波士頓物產 (BXP) 2019 Q4 法說會逐字稿

Good morning, and welcome to Boston Properties Fourth Quarter 2019 Earnings Call. This call is being recorded. (Operator Instructions)

At this time, I'd like to turn the conference over to Ms. Sara Buda, VP, Investor Relations for Boston Properties. Please go ahead.

Thank you. Good morning, and welcome to Boston Properties Fourth Quarter 2019 Earnings Conference Call. The press release and supplemental package were distributed last night and 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. If you did not receive a copy, these documents are available in the Investor Relations section of our website at investors.bxp.com. A webcast of this call will be available for 12 months.

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. 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 yesterday'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.

I'd like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the Q&A portion of the call, Ray Ritchie, Senior Executive Vice President, and our regional management teams will be available to address questions. Now before I turn the call over to the team, I would like to mention that we'll be holding our investor conference this fall in Boston. As many of you know, we hold this event once every 3 years. This conference will be a great event, designed to provide significant insight into our strategy, our team and our themes in our business. The date for the conference is September 30, and we'll be holding it at our new hub on Causeway entertainment and office complex in Boston. I'll send out some reminders, but we do look forward to seeing everybody at the conference.

Now I'd like to turn the call over to Owen Thomas for his formal remarks.

Great. Thank you, Sara, and good morning, everyone. We completed another strong quarter of performance, which capped off a very successful year at Boston Properties. Specifically, in the fourth quarter of 2019, we generated FFO per share of $1.87, which is a quarterly record for Boston Properties and $0.02 above our prior guidance and market consensus. We leased 1.7 million square feet, including significant leases at the GM Building, 399 Park, Reston Town Center and Colorado Center. We delivered and placed in service 866,000 square feet of new developments that were 98% pre-leased with an initial cash yield of 7.5%. We increased in-service portfolio occupancy to 93%, which is a 40 basis point increase over the last quarter and 160 basis point increase over where we were a year ago. We increased our average net rental rates on our second-generation leases by 48% for the quarter and 28% for all of 2019. We increased our regular quarterly dividend 3% to $0.98 per share. Boston Properties has now increased its quarterly dividend by 42% over the past 3 years. And we increased our growth outlook for 2020 by raising the midpoint of our FFO per share guidance by $0.01. We continue to forecast 8% growth in 2020, following 11% growth in 2019, leading our office peers over the last 2 years.

In terms of full year 2019 operational highlights, we completed 7.6 million square feet of in-service asset and development leasing, exceeding 2018 leasing numbers and our second highest level of annual leasing ever. We commenced 908,000 square feet of new developments, including 325 Main Street in Cambridge and 2100 Pennsylvania Avenue in Washington. We completed new acquisitions for a total of $336 million, including 880 and 890 Winter Street in Waltham, the remaining 5% interest in our Salesforce Tower development in San Francisco and land parcels at Carnegie Center in Princeton.

We completed approximately $406 million of asset sales versus our goal of $200 million, including the sale of 540 Madison Avenue in New York, Tower Center in East Brunswick, New Jersey and land parcels in suburban Maryland and Massachusetts. We also formed a joint venture with CPPIB, which now holds a 45% interest in our Platform 16 development site in San Jose. We raised $2.2 billion in debt financing, including $850 million in green bonds at very attractive interest rates. And once again, we are recognized throughout the year for sustainability, performance and leadership, earning an eighth consecutive Green Star recognition, ranking among the top 4% of almost 1,000 worldwide participants in the GRESB Assessment and earning ENERGY STAR Partner of the Year from the EPA.

Overall, 2019 was an excellent year from a management, development, leasing and capital markets perspective. A differentiator for Boston Properties is the depth and strength of our regional and corporate management teams. I'm very proud of our entire team at Boston Properties and what we accomplished in 2019 through experience, relationships, teamwork and commitment to success.

Now turning to the economic environment. Conditions remain very favorable for our business, and leasing activity is robust in our core markets with few exceptions. Economic growth in the U.S. at around 2.1% projected for 2020 remains high enough to power job creation, space demand and rent growth, but not high enough to spark inflation and higher interest rates.

The 10-year U.S. treasury remains around 1.6%, 1.7%, and the Fed appears to be on indefinite hold for further rate action. Job creation and inexpensive capital is very constructive for what we do. And in addition, concerns over the geopolitical risks of 2019, particularly trade disputes, are currently more tempered creating confidence for business leaders to make investments like new space requirements and for investors to move financial markets positively as we have recently witnessed.

The private capital market for real estate and office assets in our core markets remains healthy. U.S. real estate assets remain an attractive destination for domestic and foreign institutional capital with stable -- with a stable and growing economy, relatively higher yields and decreasing hedging costs. Significant office transaction volume in the U.S. ended the fourth quarter up 24.3% from the prior quarter and up 3% for all of 2019. Yet again, there were numerous significant asset transactions this past quarter, and I'll cover the largest of which, which were One Marina Park in the Seaport District of Boston sold for a little over $480 million or $918 a square foot and about a 4.6% stabilized cap rate. This little over 0.5 million square-foot building is 100% leased and was sold to a domestic real estate investment manager. And secondly, in New York, 330 Madison Avenue in Midtown East is under agreement to sell for $900 million or $1,060 a square foot and a 4.8% cap rate. This 850,000 square-foot property is 95% leased and will be sold to a non-U. S. insurance company.

Now moving to Boston Properties capital activities. Development continues to be our primary strategy for creating value for shareholders, and we remain active in our pursuit of new projects and value-added redevelopment. In the fourth quarter of 2019, we delivered 2 successful and accretive projects into service. We completed 145 Broadway, the new 485,000 square-foot headquarters for Akamai in Cambridge. The building is 98% leased to Akamai and was delivered on time, in budget at an attractive yield. We also completed the podium phase of our Hub on Causeway development in Boston. This 381,000 square-foot project is 97% leased and was also delivered at an attractive yield. The Hub on Causeway podium is the new entrance to the TD Garden and North Station and includes multilevel retail amenities, restaurants, theaters and other exciting entertainment venues. Further phases of this development, all of which will be built on top of the podium include Hub50House, a 440-unit residential tower to be delivered this quarter, 100 Causeway, a 632,000 square-foot office tower that is 87% leased and expected to open in 2021. And land under long-term lease to citizenM, a 269-room, 8-story luxury hotel, which was delivered last year.

With these deliveries removed, our current development pipeline stands at 12 office and residential developments and redevelopments comprising 5.5 million square feet. And $3.1 billion of total investment for our share. The commercial component of this portfolio is currently 76% pre-leased and aggregate projected cash yields on cost are just shy of 7%. Most of the development pipeline is well underway, and we have $1.4 billion of equity capital remaining to fund.

In 2020, we anticipate our development pipeline will continue to be dynamic. We plan to deliver 6 projects, representing 2 million square feet and $1.1 billion of investment, including 1750 Presidents Street, 159 East 53rd Street, Dock 72, 20 CityPoint, Hub50House and Skylyne. We are already recognizing a portion of the income expected for most of these projects.

As replacement for these deliveries, we expect to begin the first phases of Fourth and Harrison in San Francisco and Platform 16 in San Jose. Fourth and Harrison received 505,000 square feet of Prop M allocation in the fourth quarter of 2019 that will allow us to begin construction in 2020. And site enablement work is underway at Platform 16. The first phases of these future developments totaled $935,000 (inaudible) approximately $1 billion in new investment.

With our current pipeline of deliveries and these new potential starts, our development pipeline at year-end 2020 could be approximately 8 projects, comprising 4.4 million square feet and $3 billion of investment. And for beyond 2020, we have a 13 million square-foot land bank under control, which should lead to additional development opportunities. Nearer-term prospects in this portfolio include 3 Hudson Boulevard in New York, 25% owned by us, 171 Dartmouth Street adjacent to the Back Bay Station in Boston and CityPoint in Waltham, for all of which we are pursuing anchor tenants before commencing vertical development. In addition, we have another phase of significant residential development at Reston Town Center.

Moving to acquisitions and dispositions. We are under contract subject to due diligence for the sale of New Dominion Technology Park for in excess of $250 million, that we will -- that we believe will close this quarter. The property comprises 493,000 square feet leased to the Federal Government in 2 buildings located in Northern Virginia. We recently extended the current government tenancy for 15 years at flat rents, making the property a strong disposition candidate. We anticipate completing a like-kind exchange for this asset and retaining all proceeds for other investments.

We also just completed a joint venture with Alexandria Real Estate Equities for our Gateway commons portfolio in South San Francisco. This joint venture, where both parties will have approximately a 50% ownership when fully funded, will be formed with Boston Properties contributing 3 existing office buildings totaling 768,000 square feet and Alexandria contributing 3 adjacent buildings, including a newly constructed amenity center totaling 313,000 square feet. The critical value creation for Boston Properties and Alexandria with the joint venture is that both parties will contribute land, including a parcel owned by us and encumbered with surface parking by Alexandria, and excess structured parking associated with the existing buildings, creating 3 sites totaling a minimum of 640,000 square feet of potential development for lab and office use. Upon completion of the development plan, the joint venture will comprise a significant critical mass of 1.7 million square feet of office and life science space in the premier location in one of the strongest life science markets in the U.S.

So in summary, 2019 was a very successful year for Boston Properties. We executed well on our growth plan, driven by the lease-up of in-service properties and external growth driven by development. Given our leading property market positioning, constructive market conditions, growing new investment pipeline and a team eager to produce, we are very excited for 2020 and beyond.

Let me turn it over to Doug.

Thanks, Owen. Good morning, everybody. Happy New year. We're not going to say that anymore. It should be pretty clear from Owen's macro commentary that we are feeling really good, very positive about the state of the business economy. And the overall daily transactional leasing activity that we're experiencing across our portfolio really is in lockstep. And as you heard during the last 12 months, we increased our in-service occupancy by more than 160 basis points. So strong leasing volumes everywhere. You shouldn't interpret this though, to mean that every market is strong. We have our strong markets, which are characterized by tight supply and very modest short-term new deliveries, Boston, Cambridge, Waltham, Lexington, San Francisco CBD and West LA, and there, we have rental economics that continue to grow and grow significantly strongly. We operate in the second group of markets, which have higher availability, consistent new construction deliveries, i.e., less supply constraints, but that are coupled with very significant technology demand. So Silicon Valley, the Reston Town Center area, the new construction on the far west side of Manhattan. These markets are improving, though it's more of a function of the premium of new products being added to the market as opposed to simple market conditions. The third segment is the Plaza District in Manhattan. It behaves differently since it lacks the technology demand growth. We continue to have strong activity from nontech users. Obviously, they have more modest growth, although we had 2 deals this quarter, which were expansions from nontech users, and we'll talk about those in a few minutes. But there does remain significant supply, and there really hasn't been much in the way of changes in the economics over the last year or 2. And then the fourth category, really, is limited in our portfolio to DC CBD, which both has supply and demand headwinds. The best buildings continue to have leasing activity, but the market concessions are at an elevated level. Our primary customer, large real estate users, be they private or public, start-up or established, continue to make decisions to upgrade and consolidate their space and in many cases expand as they use their space in the competition for talent, which is the key to our business. Even in our most expensive markets, we see very few tenants taking actions that reflect looming concerns about their business prospects. A case in point, we're in discussions with a service firm in San Francisco that is currently located in the base of one of our AC buildings. The tenant is negotiating to move to the top of the building, where the rent will be 25% higher that's on a renewal in one place versus the other, and they will have to come out of pocket over $100 a square foot to build their new improvements and their square footage isn't changing a bit.

Let's talk about the markets now. Our expectations and what's going on in our portfolio. Let me begin with New York City. The significant technology tenant leasing in Manhattan that was completed over the last few months was very much in line with market rumors and expectations. There really weren't any surprises. It's great since it represents lots of growth and absorption. And practically speaking, we think it may accelerate the timing of 3 Hudson Boulevard, since there are fewer new construction options with large space block opportunities. The 2 law firm leases in the new developments that were announced will lead to availability in existing products. So we are optimistic -- while we're optimistic about the shrinking availability of the newly constructed space, we will continue to have a cautious view of transaction economics over the next few years. That being said, leasing volume is very strong. Last quarter, we completed a 20-year lease renewal at 599 Lexington Avenue with Shearman & Sterling, our anchor tenant, starting in 2022 for a minimum of 338,000 square feet. We've now extended every major lease expiration in our portfolio above 140,000 square feet that was due to expire through 2024. And the reason I use 140,000 square feet as we have a tenant that looks to be moving to one of the new developments in our 601 Lexington Avenue development in 2022. We have signed leases on 3 of the 4 available floors at 399 Park Avenue and are negotiating a lease on the remaining floor. As a barometer of market conditions, these leases on these 4 floors have average starting rents of about $100 a square foot and market-level rent bumps, TIs and free rent. The expiry rent on the floors was about $107 a square foot. We would have done a similar deal in 2018 or 2019. In addition, we signed a renewal and expansion at the base for 80,000 square feet, and we are negotiating an expansion for one of the tower floors that we're going to get back in 2021. So again, very strong leasing activity.

At the General Motors Building, since the completion of the plaza work and the opening of the Apple Cube in September, we've completed 140,000 square feet of office leasing, including a new tenant on a vacant floor, full-floor, in the upper portion of the building, a long-term expansion and 2 short-term renewals. CBRE reports that the city saw more than 2.1 million square feet of relocation deals with starting rents over $120 a square foot and $1.2 million of relocation deals with starting rents between $100 and $119. So that's 3.3 million square feet, and that's versus 2.5 million square feet in 2018. So we are encouraged by the level of activity at the high end in the market and at our building. We also completed a lease on the available 6,600 square feet of Fifth Avenue retail space for a retailer that is planning to remodel an existing Madison Avenue store, and we did a 7,500 square-foot renewal with a -- for a 2021 expiration on Madison Avenue retail.

Switching to Washington, DC. The CBD continues to have, as I said, the most challenging market conditions amongst our regions, though it would only represent 6% of our NOI. This quarter, we completed a 76,000 square-foot 10-year renewal at 2200 Penn for a lease that was expected to expire in '21. The current rent, which has been escalating for 2.5% for a decade, is going to roll down about 18%.

Give you a sense of the conditions in D.C. Northern Virginia, where 9% of our company NOI originates and where we are developing, continued to have significant tenant demand growth. The same technology companies that are growing in San Francisco and in Boston and in New York City are also expanding in Northern Virginia, as they both service the U.S. Government and search for the highest-quality labor markets. We believe that the $10 billion JEDI cloud-computing contract will create significant office demand in Northern Virginia. There is still significant vacancy in the market, but the urban core in Reston continues to outperform with starting rents in the high 40s to low 50s. This quarter, we completed 438,000 square feet of leasing in Reston Town Center, including 75,000 square feet for Facebook, a 312,000 square-foot renewal with Bechtel and 11 smaller deals. We are in lease renewal and relocation negotiations with another 135,000 square-foot tenant. The 270,000 square feet of Leidos relocation and expansion to 1750 is expected to occur by the end of April. So they're going to vacate One and Two Freedom Square, so we'll still have some work to do, filling our 500,000 square feet of availability in Reston, but we are in active discussions with tenants that could fill significant portions of that space. And most recently, we entered into a dialogue aka a lease negotiation with a tenant with a 2023 to 2024 occupancy requirements that is interested in a significant portion of the availability at RTC Next. That's the building that's under construction for Fannie Mae. So really strong activity in Reston.

Switching to the West Coast. The story in San Francisco CBD is a lack of availability in 2020 through 2022 and the meaningful increase in asking and taking rents that has occurred. The vacancy rate is at its all-time lowest level since the last cycle began after the great financial crisis. There's about 3.5 million square feet of either under construction or announced and permitted projects with delivery beginning no earlier than late 2022, and more than 1.6 million square feet is either in lease negotiation or leased. With our Prop M allocation in hand, we are moving towards the purchase of the land to develop Fourth and Harrison, and we could start construction in late 2020 for an early 2023 delivery. Tenant conversations have begun. There are additional permitted potential development in 2024 and beyond. New construction rents are approaching over $100 a square foot, triple net, on all this new development. New to the market are about $700,000 of sublet opportunities stemming from Uber's anticipated move to Mission Bay. So perhaps, it'll be a little bit early for tenants.

Our San Francisco CBD portfolio ended the quarter at 97.2% occupied and 98% committed. With little availability, we had one of the quietest quarters I can remember with only 24,000 square feet of CBD leasing. In 2020, we have very limited availability, so our focus today is '21 and '22 expirations. Based on current market fundamentals, we continue to believe that we will realize double-digit rental increases as we relet space. As an example, we just recaptured a floor at 680 Folsom Street that was leased in 2015. The terminated lease, which had 3% annual bumps, had a mark-to-market in 2020, even after 5 years of escalations of almost 20%. So the market rents continue to grow. In the Silicon Valley, we have our Mountain View assets and a portfolio of great development opportunities. This market continues to experience strong growth led by Google, which leased another 475,000 square feet during the quarter, and the market had a record-setting absorption in 2019. In our existing Mountain view portfolio, we continue to re-lease and renew space at rents in excess of $55 triple net. This quarter, we completed 2 leases totaling 52,000 square feet with an average rental increase of 65%. In 2020, our most significant opportunity in the Bay Area is in the Mountain View portfolio, where we'll have about 150,000 square feet of availability.

Owen mentioned Platform 16 and our opportunity in San Jose. It's been quite clear that as the technology companies continue to grow, their employees' commute to work is becoming a critical factor in their recruitment and retention. We've seen companies like Facebook and Google expand in San Francisco as they provide an alternative location for employees that may spend 3-plus hours a day on a private bus. And likewise, Uber and Splunk and Twitter and Airbnb have all expanded down into the Silicon Valley for similar reasons. We have seen a distinct premium for those valley and peninsula office assets that are in close proximity to the Caltrain stops and particularly the bullet locations.

Platform 16, and the Plaza at Almaden, our other development, are less than 1 mile from the Diridon Caltrain bullet stop as well as future BART connections. I think the last owner-occupied new construction in Downtown San Jose was in 2009, 11 years ago, and it was based on a set of plans that was drawn in 1987. We believe Downtown San Jose is poised for significant growth, and as you read in The Wall Street Journal this morning, it's clearly coming.

But last but not least, we're going to get to Boston. The CBD, Cambridge and Waltham and Lexington continue to be the beneficiaries of ongoing growth in the technology and life science sectors and significant migration from the outer suburban markets and corporate relocations. As the Boston region comprises more than 1/3 of our NOI, we are benefiting from this growth in a big way. Similar to San Francisco, there is very little available space in large blocks in the Boston CBD. There are multiple buildings under construction in Boston, which will deliver in late '22 and '23 with some current availability and there are active plans for new construction, including, as Owen suggested, our permitted project at 171 Dartmouth Street, that's the Back Bay Station site, which will create additional supply in 2023 and beyond to meet demand. In an interesting twist, many of the new buildings are being designed for life science users as the availability in Cambridge has all but disappeared. Our CBD portfolio is 99% leased today, and we continue to complete forward leasing transactions.

During the quarter, we did about 200,000 square feet, including 72,000 square feet at The Hub on Causeway, as Owen talked about. In addition, at 200 Clarendon, we continue to get early renewals and expansions. We completed over 114,000 square feet of leases with an average increase of rents of 30%. In Cambridge, 145 Broadway, the 485,000 square-foot building leased to Akamai is open. And to put the strength of the Cambridge office market in perspective, if the Akamai lease, which was negotiated in 2016, were to roll to market today, the mark-to-market would be over 50%, 4 years. There continues to be significant demand in the Waltham and Lexington suburban market, which is where we have our largest availability in the region in 2020. Our 200 West Street project, which is actively being converted to lab use, will be ready for tenant buildout in the third quarter. We will continue to expand our potential tenant universe in Waltham to include lab requirements. New construction office rents in this market are in the mid-40s triple net and lab rents are pushing through $60 triple net. Our 180 CityPoint project is permitted and in a position to start with either a lab or an office installation.

I'll conclude with a comment about the Prudential Center observatory. Later this year, we expect to commence on major repositioning of the 50 to 52nd floors of the Prudential Tower. We anticipate spending in excess of $125 million, creating an extraordinary experience for local area residents and visitors to Boston, expect an initial return on this capital investment, including forgone income from the space, which is part of our 2020 guidance, in line with our recent development projects, and we hope to open this public facility in mid-2022.

With that, Mike has some comments about the fourth quarter results and 2020 FFO.

Great. Thank you, Doug. Good morning. As Owen described, we had a really strong year in 2019. In addition to our 11% FFO growth, we demonstrated substantial revenue growth of 9% and the growth came organically from higher occupancy and higher rents in the same-property portfolio as well as externally from the delivery of developments. Our share of 2019 same-property NOI growth ended the year higher by 5.4% over full year 2018, and it was even higher on a cash basis at 6.7% growth. We also had an incremental $78 million in NOI from our developments, contributing 6.5% to our growth. And we still have an active pipeline of $3.1 billion in developments under construction that are projected to provide incremental earnings growth every year for the next several years.

Turning to our fourth quarter 2019 results. We reported funds from operation of $1.87 per share and that was $0.02 per share above the midpoint of our guidance. The increase was primarily from improved portfolio revenues due to a combination of leases commencing earlier than projected as well as better-than-projected service income from our tenants in the quarter. Our results would have been $0.01 stronger, had we not incurred a $1.5 million charge from extinguishment of debt. We elected to prepay a $26.5 million mortgage encumbering our New Dominion property. The loan carried a high interest rate of 7.69%, and repayment is reflected in our lower interest expense assumptions for 2020.

Looking ahead to 2020. We have updated our FFO guidance with changes primarily coming from a pending asset sale and changes in our interest expense assumptions. Our portfolio NOI assumptions remain in line with last quarter's guidance. Doug detailed the solid leasing activity we're seeing in the majority of our markets, which gives us confidence in our ability to deliver ongoing same-property growth. Our assumptions for 2020 include same-property NOI growth of between 3% and 4.75%, and incremental growth from our non-same properties, primarily our development deliveries, of $60 million to $70 million. As Owen described, we have New Dominion under contract for sale, and we expect diligence to be completed and the sale to close in the first quarter. The sale results in a significant gain. We plan to complete a lifetime exchange with 880, 890 Winter Street that we acquired in 2019 and the acquisition of the land under our Fourth and Harrison development in San Francisco that is currently under option. These exchanges allow us to retain the sale proceeds for reinvestment in higher growth developments. The projected earnings impact of the sale, net of interest earned on the proceeds, is $0.04 per share of FFO dilution compared to our prior guidance. The other change in our assumptions relates to reduced interest expense. We now anticipate that we will commence construction this year on the first phases of both our Platform 16 development in San Jose and our Fourth and Harrison development in San Francisco. The associated capitalized interest for these developments reduces our interest expense assumptions. Also contributing to the reduced interest expense are the repayment of the New Dominion mortgage and lower interest rates overall. The combination of these items lowers our assumption for net interest expense by approximately $15 million at the midpoint, and our new range is $395 million to $415 million for 2020. So we're increasing our guidance for 2020 funds from operation by $0.01 per share, at the midpoint, despite the projected dilution of $0.04 per share from asset sales. Our revised guidance range is $7.47 to $7.65 per share. So excluding the asset sale, we would have increased our guidance by $0.05 per share. All of this points to continuing our strong earnings growth rate with 11% FFO growth in 2019, followed up by a projected 8% FFO growth in 2020 at the midpoint. Our 2020 growth will be driven by strong top line revenue growth from increasing rental rates in our existing portfolio, and the delivery of profitable developments from our pipeline. We have a robust $3.1 billion development pipeline under construction with the commercial space currently 76% pre-leased. This plus the expected additions of Platform 16 and Fourth and Harrison later this year, position us well to deliver continued multiyear growth.

That's all we have for our formal remarks. I think the operator will now open it up for questions.

(Operator Instructions) Your first question comes from the line of Nick Yulico with Scotiabank.

I guess, starting out with the new joint venture in South San Francisco. Clearly, a very strong market. Can you just give us a feel for how is this going to work in terms of redeveloping existing buildings versus doing new development? And if there's any -- I know you're going through the plans still, but is there any early indications of how we should think about cost per square foot incrementally to build this out along with rents, you think, you can get in the market today?

Nick, let me start off. I'm sure Doug will have a few comments as well. So just to back up for a second and talk a little bit about our rationale for doing this joint venture. Gateway is a very well-located office park near transit in South San Francisco, which is a very strong lab market and, frankly, a less strong office market. The keys that drove the joint venture is there is a land parcel that is located between our assets and Alexandria's assets that are part of this joint venture. And that land is owned by us, but it's encumbered by a surface parking easement by one of the Alexandria buildings. So by doing this joint venture, both we and Alexandria are contributing our rights to that site. And we can develop on it. So this JV opens up that parcel to new development, and we -- and Alexandria also contributed additional sites. And also on the Boston Properties side, we have some excess parking that we can contribute to as well. So the way we look at this is, from our standpoint, and I do think Alexandria, this is 1 plus 1 equals 3. It's -- we're creating value just by putting the 2 sides together. Also, from our standpoint, we get to reorient our investment in Gateway, which is primarily an office project to date, to the lab market locally, which is much stronger. We free up 3 new development opportunities. We have no loss of income. So again, I think this is a win-win for both Boston Properties and Alexandria.

As it relates to some of your questions about the development, the total development rights, as I mentioned and it's mentioned in the release and in my remarks is over 600,000 feet. It's on 3 separate sites. We and Alexandria are -- will have been and will be working on development plans for those sites. So we're not prepared at this point to answer some of your questions as it relates to cost. There is a possibility that we could launch one of these buildings in this year. So not all of them, but one of them.

Yes, I would just add a couple of more -- just clarifying comments. So the current portfolio is our 3 office buildings -- a office building that Alexandria owns, a lab building the Alexandria owned and an amenity building. So think of it this way. Right now, we're 100% office, and as of the formation of transaction, we're -- have about 13% lab. So we've reduced our office exposure. And assuming we build all the lab buildings, and we do some conversion of some of our -- of the existing assets, we're probably going to be somewhere closer to 50% or 60% lab in this marketplace at the end of the day. Right now, I think we contemplate that the buildings that will be developed will be lab buildings. They're all sort of in a couple hundred thousand square feet range. And we are actually -- there's a plan that we've agreed to for the first building, and we're hopeful that we're going to be in a position to have gotten our permits pulled and start construction on that building by the latter parts of 2020. And as -- with regards to market rents, I think, our view of market rents and -- is that the lab rents are in the mid-50s, plus or minus. And so we're -- we try to achieve a 7% return on cost. And I think Alexandria has the same perspective. And so that can sort of give you a sense of where we think new construction will be.

Okay, that's helpful. And then just in terms of the 50-50 nature of the venture. Are we to assume that the contributions are roughly equal? So any future spend would be split 50-50?

The -- we are -- the value of what we're contributing is slightly more than the value of what Alexandria is contributing. So the venture is starting off with us owning a little bit more than 50%. And as we proceed with new development, Alexandria will be funding all of it until it's trued up to 50-50.

Okay, that's helpful. Just one last question on GM Building. I was just hoping to get an update. I know you've got some leasing done in the quarter. But in terms of the leasing prospects for the remaining vacancy there as well as the upcoming lease expirations and -- as well there was -- there's been some reports about Perella Weinberg, which has a lease for, I think, 130,000 square feet in the building expiring in early '22. There've been some reports about them being courted for some other redevelopments in the city. How are the renewal prospects looking for that along with the rest of the leasing you're trying to do right now?

John Powers, do you want to take that one?

Yes. Yes, we think Perella will leave. We tried to keep them. We worked on that very hard. But for a number of reasons and restacking in place is always difficult. And I think that they will leave the building. We are talking right now to a couple of tenants for that space. I don't know if we'll make that deal -- those deals. And we have space rolling up. But as Doug said, we had a pretty good quarter at the end of the year, and I'm pretty optimistic. I think we'll be moving forward with some amenity space in the building, which will also be a plus.

Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

The $12 million increase in NOI loss from dispositions. Is that all Dominion? Or is there -- there's no leakage from the JV contribution?

No, not at all. It's 100% New Dominion. And obviously, that's not a net number, right? That's just the gross number.

So what -- depending on what timing you guys have in there, what was the cap rate on New Dominion? .

We're not going to talk about that. It's not a closed deal.

Okay. And then just you guys have talked about 3 Hudson may be kicking off sooner than expected. I mean what kind of interest are you guys getting now that a lot of other new supply is being absorbed? And what timing do you think realistically could be accelerated, too?

John, do you want to answer that one? John?

Can you hear me?

Yes.

Yes, yes. Thanks, Doug. Yes, we're pretty optimistic based on the response, first of all, from the building that we've received, very positive response. The building, of course, it's on a full acre and it has avenues on 3 sides. So it's a great site, and we've designed a building that's pretty designed. We're in 100% CDs now. So we've shown it to a lot of brokers, but we've made probably a dozen tenant presentations, and it's been very, very well received. So based on that, we're still rolling with the foundation. The foundation is not quite complete yet. Obviously, we will not go forward without an anchor tenant. We have a stream of tenants that are interested. Some have -- we can make a 24 lease expiration date that would be the earliest that we could make. Some of the deals that have been done, that have been announced, those tenants met with us. I think every one of them likes the building, but we could not make the earlier dates that they really wanted. So we have also some tenants with later dates. We're talking to some 25s, 26s, even 27s. So I think what we've decided now is we have the building that we want to build. We have the foundations in. So this is going to be a when not if, and we have to just see how it goes over the next quarter or 2 quarters to see whether we just continue and go forward, or we slow down the construction process.

Great. And then just one last one. I know we talked previously about a land site in Dallas. Is that still kicking around? Where are you guys on that?

We are looking at different sites all the time. And so we continue to think about Northern Virginia as a really important focus for our growth. And so we don't have anything that we can comment on specifically, but we continue to look at different assets.

Your next question comes from the line of Manny Korchman with the Citi.

It's Michael Bilerman here with Manny. Doug, in your opening comments, you talked about the 3 other predevelopment projects, 3 Hudson yards, which John just talked about Waltham and Back Bay. I guess if you had to think about the probability of one or more of those projects starting this year, I guess, how would you rank them? And how much of it is tenant demand-driven versus the rents and the returns that you require in getting those projects off the ground, right? Because I assume it's part of both, right? You need the tenants to show up, but then you need them to pay the rents that you want for your shareholders to earn the returns that they thought.

Yes. So I will answer the question in the following way, Michael. The -- so we are actively engaged in conversations with tenants, as John said, at 3 Hudson Boulevard, and we are also actively engaged with tenants on conversations on both 171 Dartmouth Street and on 180 CityPoint. We don't have a signed letter of intent with anyone yet. So I don't think we're in a position where we're close to announcing something. The rents that we are asking are, I would say, commensurate with where the market is today, and they are more than satisfactory to provide us with an acceptable return to start those buildings. So if you force me to push from a timing perspective, I think that the 171 Dartmouth Street building is probably the one where we have the most significant conversation with tenants, who we know are going to want to make a move from where they currently are or expand in the city. And so I'd say that's probably the one of the 3 that's most likely.

Some additional color. This is Bryan Koop. Some additional color would be, as we ended last year with the completion of leasing, let's say, for The Hub, which was our major exposure on the urban side, it's -- we're thrilled with our position on our development pipeline from the standpoint of our basis as well. Because when you look at the recent sales of land at record numbers, we couldn't be more thrilled with our position in this late cycle. With both the Back Bay Station and also Waltham with some of the new sites that have been delivered up for sale at exceeding $500 of buildable foot, and then you compound that with 6% increases in construction cost over the last 5 years, we couldn't be happy about our position with these development sites that Doug mentioned.

And then the second question. I mean, Owen or Doug, can you take us a little bit behind the curtain on joint venture with Alexandria? Sort of when your discussions started? And also you have a lot of overlap in some of your other core markets? Do you think about holdings in Cambridge or in San Francisco. Did your -- have your conversations expanded to see other ways that you can have a 1 plus 1 equals greater than 2 between your 2 organizations that do have very similar philosophies to capital allocation, to development, to management and all those sorts of things?

Yes. So Michael, it's Owen. We initiated these conversations with Alexandria last year. And the reason we initiated it was for the rationale that I went through earlier. The 1 plus 1 equals 3, reorienting our investment in Gateway from office to lab. No loss of income. And also I think not only win for us but also win for Alexandria. So we initiated it. We just got it closed, as you know. We have and hope to continue to have a strong relationship with Alexandria, but there's no additional dialogue with them at this time about other joint ventures or other cooperations.

Did you discuss at all, just selling outright your holdings to them, or them selling their holdings to you?

Our preference was to do the deal that we've currently constructed. We think that's a better outcome for Boston Properties' shareholders than selling the park. Because it's all -- as I mentioned earlier, it's all office. It's in a strong lab market. We think we'll create more value for our shareholders by doing the joint venture as currently constructed than we would if we sold it for cash.

Your next question comes from the line of Jamie Feldman with Bank of America Securities.

Great. Just a quick follow-up on the JV. Can you talk about who's going to be managing construction and then managing the assets?

So the joint venture will be jointly controlled from a governance standpoint. Alexandria will be the property manager, although we will receive a portion of the fees. We and Alexandria will be codevelopers, though Alexandria will be in the lead, and we will also receive a portion of those fees. And we think this structure makes sense given the larger presence that Alexandria has in the South San Francisco market.

Okay. And it sounds like there's an amenity building that's now going to be included in your joint portfolio in the Gateway? I mean what kind of value do you think that adds to your holdings in that submarket?

So this is Doug, Jamie. We think it holds a lot of value, which is why we did the transaction. So we have 3 buildings of almost 700,000 square feet that are currently office buildings and a pretty de minimis amount of amenities. And we saw that Alexandra is building -- was building a 17,000 square-foot high-quality first-class amenities building with a significant advantage from a leasing perspective with regards to both office and the lab tenants that are in that marketplace. So we really -- this was truly an opportunity where the 2 organizations looked at their assets in this particular submarket and said, we are much better off operating this as one collective as opposed to us sort of doing our own separate things and not being able to untie this piece of land, where we owned it and they had an easement on it, and where we had extra parking and other assets and where they had an amenity building. So you throw all this stuff together, and it's a win-win for all of the customers in both locations today and in the future.

All right. And then Owen, I want to go back to some of your comments at the beginning of the call. I guess starting out, maybe just your thoughts on capital flows. You talked about hedging costs and maybe a potential increase in foreign capital. Just as you look at the office business or office assets that have been kind of slow to trade in the last few years, do you see a meaningful pickup? And if so, kind of what markets and what types of assets? Whether it's core, value add, opportunistic? Just anything you think may change here?

Yes. Yes. So I -- if you just look at the numbers, the transaction volume for our space, those being larger office buildings was a little bit up in '19 versus '18. But I think the market is very solid. There's good liquidity. I look at things like interest rates are going down and cap rates are -- at least, so far, have not. So that spread between where the cap rates are and the risk-free rate is very healthy from a liquidity standpoint. I think there is a lot of liquidity in the world that's looking for real estate. I think the U.S. is a very strong destination. Given that even though our -- we look at our rates as being low, they're lower in most of the other developed countries, and cap rates are even lower. So there's yield available here. There's stability available here. And I'm optimistic for capital flows going into 2020. In terms of the markets, I do think there is a higher level of liquidity for the tech and life science sectors of the private capital markets. So I think competition for buildings that are in Boston or in San Francisco or in West LA are stronger, I think, in general, than they are in New York, for example.

Okay. We've heard about the pushback on just people getting their heads around CapEx costs when it comes to office. And do you think that tone has changed at all? Or that's going to be persistent? .

I don't know if it's changed. That's certainly a focus on the private market as well. But again, every quarter, and I did a couple more this quarter. The cap rates haven't changed much. I mean I've been giving on these calls, a pretty robust report on the private capital market for Class A office buildings in our core markets and the cap rates have been sticking more or less in the 4s. So I think CapEx is always something that's discussed for office and, frankly, for all types of real estate, but I don't think it's had a material impact on the cap rate.

Okay. And then just finally, you had also commented that business conditions and business confidence seem better today than heading into '19 given some of the global risks at the time. We saw a lot of tech leasing last year. Do you think this is going to spread to other sectors where you could see major large expansions from other sectors into some of these markets? Or do you think it will still be mostly tech that's taking down most of the space. .

Yes. I think that tech and life science and other creative industries will continue to be the drivers of net absorption. I think the more traditional industries, financial customers, legal customers, their businesses are fine. They're doing well. I don't see as much growth in those areas. So I think you'll see them. There'll be lease expiration-driven leasing. I think many of these employers will also be seeking to upgrade their space, but I'm not sure they're going to necessarily grow substantially.

Your next question comes from the line of Derek Johnston with Deutsche Bank.

Doug, do you believe the technology company demand you mentioned in New York City actually has some runway? And could it potentially continue at this pace or potentially even accelerate?

So Derek, I would answer the question in the following way. I believe that New York City as a physical location for -- the kind of workers that the technology companies are looking for will continue to be very attractive. It has, relatively speaking, the best transportation system in all of the major metropolitan markets. And it has got affordable and reasonable housing prices within great easy proximity to where companies are locating. And those 2 things, in my opinion, are very important determinants for where the technology companies are looking to expand their workforce. Plus, they obviously have a lot of college-educated workers. So I do believe that New York City has a lot of legs under it, and on a long-term basis, will be a market where the technology companies will continue to grow and prosper.

Your next question comes from the line of Jason Green with Evercore ISI.

Split roll in California has been a topic that's gained a lot of traction to start the year. Just curious if you're able to share your thoughts on the probability of passage and also the impact it would have on your portfolio?

So I'll talk about what the impact on the portfolio will be. And I'm going to let Bob Pester talk about the "probability of passage." So the way we look at this is that we have triple net leases and we have gross leases. In a strong market, you can very easily make the argument that, well, that the triple net lease escalation of taxes will get pushed along to the tenants. And with the gross leases, the escalation to the tenants that's not rolling will get passed along. But to the extent that you're resetting base years on gross leases, the question will be, how will that impact your net. And if it's a really strong market, you probably could choose to move those gross leases to net leases and sort of continue that "path" along with your other portfolio. The thing about this split tax is that it's very unclear as to how the reassessments will occur, how long it will take, how they're going to do it, how much "annual escalation" there will be in the assessments. Will it be every 3 years that they get to you? Will they be on an annual basis. How long -- how many years will it take for them to actually start the reassessment process? So all that stuff is very, very much in flux. If you said to us, okay, well, assuming everything had to get reassessed and assuming you were able to continue to pass along all of your triple net escalates into the tenants, but on your gross leases, you had to demonstrate what the impact was. We would tell you it's probably somewhere between $0.02 and $0.03 a share on our portfolio, and it would take -- our average lease length is 8 years so it would take 8 years for that to roll through. Bob, do you want to talk about the probability of the split roll taxing?

Sure. I think the jury is still out on how this is going to turn out, although I believe current polling is showing that it doesn't pass and then there's -- the issue is this is just the first step of them trying to raise property taxes, not just on commercial properties, but then having a second phase that hits residential, which I think is a nonstarter for anyone that owns a house in California that this will play out over the next 6 to 9 months, and we'll have a better feel during that time. But at the present time, I don't think it's going to pass.

Got it. And then, I guess, just a follow-up, just given the votes getting closer, have you seen any change in asset pricing or transaction activity in California just relative to this actually being on the ballot?

I have not.

And remember that when a new building is sold, it gets assessed to market. So unless there were some odd structure about the way the sale is going to occur, everyone would assume that the assessment would change. And I don't think people are viewing the building escalations after the assessment to have a material impact on the value on a going-forward basis. .

And that's not a change. It's always been that way. They always get reassessed on purchase. So that's always been kind of baked into the valuations in those assets.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler.

So 2 questions from us. So first one, just on the Shearman & Sterling renewal. Can you just talk about what played into that? Maybe every partner there commutes in and out of Grand Central. But can you talk about the things that you were able to do to keep them in that building versus some of the other major law firms that chose and other major tenants that chose to go to new construction? So I don't know if there are restacking in place, but maybe I don't know if there are particular things or if it was just general, they just -- they like where they office, they weren't interested in relocating to a different submarket. Just curious.

So I'll just make one quick comment and then I'll let John describe the negotiation. We're really good at what we do, Alex. And so tenants like it to be in our buildings. I just make that as sort of a visceral reaction to that. But John, do you want to talk about?

Doug, I appreciate. I would expect nothing less from you.

John?

Maybe I'll be a little more specific. Yes, they were -- I think they were intending to leave. I think they were going to leave, and I had lunch -- we've kept in touch with them, but I had lunch with the Chief Operating Officer there. And he gave me a list of all the things that were forcing them to leave, and then we took that list one by one, and we responded to it. And we found swing space for them in the building. We made a deal with Citibank across the street to move to get their -- the conference center. So that would be available. It's very hard to rebuild a conference center, pay for that and then move back into a conference center. So Citibank has downsized as everyone knows here in the corner, and they were ready to do something different with that conference center. So we made a deal with a firm in London to sublease it from Citibank. And then we made a deal with the firm that subleased it to allow Shearman to use it for a year. They go across the street to rebuild their -- the conference center. So the swing space, the conference center, they had some operational issues in the building because it was a -- these weren't really built-based building problems, but they were problems that stemmed from the way they did the buildout way, way back in the late 1980s, and we were able to get them to understand how that all happened from an MEP standpoint, and they were very comfortable that we were going to fix it all. So given you a high point of a number of things on a much longer list, but when we had all that done, they decided when they looked at their alternatives that they could live here happily for another 20 years, which will, by the way, make it 50 years at the end of that 20 that they'll be in this asset. .

Okay. And then second question is, I was talking to a broker recently in one of the life science markets. And the point came up about the political rhetoric that was on the campaign trail in health care and all the fun stuff. And the question is if it's having any impact on life science leasing? So were you -- are you seeing any life science tenants may be starting to dial back their thoughts on taking space based on what may happen in the election or in health care legislation? Or is all that rhetoric, not having any impact and life science continues to go full bore?

So our venue on life sciences, primarily in the greater Boston market because that's where our life science assets are. And I would tell you that our view is that, interestingly enough, there are more life science tenants looking for space today than there ever have been. And many of those same life science tenants are actually, if you will, warehousing space because they're concerned about finding space as they grow. So we have not seen any of the rhetoric translate into a visceral reaction that we should slow down or stop what we're doing because our business models are going to somehow be stressed by what goes on from a political perspective.

We haven't also seen any slowdown in the investment portion of the life sciences. We had a record number of VC investment last year, I think it was 1 out of every $4 in VC came to the Boston market. We continue to see that. And then we also continue to see several of our clients have a pipeline of, call it, new drugs that are up for approval, which have a tremendous amount of opportunity. So we haven't seen any of the rhetoric translate into demand.

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

Just 2 quick ones. One, can you post sort of WeWork and maybe just a bit of a slowing down in the base here in New York and maybe some other markets? Just give us some updated thoughts on how you see BXP FLEX evolving? And just maybe broader thoughts or specific thoughts on plans for the makeready suites that you've referenced in the past? .

Yes. Okay. So maybe I'll make a general comment on the whole shared workspace business. I'll turn it over to Bryan to talk about FLEX by BXP. Clearly, there's been a slowdown in new leasing from the co-working operators, given all of the tumult with WeWork last year. And I think that's not only been true of WeWork but also some of the smaller operators. I mean, I think the markets continue to be healthy given that, that demand driver has gone away at least for the beginning of 2020.

Yes. This is Bryan Koop. If you look at our strategy with FLEX in Boston, it's really been almost complementary to our existing products. So as an example, with The Hub on Causeway, we have one full floor that we had always planned on putting in the podium, and that's 100% pre-leased and opened last week, and we're just thrilled with the product and how it came out. By year-end, we hope to have 4 locations, but it's really complementary to our existing assets and has nothing to do with what's taking place in the greater market. And then in the greater market on coworking, I think our FLEX product has been immune from, call it, a lot of the noise because the FLEX product is really for the small-to-medium enterprise, and it's not a coworking product per se. It's a Space as a Service for small-to-medium enterprises.

Yes. So we look at it as we're not trying to grow FLEX for the sake of growth. But if we have -- we do think the product is interesting to a segment of our customer base. And if we have the right space in the right place, we'll consider future stores.

And we're the only other places that we're currently in processes in San Francisco (inaudible) that we actually got back in November, and it's underway to be a floor of a similar ilk in San Francisco.

Great. And then just the JV with Alexandria, definitely interesting. Is this a very -- this seems like a very specific deal and a specific opportunity, but just curious, as you step back and look at sort of your holdings on the East Coast as well, do you think there are opportunities kind of to partner with, whether it's private capital or other firms sort of more on a joint venture basis, given sort of maybe where we are in the cycle?

Yes. So to answer you, let me -- I think you asked kind of 2 questions there. The -- absolutely. This joint venture at Gateway, we're very excited about it. We think it's going to create a lot of value for shareholders versus what we own right now. But it's very specific. It was very specific to the fact that Alexandria owned the assets next door, and had these sites where the development potential was unlocked. So that's why we did it. As it relates to joint ventures, overall, we're increasingly using joint ventures in our portfolio for different reasons than the Gateway project. We recently brought in CPP to own a 45% interest in the Platform 16 project. They are our partner on the Santa Monica Business Park acquisition that we, I guess, increasingly less recently made. So we are continuing and we'll continue to inject private equity into our investment portfolio to extend our capital. But the rationale for that is very different from the rationale of the Gateway joint venture.

Great. And then just one last quick one. So The Street retail deals you referenced earlier in -- the 2 deals I think you recently did. Maybe just give us -- there's obviously been a lot of churn in Fifth Avenue, Madison, sort of submarkets, and I'm just curious your thoughts -- you don't have a -- there's not a massive exposure there, but just your thoughts on where we are in the sort of evolution in terms of rent resets? And do you have a sense of where rents at grade might be there in the 2 specific submarkets where you have exposure?

So the answer is, obviously, we know what the rents are, of the deals that we just did, but we're not going to disclose the specifics of what those tenants are paying. I just make 2 comments, and then, John Powers, if you want to make some more you're welcome. The first is that we have now had our second what I refer to as successful tenant look at the Fifth Avenue store that we have as a great place to conduct their business, while they are on -- doing an ongoing remodel, and they've paid what we would believe are fair market rents for that space. But they have not invested in it on a long-term basis. And then on Madison Avenue, we're -- we recognize that the rents are not where they were 5 years ago. And so there's a reset, and we're -- that's just the reality. John, do you have any other comments?

We don't have any retail exposures in that area. Obviously, the overall rents have dropped in the retail market. But for a specific store, for a specific need, there were still people in the market, looking at different alternatives. What we've done in some of our other retail is concentrate on food and beverage because that's an amenity to the office towers, which is very important.

Your next question comes from the line of John Guinee with Stifel.

Wonderful quarter. Wonderful guidance. Life is good. One question. Mike, you're bouncing up around 6.3, 6.4 net debt to EBITDA. And I think you're on a path to deliver about $800 million to $1 billion of development every year, maybe sell $200 million to $400 million of assets. When do you -- what is your self-imposed maximum on your net debt to EBITDA? And when do you anticipate needing to go to the equity markets, if at all?

So our -- we've been pretty consistent over the last many years of targeting net debt to EBITDA between 6.5 and 7.5x. So we've been able to do a lot of development and deliver a lot of properties without raising equity. We have a number of opportunities in front of us, including 2 we talked about today. And things that are in the future pipeline. And as we determine if those and when those will come in, we will look at all of the sources of capital that are available to us. So we mentioned private equity and bringing that in, and we did that with CPP. We can bring in additional debt, which is very attractive and very inexpensive. And we would also consider public equity in the future to make sure that we maintain our leverage in a place where we think it -- where we think we should be.

Great. Then just a couple of cleanup questions. I don't think 30 Hudson (sic) [3 Hudson] is in your development page on the supp. Any reason for that? Or maybe I just missed it. And then second, is everything going smoothly on Dock 72, and we were taking it on time -- taking space on time.

I'll respond just to the 3 Hudson. So right now, that's in our land position and the work that we're doing there is improving the land. And since we have not made a commitment or decision to move forward with that full development, we are not putting it on our development page until such time as we would do that. And that's very similar to the way that we handle these other projects. I mean, for example, Platform 16 that we talked about, we're doing enabling work, we're doing prep work. So we're improving the land that we have. But until we decide that we're going forward, we aren't going to put those projects on the development pipeline.

John, do you want to make a comment about Dock 72?

Yes. Everything is fine on the WeWork side, there -- they built out about 2/3 of the space, and they're paying rent on all this space. They have a good number of members signed up. We are slow, unfortunately, on the amenities, and we need to get that done. That will be done in the first quarter. And after that's complete, we should -- we expect that more WeWork members will move in. The amenities of 35,000 feet and they're a key part of what we're creating there. On the leasing side, it's been very slow. As you know, we do have a proposal and we're trading paper on a 50,000-foot full floor, which we're optimistic about, but we'll have to see how it comes out.

(Operator Instructions) Your next question comes from the line of Daniel Ismail with Green Street Advisor.

For the observation deck at Prudential Tower, is this something you're going to seek to manage internally or look for an operator? And then are there any opportunities to add this in other developments like 3 Hudson?

So, Danny, we haven't made any decisions, firm decisions, yet about how the observation deck on the Prudential Tower will get operated. Interestingly, that -- it's -- it exists and, therefore, doing a major renovation of it, obviously, made a lot of sense. We thought about having an observation deck when we were developing Salesforce Tower, but we just couldn't make the vertical transportation work in that building, given where the design had already been and I would say that at the moment, none of our other assets are candidates for those types of uses.

Right and then on Proposition E is on the ballots in San Francisco in March. Assuming it passes, does this cause you guys to change your thinking on development timing or acquisitions outside of the city? And are you hearing anything from tenants regarding this ballot measure?

So, Bob, do you want to explain what the ballot initiative E is so everyone understands it?

Yes. Proposition E is a ballot measure put forth by Todco, John Elberling. And basically, it would tie affordable housing deliveries to the amount of office space that could be delivered in San Francisco, thereby reducing the amount of Prop M allocation if the affordable housing goals aren't met. It's polling fairly well right now. In our case, the Central SoMa projects all would get their existing allocation that's still outstanding. So in our case, we would get another 250,000 feet because they want to get the fees from the developers upfront. We're not hearing anything from any tenants as far as it's impacting their desire to be in San Francisco or they're looking elsewhere. And San Francisco has always been a difficult market to develop in. So I don't think it really changes anything.

Do you think this would impact the -- an accelerated phasing of projects in San Francisco or elsewhere?

Only on the Central SoMa projects that have already been approved where it would accelerate the second phase of their Prop M allotment. What the impact will be is existing product, the rent should continue to rise substantially because it's going to restrict supply.

So Danny, the way this works is that the projects that are currently in the pipeline in Central SoMa will get their additional allocation. The reason why there would be a theory in acceleration is because if you don't use your Prop M allocation within a certain period of time, Bob, I think it's 2 years, then it goes back into the bank. And so to the extent that you get the allocation, you'd want to figure out a way to use it.

There are no further questions at this time. I would now like to turn it back over to the speakers for closing remarks.

Okay. Well, I think that concludes all the questions. That concludes all of management's remarks. Thank you all for your attention and interest in Boston Properties. Thank you.

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