波士頓物產 (BXP) 2014 Q4 法說會逐字稿

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

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

Good morning, and welcome to Boston Properties' fourth-quarter earnings conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements.

If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we'd 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 Thursday'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, Chairman of the Board; Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchie, our Executive Vice President of Acquisition 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. Let me spend a little bit of time talking about the economy at large, since we all work within that environment. The mood out there is really quite despondent. In the recent poll, only 40% of Americans say they are satisfied with the economy.

This erosion of support is because we are undergoing the weakest recovery from a recession since World War II, and the restorative benefits of a rebounding economy have not reached a significant percentage of Americans. In manufacturing, we have 300,000 fewer jobs compared when Obama took office, and 1.5 million fewer total jobs than before the recession. Adjusted for inflation, the average wage for an employee in America has increased by a mere 2% since Obama took office. And half of that is because of increased hourly pay, and the other half is because of increased hours.

Ordinary folks are just not sharing the little wealth that has been created. Fortunately, lower gas prices has put about $7.50 a week into the average wallet. But the President has lost much of his credibility and traction with the public and so has the Congress. The President is trying to shift all the new tax burdens as a tax on capital or wealth, rather than on income or wages, and the Republicans want to find ways to help the middle class, primarily through a much stronger job market, which they don't believe will come out of the Obama approach.

But it's that kind of environment that is still the background for what we are all working in. A year ago, 65% said the gap between the rich and everyone else had grown over the last 10 years, and 90% of Democrats and 45% of Republicans want to do something about this gap. So it's going to be a very interesting political year, with the Republicans in charge of the Congress, and the President, of course, as the Chief Executive, on the other side of just about every issue.

Fortunately, for Boston Properties and its activities and strategy, we have been able to do and continue to do quite well, given the fact that we are focused in certain markets and in certain developments within those markets. So, I will say to you that we still believe that there is a market for what we do. And I think we will be able to describe this, as you will hear from my colleagues in a little while.

I have a little bit of an additional announcement. As you all know, at the end of 2014, I completed my previously announced move from Executive Chairman to Chairman of the Board of Directors of Boston Properties. I will still be active in the Company, and I will obviously continue to share my views on the economy, our markets, and the Company's activities with our executive team and Board of Directors.

By way of background I'm just going to say this. I founded Boston Properties nearly 45 years ago. My longtime partner and great friend, the late and very talented Ed Linde, joined me six months later. We shared a simple philosophy of building and buying first-class buildings in first-class locations in first-class markets.

That may sound simple, but it was a lot more difficult to execute. And it was made possible primarily because of the wonderful group of people who joined the Company over the years, and helped grow Boston Properties into one of the largest, and I sincerely believe, one of the most respected real estate firms in the country, which remains true to this day.

I believe it will continue, given an outstanding management team who will continue to ensure that Boston Properties thrives and prospers. I look forward to remaining active as the Chairman of the Board and continuing to provide my support to the Company's efforts. I want to thank you all for supporting the Company for all the years that I have been involved, and I wish everybody well.

With that, I will just turn the telephone now over to my colleagues.

Okay. Good morning, everyone. It's Owen Thomas. Thank you very much, Mort. You and Ed Linde certainly built a remarkable franchise over the last 45 years. And all of us at Boston Properties are very grateful for all your successes on the Company's behalf. And we look forward to continuing our work together with you as Chairman of the Board.

This morning, I want to address the economic and operating environment, our performance for the fourth quarter, and provide an update on our capital strategy and related accomplishments. Let me start with the environment, and Mort touched on some of this.

We've all experienced rather significant and, at least in my opinion, unexpected volatility in a number of capital and commodity markets over the last quarter. As we all know, oil prices have dropped to $45 a barrel -- basically dropped in half in just the last three months. The European economies continue to suffer declining economic growth and inflation, prompting strong action by the European Central Bank, which initiated a new and aggressive QE program. Many other central banks around the world have and will continue to take comparable actions.

China announced 7.4% GDP growth for 2014, its lowest level since 1990. Lower interest rates and slower growth outside the US have prompted roughly a 15% rise in the trade weighted dollar over the last six months. And importantly, lower interest rates around the world have sparked a reduction in our rates here in the US. The 10-year has dropped another 40 to 50 basis points in the last quarter to a level of around 1.8% today.

US economic growth has remained reasonably robust. The forecast for this year or for 2014 is around 2.5%. You just saw fourth-quarter announcement of 2.6%. And the unemployment rate, which Mort discussed, has dropped under 6%, though underemployment remains stubbornly high.

So, what does all this mean for Boston Properties? Starting with the property market, in the short-term, there has not been nor do we expect much change. We are not active in any energy-driven markets, so we see no direct impact to our tenants from falling oil prices and their associated negative impact on capital investment and employment in the energy sector. We continue to see healthy economic growth in San Francisco, Boston, and New York, driven by technology and other creative tenancy, while downtown Washington, DC, driven more by government and law firms, continues to experience more difficult leasing conditions.

The longer-term impacts of all the recent market moves are more difficult to discern. Lower energy prices should be healthy for consumers. However, low oil prices will have a negative impact on the energy sector, and a stronger dollar will be an obvious headwind for exporters and US companies with significant non-US activities, as evidenced by some earnings reports over the last week.

Now moving to the impacts on the capital markets for real estate, lower interest rates can only add to the aggressive pricing we've witnessed for assets in our core markets. Further, the downward pressure on growth and interest rates outside the US has likely pushed back the timing for the inevitable increases in US rates. Acquisitions will likely remain as competitive as ever, and we believe we can be more patient in the pace of our asset sales and in Company financing activity.

Now let me move to results for the fourth quarter. We continue to perform well, and made excellent progress in the execution of our business. As you know, FFO for the fourth quarter was $1.26 a share, which is a penny above consensus forecast. We completed 88 leases in the fourth quarter, representing 2.2 million square feet, with the New York region being the largest contributor at nearly half the leasing volumes. This level of leasing activity is roughly 70% higher than our quarterly averages.

And for all of 2014, we executed 362 leases, representing 7.8 million square feet of activity, an annual leasing record for Boston Properties. The record level of leasing is being driven by not only new development activity, but also the early renewals of several significant law firm tenants, primarily in New York but also in Washington, DC. Our in-service properties in the aggregate are 91.7% leased, down 0.3% from the end of the third quarter.

Now, moving to capital strategy, as mentioned, our approach will remain consistent with what we've communicated in prior quarters. Given that prime assets in our core markets are trading at higher prices per square foot and lower yields than where we can develop, we will likely continue to be net sellers of real estate while reinvesting raised capital into new developments.

Starting with acquisitions, the pursuit of acquisitions remains active but challenging. New investments considered to have some type of competitive angle for us, such as providing tax protection through the use of operating partnership units as consideration, working with a financial partner on specific assets, or involving properties with a development or redevelopment component, where we add value through our expertise.

We also continue to be active in our disposition activity. In the fourth quarter, we completed the sale of Patriot's Park, the Norges venture on 601 Lexington Avenue, Atlantic Wharf Office, and 100 Federal Street, and the sale of a small land parcel. With these three transactions, along with the sale of five additional smaller assets, we sold $2.3 billion in 2014 at a 4.25% aggregate cap rate, resulting in a $4.50 special dividend to shareholders, and the remaining capital to be invested in developments we expect to yield around 7%.

Turning to dispositions for 2015, we intend to remain active. We will continue to focus on noncore assets and transactions where pricing is very attractive relative to the cash flow growth characteristics of the asset. Our expectation is that we will likely have a greater number of smaller transactions in 2015, totaling in excess of $750 million in total dispositions.

In early January, we restored the contract for the sale of our leasehold interest in the Avenue at a net price of $190 million. The Avenue is a 335-unit Class A apartment building with 50,000 square feet of associated retail, located adjacent to George Washington University at Washington Circle, and is encumbered by a 54-year remaining ground lease. The sale was completed at a 4.1% cap rate. Our basis in the asset is $95 million, and the total unleveraged return to shareholders from this development is 15.2%.

The transaction is scheduled to close in the first quarter and is another great example of the value we add for shareholders through our development activity. We 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 did not fully place in service any new assets in the fourth quarter and did add the previously discussed 15,000 square foot expansion of the Prudential Retail Center to our active pipeline, which now consists of 11 projects representing 3.3 million square feet, with a total projected cost of $2.1 billion.

Our development pipeline is in the aggregate 58% leased -- preleased. However, we had a number of important accomplishments in our predevelopment pipeline, which Doug will cover in more detail in his remarks. Most importantly, we completed our joint venture agreement with Delaware North for the development of the 1.8 million square foot mixed-use North Station Project, located adjacent to the Boston Garden.

Further, we were able to add two potential projects to our predevelopment pipeline -- a site at 4th & Harrison Street in San Francisco, and a renovation and potential development at the Back Bay Transit Station in Boston. We are now actively engaged with development projects at two of Boston's three major transportation nodes.

We continue to be in the predevelopment stage on a significant set of projects with strong potential in all our markets. Over the next year, we expect to be able to add approximately $1 billion in new projects to our active development pipeline, which is followed by a significant number of additional projects for future years, all, of course, subject to market conditions.

Let me turn the discussion over to Doug for a further review.

Thanks, Owen. Good morning, everybody. Talking to you here from snowy Boston, where we've recovered from the blizzard of January 2015. We were -- in fact, were closed on Tuesday, so we couldn't physically get here. There was a state of emergency. All the roads were closed, so we were unable to get our work out to you as we had hoped. But we got it to you last night and here we are this morning.

I'm going to organize my comments into three segments today. The current state of our operating markets -- I'm going to give you a short update on our existing development pipeline. And then I'm going to put a little bit more meat on the bones of our future development activities.

Consistent with Owen's remarks on the overall US economy, as we enter 2015, the overall health of the office markets, in our opinion, is stronger today than it was 12 months ago. And why do we say this? Well, first and foremost, it's the demand from the technology and the life sciences businesses that's really driving things. And it continues to be very strong.

In 2014, there was more capital deployed in the startup ecosystem than in any year since 2000. Venture capital investing in 2014 was over $48 billion, and included more first and second round investment than at any time since 2001. The Silicon Valley and New York City and Boston dominate the share of those investments.

In 2014, the top 20 technology leases in San Francisco totaled almost 3.8 million square feet of demand. The average of the previous four years, which all were strong years, was 1.9 million square feet. In Massachusetts, we had 17 biotech IPOs in 2014 compared to 9 in 2013.

And while the demand from traditional office tenants in the legal and the large financial services sector is not expanding, we believe we are getting much closer to the end of the law firm and financial services space reductions, stemming from changes to space utilization and downsizing. And we are seeing small financial firms expanding and absorbing high quality, premium office space.

One of the DC brokerage firms actually estimates that 80% of the law firms in the DC market have gone through their downsizing cycles, so we are getting closer to the end. We had a terrific year on the leasing front, judged by our gross volume of activity. And that was driven in large part by the Salesforce.com lease at Salesforce Tower, and our strategic decision to go get in front of our major law firm expirations.

So, in 2014, we completed six leases with law firms, with expirations from 2015 to 2022, totaling over 1.4 million square feet. As you can see from our leasing statistics in the supplemental, the mark to market we've been describing in Boston was 38%, and in San Francisco, 22% positive, all running through the portfolio as we've talked.

The Boston figures are dominated by 139,000 square feet of leases in our Cambridge portfolio, where there was a net increase of over 50%. The New York City portfolio had a very small down hit this quarter, largely due to the fact that the majority of the deals were coming from Princeton, where there were limited transaction costs. And there was only one Manhattan deal in the stats, and it was actually a short-term extension on a piece of space that was signed in 2010. So, really very irrelevant.

And in DC, those supplemental statistics are really biased by the NII bankruptcy, which resulted in a leased piece of space that was sublet, converting to a direct lease with Leidos in Reston Town Center. And that resulted in a $5.00 a square foot reduction in rent on 72,000 square feet. If you pull that out, our transactions in DC were actually up 12% on a net basis.

Last quarter, I provided a leasing roadmap for our 2015 earnings projections. This morning, my focus is really on the current market conditions that are impacting our portfolio. So let's start in Washington, DC.

The Washington, DC (CBD) market continues to be very competitive, since there really hasn't been any significant increase in demand. In the face of this, our DC team is making significant progress on the future expirations which are found in our 50%-owned JV properties in the CBD. In December, we completed a 250,000 square foot early renewal at 901 New York Avenue, where this law firm downsized by only 15%. In three assets, where we have upcoming rollover due to law firm relocations, we are competing for and winning market share.

At 901 New York Avenue, we have a 90,000 square foot lease expiration in 2015, and we have leases signed or pending for 55,000 square feet of that space. At Market Square North, where we are getting 90,000 square feet back, we have leases pending on 60,000 square feet. And at Metropolitan Square, at the end of the year, we have 122,000 square foot lease expiring at the top of the building. And the space is probably some of the best space in the entire portfolio and in the entire city.

There does continue to be additional supply coming into the DC market in the form of partially-let buildings for lead tenants, not unlike the building we are building at 601 Mass, as well as speculative new construction in the CBD, NOMA and the Southwest markets. Reston, which offers walkable retail and a great mix of office and multifamily, continues to draw tenants. Small tenant demand is strong. And Bechtel, which moved to Reston Overlook in July of 2012, continues to relocate additional employees into the Town Center, and we are working hard to find space to accommodate their growth.

As we described last quarter, NII filed for bankruptcy, and it resulted in about 72,000 square feet of space moving to direct lease with Leidos; a 21,000 square foot expansion by Google to take some of that space; and about 63,000 square feet of immediately available uncovered exposure. The Omnibus federal spending legislation that was signed in December may result in some limited spending increases in the defense and homeland security areas. And if this finds its way into the programs associated with Ft. Meade -- such as the Cyber Command -- it should improve our opportunity to see enhanced leasing activities at our JV assets up at Annapolis Junction.

Four of those law firm transactions I talked about were completed in New York City in the portfolio in 2014. And as I said earlier, this was a strategic decision, since these tenants were all evaluating the large blocks of space available both downtown on the far west side, and in those blocks that were going to become available due to some of the tenant relocations, such as Conde Nast and Time, down from the Midtown West market to the downtown market.

The economics we achieved in these transactions recognized the locations of our building in contrast to the potential competition. In other words, we got paid for the kind of space we had. We didn't compete on price. In the case of Weil, we were also able to take a floor back on December 31, and have already leased it at an average mark to market of over 60%. We also completed an early renewal at the top of the building, where the mark to market on the initial rent is over 25%, to sort of give you a sense of the embedded upside at the General Motors Building.

We are actively working to re-lease 173,000 square feet of our Citi exposure at 601 Lex that occurs in mid-2016; 90,000 square feet of that is on floors 15, 16 and 17, and we are under discussion and working with Citi on an early termination and a lease-back. The rest of the space is in the Annex building, the lowrise, where we expect to commence a major redevelopment in 2016.

Activity at the high-end of New York City -- rents over $100 a square foot -- was almost 1.9 million square feet, which was more than double the activity in 2013. And it's risen from the nadir in 2009 of under 200,000 square feet. We have leased our last available floor at 510 Madison Avenue. While the majority of the high-end activity is still under 40,000 square foot on a unit basis, and the new leases average about 12,000 square feet, as opposed to the renewals, larger transactions above $90 a square foot are becoming more and more frequent on Park Avenue and in the Plaza district.

Princeton continues to outperform the New Jersey markets. We completed almost 100,000 square feet of leases in the fourth quarter, most from expanding pharma companies, and we are now in lease negotiations with another 250,000 square feet as we enter 2015.

Turning to Boston, the Kendall Square area of Cambridge continues to dramatically outperform the rest of the urban Boston markets, and asking rents above $70 a square foot are prevalent and the vacancy rate is under 8%. Migration out of Cambridge is now occurring. During the last half of 2014, three tenants moved to space in the Financial District, the Back Bay, and Downtown Crossing, because they couldn't find a space at an affordable price.

In the Back Bay, we are underway with our repositioning and rebranding at 120 Clarendon, the Hancock Tower lowrise, where we have 150,000 square feet of availability. Our asking rents on the lowrise space of the Hancock Tower are lower than the rents in Cambridge. When fully leased, the available space at the Hancock should generate close to a 40% increase over expiring rents.

The Waltham Metro West market continues to get stronger, driven by expansion by life science and technology companies. Organic growth continues into 2015. A number of suburban life science and tech companies have announced expansions. During the first -- fourth quarter, we completed another 175,000 square feet of leasing in the market, including a 61,000 square foot lease at Bay Colony. This was the space we toured during our Investor Conference in September, bringing our total leasing at Bay Colony in 2014 to over 250,000 square feet.

We have limited current vacancy in our suburban portfolio, but we will be taking back 170 Tracer Lane, which is a 75,000 square foot building, and taking it out of service and repositioning it in the spring. And we are going to be getting about 100,000 square feet back at Bay Colony in October.

San Francisco continues to be the strongest demand in the country. With the expected Prop M restrictions, it's also going to be facing availability supply constraints. 2015 will be very similar to 2014, with very limited roll-over and flat occupancy in all our existing portfolio. During the fourth quarter, we completed eight more leases, including a vacant leased floor at EC4, with starting rents in excess of $80 a square foot.

We're actively engaged with over 215,000 square feet of full floor tenants with 2016 and 2017 lease expirations. Some of these renewals will be with law firms, where they are shedding some amount of space, but where we see significant opportunities for rental rate increases for both the renewals and the recapture space. The average mark to market over -- on the starting rent on all these transactions is over 50%.

Our current development pipeline continues to show strong leasing momentum. Wolverine took an additional 30,000 square feet at 10 CityPoint, bringing the leasing in that project to 74%. We have three leases under negotiation at 888 Boylston Street, which would more than double our commitment to over 260,000 square feet. We've completed two additional leases at 535 Mission, bringing us to 202,000 square feet of signed leases or 66% leased at the end of the year. And we have a number of active full floor proposals under discussion there.

We've leased all of the office space at 690 Folsom, which was delivered in early December. The Avant, the residential building in Reston, is now 84% leased after 13 months. 601 Mass Ave in Washington, DC signed its first retail lease for 12,000 square feet. And we are in negotiations on the remaining 6,000 square feet of that retail. We anticipate delivering the building to A&P, Arnold & Porter, per the lease during the third quarter of 2015.

At 250 West 55th Street, we ended the year at 79% leased. We continue to have success with small tenants, and are continuing our prebuilt program on the 30th floor, where we've done two leases of 5,600 square feet, each in the high $90's starting rent; another 13,000 square feet of pre-builts is under lease negotiation, and there is good full-floor activity on a portion of the remaining floors.

Construction at Salesforce Tower continues to progress. With a mid-2017 delivery for spaces at the top of the building, we are not yet in the window for any lease expiration-driven leasing under 100,000 square feet. Our marketing team continues to actively market the building across the Bay area, both urban and in the Silicon Valley, and there is a continuous flow of users that have expressed interest in the building. And we have commenced preliminary conversations with a few large tenants for the building for delivery in 2017.

Before I turn the call over to Mike, I do want to provide some commentary on our future development pipeline, where we really did make a lot of significant progress during the fourth quarter. The press release announced the official commencement of our venture at North Station. We've also garnered our first lease commitment for the retail podium. Star Market has taken 62,000 square feet and put in a full-service grocery store. And we are in discussions with a number of other retailers, as well as office tenants, for various portions of the podium structure.

Design documents are progressing. And over the next few months, along with our partners at Delaware North, we will determine the phasing of the project, and how and when we will sequence the construction. Again, earlier this month, we completed an amendment with the state of Massachusetts for the Back Bay Garage leasehold. We agreed to a 45-year extension of the ground lease, so it's now a 99-year ground lease.

We agreed to prepay the ground rent. We agreed to manage the refurbishment of the Back Bay Train Station, which will be paid for by the Commonwealth of Massachusetts. We agreed to take over the property managing and leasing of the station and, most importantly, we've created a mechanism to potentially add additional density to our existing Clarendon Street Garage plus a separate parcel adjacent to the train station and the Garage. We have not yet advanced any plans for these air-rights parcels, nor have we had any detailed conversations with the City of Boston or the local community. This will come as we work furiously over the next year to advance our planning.

In San Francisco, we've executed an option agreement on a 2.3 acre site at 4th & Harrison, and to assist the long-term owners, the Barrett family, with a permitting process on this block. The site is located in the heart of the South of Market area, and it is two blocks from stops on the new Central Subway line on 4th Street that connects Caltrans to the city. Based on the pending Central SoMa zoning, approximately 780,000 square feet of office retail and/or residential can be built on this site. We will, however, require Prop M allocation before we commence development.

We are in advanced discussions on a development project in an outer borough of Manhattan, probably one of the worst-kept secrets in the city; as well as another site in Waltham, Massachusetts that would include a building that could be under construction in 2015, and the potential for 1 million square feet of additional office and retail development that's on a joint venture basis. We continue to chase a large GSA consolidation requirement for our Springfield, Virginia landholdings, and we are in design and permitting for 500 residential units and 25,000 square feet of retail development in the Reston Town Center urban core on our signature site.

So, as Owen suggested, we may not be making much acquisition headway, but we continue to dramatically expand our opportunities to put our capital to work through our development activities. And with that, I'll let Mike go through our results for 2014 and our 2015 guidance.

Great. Thanks, Doug. Appreciate it. Good morning, everybody. I'm going to start with a couple of comments on the -- on our capital markets activity. As Owen mentioned, we had the successful closing of sales of Patriot's Park and the portfolio sale of a 45% interest in Atlantic Wharf, 100 Federal Street, and 601 Lexington Avenue this quarter. The returns associated with these deals reflect the strong value creation that we can achieve through the development process, as well as a smart and disciplined acquisition strategy.

The unleveraged IRRs we generated with these investments were strong, and totaled 10% for Patriot's Park, which is over a 16-year hold period, and 15.5% for the portfolio sale. I do want to point out that the $970 million gain on sale for the portfolio deal is reflected in our financial statements as an increase in our paid in capital account, combined with a decrease in noncontrolling interest in property partnerships to account for the debt assumed, and not as a simple gain on sale, as you might expect.

This accounting treatment stems from the fact that we have maintained operating control of the buildings and we will continue to consolidate them under GAAP. We were also active in the debt markets this quarter. We refinanced our $150 million expiring mortgage loan on 901 New York Avenue. The old loan had an interest rate of 5.19%. And the new 10-year mortgage loan, which is for $225 million, it has a coupon of 3.61%. We locked the rate when 10-year treasury rates were in the low 2% range. And with the rally in rates this year, we think we could price a new 10-year in the bond market today in the [3.125%] to 3.25% area.

This quarter, we also redeemed $550 million of our unsecured notes that were set to expire in mid-2015. That resulted in a debt extinguishment charge to earnings of $10.6 million or $0.06 per share in the fourth quarter. This was relatively high-cost debt with an average coupon of 5.34%, and the redemption was funded with a portion of the net proceeds from our sales activity, and was included in our prior guidance.

Our projections don't include raising new debt capital in 2015. But given the low interest rate environment, we are evaluating various hedging strategies, including both traditional interest rate hedges and potentially early refinancing of a portion of our 2016 and 2017 debt maturities that have an average coupon of 5.8%. Our current cash on-hand is nearly $2.3 billion. After funding our special dividend of $4.50 per share this week and our forecasted development spend, we project a cash balance at year-end 2015 of about $800 million.

Turning to our earnings for the quarter, we reported funds from operation of $1.26 per share, which is $0.02 per share above the midpoint of our guidance range. The earnings outperformance came from a combination of core portfolio performance and better-than-projected development and services fee income. The biggest mover in the portfolio was from the accelerated recognition of fair market rental revenue associated with Weil Gotshal, who elected to terminate the 35th floor of the GM Building a couple of months earlier than we had projected.

As Doug mentioned, we've already leased this floor to a new tenant at a rent roll-up of over 60%, so we will have downtime in 2015 as the space is built out. A portion of our fee income this quarter came from the signing of our joint venture agreement at North Station. This enables us to recognize development fees this quarter as well as through 2015, as we finalize the design and plans for the first phase of the project. We also generated better-than-projected service-related fee income this quarter.

Overall, we had a really strong year in 2014. Our portfolio generated same-store cash NOI growth of 5.6% over 2013. As Owen mentioned, we sold $2.3 billion of assets at a weighted average cap rate of 4.25%, and we delivered $1.5 billion of new developments that are currently 86% leased, and are anticipated to generate an initial cash yield, which is weighted by 250 West 55th Street, of over 6% on stabilization.

In addition, we have another $2.1 billion of development underway, with a projected initial cash yield of greater than 7%. And importantly, we've already raised the funds required to complete our pipeline, which is currently sitting in cash on our balance sheet.

As we look at 2015, and as we discussed last quarter, we have 580,000 square feet of roll-over in our CBD Boston portfolio, primarily at the Hancock Tower, that we anticipate will result in a temporary loss of occupancy and income during 2015. Again, upon re-leasing, we anticipate a significant uptick in rent from the space, but it negatively impacts our 2015 earnings growth. The majority of this space expired on December 31, 2014, so we expect our occupancy to dip down from its year-end level of 91.7% to closer to 90% in the first quarter before recovering and averaging around 91% for the full-year.

In New York City, we were successful in our large law firm early renewal strategy in the quarter. We completed three law firm renewals totaling 700,000 square feet. The net space contraction was only 40,000 square feet or 5%. However, one of the leases was above-market and this, in combination with the give-back space, will have a negative impact on our 2015 cash NOI. On a GAAP basis, these deals have a positive aggregate impact to our earnings due to contractual rental bumps in the leases.

In Washington, DC, we are in contract to sell our residences on The Avenue project for a price of $190 million. We expect closing in early March and the loss of $5 million of FFO to 2015. The FFO cap rate, which is 3.1%, is lower than the cash cap rate that Owen described, due to the impact of the ground lease that contains contractual increases that are straight-lined for GAAP FFO.

Our projections for the rest of the portfolio are generally in line with our guidance last quarter. Overall, we anticipate our same-store GAAP NOI for 2015 to be relatively flat between negative 1% and positive 0.5% compared to 2014. And that's in line with our guidance last quarter. We project 2015 same-store cash NOI growth of flat to 1% from 2014. That's 50 basis points lower than last quarter, due to the impact of the law firm renewal in New York City.

And as Doug reviewed, we saw good progress in our development leasing this quarter. Our developments are projected to add an incremental $53 million to $63 million of NOI in 2015. Our non-cash straight-line and fair value lease revenue is projected to be $90 million to $100 million in 2015. And we expect our hotel to generate $12 million to $14 million of NOI in 2015.

For our development and management services fee income, we are projecting $17 million to $22 million in 2015. This is slightly better than the last quarter, due to higher expected development fee income. There's one item I do want to point out in our fee income, that our GAAP fee income excludes cash leasing commissions that we collect on our consolidated joint ventures, that in accordance with GAAP accounting, are recognized as a reduction in noncontrolling interest. And, more importantly, they are amortized over the term of the respective leases, which could be 10 to 20 years. I

If these joint ventures were unconsolidated, we would earn the fees in the period the lease was signed. This quarter, we collected $7.8 million of these fees, which is reflected in our FAD.

We project our G&A expense to be $96 million to $100 million in 2015, which is lower than our projection last quarter. As I mentioned, we have no material 2015 debt expirations, and our guidance does not assume any additional financing activity during the year. Our net interest expense projections are unchanged from last quarter at $415 million to $425 million for the full year, and includes $40 million to $50 million of capitalized interest associated with our development activities.

Our noncontrolling interest in property partnerships will be higher than in 2014, due to the sale of a 45% interest in the three-asset portfolio to Norges. Because these properties remain consolidated, 100% of the NOI and interest expenses reported in our consolidated statements, and the net income allocated to the noncontrolling interest is deducted separately. We've provided a page in our supplemental financial report that reconciles our noncontrolling interest, so that you can calculate the deduction from FFO.

For the full-year 2015, we project the FFO deduction for noncontrolling interest in property partnerships to be $135 million to $145 million. So if you combine all of our assumptions, it results in our projected 2015 guidance range for funds from operation of $5.28 to $5.43 per share. Despite the loss of $0.03 per share from the sale of The Avenue, we are increasing our guidance range by $0.03 per share at the midpoint.

Our guidance increase includes $0.02 per share of projected improvement in the contribution of our developments; $0.02 per share from lower G&A; and a penny of higher development fee income. We have not included any additional asset sales in our guidance.

In the first-quarter 2015, we project funds from operation of $1.22 to $1.24 per share. As in the past, our first quarter is always our weakest quarter, due to the seasonality of our hotel and the timing of the accrual for payroll taxes investing in our G&A.

With the addition of the residences on The Avenue to our disposition program, the aggregate impact from our disposition activity since 2014 is the loss of $72 million of FFO or $0.42 per share in 2015 compared to 2014. In addition, we've paid $770 million or a $4.50 per share special dividend to our shareholders. Despite this sales dilution, we still expect to grow our FFO in 2015, with a strong contribution provided from delivering developments and lower interest expense from reducing our debt, which in aggregate add over $90 million of incremental FFO to 2015 at the midpoint of our guidance range.

In addition, we have retained nearly $1.2 billion of sales proceeds for redeployment in our active development pipeline.

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

(Operator Instructions) Michael Bilerman, Citi.

If we look at the residences at The Avenue sale, you had a comment about NOI support in your press release. Just wondering if you could share some details of what that entails with us.

Sure. So, the way the transaction was structured was that actually $196 million purchase price, and to the extent that the NOI is less than a particular number over the first, I think, six years of the property's performance, we effectively have agreed to make up the difference to the tune of a total of and a maximum amount of $6 million. So effectively, for purposes of accounting, we are only going to book $190 million sale and we have a $6 million receivable effectively that will -- if we actually pay it out, then it will -- nothing will change. If we don't pay it out, we'll have $6 million of additional gain later over the period.

That's helpful. And then maybe just more generally, was wondering if you've seen any changes in the investment landscape across your sort of prime CBD market, especially from foreign buyers? And maybe as a secondary, that if the drop in crude oil prices has led to any more recent changes in that environment?

Michael, it's Owen. I'd say no. I think that -- I can't point to a large number of significant trades yet, but my expectation is that lower interest rates could make cap rates even more aggressive in our market. And given that a number of sovereign wealth funds are driven by oil revenues, that is a very logical question you asked, but I haven't seen any tempering of enthusiasm from them because of lower oil prices. So we expect that the interest in our core markets by offshore investors will continue into 2015.

Great, thanks, guys.

Jamie Feldman, Bank of America Merrill Lynch.

I'm hoping you can talk a little bit more about your comments on New York City. I think you had said you are seeing a pickup in 99,000 square feet and larger leasing activity on Park Avenue. Financial Services firms, boutiques getting a little stronger there. So I guess just kind of big picture as we are thinking about the year ahead, how is Park Avenue stacking up versus some of the other submarkets? And what are tenants -- what is kind of tenant desiring now for like some of the -- for either downtown or for the Hudson Yards versus some of these more traditional submarkets?

John, do you want to take the first crack at that?

Sure. Sure, I will. Yes, Jamie. New York is in terrific shape now, I mean, on every measure. If you look at tourists, if you look at employment, if you look at the number of people living in the city, pretty much every variable is positive.

As it reflects the leasing market, I think the tech sector is doing very well, and you're seeing some expansion out of Midtown South into downtown and also into Midtown, particularly the Western part. And as Doug said, the financial market on the high-end is doing very well also. So the availability rate has dropped about a point and we're looking for it to drop more this year.

Okay, any thoughts on prospects for rent growth in Midtown over the next year?

Well, I think that we are going to continue to see more upward pressure on that than downward pressure. The availability rates, however historically, is still fairly high for what I would call a rent spike or rent top, although you are seeing that certainly in some sections of the city.

In Midtown South, certainly on the high-end market, we have a lot of activity at the over $90 and over $100 number that Doug mentioned. That barrier has been cracked in a way it hasn't been since 2007. So I think that there is still going to be trending upward rent, but perhaps not the rent spike until that availability rate drops down certainly into the single digits.

Okay, and then just if you were to think about if the pendulum of demand, how maybe a year ago, Hudson Yards was very interesting to people, talking to brokers and some of the other companies, maybe that swung a little bit more towards traditional Midtown submarkets now, is that -- are you seeing that as well? Or it hasn't really changed?

Well, the Hudson Yards has been a very attractive to the very large users that needed a block of space, because finding big blocks of space in Manhattan has been very difficult, except, of course, downtown. And most of the large -- most of the deals done there have been through large organizations looking to settle in on very large blocks of space.

The balance of Midtown has been very active and continues to be active. We are seeing very good activity at 250 now. As Doug said, 510 is pretty much done. When we got a floor at GM, that went quickly. So, with regard to the occupants of the vacancy we are going to have at 399, we are pretty optimistic on that. That's the Citi space and the Morgan Lewis space that will roll on [2017]. We are already working on that and we're already seeing good activity there.

Okay. And then just a follow-up for Mike LaBelle. Can you talk about the better G&A outlook? What moved that?

So, our G&A for 2014 was about $98 million, $99 million. And there was still some costs in there from the transition of the CEO that we had. So those costs are basically out of 2015. So, 2015 now excludes those costs and has kind of a general increase that we typically have for our compensation.

Okay. All right, great.

So we basically just -- yes, we finalized all of our compensation process over the last two weeks, and we have put in what we actually have for raises and anticipated bonus accrual for 2015 in the numbers now.

Okay. All right, thank you.

I just want to make one more comment on New York City, because I mean I did read some of the notes that were put out about sort of what's going on in the city. And I want to relate it to what we did.

So, the reality of the situation in New York is that for large tenant demand, there are three primary choices. There's the renewal in place, there's the new construction on the far West side, either Hudson Yards or at the Brookfield's project, or there is the new construction and the huge availabilities downtown. The pricing opportunities on those two new construction areas are subsidized in some way, shape, or form, however you want to characterize it.

And so -- and recognizing that a large tenant with a 2017 to 2020 lease expiration in Manhattan has reason to look at those types of alternatives, we made a decision that we were better off trying to cut those deals early at rents that we considered to be market rents for our space when we did that, which basically put our portfolio in the situation that we are now in, which is the bulk of the availability that we have is in very small chunks of space in the higher portions of our buildings, where we have the ability to achieve more premium rents than we might have, had we allowed these various tenants to sign lease expirations that were going to bring them out of those buildings two or three or four years from now, where we really didn't know when we were going to get the space back, what the market conditions might be.

So that -- those big blocks of space still remain in the city, and they have an impact on large tenant leasing, but they don't have that same impact on the single floor at a General Motors Building or the single floor at a 510 Madison Avenue or a single floor at 399 or a single floor at 601. So we feel really good about how we have strategically positioned our portfolio in the context of what will likely happen in midtown Manhattan and downtown Manhattan over the next three or four years.

Okay. And what do you consider the cut-off when you say big block?

John, what's your -- 250,000 square feet?

Well, yes, I would say 250,000 or more. Most of the deals that have gone to the Westside or gone downtown have been larger than that. But I'd say probably average size is more like 500,000. But certainly a 250,000-foot user has few choices in Midtown. There are -- in addition to what Doug said, there are a couple of choices on Sixth Avenue, one or two, and that was a -- that was another price point. Clearly, our renewals were at a higher price point than that also. But those are essentially the choices that rush tenants out. Downtown, Westside, something on Sixth Avenue or stay in place.

And is there a pipeline at all of new 250,000 square-foot-plus users? Like anyone new to the market that's looking for that much space?

Well, there is always new users. But when you just shove them further in the future. So, the [2019's] are pretty much done now and people are looking at the [2020's] and [2021] lease expirations. So those tenants are starting to get in the market interviewing brokers.

Okay. All right, thanks for the added color.

Jed Reagan, Green Street Advisors.

How is the early law firm renewal process going so far versus your initial expectations, maybe if you were scoring yourself on your internal score card? And how much more of that program do you think you can complete in 2015?

(multiple speakers)

Doug, can I jump in on the first one since New York had a lot of these?

Sure.

We targeted five and we've done four out of five, and we are still working on the last one.

And in our other markets, we had one in Boston which we completed, and we have -- had three in Washington, DC. One of them is done, which I described one of them, we are in negotiations to complete. And the third one, we made the decision that the Red Bull desires of that kind that were not comparable with where we thought the space would be allowed to be let by other tenants, and so we chose to move on.

And that doesn't have an expiration until 2019, Doug.

Okay. And the renewal in New York that had a roll-down, was that an unexpected roll-down? Or did that come just -- you just landed that sooner than you had initially thought?

I'll give you the specifics. It was a tenant that did a lease 10 years ago and their current rent was $135 a square foot. And that's above market for where they were in the building at 599, and so we reset them to a market rent.

Okay. And then on the San Francisco option agreement, can you just talk about your expected timeline for moving through the permitting process on that? And if you were successful in permitting, do you feel like that's a project for this cycle potentially or are you more likely looking at a future cycle?

Well, I'm going to let Bob answer the question, but if the site were permitted today, it would be a next-cycled product. But I think the fact of the matter is that it's not going to get permitted in short order. So Bob, why don't you sort of give a perspective on the permitting process?

Sure. This site falls within the Central SoMa corridor, which is being master-planned by the City right now. That's not expected to actually be in place until sometime in 2016. They say first quarter; it would probably be beyond that. So, it definitely is going to be a next cycle project based on Prop M allocation and the Central SoMa corridor plan.

But Jed, this site is in the heart of where all the activity is right now. I mean, if the site were available today, we probably would have significant demand for the larger tenants because of both its proximity to the central subway line and the configuration of the site, and the fact that we can do a really large floor plate.

Boston Properties move their local offices to that building?

I don't think we have enough demand for the size of floors that this building would allow us to have. So we are probably better off at a more traditional size floor plate.

Got it. Thanks a lot, guys.

Brad Burke, Goldman Sachs.

Doug, I want to know what you're seeing with construction costs and whether it's more pronounced in any of your markets than the others? And when you talk about building to over a 7% yield, are you expecting much in the way of cost inflation?

Okay. So let me answer in the following way. As much deflation as there is in the overall economy right now, in terms of the impact of oil prices and the impact of other commodities, it's not being reflected in reductions in construction costs in our markets. And that's largely due to two things.

The first is that the overall amount of activity in our markets on a relative basis is probably higher today than it's been at any time over the past five or six years. So there is more institutional residential as well as commercial development going on in New York City and Washington DC, in Boston and in San Francisco than there has been in quite some time.

The other thing that has occurred is that during the downturn, there were a number of contractors who basically gave up and either went out of business because they decided it wasn't profitable, or they were forced out of business because they couldn't make ends meet. So the number of quality contractors that are around to do the kind of work that we need to have done, has been reduced.

And so there has been somewhere in the neighborhood of 3.5% to 4.5% annualized increases in construction budgeting over the past year or so. And that is what we are using as we plan our projects on a going forward basis. And that's all baked into our numbers. And we really don't expect to see much in the way of a change in that.

In fact, in some of the cities, some of the larger projects, like the potential casino that's going to be built in Everett, and the current casino that's being constructed in National Harbor, are major users of both materials and labor. And given that the revenue models of those types of projects are such that time is critically important, they are prepared to pay whatever it takes to get resources. And that impacts the overall availability from a construction perspective in those markets as well. So, we are seeing it and we don't expect for it to abate any time soon.

Just to add to that, Brad, on the projects that we have underway, which is the $2.1 billion that I indicated and Owen indicated, had a return of over 7%, the vast majority of the costs associated with those projects have been bought, because those projects are underway. We have GMP's and contracts in place for those projects. So we are protected on those.

The place where cost increases would have more of an impact is the future stuff, that Owen had mentioned and Doug had mentioned, where we are building that into our budgets, based on the timing of when we think those projects are going to happen.

Okay. That's helpful. And then --

Just before you go on, there's one more component to that, and Owen probably should talk about it, which is -- I mean the interest component, and what people's returns expectations are, also are sort of a part of this whole process.

Yes. Well, look, I think that, given lower interest rates and lower returns generally available in the world, I think that's going to contribute to compression in the yields that investors are looking for in the development project. So that's impacting land prices directly.

Okay. And with the 50 basis point decline that we are seeing -- maybe more than that over the past couple of months -- are you seeing that yet in expectations and pricing on assets? Or is it more anticipated?

No, I think we are seeing it. If you look at the land price escalation that's occurred in San Francisco, I mean, some of it is clearly due to above-inflation levels of rent increases that's driving some of it, but some of it is definitely driving -- is driven by returns. As we underwrite -- some of the sites that have sold, they certainly are not being sold, at least on our underwriting, at 7% yields.

Okay. And then, Mike, as we are looking at the trajectory of FFO over the course of 2015, I think the full-year guidance is coming in line with what a lot of us were thinking about. The first quarter is lower, and I realize there are a lot of moving parts. But I was hoping you could help us think about FFO trajectory over the year, whether there's anything unusual in the first quarter beyond you had pointed out the normal seasonality with the hotel business and G&A?

And I know you are expecting -- I think you had said $53 million to $63 million from those recently completed developments. But can you give us a sense of how much of that you are expecting in the first quarter?

So I would expect that our FFO would improve as the year goes on. As I mentioned in the core portfolio, we expect our occupancy to be at its low point in the first quarter, and will improve going forward. So I would expect it to improve modestly throughout the year.

And on the development side, you are also talking about, in the first quarter, a contribution that -- of that $53 million to $63 million, of being somewhere in the $12 million to $18 million, and incrementally growing every quarter, as we continue to lease up some of the projects -- like 250, where we are doing leases on pre-builts that are coming in, The Avant.

Every quarter, we are seeing probably 20 additional units being leased. And by the end of the first quarter, that should be fully stabilized. And then at 535 Mission, we're going to have lease-up. And then in the fourth quarter, we've got 601 Mass coming online. So obviously that has an impact on our interest expense because the capitalized interest for that goes off. But Arnold & Porter is going to be paying on their 380,000 square foot lease starting in the fourth quarter. So you'll see that coming to the development side.

Okay. Thank you.

Steve Sakwa, Evercore ISI.

I guess two questions. One, I can appreciate the decline in interest rates is probably push-down return expectations for many sovereign wealth funds. I'm just wondering, has the strength of the dollar perhaps impacted just the actual demand that you are seeing? Or is it too early to maybe have an impact on the sales market?

Steve, I think it's a good question and I would say, so far, we haven't seen any impact. Not to suggest if this continues that we won't see some impact. If anything, I would say the strengthening dollar has confirmed the US as an interesting area of investment, because it's added to the returns for the investments that have already been made here by offshore investors. So -- but I don't see it yet as an impact on capital flow.

Yes, and just the other components of the capital flow as well as that -- and it shouldn't be discounted -- it seems like the Canadians have continued to ramp up their interest in US real estate. So, we've seen CPP and Oxford and now SPQU all make pretty significant investments in the fourth quarter, or commitments in the fourth quarter, to purchase high-quality, well-located Manhattan and other CBD market real estate.

And so, the flow of funds from either Asia or Europe or the Middle East or Canada or the domestic pension fund market, which has also espoused its desire to expand its allocation to real estate, doesn't feel like it has slowed down, whether oil prices were $80 or $90 or $45 or $50, and when the euro was at $1.30 or $1.12.

And the other aspects too is, okay, you are right. The dollar has appreciated, but what's your expectation for what it's going to do from here? Rates everywhere else around the world, as we talked about, are going down, yet there's certainly a lot of discussion in the US about when rates are going to be increased. So, the positive expectation for the future dollar appreciation is also a factor, I'm sure it's being looked at.

Okay. And then I guess, secondly, as it relates to development, I mean, I know that over the 40-plus years Mort's been building, you guys have generally had a relatively conservative stance towards development business. And Mort was able to navigate the waters in the kind of late 1980's, early 1990's. As we kind of move later into the cycle, are you guys thinking about development any differently? Or has the conservative stance you've always taken just something you could continue to do, or do you make any changes over the next couple of years?

I would say, Steve, that our penchant for having strong pre-leasing commitments prior to commencing construction has really been a pretty consistent thematic way of approaching development. And while it is true that in San Francisco we started a 300,000 square foot building on spec, aside from that, there really hasn't been any other development of significance that's been done without some major pre-leasing effort.

You know we continue to believe that we are pricing our development properties at a level that is a great value for the tenants that are our customers. And we are feeling pretty good about where we are from a business cycle perspective in those markets where we are building new buildings and where those particular locations are. But we clearly -- it's been now six or seven years since we've obviously had a quote/unquote recession, at least from a statistical perspective, so we are cognizant of what's going on across the market.

And we are also cognizant, as everyone here has described, where our overall leasing efforts are on the developments that we've commenced. And there is a strong focus on making sure that those things get leased before we put ourselves in a position where we are adding additional exposure to the portfolio.

And I would add to that, Steve, if you -- it's certainly not always going to be the case and we do have landholdings in the Company, but a lot of what we've been doing lately are joint ventures with landholders. The transaction that we just talked about in San Francisco involves an option to purchase land, so we are also not employing -- at least in some of these deals, capital to purchase land, at least upfront.

Okay, thanks.

Richard Anderson, Mizuho Securities.

(technical difficulty) -- to market in New York driven by the Princeton activity. What would you say a normalized kind of mark to market would be when you look at your New York City Manhattan portfolio today?

So I missed the first part of your question, but I think I've answered this question in past quarters and I don't think the answer is changed, which is, it is highly dependent on the building. So as we look at the portfolio, the largest exposure we have from a positive mark to market is at 767 Fifth Avenue, the General Motors Building, where we had -- and we talked about this when we purchased the building back in 2008 -- where we had close to 1 million square feet of that, almost 2 million square foot building, that was let at rents in the mid to low-80s.

And so there is an enormous mark to market there that dwarves everything else. The deals that we've been doing at 601 Lexington Avenue on the margin have been a positive mark to market, not a significant one. At 599, there's been a negative mark to market on the transaction we've done recently with these law firms, because most of those deals were done in that 2005/2006 timeframe when markets had been exposed to a pretty significant spike.

And then everything that we've done in our smaller buildings, 510 Madison, 540 Madison, and the pre-builts on the other deals that we've done at 250, at this point today, have a very positive mark to market. Not a -- not 20%, but a -- so if we did a deal in 2011 at $95 a square foot at 510 Madison Avenue, that space is probably $115 a square foot today. That kind of mark to market. But we're not going to see that for a while.

Okay, regarding the residence sale. Understanding you guys are thinking for 2015 that your dispositions will be primarily driven by noncore type of assets to make up the [$750 million] for this year, is residence a noncore asset to you because it's not office? Or was that just a price you couldn't refuse?

Yes. So the categories for the sales are, as you suggest, noncore, but they are also assets where we think it's an interesting price. The Avenue is a new asset. It's in a great location. It is residential, but I wouldn't necessarily say we'd consider it noncore for that reason.

The issue is we've got -- or the attractiveness to shareholders is we received a 4.1% cap rate on a Class A asset that's on a 54-year remaining ground lease. And we thought that was attractive.

Okay. And what about --

And just before you go on, I'd just say this, the following about our residential business. So we are a developer. We are not a owner/manager in the residential world. We don't have the portfolio size to be great at operating residential. We don't have the portfolio size to be creating a business that's strategic from the perspective of, well, there is a need to have a certain massive units to sort of maintain an operating platform.

So we look at the residential business as a way to utilize our development prowess to create a lot of value in infill locations in our markets. And so to the extent that we don't deem there to be strong overall growth in those assets over a foreseeable point in the future -- and someone, as Owens said, offers us a terrific price -- we are going to sell those buildings.

So, it's very different than the way we think about our midtown Manhattan office portfolio or our Back Bay office portfolio or our Reston, Virginia office portfolio, which have a lot of continuity and operating leverage about them that create them to be quote/unquote strategic as opposed to quote/unquote noncore.

Is Princeton long-term noncore?

Princeton is a terrific portfolio that is well-run now by our New York City region. It's no longer a region in itself, which made a lot of sense and created some synergies from an operating expense perspective, which, as you are seeing, are flowing through our G&A to some degree. And as long as we continue to believe that this Princeton market will continue to expand from a user perspective, and we are seeing marginal to positive rental rate growth, and we still have the ability to develop buildings, which allow us to create assets that are yielding significantly higher than what we could sell assets for just to some third-party, we are going to continue to just look as it as an important portion of the Company's portfolio

Yes. And also, I think, Princeton, you have to differentiate between Carnegie Center and Tower Center, which are different assets. And, as Doug suggested, we are seeing positive leasing momentum at Carnegie Center. We are investing in the buildings. We started a new build-to-suit, and we have options on additional development land.

Last question. At Salesforce, you mentioned conversations going on. Are any of those conversations with Salesforce to take on more space?

We are not going to comment on any particular conversation with any particular tenant asset. It's not appropriate.

Okay. You got it. Thanks.

Alexander Goldfarb, Sandler O'Neill.

Two questions. The first one -- Doug, you sort of opened the door on the worst-kept secret in New York. So, if there is any color that you can provide at this point on the Naval Yards. And in the Forbes article, it mentioned a partnership with WeWork in San Francisco and maybe Boston. If you could just provide a little bit more color on that.

So, Alex, unfortunately -- we are just -- like I said, we are not in a position of talking about what we're doing in the outer boroughs of New York, so we just can't comment on what other people have written. But we hope that we'll be able to announce something sooner rather than later. We did a lease with WeWork -- a straight lease with WeWork in San Francisco at (technical difficulty) 535 Mission. And, at this point, that's the only transaction that we currently have in our portfolio with that organization.

Okay. And then the second question is, going again to the declining -- sorry, to the strengthening dollar, declining foreign currency. Does where the dollar has gone versus the pound, does it make you guys possibly want to reconsider looking at London? Or you've firmly sworn off that market and are only looking domestically?

Alex, I don't think the dollar/pound movements are driving any thinking we are having about investing in London.

Okay. So you're only looking domestically. You're not -- you've put London off; it's not in the strategic view any more?

That's not what I said. I said we are not making investment decisions in London or elsewhere based on currency fluctuations.

Okay. I appreciate that clarification, Owen. Thank you.

Brendan Maiorana, Wells Fargo.

Mike LaBelle, I apologize because I'm splitting hairs here, but you mentioned average occupancy for the year at 91%. I think last quarter, you said 91% to 92%. So I'm not sure if that's actually a change or just 91% is still within the range. And I think you previously expected to end -- have a year-end occupancy around 93%. Does that projection still hold?

I think we have -- we did bring it down a little bit. We did say 91% to 92% last quarter. We still hope to increase our occupancy. Getting to 93%, I think will be pretty tough, to be honest with you, based upon where we think we are going to be in the first quarter, and the fact that a lot of the space that we are getting back in Boston -- which is, again, the majority of this -- is highly marketable, but it's going to take a little bit of time to lease.

And it's going to take -- somebody is going to have to build that space. So we do not anticipate that that space is going to be occupied in 2015. It's going to be 2016 and later. So I would agree that we brought it down a little bit, and we think it's going to average around 91%. It should end above 91%.

Okay, that's helpful. And then, Doug, you mentioned -- just in Boston, you mentioned at the base of Hancock, good activity there. I think you also have 200,000 or 300,000 square feet at the Tower that Mike alluded to leasing there. Could you just shed some color on how conversations with prospective tenants are going for the top of the building?

It's some of the best space in Boston. We are, as we like to sort of commonly say, baking the cake before we try and serve it at the base of the building, with our new rebranding and our new identification of 120 Clarendon Street as a sort of that new address for those larger floors at the base of the building. And we continue to send proposals out on that space at a pretty significant pace.

I think the space of the top of the building is -- right now, it's a little bit challenging to have conversations because the space is currently occupied by a tenant that's going to be moving to the lowrise. And when you tour the space, it's fully occupied with an insulation that was built 10 years ago -- it's not what somebody sort of thinks about when they want to be in the kind of space that the Hancock will offer you. And so it's a little bit of a challenge.

But we also try and bring people to the floors above and below them, which are just fantastic. But the market for that space will be slower than we think the market will be for the space at the base of the building that's of the attractive value that that space is going to occur with the market.

Yes, so I think you guys -- is it April when they moved down? So, kind of your expectations of leasing that, do you think it's maybe a 12-month process to get that leased? Not a tenant in the space, but just kind of leased?

I hope our leasing people aren't listening, because what their motivations are and what our projections are, are different things. Our view is that this space is going to get leased really, really quickly. The revenue recognition is going to be a different story.

So our view is that we are going to have really good strong leasing on this space in calendar year 2015. Some of those leases might not start until 2016 or later, just because of the realities of when these expirations occur in the marketplace. We just don't know if we're going to -- if we do the space on a floor-by-floor basis, the leasing will probably be a little bit slower, but the revenue recognition will be quicker. If we do a larger block of space, the revenue recognition will probably be a little bit slower but the leasing will be quicker.

Sure. Okay. Thanks for the time.

Vance Adelson, Morgan Stanley.

First, back on 425 Fourth Street, regardless of entitlement timing, which you provided some color on, how good do you feel about the process itself and the Prop M allocation, if you had to rate it somewhere between a slam-dunk and very challenging?

Bob, do you want to take that one? You are better at it.

Yes, there is a queue of 10 million square feet of space that's seeking Prop M allocation. I mean, this is a fantastic site. It's a great location. The city is going to look to the transportation corridor and the benefits of being on the transportation corridor. But it's going to take some time. I mean, this is not something that's going to happen very quickly. It's going to take several years to get approved.

Okay. Makes sense. And then related to that, can you share with us anything on the potential magnitude of the project? What it would be if you got all your wishes that you've put forth on the entitlements? Could you ballpark the potential investment?

It will be approximately (multiple speakers) -- go ahead, Doug.

Yes. We are really -- I mean, basically we don't like to get in front of the jurisdictions that we are dealing with. So the current Central SoMa plan allows for around 750,000 square feet of space -- residential, office, and retail. We're -- at this point, it's unclear what the right plan should be for the property, vis-a-vis what we think where the market wants the space to be designed, and what the city would like to see happen there.

And those are conversations that are going to take place over the next quote/unquote months and year. The big picture, construction costs for new development in San Francisco are probably, including land, the whole armadillo, are well in excess of $800 a square foot.

Okay. Thanks for that. And then shifting gears, could you comment on how important New York street-level retail is going to be for Boston Properties going forward? Is rental growth there something you are optimistic about? And therefore, is that a presence you would like to perhaps grow over time?

So, I think we've had this topic of conversation before, and I want to make sure I am consistent with what I said before. We have a terrific portfolio of retail space with high opportunities for value creation in our existing buildings in midtown Manhattan, namely at the General Motors Building and at 601 Lexington Avenue, and potentially at 399. That's where the focus of our investment is going to be.

So, if the question was sort of a way to say, are we going to be doing what Renado and SL Green and others have done in terms of going after street retail condominium interest in and around the city of New York, I think the answer is, at this point, we are busy doing our own portfolio and looking for larger scale opportunities to put development dollars to work.

Okay. And yes, you did get the gist of the question. And then lastly on G&A, it sounds like you have a pretty good forecasting process. What are the main variables that could push you to the high or low end of the new guidance range, which is understandably fairly healthy at this point in the year? And do you think there is any chance you could exceed or come in below the range?

I think the -- one of the wild cards in that is always capitalized wages. And given our development pipeline, I think we view that our development team and construction team and leasing teams are going to be very, very busy doing transactions. So we have estimated that they are going to be, and that's going to benefit that G&A. I think we are comfortable with the range that we have provided, certainly. So, I would be very surprised to see something outside of that range.

And the other tricky piece of this is that, if we do a joint venture, we don't necessarily have the ability to recognize that capitalized wages expense. So, if some of these properties turn out to be JVs versus wholly-owned assets, that -- it can skew the number not insignificantly by hundreds of thousands or millions of dollars on any one project in the year.

Okay. I'll leave it there. Thanks very much.

Ian Weissman, Credit Suisse.

Just two questions. First, on Salesforce Tower, where would you guys expect to end the year with additional leasing in 2015?

Ian, I would say that we expect to end the year not dissimilar to where we are today, unless a large nontraditional lease expiration-driven transaction occurs. So, our view is that as we get to the end of 2015, that's when we are going to be in the heart of the procurement of leasing conversations with existing lease expiration-driven tenants.

But that doesn't mean we won't have another type of transaction from a user who is looking for a big block of space and says, gee, there aren't any other big blocks of space, so we are tantalized by the opportunity to be in Salesforce Tower. And we engage in a conversation with them early on that. So, that could happen, but it's not really part of our expectations. In the first quarter of 2016, we would hope that we will have some additional leases then.

Got you. Okay. And just one last question. Just as I think about potential refinancings down the road, you've got about $2.7 billion of debt on three buildings maturing, I think, in -- as I said, 2017 at a [5.7%] rate. The 10-year is below [1.7%] today. How should we think about sort of fast-tracking some of that refinancing early on? And is there -- how much capital do you think you can pull out of those buildings?

Well, I think that, as I mentioned on my notes, this is something we are clearly evaluating. And one of the things we are watching is what's going to happen to the 10-year over the next three months, six months, nine months. And we are watching a very closely. Because we clearly have the opportunity to try to do a financing early.

Now there is a significant prepayment penalty associated with repaying this debt early. And if you were to do the analysis, some of these debts in 2017, if you did it early, your breakeven point is 75 basis points to 125 basis points on the 10-year from now until mid-2017. And if you look at the forward curve, it's telling you it's going to be 50 or 70 basis points higher than -- if that.

So, it's hard to make the decision at this moment in time to go and do that kind -- pay that kind of prepayment penalty. However, I think, as we need to focus -- think about how we can hedge that risk. (multiple speakers) So, again we are thinking about interest rate hedges. And as we get closer, and our view of interest rates may change, you may see us in 2015 take some of that financing off the table and do something early.

Ex the prepayment penalty, just where do you think you can get financing for those buildings today?

In terms of size?

Well, just rate.

Well, we can do a 10-year bond today at [3.125%], 3.25%, something like that. A mortgage is not that dissimilar. Maybe it's 3.5%; maybe a little bit higher, as some of the life insurance companies are trying to hang on to floor rates. So some of those floors are in the mid to high-3's. Once you start getting them competing, I think that sometimes that goes away. And then the CMBS market is also a very effective financing source right now.

So -- and on the mortgage side, because with 599 Lex, which is expiring -- one of those expirations in the GM building, both of those are probably going to be secured mortgages. One is JV and one has a lot of mortgage tax that we paid that has value. So we would look at that life company market or the CMBS market, which again, is probably in the mid-3's somewhere.

That's helpful. Thanks very much.

That's a significant savings from the weighted average coupon of 5.8% today. The reason I give 5.8% is we also have a mortgage done Embarcadero Center 4, that is coming due in 2016, that we should be able to improve the rate on that as well.

Got you. Thank you very much.

Yes.

Vincent Chao, Deutsche Bank.

Just a final question, I hope, on sort of capital flows and whatnot. Given the comments about foreign buying demand, at least not seeing any change in it today, and also your comments about cap rates continuing to -- or potentially continuing to compress on the back of the 10-year, has that caused any material shift in those types of buyer's appetite for assets beyond just the core gateways?

And then maybe a corollary to that, the acquisition market has been tough for you guys for a long time. Have any other markets outside of your current core become more interesting to you recently?

So the first question is, given how cap rates are coming down, are sovereign wealth funds or offshore buyers looking at noncore markets or taking more risk? My view of that is, I don't think -- I think the perimeter is probably staying pretty much the same. I think core gateway cities is still a primary focus for offshore investors.

That being said, I do think there is a little bit of a trend for some of these groups to go up the risk curve. So I think you're seeing, particularly in New York, there have been a number of Chinese investors who have gotten involved in development projects. So, I think if there is a -- I don't think it's a change, but I think if there is a somewhat of a trend, that you might see more offshore buyers moving up the risk spectrum in their real estate investing in core markets.

And then on your second question is, does the aggressive pricing in our core markets today lead us to look at transactions or acquisitions outside of the core markets? You know, as we have mentioned in the past, there are a small handful of other cities and areas that are interesting to us because they have -- certainly they have a strong creative tenancy, which is driving a lot of growth in the office business today. And also these markets demonstrate value creation for real estate and office in particular, over a longer period of time.

So, we are consistently and constantly looking at that type of thing. But the issue is the pricing that we described in our core markets isn't substantially different in these new markets. I mean, the offshore investors are also very active in a number of these places. So, I don't think we would do that, because pricing is really substantially different.

Okay, thank you.

And our final question comes from Ross Nussbaum with UBS.

Can we talk about the recurring dividend for a second? I know that the Company has been perhaps extraordinarily generous with special dividends, not just lately but in the last decade, but the recurring quarterly dividend hasn't gone up in two years and actually is the same level it was 10 years ago -- and I went back and looked -- despite the fact that your AFFO is 30-something-percent higher.

So I guess the question is, with the Company having a recurring dividend yield under 2%, below the S&P 500, what is management and the Board thinking in terms of increasing the recurring quarterly dividend? Thanks.

This is Doug. So the -- I think the stated operating philosophy that we have had since the great financial distress of 2008 was that we should make sure that our dividend is appropriately sized vis-a-vis our taxable income. And that to the extent that our taxable income should be going up, we will -- we would be increasing our ordinary dividend.

One of the things that happens when you sell -- what was the number, Mike? (multiple speakers) -- $0.72 a share of earnings, your taxable income doesn't go up as much as it might. So, it gets pushed into a return of capital based upon the gains on sale -- which, I guess, we consider to be a very good thing.

So it's retarded the overall growth in our taxable income to the extent that that is no longer part of our operating strategy from a capital recycling perspective, the dividend is going to go up. Over time, if you look back -- Mike, what is it, 10 years? -- the average dividend yield for the Company has been, I think, over (multiple speakers) -- over 4%. So, relative to where our other dividends are, certainly in our space, we think we have a pretty healthy dividend. It just comes in a little bit of a bulkier manner as opposed to a constant recurring dividend yield that gets paid out on a quarterly basis.

Yes, and as you pointed out --

Yes, and I think we've had special dividends in like five of the last 10 years. So if you look at that together with the regular dividend, then our dividend yield is significantly higher than otherwise.

Yes. And that all makes perfect sense. And if I had been a shareholder for the bulk of that period, certainly I would have been rewarded for it. But I'm thinking in terms of if I'm a potential shareholder looking at buying the stock, can I rely on getting those special dividends kind of every other year, every three years? Or would I like to have a bit more security and a higher recurring dividend? And is there a better balance between those two in the future?

If we don't sell, you will have a higher dividend because our earnings will be significantly higher. But if we continue to sell, you'll continue to get dividend in the form of a return of capital or gain on sale.

And as the cash flow comes in on the developments, you know the $2.1 billion that is going to be delivering between 2015 and 2018, I mean, that goes right into our taxable income as those cash flows come in. So that will, by its nature, increase our taxable income and require an increase in our dividend over time. And as Doug said, if during that period of time, we think that sales are the right strategy, then we might have specials.

Thank you.

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

Okay. Well, that concludes our marks and Q&A. As hopefully we were able to demonstrate, we've made terrific progress executing our business. We increased our guidance for the year despite announcing a significant asset sale. And we thank you all for your attention. Go Patriots. (laughter)

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