Boston Properties Inc (BXP) — Q3 2015 Earnings Call Transcript

Good morning, and welcome to Boston Properties third quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Forms 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website. At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in 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 would like to welcome Owen Thomas, Chief Executive Officer, Doug Linde, President, and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchey, our Executive Vice President of Acquisitions and Development, and our regional management teams will be available to address any questions. I would like to now turn the call over to Owen Thomas for his formal remarks.

Okay, thank you, Arista and good morning everyone. Our focus today, in addition to market conditions and strategy, will be on the 2016 guidance we provided in our release last night and a further discussion of our growth opportunities in 2017 and beyond. On current results, we produced another solid quarter with FFO per share of $0.05 above consensus and $0.06 above our guidance. We have increased our full year 2015 FFO guidance by $0.06 per share and provided you a projection for 2016 FFO per share over 2% above 2015 estimates. Our 2016 projected FFO growth would have been 4%, excluding the dilution from the asset sales that we conducted this year and will have next year. Further, on our most recent Investor Relation materials, we outlined that for 2017 we see the potential for $80 million in same-property NOI growth over 2015 from a select group of our assets, as well as an additional $72 million in annualized NOI from developments by the end of 2017. We own and manage many significant buildings with large tenants, several of which are rolling over in 2015 and '16. And these larger spaces can take time to backfill. Further, we are planning proactive investments in some of our properties such as the retail of the GM Building and the low-rise building at 601 Lexington Avenue, which have short-term dilution impacts but long-term benefits to our company’s earnings. Though our projected 2016 FFO growth is more modest for these reasons, we believe Boston Properties has the potential to deliver material NOI growth in 2017 given our lease-up opportunities and development underway. Through all of our comments on this call, you will hopefully get a more detailed understanding of the progress made to-date in executing on these growth opportunities. Now, turning to the economy and the operating environment, though we had a clear volatility spike in the financial markets in August driven primarily by China economic growth fears, our views on the U.S. economy have not changed materially over the last quarter. U.S. GDP growth is steady but tepid with third quarter growth announced yesterday slowing to 1.5% and approximately 2.5% growth projected for all of 2015. A similar story exists for employment, where 142,000 jobs were created in September, which is lower than the average for the past year and wages are growing at around an annual rate of 2.2%. As evidenced by the jobs data in corporate earnings, certain sectors of the U.S. economy are experiencing a challenging business environment, particularly industrial production and energy given low oil prices. Our assets are located in coastal markets that are not as directly affected by weakness in these sectors. Office property market conditions remain healthy and improving. Office net absorption remains steady with 13.9 million square feet absorbed in the last quarter and 1.2% of stock absorbed over the last year in major U.S. markets. Construction remained just above long-term averages of 2.1% of stock and annual rent growth was approximately 4% nationally over the last quarter and positive, particularly in San Francisco across all our major markets, except downtown Washington D.C. We leased 1.3 million square feet of space in the third quarter having completed 89 leases and our occupancy remained roughly flat at 91.3% for the quarter. The private capital markets for real estate remained strong in our core markets as well. Interest rates continue to be favorable with the 10-year U.S. Treasury currently trading just above 2% and transaction volumes and pricing remain at elevated levels. We continue to see strong interest from domestic and offshore investors in Class A office assets. There is, however, a significant pipeline of real estate currently in the market and pricing levels may be tested this fall given the supply of product, higher volatility in the public capital markets and the prospect of an interest rate hike before year end. For all of these reasons, our fundamental capital strategy has not changed. We are continuing to sell selected assets to fund special dividends and developments, which we continue to deliver at lower prices per square foot and materially higher yields than where existing assets are trading. Now, moving to the specific execution of our capital strategy, let me begin with acquisitions. We continue to evaluate new acquisitions but are finding pricing challenging and uncompetitive from a financial return perspective with our development opportunities. This past quarter, we did close on the previously contracted acquisition of the 50% interest in Fountain Square at Reston Town Center we did not own for $206.5 million. The pricing of the acquisition was a 5.5% cap rate on 2016 NOI and $545 per square foot. We also remain active on dispositions. Since our last call, we completed the previously described sale of a 50% interest in 505 9th Street in Washington, D.C. for $318 million and a land parcel in Gaithersburg, Maryland for $30 million. We also just placed under contract to a user Innovation Place in San Jose, California for $207 million. Innovation Place is comprised of four existing buildings totaling 538,000 square feet. Three of the buildings are currently vacant and the fourth will become vacant in 2016. The site has a total of 26 acres and can support 537,000 square feet of additional development. It is our expectation that the user will build additional structures on the site for which we will be engaged as the development manager. This is an exciting sale for Boston Properties, in that it generates $207 million in sale proceeds, represents a gain of approximately $78 million, reduces the overall vacancy of the company and creates a new client relationship and development assignment for us. Assuming Innovation Place closes as scheduled before year end, we will have sold $743 million in assets on a gross basis and $584 million assets on our share basis in 2015. Our total projected 2015 tax gains from sales would be approximately $285 million and could result in another special dividend this year. It is our expectation that we will not have additional sale activity in 2015. However, we will continue to be opportunistic with asset sales in general and evaluate targeted sales of non-core assets for 2016.

Thanks Owen. Good morning everybody. While our leasing and our overall investment actions are pretty influenced by what we view is long-term perspectives on the various market conditions, you are going to hear a lot less about this from me this quarter. And I am going to really spend most of my time talking about the factors impacting the next 12 to 18 months and the issues in our portfolio market conditions, the space that we are working on to lease or re-lease, how we are going to achieve that significant incremental NOI that Owen just described from our portfolio, as well as the growing contribution from our ongoing development investments. That’s going to be the focus of my comments. A couple of comments on our some of the supplemental first though. So overall, leasing activity in the third quarter picked up from the second. We were slightly more than the second quarter by about 100,000 square feet. Those second generation statistics had some interesting SKUs and that I sort of I wanted to highlight. In fact, each of the various regions had something going on with it. So in Boston, there was a pretty significant uptick and that was really from two transactions. The first was a lot of leasing that was done in Cambridge. Those leases were actually signed in 2014. And then there were a number of leases at 200 Clarendon Street and the increase in the net rents on all of those transactions was over 100%. Interestingly, San Francisco looks pretty muted. And the reason for that is two-fold. The first is that there was a large renewal at Gateway that was done in 2013 that was actually 60% of the square footage that was in the stats. And then the EC office number interestingly, while it was only positive 25% on a net basis that was because there was a 5-year renewal that was done in 2012 on about 50% of the square footage in the EC and that was done at $50 a square foot with dollar bumps. Interestingly, we have just completed the lease this quarter, one floor above that lease where we did a same-as-is 5-year renewal for the starting rent on the new transaction is $70 with 3% increases. So you can sort of get a sense of the dramatic increase in rents in San Francisco just over the past 3 years. In DC, we have a large law firm renewal completed in ‘14 that became effective this quarter and the rent went from 46 net to 38 net, but that’s on a last contractual rent number to the beginning contractual number. So a 2.5% increase is the actual GAAP rent is actually higher than $46 over the term 15-year lease. And in New York City, there was a former city floor that was re-leased at 601, where the rent went from $109 to $79. And with 540 supplemental where we did a 20,000 square foot deal at base of the building where the rent went from $135 to $70. Just to gauge any concerns, our mark to market in New York City right now, as it stands in 2016 is over $9 a square foot and in 2017, it’s pretty flat and I will talk about what’s going on in ‘17 as we get into 3.99. So let me begin my formal remarks on our markets with Midtown Manhattan. So during the quarter, we did 12 deals for about 90,000 square feet. Ten of those deals had starting rent over $90 a square foot and seven of those deals were above $100 a square foot. The bulk of our availability and rollover in the portfolio in the next few years occurs in spaces that come at rents in excess of $100 a square foot. While it’s a small subset of the Midtown market, it continues to be a very healthy and growing one. Activity is expanding, overall there has been an average about 870,000 square feet of leases done per year since 2011, over $100 a square foot and about 30% of that is new. And in 2015, we have already seen 900,000 square feet of activity above $100 a square foot and about 35% of that is new. Nonetheless, the transaction size continues to be small with a preponderance of the activity of leases under 10,000 square feet for non-renewals and there are relatively few deals above 40,000 square feet for renewals. So you have to temper what’s going on in that market given the scope of the transaction sites. We are fully leased at 510 Madison, no rollover until ‘17. We are working through those law firm rebuilds that we have been describing at 599 Lex and we are going to be getting back the three floors of swing space in 2016, late ‘16 where we already have leases out on two of those floors, with rents over $90 a square foot. At 250 West 55th, we have leases out on all of our remaining pre-builds and we have half lower deals on two of the remaining three available floors. We expect to have full revenue contribution by the third quarter of ‘16 at 250 West 55th. We are seeing heavy traffic across the entire portfolio, but with very limited current vacancies, most of our transactions revolve around future availability. At 767 Fifth, we are getting back 80,000 square feet in July of 2018, the expiring rent – excuse me, the expiring rent is under $100 a square foot and we expect that space to lease for over $180 a square foot. We are actively marketing the former FBO space, which will be available for lease in early ’17. And we have active interest from tenants ranging in size from 14,000 square feet to the entire 65,000 square foot unit. At 399 Park, there are 640,000 square feet expiring in ‘17. We have 280,000 square feet of the base leased to Citi and we are in lease discussions on 180,000 square feet with starting rents equivalent to Citi’s expiring rent in the high 80s. There was a 97,000 square foot block in the lower portion of the building. We have got a proposal out on 75,000 square feet at over $105 a square foot. There is 150,000 square foot of block in the middle of the building, we are going to get that back in September of ‘17 if leased it about $100 a square foot and we expect to achieve rents over $115 a square foot. And the final Citi block is of 110,000 square feet of below-grade space and that’s leased at about $50 a square foot. At 601 Lex, we are in the planning stages of a major repositioning of the retail in the low-rise building. We are working on a plan to vacate the entire 140,000 square foot office building including 70,000 square feet that are currently under-leased to Citi. This is going to result in ‘16 and ‘17 additional vacancy as we renovate that portion of the complex. We have no vacancy right now at 601 and so the New York team is actively looking at ways we can control currently leased space so we can move forward with these plans. This quarter, we actually took back a floor at the top of the building in order to accommodate the potential repositioning. This is high contribution space, which is going to result in the diminishing of occupancy and revenue, but consistent with our core strategy and philosophy, we are making decisions with the long-term to maximize the value of the asset and the portfolio. In DC, our development at 601 Mass opened in September, a little bit early. The office space is 86% leased, the retail is 100% leased and the income contribution will ramp up in ‘16 and fully contribute in ‘17. This development is being delivered at an initial stabilized cash return in excess of 8%. While the delivery impacted citywide brokerage statistics negatively this quarter, our view really is that the overall market conditions in the CBD of Washington, D.C. haven’t really changed much. The district continues to be very competitive since there just hasn’t been a lot of significant increase in user demand. We completed another major renewal of our law firm deals at 1330 Connecticut where the incumbent tenant renewed for 15 years on 212,000 square feet of approximately 240,000 square feet currently occupied. That new rent is going to commence in ‘17. The rent rollup is over 25% on a net basis. As part of this transaction, we will be using 52,000 square feet of 1333 New Hampshire space, which is across the street as swing space. This space is technically leased, but it’s not going to be revenue-producing until the repositioning of 1330 is over. And that space would ultimately rent for over $65 a square foot growth today. We are making steady progress on all the availability at our JV assets at Market Square North, 901 and Met Square. Activity in Reston continues to be very strong, though with limited availability again in our portfolio. Activity really is involving, extending and expanding tenants by accommodating takeovers and sublets. All of this is in the context of starting rents above $50 a square foot in the urban core. Our portfolio has a vacancy rate of under 3%. Overall, Reston vacancy is 14%, Roslyn is over 30%, Tyson is over 18%, and that’s just actual vacancy, not availability. The weakest subset of our DC portfolio is the GSA-related properties in Springfield and Annapolis Junction. And while the user groups want to need space, the GSA mandated densification and to-date, the lack of appropriations in the defense complex have severely limited current demand. We hope that the changes with the House of Representatives and the changes with sequestration and the new budget deal will in fact add to the demand for the defense complex and improve our leasing prospects in these properties. The Boston CBD continues to be a really good market as supplies dwindled over the past few years. Although, there is speculative development in the Seaport and we are obviously adding inventory to the Back Bay with 888, demand is currently lease expiration driven. At 120 St. James, that's the low-rise of the 200 Clarendon area, we have 180,000 square feet of availability and we have responded to three full block proposals in the last 90 days, each anticipates full utilization of the space in 2017. At 200 Clarendon in the high-rise, we completed 88,000 square feet of leasing this quarter, including one floor in that 150,000 square foot block from 44 to 48. While we have seen interest from a few multi-floor users, the high-end demand in Boston has typically been for users under 30,000 square feet and we expect to lease this space in smaller units. As we said previously, we expect to have a rent commencement on all the space towards the end of 2016 and into 2017. At 888 Boylston Street, we have topped out the steel, we are 71% leased. We actually completed our first retail lease this month with an 18,000 square foot multi-floor user. We have extensive conversations going on with retailers in all of the remaining retail space at 888, which we expect to open in 11 months and a few months after, that will open a few months before or excuse me after the office space opens in the summer of 2016, and so 888 will have full contribution by the end of 2017. Since we have no availability in Cambridge, I just have a few comments there. Asking rents are now in excess of $80 a square foot and in spite of the recent volatility in the life science industry, as well as some job reductions around specific companies, there continues to be a flow of new tenants looking for a beachhead in Cambridge, which is home to both the life science and technology businesses. Lack of available supply continues to be the story. The Cambridge Redevelopment Authority has made this submittal to the city for up-zoning of our Kendall Square project and we hope to have some clarity on our ability to build more space by the end of the year. There is no real update on the Volpe site disposition. The GSA schedule suggests an award in early ‘17, which means no additional spaces at Volpe for four to five years. In Waltham, that metro market continues to get stronger driven by organic expansion. This quarter, we did 19 leases in our suburban portfolio, 150,000 square feet and we had a similar amount under lease negotiation right now. All of the space at 10 CityPoint is committed, rents in excess of $50 a square foot for the top floor. The project will deliver in mid-16 at a cash return over 8%. Rents have increased by 25% over the last 18 months at our CityPoint project. While there is no speculative construction currently underway, our reservoir north renovation where we basically scraped the building other than the structure is very much underway and we anticipate rents in the mid to high 40s of significant upgrade from the expiring rents that we had in May in the low 30s. Again, this won’t occur until 2017. Finally, I want to talk about San Francisco. At the June NAREIT meeting, there was a real focus on demand in San Francisco and whether we were seeing signs of concern. Now, we’ve lay off the Twitter and the limited activity in the IPO market, I think it’s become another renewed topic of conversations. Well, between 2011 and 2014, the annual CBD leasing activity averaged about 9.3 million square feet and absorption was about 1.5 million square feet a year. Through the end of the third quarter this year, there has been about 6 million square feet of completed transactions and 1.4 million square feet of absorption. Leasing activity continues to be healthy. Tech demand has averaged about 55% of this activity, where there has been sublet space, it’s been small pockets and it’s leased for strong rents. Last quarter, the big news was that Apple grabbed the sublet space at 235 Second. Our largest sublet is our Morgan Lewis space at EC 3 stemming from the merger with Bingham, 125,000 square feet expires in August of 2016. We are negotiating leases for three of the five floors right now and have multiple proposals out on the rest of the space. We get the space back, as I said in August of ‘16. The anticipated rollup is over 100% on this 125,000 square foot block. There is speculative new construction in the city, 181 Fremont and 333 Bush and Block 40 are all under construction adding about 1.4 million square feet, but the vacancy rate is under 6%, total availability is under 8.5% and after an FAR deposit in October, the Prop M Bank is currently under 1.75 million square feet and that’s it. Down in the valley, Apple committed to another 800,000 square feet in the new development. They are purchasing additional land in North San Jose, Palo Alto Networks is growing, Google is growing, Aruba is growing, Toshiba is growing, General Dynamics is growing, Silver Spring Networks is growing they have all committed to large new expansions. At Embarcadero Center, we completed another 116,000 square feet of leases during the quarter. The largest deal was 41,000 square feet and the mark-to-market was over 60% on a gross basis and over 100% on a net basis. None of these transactions are in our same-store stats for the quarter. We are now actively engaged on over 350,000 square feet of full floor tenants, including the five currently vacant floors, a 117,000 square feet of vacancy with an average starting rent on those floors of over $80 a square foot. The largest tenant is only 51,000 square feet. The anticipated rollup is in excess of 50% on a gross basis and over 75% on a net basis on all of that space. In total, we have over 1 million square feet of near-term lease expirations and vacancy with an average rent of $53 a square foot at EC. At 535, we are now 91% leased and we have leases out on all but 4,000 square feet. The last three deals were with a foundation, an insurance company, and a law firm. The building should be fully contributing by the third quarter of ‘16 at a cash return of over 7.8%, 150 basis points greater than our original performance. We have 700,000 square feet of available space at Salesforce Tower. Currently, we have leases out on 100,000 square feet totaling 4.5 floors. We have active or multi-floor discussions defined as multiple letters of intent being exchanged proceeding with asset managers, hedge funds, VCs, law firms, consulting firms, real estate brokerage companies, and other non-tech service firms that encompass more than 475,000 square feet. Only two of these tenants are existing customers at Embarcadero Center. These requirements are all lease expiration driven for occupancy at the end of 2017 or early 2018. In summary, activity at Salesforce Tower and the rest of our city portfolio is robust as much as we had seen since we bought the property in Embarcadero Center back in 1998. With that, I will turn the call over to Mike.

Thanks Doug. Good morning everybody. I am going to briefly cover our earnings for the quarter and projections for the rest of the year, but we will focus my comments primarily on our 2016 guidance that we provided. I would also like to point out that we added a new page to our supplemental report this quarter that provides our key earnings guidance assumptions. We are hopeful that this in conjunction with the guidance explanations that we have historically included within our earnings press release is helpful. Starting with our quarterly results, as you can see from our press release, we reported third-quarter FFO of $1.41 per share. That was $0.06 per share, about $11 million above the midpoint of our guidance. The results included unbudgeted lease termination fees of $5.6 million. This includes the $3.6 million payment we received related to our Lehman Brothers bankruptcy claim. So far this year, we have collected over $8 million from our claim, which we believe has the remaining value of about $2.5 million, though we don’t know when or if we will collect it. We also recorded $2 million of termination fees for taking back a floor from a tenant at 601 Lexington Avenue that Doug mentioned. The remaining $5.4 million of our earnings beat included $900,000 of better-than-expected service fee income and $4.5 million from the portfolio. In our portfolio, our operating expenses were about $1.5 million below our budget, all of which we expect to incur in the fourth quarter. And we delivered two developments this quarter earlier than we expected resulting in $3 million of portfolio outperformance. We projected both of these developments to deliver on October 1. So, there is no impact on our fourth-quarter projections. Our projections for the fourth quarter are generally in line with our prior guidance. The only meaningful changes are that we will benefit from the early acquisition of Fountain Square that will add about $2 million for the quarter. However, we projected to be offset by operating expenses being moved from the third quarter to the fourth quarter and the loss of income from terminated tenants. For the full year 2015, we are projecting funds from operations of $5.46 to $5.48 per share. Again, this represents an increase from our guidance last quarter of $0.06 per share at the midpoint reflecting the outperformance we recorded in the third quarter. Now, I would like to spend a few minutes on 2016. Last quarter, we discussed a few larger items that would impact our 2015 earnings, including asset sales, in particular the sale of 7 Cambridge Center to its user The Broad Institute, which will result in the loss of $13.2 million of NOI. The Broad Institute is a unique situation given that they negotiated this purchase rate as part of the build-to-suit development 12 years ago. And the rent contained two components, a base rent which was used to calculate the purchase price and a large tenant improvement investment that was fully amortized over the term of the lease of additional rent. We do not have any other tenant purchase rights like this in our portfolio. The impact of this and our 2015 sales are partially offset by the acquisition of Fountain Square. But in aggregate, we project a $16 million or $0.09 per share decline in 2016 NOI from 2015 related to net sales activity. Last quarter, we also discussed the impacts on 2016 from downtime in between leases for some larger lease expirations such as Citibank vacating 140,000 square feet at 601 Lexington Avenue, FAO vacating at 767 Fifth Avenue and lease expirations at our Gateway project in South San Francisco, 100 Federal Street in Boston and in our Washington, DC buildings. This has tempered our same-store growth for 2016, but will be more than offset by growth in the remainder of our same-property portfolio and incremental NOI from the delivery of a portion of our development pipeline. In Boston, we project occupancy gains at the Prudential Tower, 200 Clarendon Street and our Suburban Waltham buildings. We also will reopen the Boylston Street side of the shops at the Prudential Center in the second half of 2016, including Eataly and the completion of the retail expansion, which is 100% leased. This income will start to show up in the second half of 2016 and will be fully in place in 2017. As Doug mentioned, we have good activity in New York City at 250 West 55th Street and expect stabilization in 2016. Year-over-year, we project 250 West 55th Street to contribute an incremental $15 million to $20 million of NOI in 2016. We are also projecting incremental income gains at 599 Lexington Avenue and in Princeton. Doug also described the activity at Embarcadero Center. The potential revenue from the five vacant floors he mentioned is over $9 million and our anticipated rollup from expiring leases through 2017 is over $20 million. Some of this is projected to commence in 2016. Overall, we project our average occupancy remaining relatively stable between 90% and 92% during 2016 and then improving with positive absorption in 2017. On a GAAP basis, at the midpoint of our 2016 guidance, we project our same-property NOI to be relatively flat compared to 2015. The most significant headwinds are at 601 Lexington Avenue, 100 Federal Street, and 757 Fifth Avenue, each of which is a consolidated joint venture. If you include only our share, our 2016 same-property GAAP NOI performance improves by 100 basis points. On a cash basis, our same-property projections are much better. We have a significant amount of free rent burning off at 680 Folsom Street, 250 West 55th Street, 101 Huntington Avenue, and South of Market. And also, we will experience the cash impact of the rollup in rents from early renewals we completed in Cambridge and in San Francisco. We project our cash same-property NOI for 2016 to be up by 1.5% to 3.5% from 2015. Again, if you only include our share of consolidated joint ventures, this growth goes up by approximately 100 basis points. So cash NOI growth of 2.5% to 4.5%. Properties not included in the same-property portfolio include our 2015 and 2016 development deliveries. These developments represent a total investment of $1.1 billion and are projected to provide an aggregate average unleveraged, stabilized cash return of 7.75%. We project an incremental NOI contribution to 2016 from these properties of $34 million to $40 million and growing to over $70 million by the end of 2017. Non-cash rents, including both straight-line rent and fair value rents will be down significantly in 2016, as much of it will convert to cash rents. We project our non-cash rents to be $30 million to $50 million in 2016. That compares to our current 2015 projection of $90 million to $95 million. We have four maturing mortgages in 2016 that total $580 million and we project interest expense savings of $8 million assuming we complete a $500 million financing in the fourth quarter of 2016. This is baked into our interest assumptions for the year and we currently project interest expense of $400 million to $420 million for 2016. This is net of capitalized interest associated with our development pipeline of $38 million to $48 million. We have not made any other financing assumptions, though we continue to monitor the market in advance of our $3.6 billion of aggregate debt expiring in 2016 and 2017. We continuously evaluate the costs associated with an early refinancing, which could occur later this year or in early 2016. Any transaction would result in a significant prepayment penalty, which will be charged to earnings in the period we complete the refinancing. We also continue to layer in forward-starting fixed-rate hedges targeting corporate financing in late 2016 and our $1.6 billion loans on 767 Fifth Avenue that expire in late 2017. With our acquisition of our partner’s share of Fountain Square and the sale of 505 Ninth Street combined with the transition between leases and some of our consolidated joint ventures, we project the FFO deduction for non-controlling interests in property partnerships to be lower in 2016 at $95 million to $115 million. Overall, we project 2016 funds from operations of $5.50 to $5.70 per share. At the midpoint of our guidance, we are $0.13 per share higher than 2015, which reflects approximately $0.22 growth from our development deliveries, $0.10 growth from our share of portfolio NOI, $0.08 of lower interest expense, offset by $0.09 of dilution from asset sales, $0.04 from higher G&A expense and $0.14 of lower termination income. The dilution from selling assets in 2015 has an impact on our 2016 growth profile. If you exclude the impact from asset sales, our FFO growth at the midpoint will be approximately 4% even with some of the transition we are seeing in the portfolio. Our portfolio was well-positioned for additional growth beyond 2016 and we anticipate improving our occupancy, adding incremental NOI from the existing portfolio and from our development investments. That completes our formal remarks. Operator, if you can open the line up for questions, that will be great.

John Guinee here. Thank you very much. First, a couple of questions for Owen and then one for Ray Ritchey or maybe this is Doug. Back in 2010 or 2011, Princeton Corporate Center came on, you sold it, you backed out what are your thoughts on Princeton Corporate Center these days?

Well, it’s called – we call it Carnegie Center, John. And I think the basic fundamental philosophy down there is that we have been able to find the real niche with the pharma, biotech and some other industrial companies, many of whom are growing and we have been able to both capture additional occupancy, as well as additional users while we are building a building as an example for NRG right now and our plans are, at the moment to continue to have a thriving 2.5 million square foot campus, where we have growing tenants though we hope to see rising rents and we can accommodate future growth.

Thanks, John. First of all, in TSA, obviously we are involved in a protest there. So, it’s like we will not comment on that except to say that we would not file the protest, if not we didn’t feel good about our position. Number two on GSA in general, you may have seen where DOJ just signed a lease for over 800,000 square feet on a to-be-built complex here in the NoMa District of Washington, and I think that’s indicative of the fact that current landlords or existing landlords have a hard time meeting the space allocation needs. And that these larger requirements more likely than not will be forcing new development. And as we control several sites that would be responsive that we are encouraged that that may be the case. Having said that, we are still aggressively pursuing renewals at a number of our buildings where leases expire in ‘16 and ‘17 and because of the strategic nature of those specific buildings, we feel really great about the renewal prospects for our buildings.

Looking forward to it. Thank you.

Good morning, guys. In your remarks on sales force, you spoke about the non-tech sort of demands from users. What are you seeing on the tech demand side of things? Has the sales force sort of naming rights been an issue or are you seeing larger source of requirements than you thought you would when you built that?

I think what we are seeing is exactly what we would have anticipated seeing with regards to the building. This building is in the premier office address in San Francisco at this point. And given the relatively higher rents that we are asking relative to other parts of the city and other properties, we anticipate that the market demand would be geared towards the financial services companies with lease expirations and driven occupancy needs. And so I think we are seeing exactly what we would have expected to see.

I think our appetite is to maximize the revenue and maintain the image of the building. And if it comes in the form of two or three transactions, that’s okay and if the right brand awareness organization wants the whole 65,000 square feet and they are prepared to pay what we consider a fair rent, we will do a deal with them as well.

On our G&A, we have really just assumed cost of living adjustments on our 2015 general G&A. And then we do have a long-term compensation plan that is identical to the plan that we had in ‘15 that is in there and the difference is that the plan that is rolling off from ‘13, the unvested piece of that is just less than the charge for the first year for the plan that is projected for ‘16, but that plan is identical – projected to be identical to what the plan we had in ‘15 is. There is really two pieces.

Owen, you mentioned that asset prices maybe tested this fall. And I am just hoping you guys maybe elaborate a little bit on that statement and just what dynamics you see at play there and do you think there are certain of your markets that might be more vulnerable than others?

Yes. So, we have had as you know now several quarters/years of I would say very strong capital market conditions, particularly for Class A assets. And from all the evidence that we have of deals that we are involved in and deals that we watch, that market conditions still exist. However, I made the comment, because there have been a few new things that have happened over the last quarter. We had some clear market volatility, a downdraft in the equity markets in August, which is now recovered, but clearly the volatility levels are higher. I am sure that’s had an impact on some investors. We are closer to the end of the year. So, everyone has got a different belief on what interest rates are going to go, but we are closer to a possible December rate hike. And then lastly and anecdotally, a lot of what we see and what we hear from the industry, there is a significant pipeline of assets for sale, both office assets and other asset classes currently in the market. So, I just want to make the point, again, we have no specific deal evidence of change, but there are a few of these moving currents, which could have some impact on it and we will have to see.

I don’t think there is anything in my remarks that are targeted towards any one specific market. I think we have mentioned before that the attractive asset pricing that we are seeing exists across all of our four markets. And these factors that I mentioned, I think would have an impact on all of them.

We have obviously been watching our stock price, Jed and we talk about it and we have even addressed it with kind of our board and talked about it. And our view is that we have got a great use of capital for our developments. If you look at our liquidity and you look at our capacity, which is actually significant given our leverage, we certainly have capacity, but then you look at the impact, the accretion impact of doing a share buyback of $1 billion or $1.5 billion or even $2 billion and it’s not that meaningful to us given the fact that we think we are going to have alternative investment opportunities and continue to have new development given our shadow pipeline over the next few years. So, we don’t want to give up that capacity for some sort of short-term gain when we have great opportunity in the future.

Great, thank you. So, you have done a good job of laying out the $80 million of potential NOI upside through year end ‘17 and provide advice on this in the past. And just listen to your comments, it does sound like maybe there is some 2017 NOI that might be moving out. So, I guess my question is two parts. Number one, can you just bring us up to speed on, of the $80 million, how much of that is in the bag? And number two, when we think about that $80 million, is there some movement in ‘17 that might be a drag again?

Jamie, this is Doug. So, it’s hard for me to sort of describe what is in the bag or not in the bag. I mean, as an example, I described and might put some numbers around all of the rollover that we have in Embarcadero Center. And I also – I put some perspective on the activity we have in Boston and we have previously talked about what’s going on at 100 Federal Street. All of that, I think is activity that we are confident is going to progress in the appropriate manner, but none of it is "in the bag". But I – we feel pretty good about it. With regards to ‘17, and interestingly I actually went through and looked at our entire portfolio from 2017 to 2020, because I figured somebody – someone might ask if there are any other really large rollovers in our portfolio. And in ‘17, aside from the square footage that I described at 399 and I think I gave some clarity on the fact that much of that space is likely to be leased prior to those leases expiring. In fact, we may get some leases done in early 2016 on that space. I think that we are feeling relatively comfortable that that space is not going to be a drag on our earnings on a going forward basis.

Well. Yes. I mean obviously, I had some comments there relative to our same-store cash being higher. And I made some comments on what our free rent and straight line rent is going to be which is significantly lower than it’s going to be in 2015. The other thing I would point out is we have done a lot of leasing in 2015 that has – in ’15 and that was just a lot of this early renewals and take-backs and deals that we did. So the leasing transaction costs that we are seeing in 2015, I think are higher than what they have been historically because there has been so much volume of leasing. So as I look at our occupancy projections and I look at 2016, I mean I am looking at probably doing 3.5 to 3.7 million square feet of leasing in order to achieve our projection. So you can throw whatever transaction costs you need to throw at that based upon some renewals, some being new. But if you use $45 or $50 a square foot, you are talking about $160 million, $170 million. And then we talked about our cash rents and our CapEx, I would expect it to be similar next year to this year. We expect this year to be somewhere in the $70 million range, and I would expect that to be similar. We do have some more significant work going on like this year we had Hancock lobby and we have started the 599 lobby and the elevator work at 599 and that’s going to go also into next year. And we will do some work at 399 next year and some other buildings. But overall, I mean I would see it being an FAD of somewhere around $4 somewhere $3.80 to $4.20, something like that per share, which is higher than this year by probably 10% to 15%.

Great, thank you very much. Just two questions for me. The first one is for Ray Ritchey, now that you guys have bought out Beacon on Fountain Square and consolidated all the Reston Town Center, does this allow you to accelerate some of your redevelopment plans or regardless of whether you owned it in a partnership or not it doesn’t change the timeline with regards to future redevelopment?

Thanks, Alex. The original density of additional development pad in the Town Center per se was acquired where we bought the first space 2.5 years ago. And we have been going the last two years to position that asset for development and it’s really a two-phase asset. The first as we talked about today is the 508 and the 20,000 square feet of commercial space, 508 units of residential, but we are also working on another office tower that will be approximately 270,000 square feet and we are taking steps to put that in position as well. And then of course, we still have the Gateway side, which has the potential of upwards of 3 million to 3.5 million square feet of space in mixed use development that will be forthcoming when Metro comes. So, Reston is great today, it will be even greater in the future.

The thought process of the sale was that was the preference of our clients. And in my comments, I mentioned a gain, which I think is $78 million.

Yes, that’s also in our guidance for net income. There is the GAAP gain within the guidance for net income and our guidance that we provided. So, there is a GAAP gain and there is also a tax gain.

Hey, good morning. I was hoping you can give us some color on how should we think about the magnitude of the podium project at North Station since it sounds like that might be a near-term start and since you will be capitalizing interest in G&A on that and any other projects that come out of the shadow pipeline, I was wondering what the guidance contemplates if anything, in the way of new incremental development for capitalized interested in G&A?

So the podium project is approximately $285 million. Right now, we are assuming that Delaware North if he started we will go forward with it, so obviously it would be half of that. And we also assume that if we have Delaware North as a partner that we will put some additional third-party financing on it. So that’s sort of the magnitude of that. And then next piece would be the residential and hotel sites, which are pretty integral to one-half of the building. And then the last piece of the Office Tower, which is I think is the longest lead item from our perspective because it’s more tenant specific. And I think we will have a better sense of where Delaware North is on those two projects in the next quarter. And as Owen said, when we talk to you in I guess early January or late January we will have more flesh to put on the bone.

So I think I have said this previously and it will be a consistent message, which is as little inflation as the Fed is and others are seeing in parts of the consumer economy. Construction market in San Francisco, Boston, Washington, DC and New York is seeing significant inflation defined as right now somewhere around 6% plus per year. And so we are doing everything we can to make deals and do our bidding sooner rather than later and do buyouts on long-term lead items and get our drawings in a position where we can do that thoughtfully as quickly as possible. And we build all of that inflation into the budgets that we provide you. So a budget that for a building that’s going to commence in 2016 or ‘17 will have built-in inflationary creep in the hard cost numbers to take care of what we consider to be a reality of the market today.

Good morning, everyone. Just two questions, as I listen to you comments about San Francisco and a way that also what Kilroy is saying about the continued strength in that market, I was wondering if you can help us understand as you guys think about leading indicators for demand, what should we be focused on, a lot of times people focus on sub-leased space, but how do you think about lack of IPOs this cycle or growth space or private market valuations?

So Ian, my comment to you would be as follows, which is I think the thing that we first look at is we look at the amount of venture capital led investment that’s occurring in the various markets in the country and how that measures vis-à-vis the last four quarters or five quarters in years and what it sort of looks like historically and because that sort of where a lot of it starts particularly on the tech side. And then we expect that there will be failures that the changes that are occurring in the technology space and the number of entrants into various product categories are not single. And so as an example, in the mobile payment system, there are five or six tech companies that have all either attempted to go public or are moving towards that direction and have aligned themselves with other tech companies. And in my opinion, they are not all going to be successful, right. So Samsung has their own pay, Apple Pay is out there, PayPal is out there, Visa has a product, Square has a product, they can’t all possibly be on every mobile payment service in every retailer in the country because it’s just too many of them. And so we anticipate that there are going to be failures. And so when we look at things like layoff at Twitter or other blowups, on a one-off basis those are the types of things that don’t worry us. Where we start to see significant layoff due to global economic concerns and major changes in what’s going on from a GDP perspective, that’s where I think we would start to feel really uncomfortable about the demand characteristics of that particular marketplace. And it’s really hard to sort of see with who the canary in the coal mine is on that in the current environment. I would just add to that. Look, I think there are metrics that we can all look at. I think the venture capital investing historically versus rents is certainly an interesting one. But I think we also rely heavily on what just what is our expense on a day-to-day basis in the marketplace. I mean given the portfolio that we have and the insights that we have and what’s going on in the market, we have watched with some wonder over the last couple of weeks, all of the negative press and commentary about the San Francisco market when our actual experience is completely inverse of it as Doug and Bob described.

Well, Tom, on the multifamily, specifically to Reston and wherever multifamily is part of a mixed-use development, we tend to hold on to those, because we want to control the environment for our office and retail tenants as well. So, in places like the Back Bay or certainly Reston Town Center and other mixed-use projects look to us to continue to own those. Now, the situation in Gaithersburg with Camden is completely different. That’s a greenfield suburban site. We still haven’t developed anything vertically there yet. We sold an adjacent site to lifetime fitness. It just seemed sense to take our profit on the land, sell it and let Camden experience the great joy of going vertical. So, long story short, we are going to keep the stuff that’s integrated into our projects and may continue to sell the stuff that’s one-off and not key to our mixed-use development.

Well, I think it’s another indication as we were talking about earlier of the interest in both offshore and we also see interest from offshore investors, but I think it’s another example of offshore investors being very interested in high-quality U.S. real estate in core markets. And I think that there is also I think increasingly – increasing interest on some sovereign wealth part – some funds part not on all and moving up somewhat in the risk curve and trying to achieve higher returns while we are taking the risk and I think this investment like Qatar in that project is an example of it.