -- that has an installation that was built 15 or 20 years ago, by definition, is looking at the way they are utilizing that space very differently.

And we've talked about this before -- law libraries and the way conference rooms are used and the more uniform nature associated with the way offices are built out and the lack of secretarial or administrative report stations, that in itself is creating a reduction in the total overhead of occupied space necessary for a law firm.

Then there are in fact mergers and acquisitions going on within law firms, so some of those firms are growing. And then there are business unit differentiations. So as an example, firms that have -- maybe that had a significant bankruptcy practice probably are in more of a downsizing mode and those firms that are in the patent and trade and for a biotech technology complex.

So as I said, we actually have in New York City -- of the six firms that we are talking to, two of them are actually looking to maintain the same amount of space and that's after rebuilding it. So that would imply some growth for a few of them.

And then we have others, depending upon their business practices and how much space they have, that are going the other direction. So I think that any law firm that has an installation that is probably pre-2007 can find efficiencies. And we are still -- you know, I refer to sort of the sixth or seventh inning of the continuum in the law firm world of tenants moving through their footprints and getting to sort of what I would refer to as the right size environment.

Okay, appreciate those thoughts, and Jamie just has one quick question.

Yeah, just a quick follow up, if you guys don't mind. Mike, are you able to quantify the FFO impact of the transitional leases in 2015?

You know, we're not going to give guidance for 2015 today. I think the challenge that we have is that I described 500,000 or 700,000 square feet of space, which is over 100 basis points of our space, that is going to be going through transition.

So with that kind of occupancy loss, we do continue to have roll-ups, particularly in San Francisco, where we hopefully will see positive absorption. In New York City, there's opportunity to grow occupancy. And we will have roll ups in Boston. So those may offset each other, we will see, but it's some headwind to having real same-store growth in 2015.

Okay, all right, thank you.

John Guinee, Stifel.

Great. Thank you. Three quick questions. First, on your law firm deals, I guess, Doug, can you give us just a basic number in terms of price -- dollars per square foot for releasing cost, TIs, leasing commission, base building upgrades? How that tends to be split between BXP and the tenant? And is there any security obtained in this day and age for those kind of capital commitments?

And then maybe this is also yours, Doug, but if I look back at your land inventory, about 9 million square feet of a developable square feet and another 2 million of options, do you have sort of near-term plans to either develop or monetize those?

And then the third question would be for our friend Ray Ritchie, if he can talk about what's happening in the DC market, excluding the CBD and excluding Reston Town Center, with the opening of the Silver Line?

Okay, let me see if I can do this succinctly. With regards to leasing costs associated with major law firms in cities like Washington and New York, where it's most germane for our purposes, a new transaction -- okay, so a tenant moving into a new installation is probably getting, in Washington, DC, a tenant improvement allowances of between $100 and $110 a square foot and in New York City, of somewhere between $55 and $80 a square foot.

In New York, we believe that the cost of a new installation is somewhere in excess of $200 a square foot, when you factor in furniture, cabling, and everything else and in DC, it's probably somewhere in the neighborhood of $175 a square foot. So that is the sort of cost.

These deals are all different in terms of what's actually going on. And traditionally, in New York City, there's free rent associated with the move for the buildout time, so to the extent that a tenant is in place and they're not getting free rent, there's a transition of those economics to either rent or into additional TIs.

And similarly in Washington DC. And then depending upon the age of the building, there may or may not be base building improvements that are required. So as an example, a building like 599 Lexington, we are undertaking a lobby renovation because we think it's the right thing to do for the building, independent of the lease expirations.

And the building work that's being done on elevators, for example, is sort of outside of a change to the tenant's improvement, so that's not part of those costs. And that's obviously amortized over the entire value of the building over a much longer period of time.

And then there are -- in cases where a building -- one of the buildings we're looking in in Washington DC, we may do a major gut rehab and change the entire HVAC system, because we think that the building has gone past its useful life and we think it's the right thing to do, both for the tenant and for the building. And those costs would all be on our side of the equation. So that's the first question.

I would also add, Doug, of the commissions that are forthcoming on these transactions, one of the biggest changes, we are seeing the law firms participate greatly in the commissions. So the commission could be $25 to $35 a square foot, but the law firm is going to harvest back between $15 and $20 of that, so that helps offset some of the costs associated with the buildout through the law firm's participation in the commissions.

So with regards to our land inventory, John, I think we are working through two things. One is there are certain sites that we are aggressively developing -- a.k.a. things like 888 Boylston Street -- and then there are other sites that we are aggressively trying to sell.

So as an example, we have a land inventory in Rockville, Maryland, associated with our Tower Oaks project and we are looking to and actually have an agreement with a non-office building owner to convert that land and permit that land into a different use -- six build or multi-family or single-purpose -- single-family homes and we would be selling some of that land in manners like that.

Again, we're selling a parcel out at the Broadrun project. We're selling a parcel of land that we have in Waltham, because we're getting a terrific price and it's improving the environment around us. So over time, I would say we are working through that and then a lot of that land, we hope to develop ourselves.

And your third question, John, regarding the DC market, were you asking specifically about the Silver Line or just the market in general?

Essentially, if you look at the core urban markets -- the Crystal City, Roslyn Ballston corridor, Tysons with the Silver Line, Southwest -- they seem to be surprisingly anemic, unless you can tell me otherwise.

No, I would fully support that position. I would be -- the biggest being Crystal city and in Roslyn is approaching 30%. And the recently announced CEB deal was a little bit of a head take, in that while they are going to take down half of the new JBG building or about 350,000 square feet, the space they're leaving behind equals the amount of space they are taking. And thus JBG is going to add 300,000 square feet to the market.

So this will push the availability of vacancy rate in excess of 30% in Roslyn and then in Crystal City -- Pentagon City, you had the TSA out with a major procurement that may continue to show some continued erosion in that market.

So while the Silver Line -- I think it's going to be great long term, and specifically for us and Reston Town Center is going to create that development opportunity that Doug mentioned earlier, that 2.5 million to 3 million square feet. Certainly, in the short term, the Silver Line has done very little to impact or improve the market conditions in the RB corridor or in Tysons Corner.

Great. Thank you very much.

Brad Burke, Goldman Sachs.

Hey, good morning, guys. Was hoping you could touch more on what you're thinking on the potential for new JVs. And first, are those included in the $1 billion of asset sales that you're thinking about for this year or is that in addition to the $1 billion?

And then, you said that they are likely to take the form of what you already did in Times Square, so should we be thinking about these mostly focused on New York office?

Yeah, it's Owen. So to answer your question, what we've said about dispositions for this year is that we felt that they would be in excess of $1 billion and we will continue with that guidance.

I referenced the Time Square joint venture that we did last year as an example of something that we might consider for this year. And to go back to the merits of that, we were able to, we feel, monetize a portion of an asset at a terrific pricing. We retained the leasing and the management of the building and we also retained the upside that was in the interest that we owned.

And then lastly, no, I wouldn't say that we would consider joint ventures only in New York. We might consider our own assets outside of New York as well.

Okay, that's helpful. And then just on the decision to pull the Avenue off the market, I realize that you can have issues with any given buyer, but what's the thought process on completely pulling it off the market versus just trying to line up a different buyer?

Well, I think -- this is Ray. We are considering the overall position of the Avenue, both the office building and the apartment building. And while our -- let's put it this way, our discussions with the current buyer has ceased. And we are evaluating where we go forward, either with the buyer that has been considering the property for the last two or three months, whether we take it back to the market or we continue to own it for the long haul.

Listen, it is a phenomenal asset that continues to perform in the best location in Washington, DC and this was not -- this was clearly trying to take advantage of the interest rate environment and the interest from the capital markets for trophy-level properties like the Avenue. And certainly, nothing has happened that has distinguished that or altered our approach towards -- and our viewpoint of that asset.

All right, thank you.

Vance Edelson, Morgan Stanley.

Following up on an earlier question -- outside of West 55th, there's no other New York development currently underway. And you mentioned you're looking at other opportunities, but given that New York is one of your largest markets, the fact that it's clearly a present -- not one of your larger development markets, is that just a matter of timing, could it one day be one of your top development markets, or do you think you just have better long-term opportunities in other cities.

And related to that is expanding into another district in New York City -- I think you touched on that a little bit earlier, but is that a realistic near-term possibility?

As a public company, we've developed 3 million square foot towers in Midtown Manhattan. And we think we been highly successful at creating value through that process. We have a new regional manager in the form of John Powers, who has a, I think, both a desire and a expectation to dramatically ramp-up our activities in New York City, commensurate with the opportunities that he can find.

And there is a significant desire to extend and expand our New York City outreach in terms of development as well as other types of transactions. And we've discussed in the past that we would consider doing residential, not unlike what we're doing in Washington and we're doing in Boston at this point, on a new development perspective as well. And again, as we said earlier in the call, we are opportunity-starved, not capital-starved. And so we are focused on trying to grow that.

Okay, good to hear. And then shifting gears, could you discuss retail strengths in Boston and the inclusion of retail in newer projects, like 8088 Boylston. How integral is retail to the overall appeal of the project.

And then longer term, do you see the non-office mix for BXP -- you just mentioned residential, but do you see the non-office mix with resi and retail moving any higher than it is currently?

So I will break this into suburban and urban, okay? So from an urban perspective, having the right cache associated with any of the buildings that we have in the form of what I would refer to as amenity-driven retail is pretty important.

But when you're in the city, you also happen to be in a network where there are lots of alternatives. So there are restaurants and drycleaners and drugstores and hard goods and soft goods sellers of other things that are around there.

The Prudential Center in itself is very different, because it's a -- it is effectively a regional mall in an urban location, and it's one of the highest producing productivity malls that we are aware of. It's over $1000 a square foot and it's sales per square foot so -- and it's got both soft goods as well as restaurant and ancillary products and hard goods like -- Microsoft is a store here.

As we think about new development across all of our markets, we are exceedingly aware that the old idea of having a suburban office park with a cafeteria in it is not the ideal mix for a tenant -- a group of tenants that want to go into a location like that.

So where we can, we are amenitizing and providing as much in the way of additional services to our customers, our tenants, as we possibly can. And in the case of, for example, what we are doing in CityPoint, creating restaurants that have a full-service menu where you can both get breakfast, lunch, and dinner, and have a cocktail after 6 o'clock at night -- or whatever time you want to have your cocktail -- is a pretty big draw for those tenants that are looking for an environment where they are trying to recruit and retain the best employees.

And relative to going to a suburban office building that really doesn't have that availability, it is a strong advantage and something we are acutely trying to bring to as many of our properties as we possibly can. And if you think about the clusters that we have, we have talked about trying to create these clusters of great place, great space.

And so it's a pretty strong focus of what we are trying to do, but we are not trying to become a major retail owner of space in an absentee perspective, aside from how we are dealing with our office buildings.

Okay, make sense. Thanks for the color.

For some additional discussion on the retail -- this is Bryan Koop -- but the Prudential Center, as Doug mentioned, we are performing already at over $1000 a square foot. We are very fortunate. We have a considerable role coming up and we are going to have an opportunity to take -- we are performing at $1000 a square foot and that's with many performers in there at $400, $500 a foot.

So there's going to be an opportunity to bring new, exciting retailers in to produce at higher levels. And when we look at 888 Boylston Street, it's a really great, perfect combination of being able to support that building, but also enhance, call it, with greater destinations on Boylston Street for the rest of the Prudential Center. So we are really optimistic and robust in the next few years of retail at the Prudential Center.

Okay, very helpful, thanks.

Ross Nussbaum, UBS.

I'm just curious -- a number of your peers have been quite active on the Manhattan street retail scene. And I don't want to say you guys have been noticeably or notably absent, because you do, obviously, have some street retail in a couple of your buildings, but you haven't done in a one-off deals.

Can you just give us your perspective on that niche of the market and how you are thinking about it going forward? Thanks.

This is not a terribly well-informed answer, but I will give you my perspective and others may have a different one, which is -- we have not focused on buying individual condominium interests in high-value potential long-term lease rollover Manhattan, Fifth Avenue, Madison Avenue, Broadway and Times Square retail as a strategy, because we are focusing on trying to put dollars to work in the office residential business in bigger volumes than that.

It doesn't mean that we don't think there's an opportunity to create value there. As you said, we have in excess of $60 million of revenue and most of it is NOI just at 767 Fifth Avenue, the General Motors building, and we have 100,000 square feet of space there, so we have a pretty significant, relatively speaking, volume of that.

And we are working real hard right now at figuring out ways to significantly enhance the assets that we have on the 53rd and Lexington and Park Corridor -- a.k.a. 601, the former Citibank building -- as well as 399 Park Avenue to really create value and significantly increase the revenue potential of the street-level retail in those buildings.

So it's not that we are not thinking about it. It's just we've not been focused on going out and buying the sort of one-off and creating a business like that.

Okay. In the second question I had was on Reston Town Center and specifically given the pricing that you achieved on Patriot's Park, and what I consider Reston Town Center to be, which is kind of an oasis in the middle of a suburban DC office desert, is that an asset you would ever consider selling or JVing and focusing your efforts in DC, sort of in a more high-rise urban footprint?

I will answer that one. This is Ray Ritchey. And by the way, I'm in the Boston office today and it's just magic. It's just wonderful to be up here with these people.

I can say that from our perspective in Washington that the Reston asset is a core asset -- not only today, but the future of that specific region is very much tied to the continued success of Reston Town Center. And that while we are an oasis in a desert, we are a very large oasis and dominate the market and we see even in times of softness in the surrounding markets, our ability to continue to outperform -- and this is before the metro comes.

And any future supply that will have a similar type of amenity base and thus attraction to the tenant, we control. So this is a market we dominate today, we will dominate in the future. And others at this table may have a different opinion, but they will get a strong argument against the Washington contingent, if that is in fact the case.

I would just put it in a slightly less personal context, which is that we believe that there continues to be an opportunity for strong growth in the Reston market, and that's both through the appreciation of the cash flows and the existing assets, as we reinvest in those assets and make them better -- a.k.a. from what we're looking at doing, for example, with the reselling with 1 and 2 Fountain Square.

And then as I suggested, we've got 750,000 square feet of immediate development and we have another 2 million to 3 million square feet of longer-term development. And so we look at what we can create and what we can grow in Reston.

And I guess to the extent that at some point we felt there was no growth left in it, we'd feel differently, but right now, our crystal ball tells us that it's this cluster and this particular location has a really strong long-term growth prospect and that it's the kind of place we should be investing our money and seeing strong increases in our cash flow over a long time period.

Also the past part disposition is a long-term 20 year lease, no real upside for a long period of time, at a very attractive capital environment. So that was more -- the sale is opportunistic and not indicative of the Company's commitment to Reston.

Thanks.

Alexander Goldfarb, Sandler O'Neill.

Two questions here. First, maybe, it's for John, but as you guys look at New York, just given the way land pricing has gone, are you still able to find deals where you can outright own the land or are you increasingly looking at ground lease situations?

And by extension, are you also have to look at situations where it's either a combination with residential or hotel to make the numbers work? Just curious just with the bid from condos, curious of straight up office deals, B simple ownership, if you can still make them (technical difficulty).

John, you want -- he addressed the question to you.

Sure. It's a very difficult market. There's a lot of money chasing deals here and it's very difficult, so my approach is not to focus on the books that I get, but to try to be innovative and proactive in the market and look for other type of opportunities. And I think we are making some in roads, but nothing we can announce here.

Okay, but do you think that we will see either ground lease situations or mixed-use situations as you announce future New York or borough deals?

I would say we are open to all that.

Okay. And then for Ray, if you can just give some color on the DC acquisition -- maybe I missed it in the MD&A, but is this a redevelopment play, is this a major lease expiration where you are -- the reason you're buying it is because you're comfortable, you've got a tenant to backfill? Just sort of curious -- some color on the DC acquisition.

This is Doug. We don't feel comfortable talking about what the DC acquisition is at this point, because it's an off-market letter of intent that we are approaching. And obviously it's a transaction that Ray has found that we think there's great long-term value creation opportunities on. But it's not appropriate to talk any more about it at this point.

Okay. That's cool. Look forward to hearing more about it when you can. Thank you.

Jordan Sadler, KeyBanc Capital.

I just wanted to take the other side of Ross's question, if I could. I'm just curious about in terms of DC, you've got this oasis in Reston that seems to have these natural barriers to entry, whereas in the District, there don't seem to be huge barriers to entry like we see in some of the other cities that you're focused, and even in Reston with construction continuing in some big potential sites. What are the thoughts surrounding pairing that portion of the DC exposure and maybe concentrating more in Reston?

Let me just give you some historical context about what we've done in DC just -- because I think it's important in answering the question. So the vast majority of our holdings in DC were done through development -- ground-up development, where we have found either sites or landowners who had sites and we've done joint ventures with those parties in order to be in the value creation business on a long-term basis.

There have been one or two acquisitions that have been done in what I would refer to as transitional times, when the capital markets were struggling and we had the availability of funds to buy buildings at very, very attractive valuations, where we felt we could reposition those assets or, honestly, wait until the leases rolled and just mark to market over a period of time.

And that continues to be where we are focused in Washington, DC. Interestingly, we have actually done a significant amount of pruning in DC over the time that we've been a public company as well.

We sold 1301 New York Avenue last year, we've sold -- we are in joint ventures with a significant number of our properties, so we sold a joint venture interest in Metropolitan Square when we did our 901 New York Avenue deal.

We sold one of our major assets in the southwest of the city 10 or 11 years ago -- [Demarkesy] Center, which is in the suburbs. So we continue to be thoughtful about the long-term opportunities to create value in DC as well as what the appropriate exit point is for a particular asset.

We are underway right now, Jordan, as you know, with 601 Mass. That's a site that we controlled five years ago with a lease back from NPR, built their new headquarters. The project is 85% lease-free activity, doesn't deliver for another 15 months.

The cash on cash return of that is going to be mid-[$8 million], unlevered when it delivers. So while Washington continues to be challenged, and at the risk of sounding self-serving here, we have continued to outperform the market, not only in Reston, but also downtown.

And we are playing really good defense on the three major renewals we have. We are very, very optimistic about our own chances of success at keeping all three. So while Washington has had a little bit of dip in the last two or three years -- and relative to barriers to entry, that pesky height limit keeps those buildings at 11, 12 stories.

So for us to deliver 1 million square foot tower that you see in the other three markets, it takes four or five buildings to meet that level of supply. So we're still bullish on DC and specifically, very bullish on Boston Properties's position in that market.

Okay, thank you.

Tayo Okusanya, Jefferies.

Want to go to the next one, operator, please?

Michael Bilerman, Citi.

Hey, guys, this is actually Manny here with Michael. Just thinking about -- you mentioned a 2015 cash NOI growth. Was wondering what the spread between the cash and the GAAP may be, given the burn off of free rents and other things?

There still is a gap, so we still do have free rent burning off in some of the same-store from some of the leasing that we've done. I don't want to describe right now what the amount of that cap is, but there still is some more in there.

I do -- I would expect our -- in the same-store portfolio, the non-cash rent to be lower in 2015 than it was in 2014, although we will have non-cash rents in our development portfolio that actually will probably be higher than in 2014. But if you just look at same store, it will be lower.

Right, thank you.

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

Okay, it's Owen Thomas. Let me just summarize by saying hopefully, we've been able to demonstrate to you how busy we are at the current time, given all the projects and activities going on. We feel we had a strong second quarter operationally and we made significant progress executing the long-term strategy that we've been articulating to you. Thank you for your time and attention.

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