Boston Properties Inc (BXP) — Q1 2017 Earnings Call Transcript

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

Thank you, Arista, and good morning everyone. Our current results show that FFO per share for the quarter was in line with our prior forecast, and we increased the midpoint of our full year 2017 guidance by a penny, driven by operational improvements. We leased 565,000 square feet in the first quarter, which is below our long-term averages for this period. This level of leasing is not a reflection of the health of the market or the vibrancy of our tour and proposal activity, but it is due to the cadence of our lease expirations, the lumpiness of our transactions, as well as the fact that we leased three million square feet in the fourth quarter of last year. Our in-service office portfolio occupancy is now 90.4%, which is up 20 basis points from the end of the fourth quarter. We also had another quarter of positive rent roll-ups in our leasing activity, with rental rates on leases that commenced in the first quarter being 13% on a gross basis and 20% on a net basis compared to the prior lease, which was driven substantially by our California assets. New investment and disposition activity was relatively light in the quarter, but we recently completed two major financings at very attractive terms, which Mike, who by the way is having a $4.5 billion financing week, will discuss in detail later in the call. Moving to the economic environment, U.S. economic growth continues to be a little sluggish, with fourth-quarter GDP growth estimates of 2.1%. The employment picture also continues to improve incrementally with 98,000 jobs created in March, and the unemployment rate dropped to 4.5%. In the capital markets, the 10-year U.S. Treasury also dropped around 30 basis points to 2.2% since the end of the last quarter. So financial markets are reflecting increased skepticism over fiscal and tax stimulus related to the new administration. The Federal Reserve has not altered its rhetoric on increasing rates at a more rapid rate in 2017. Notwithstanding the current Fed posture, given continued sluggish growth, low inflation, the uncertainty associated with federal fiscal stimulus and tax cuts, and the current realities of demographics, we're not overly concerned about a sharp rise in long-term interest rates and anticipate, at least for now, a continuation of reasonably healthy operating and financial market conditions. I commented last quarter on the potential likelihood and impacts of proposed tax reform on Boston Properties' business, so tax reform continues to be high on the agenda in Washington D.C. I will reiterate that the probability, terms, timing, and potential impact of such reform on Boston Properties is very difficult to project, particularly with the recent challenges of the ACA reform effort. Now given the growth in the U.S. economy, the office markets where we operate have positive demand and healthy activity, but are in relative equilibrium due to additions to supply. In the CBDs of our four core markets and West LA, net absorption is projected to be 4.7 million square feet or around 0.8% of stock for all of 2017, while additions to supply are projected to be 6.4 million square feet or approximately 1% of stock over the same period. Asking rents are projected to rise 1.5% in 2017 while vacancies are projected to increase 30 basis points to 8.3%. Our leasing activity remains active with pockets of strength and weakness, which Doug will describe later in the call. In the private real estate market, there continues to be a strong bid in size for high-quality office assets in our core markets, as once again several transactions were completed at attractive pricing over the last quarter. Notable examples are as follows: Starting in Santa Monica, 1299 Ocean Avenue, a 206,000 square foot office building with an oceanfront location, sold for $1,385 per square foot and a 2.5% initial cap rate to a domestic REIT partnered with non-U.S. capital. This is a record price per square foot for the L.A. region, though the yield is low because the top two floors of the building are vacant. We think the stabilized cap rate is probably in the mid-to-high 4% range. In Boston, a 45% interest in the Vertex building, two assets comprising 1.1 million square feet located in the Seaport District, sold for $1,058 per square foot and a 4.3% cap rate to a sovereign wealth fund. In Arlington, Virginia, Waterview, a 647,000 square foot office building, sold for around $711 per square foot, which was a 5.5% cap rate to a domestic pension advisor. This is also a record price per square foot for suburban Washington. The major tenant in the building is expected to relocate though there is term on the lease, and the underlying submarket has material vacancy. Lastly, in New York, 245 Park Avenue, a 1.8 million square foot 50-year-old office tower located near Grand Central and likely requiring some future renovation, is being sold to a Chinese corporation for $1,243 per square foot and a 5.1% cap rate. Our understanding is that this transaction is being financed with a $1.8 billion mortgage, which is around 81% of the purchase price at a rate of approximately 4.5% for 10 years. Given these examples and the dialogues that we are having, we continue to see strong private market interest from domestic and non-U.S. capital sources in high-quality real estate, particularly CBD office in our core markets. In summary, given the relatively steady state of the operating and capital markets where we operate over the last quarter, we're continuing to execute our capital strategy, which we've been employing over the last few years, which entails growth through aggressive leasing, selected development of pre-leased projects, and targeted acquisitions of underperforming assets that will protect the downside by keeping leverage low and financing development through asset sales and additional debt capacity from our NOI. Moving to the execution of our capital strategy for the quarter and starting with acquisitions, we continued to actively pursue development and value-added building investments, though we are looking in all of our core markets. L.A. remains the priority given our desire to build on our presence in the market. In terms of specific deals, last week we committed to enter into a long-term ground lease with the purchase option and to build MacArthur Station, residences which is a 402-unit, 24-storey residential project with 13,000 square feet of associated retail located in the Temescal neighborhood of Oakland. Temescal is an increasingly desirable area of Oakland with limited quality rental housing and no high-rise development, and the complex provides residents with immediate proximity to the McArthur BART station with direct access to downtown San Francisco, downtown Oakland, and Berkeley. Likely renters will be commuters to downtown San Francisco given we expect our rents will be a 15% or greater discount to rents in the CBD, workers in the hospitals that are located proximate to our site, or students at Cal Berkeley. The total cost of the project is approximately $265 million, excluding land value. The land value will be determined based upon a formula following stabilization, and construction will not commence until mid-2018. MacArthur Station residences is our first standalone residential project in San Francisco. On dispositions, we are actively in the market with 500 East Street in Washington D.C. and in various stages of selling a handful of land sites and buildings in the suburbs of Washington and Boston. For 2017, we continue to anticipate projected total gross proceeds from dispositions in excess of $200 million. Moving to development, this past quarter, we delivered an in-service 15,000 square foot expansion of our Prudential Retail Center and remain active in advancing our pre-development pipeline for projects that will start after 2017. At the end of the first quarter, our development pipeline consists of six new projects and three redevelopments totaling four million square feet and $2.3 billion in our share of projected costs, of which $1.3 billion has been funded through the end of the first quarter. Our projected cash NOI for these developments remains in excess of 7% and the pre-leasing of the commercial component increased 6% in the quarter to 54%. Looking forward in the development pipeline, we anticipate construction completion of the Salesforce Tower later this year with initial tenant occupancy in early 2018 and have already identified several projects to refill this important growth component for Boston Properties. As discussed in previous calls, we will be commencing a new headquarters for Akamai in Cambridge this month, and over the next three years, we will likely add new headquarters from Marriott at 2100 Pennsylvania Avenue and MacArthur Station residences. In aggregate, these projects alone represent nearly two million square feet, $1.2 billion of cost on our share basis, have extensive pre-leasing, and we believe can be delivered at an initial cash return approaching 7%. In conclusion, we remain very enthusiastic about our prospects for growth and creating shareholder value in the quarters and years ahead. We're making good progress on our clearly communicated and achievable plan to increase our NOI by 20% to 25% by the year 2020 through development and leasing up our existing assets from approximately 90% to 93%. And this growth, of course, excludes our recent new business wins and potential new investments for which we have significant capacity. Let me turn over to Doug.

Thanks, Owen. Good morning, everybody. The total market colors that I'm going to convey this morning are very consistent with our comments over the last few quarters, and I think it's really in sync with the overall tenor of the economy that Owen just described. Demand growth from technology and life science businesses are the primary drivers of positive absorption across all markets while lease expirations are dominating overall activity. Base utilization by large institutional office tenants and the legal and large financial services sector has stabilized, though we continue to see space reductions stemming from design changes as leases expired, and there has been a flow of growth in decline from smaller alternative asset management firms as Pacific Investment Strategies don't always work out forever. Under the current macroeconomic conditions, we believe the most dominant issue is the impact of new supply with ensuing tenant relocations versus incremental demand and the realities of the time needed to rebuild, reinvest, and re-tenant existing inventory in all our markets. Looking at the statistics from this quarter, the size of the pool of leases reflected in our first-quarter same-store portfolio was pretty small: about 150,000 square feet in Boston, 100,000 square feet in New York City, 100,000 square feet in Washington, D.C., and 240,000 square feet in San Francisco. The Boston same-store statistics included a full-floor deal at Prudential Center, which was cut on a low-rise floor back in early 2015, and where the rents have declined from $76 to $61. So if you exclude this transaction, we are actually up about 6% in the Boston area. In New York City, the release of one of the low-rise Citibank floors at 399 where the rent moved from $92 down to the low $80s impacted those numbers, and that's what we've been describing would be going on at 399. San Francisco continues to benefit from the math of roll-up that we've been seeing over the last couple of years; interestingly, in D.C. this quarter, all of the transactions were in Northern Virginia; there were no D.C. proper deals in those same stores. I'm going to start my regional comments with Salesforce Tower. I'm delighted to be able to report that we signed a 100,000 square foot lease this quarter, which brings our signed leases to 960,000 square feet or just shy of 70% of the building. We have two contiguous blocks remaining, floors 35 through 44, which total 250,000 square feet, and floors 51 through 58, which total 170,000 square feet. During our internal marketing call last week, we discussed half a dozen active proposals from 200,000 square feet to a single floor 25,000 square feet. The current discussions involve law firms, some tech firms, working firms, and an assortment of small financial services organizations, private equity firms, D.C. firms, and hedge funds. We topped off the building a few weeks ago, but initial tenant improvement stocking and layout have yet to commence for any of the tentative signed leases, so we don't anticipate having any occupancy or revenue recognition in the building in 2017, as tenants physically complete their space we can start recognizing revenue. Even though the spaces are leased, in many cases we're paying rent. The available space left in the building is priced at the upper end of the market, in the high $80s and up, with our lowest floor being 35. We are offering a very attractive price relative to the other new high-rise construction in the market. During the last quarter, we have been a handful of transactions in traditional inventory Embarcadero Center, Four One Market, the ferry building, that have all been completed over $90 per square foot as compared to our pricing expectations at the brand new Salesforce Tower. Market conditions in the city are certainly shifting compared to previous quarters; there are limited large blocks of public space and there continues to be a number of larger requirements in the market, but they're under 200,000 square feet, not the 500,000 square feet tickets that we saw in 2014 and 2015. This quarter, Google expanded by 100,000 square feet, the Auto Group took 130,000 square feet, Adobe expanded by 100,000 square feet, Slack took 200,000 square feet, and we did our deals at Salesforce Tower. CBRE reports that there were 12 deals over 100,000 square feet in 2016, and there have been six deals year-to-date in 2017 over 100,000 square feet. So the story of following the San Francisco CBD will be the continued demand growth and tenant response to the place of new construction. During the first week in April, we signed another 62,000 square foot deal at Colorado Center, bringing our committed space to 93%. So Ray and our outside leasing team have brought the property from 65% leased to 92% leased in eight months. We have a number of discussions ongoing on the final piece of space. Our repositioning plans are close to complete, and we're working with a local tenant with the goal of commencing construction on the interior work by the end of 2017. Overall, leasing velocity in the Greater West LA market has moderated slightly, so we were actually in discussions with one large tenant in the market with growth plans that we can no longer satisfy at Colorado Center. Turning to the Boston region; we ended the first quarter with the issuance of our special permit for the construction of 145 Broadway, the Akamai building. We are underway with the demolition of the existing 79,000 square foot building and 31 months away from delivering our new 486,000 square foot fully leased building. This investment will be added to our supplemental next quarter at a total GAAP cost of approximately $375 million, but the budget is still evolving. Our other near-term opportunity in Cambridge will be in early 2018, and we have the opportunity to lease 100,000 square feet of partly occupied space by Microsoft at 255 Main that is expiring at the end of this year. Not only is this in the heart of Kendall Square, but the space has its own dedicated entrance if a tenant is interested in expressing its brand. The Cambridge office market continues to be very tight and expensive, forcing tenants to consider alternative locations like our hub on Causeway project. Across the river at 120 St. James and 200 Clarendon, we are making significant progress leasing our vacancy. We completed our third lease at 120 St. James, 32,000 square feet, and are negotiating another lease for 50,000 square feet which will bring the low-rise building to over 75% leased, and we have actively under the remaining 50,000 square feet. There are not a lot of large expiration-driven requirements in the Boston CBD market, so we expect leasing activity will be concentrated in transactions between 5,000 square feet and 50,000 square feet. Rents are stable, so depending upon the condition of the space, the landlord contribution to tenant improvements has risen. We are also in discussions on two full floors in the mid-rise and have commented on our first pre-built program in the building, i.e. higher TI's in the hope of accelerating occupancy and our negotiating our first deal today. At the hub on Causeway, we've signed a lease with Live Nation for 32,000 square feet, which will create another entertainment venue, and we're seeing lots of interest for 175,000 square feet of office space, which is under development and will deliver in the first half of 2019. The demand is primarily from technology tenants that are either considering relocation from the suburbs or in Cambridge. In our Lexington and Washington suburban portfolio, we completed a lease for about 50% of our redevelopment at 191 Spring Street, where we hope to have initial occupancy by the fourth quarter of 2017. We've also responded to a number of built-to-suit proposals at our city point land holdings, and if we are able to land one of those major lease commitments, this would add to our investment pipeline for 2018 and beyond. In any of these projects get going, rents will likely be in excess of $50 per square foot growth. I want to focus my discussion in New York this morning on 399 Park Avenue. Supply continues to come into New York in the form of new deliveries in Hudson Yards, Manhattan West, and the World Trade Center, and the corresponding large blocks of space return to the market and buildings like 4 Times Square, 65 East 55th, 1271 6th Avenue, the Americas, and soon 399 Park Avenue. Landlords that are putting capital into other assets are attracting tenants, and spaces that are attractively priced, mid to high $80s starting rent, seem to have strong activity. While we're not anticipating office rent growth, we do expect higher concessions versus 2016 in our portfolio in 2017 and 2018. Our repositioning activities are accelerating, and we are offering products at varying pricing levels from the mid-$80s at the base of the building to over $140 per square foot for our 40,000 square foot glass box with 13 foot finished ceilings and dedicated outdoor space. In 2017, we're collecting $31 million from expiring tenants at 399 Park. We get this space back at the end of the third quarter. There are a lot of mid-sized financial and business service tenants in the market; we're making proposals, and we're going to lease space consistent with these economics that I just described, but in almost every case, we're going to have to demolish the space—the existing improvements can't be reused and occupancy will not be until 2019, which will mean that the space will not generate revenue in 2018. At 1590 53rd Street, which is currently out of service, it's also under heavy construction today. We've made a number of proposals on the 195,000 square feet of office space that's being rebuilt and can be delivered in early 2018; we're optimistic that we will have signed leases in place contemporaneously with the base building completion, but again, revenue recognition is not expected until 2019. For marketing and brand building, would greatly enhance in the lines, a brand to mechanical plant, and tremendous outdoor space on each floor. Leasing activity in the space priced with starting rent above $100 per square foot continues to be active as measured by the number of transactions, but size continues to be the real governor. In the first quarter, there were very few deals above 30,000 square feet that we are aware of; a few 50,000 square foot plus requirements will land next quarter above $100 per square foot starting rent. We have a few smaller deals under negotiation at the General Motors building, and to preempt the question, yes, our large tenant with the 2020 lease expiration has been actively evaluating their alternatives, and we do not believe they have made any decisions yet. Finally, in D.C., the swap market fundamentals continue to be a challenge with significant available inventory and tenant-favorable concession packages. Yeah, we are probably as busy as we have ever been pursuing new business, which involves long-term forward leasing commitments. In addition to the 727,000 square foot headquarters transaction for Marriott, we're in discussions with tenant for 70% of the office space we're permitting at 2100 Penn—that's the 410,000 square foot office building with a 2023 delivery, and we are now in dialogue with a tenant for 100% of our proposed new development in Reston Town Center, 1750, a 275,000 square foot office building. Finally, we continue to patiently await word from the GSA on their selection of a site for the 620,000 square foot GSA requirement. This quarter, we executed a 53,000 square foot lease with the GSA at our VA 95 Park, which is in close proximity to Fort Boulevard, and we're in discussions with a contractor for 70,000 square feet of space in that same park. In Reston Town Center, in addition to built-to-suit, we have strong activity on a 38,000 square foot block of space which we have yet to get back, but will be getting back at the end of this quarter where we have multiple tenants competing for the space. Before I turn the call over to Mike, I just want to give a quick update on our contractual income coming from our lease-up in our high contribution building. So as of the end of the quarter, we completed leases with annualized revenues of $62 million towards our target of $111 million, $24 million of that is in our 2017 projection. Finally, we're now 54% leased on our development pipeline, where we anticipate 2020 annual incremental NOI of $238 million upon stabilization versus year-end 2015. And with that, I'll give the call to Mike.

Great. Thank you, Doug. Good morning, everybody. I planned to discuss our recent financing activity earnings for the quarter, the increase in our 2017 guidance, as well as touch on a few assumptions we think are important for you to consider as you think about our 2018 projected earnings. I'm going to start by describing our activity in the debt markets, because we've been quite busy again this quarter, including executing $4.3 billion of new financing commitments. Earlier this week, we closed on a five-year renewal of our revolving line of credit. We increased the size from $1 billion to $1.5 billion and we improved our pricing. This extends out the availability on our facility from its prior maturity date in 2018 to 2022. At the same time, we closed on a $500 million five-year delayed drop term loan priced at LIBOR plus 95 basis points. We have not borrowed under the facility, and it includes a feature that allows us to delay usage for up to 12 months, which makes it an ideal facility to fund a portion of our committed future development costs. Our bank group includes 16 of our trusted partners who help us put together this $2 billion in bank financing, and we truly appreciate their continued support. The most significant financing that we plan to complete this year is the refinancing of 767 Fifth Avenue, the GM building. We own 60% of the building, and it currently has $1.6 billion of first mortgage and mezzanine loans that expire in October of 2017 at an interest rate of 6%. We've been in the market for replacement financing to repay both the existing loans and provide additional proceeds based upon the significant growth in cash flow we've generated since our acquisition. As outlined in our press release, we have entered into a rate lock and commitment for a 10-year financing of $2.3 billion at a fixed interest rate of 3.43%. Our share of the cash interest payment on the new facility will be $9 million less per year than the existing loan, even though we're borrowing an additional $700 million. We expect to close the loan in early June when the current loan becomes open for prepayment without penalty. Since we have been recording a non-cash fair value interest component on the current loan, which effectively brings the interest rate down to 3%, this refinancing will actually be dilutive to our future FFO by approximately $0.12 per share annually. The refinancing will have a significant impact on second quarter results. First, the remaining fair value interest on our balance sheet will be accelerated through our P&L and is expected to result in an additional $14 million of gain on debt extinguishment. Our 60% share of this is approximately $0.05. Additionally, the original structure of the deal required investments by the partners in the form of partner loans in lieu of equity. We have been booking interest expense due to the outside partners' loan every quarter, and it is fully allocated to them through non-controlling interest. The net impact on our earnings is zero. We expect to pay off the loans as part of the refinancing, and going forward, both our interest expense and our non-controlling interest will be lower by the amount of the interest. Starting with the third quarter of 2017, our consolidated interest expense will be much simpler to model, and we expect a run rate starting in the third quarter of approximately $90 million to $95 million per quarter. In 2018, our interest expense will be higher as our capitalized interest will start to roll up with the delivery of our development. In addition, we're in the process of finalizing documentation for a construction loan on the first phase of our hub on Causeway project in Boston. The loan will fund the vast majority of the remaining costs for the $284 million project, where we are 50% owner. So overall, our share of our current development pipeline has $800 million of equity remaining to fund through completion over the next couple of years. As Doug described, we're starting the enabling work on our next Cambridge development and several additional potential projects in the pipeline that will add to our capital needs. These three financing transactions provide the necessary funding to complete our current development program as well as ample liquidity for future investment. Now I want to turn to our earnings. For the first quarter, we reported funds from operations of $1.48 per share, which was right in line with our guidance. The quarter was impacted by a $2 million timing difference associated with the recognition of termination income for the tenant at the GM building we spoke about last quarter. We still anticipate earning the same amount of income, but a portion of it has been moved from the first quarter to the second quarter, which negatively impacted our earnings in the first quarter versus our guidance. Excluding the timing change, our FFO would have exceeded our expectations by about $2 million or just over a penny per share. This improvement emanated from a combination of about $1 million of higher portfolio NOI and the rest from service fee income. As we look ahead to the rest of 2017, there are a few changes to our prior guidance. As I mentioned earlier, our refinancing activity will result in a shift in dollars out of interest expense and into our non-controlling interest in property partnerships loan, but has a minimal impact on guidance. We have reduced our guidance range for net interest expense, which includes debt extinguishment cost to $355 million to $368 million that represents a $0.13 per share savings. However, our guidance for deduction for non-controlling interest in property partnerships increased to $117 million to $132 million, representing $0.13 per share of additional deduction from FFO. So net-net, a lot of moving pieces, but no change in our FFO guidance from this. In our same property portfolio, we have elected an early take back of 170,000 square feet at 399 Park Avenue from Citibank. This space had a natural expiration date of September 30, 2017. Citibank has been in the space for a long time and will need to be demolished and then refit for a new tenant. Taking it back early allows us to start preparing the space for marketing, with the goal of shortening the downtime. It is possible we could take additional near-term expiring space back if it is vacated. The impact of this is a shift in revenue categorization from same property rental income to termination income. We will still generate the same amount of revenue but will pull it out of our same property bucket. For this reason, we have reduced our assumption for same property growth for both GAAP and cash NOI by 50 basis points and we increased our assumption for termination income to $21 million to $25 million for the year. Overall, we have increased our guidance range from last quarter to $6.15 to $6.23 per share, representing an increase of a penny per share at the midpoint. The increase is due to better projected portfolio NOI. As you start to look at your 2018 models, there are three things that we think you should keep in mind. First is interest expense; we project our fourth quarter 2017 run rate to be $90 million to $95 million. We anticipate capitalized interest on our development to start rolling up in 2018 as we deliver some of our larger projects like Salesforce Tower. Based on what we know today, we expect our interest expense in 2018 to be between $390 million and $410 million. As we bring our development income into service, there is an increase in interest expense. Second is our same property growth. As Doug described, we signed leases for a significant amount of our NOI bridge, which we expect to contribute to solid growth in our same property NOI over the next couple of years, but remember that the impact of lost revenue from lease expirations at 399 Park Avenue will moderate our same property growth in 2018. The expected lost income from 399 Park from 2017 to 2018 equates to approximately 2% of our same property NOI pool. Lastly, our development pipeline. We provided a very clear path of the projected growth in NOI from our development deliveries and our quarterly investor materials. Between late 2017 and the end of 2018, we will be delivering some of the most significant projects in our pipeline. These include completing the lease up of 888 Boylston Street, including the occupancy by Natixis in 155,000 square feet in the fourth quarter of 2017, the initial occupancy of tenants in Salesforce Tower beginning in early 2018, where occupancy is projected to phase in through 2019, and the delivery of our two residential projects in Cambridge and Reston in early 2018. The revenue recognition for these projects will not all refer in 2018; it will be split between 2018 and 2019 as tenants occupy their space. We have contractual leases that are projected to generate incremental NOI growth in 2018 of $25 million to $30 million from 2017. The remaining lease up is projected to generate additional income in 2018 and into 2019 as the full lease up is achieved. The last thing I want to mention is that we are planning our triennial BXP Investor Conference this fall. The day will be on October 4th; it will be in Boston, and we'll be sending out more information to you soon. We look forward to seeing you all there and, as always, appreciate your support. That completes our formal remarks. Operator, if you can open up the lines for questions, that would be great.

Great, thank you, good morning. I was hoping you could focus on the leasing spreads in the quarter, a bit of a difference across the markets. Can you maybe talk through your expectations going forward and whether the net and gross leasing spreads are representative of the mark-to-market in those markets for you guys right now?

Sure Jamie, this is Doug. Again I think I give a little bit of color on what you saw this quarter, and again it was a pretty small portfolio relatively speaking that pushed their way through in terms of when the new cash rents commenced. I think that you will continue to see very strong numbers in San Francisco as we complete the million-plus square feet of rollover that we had in the Embarcadero Center starting in late 2015 that continued into 2016 and 2017. I think you'll see a reasonably strong number in Boston as you see the rents rolling through at 120 St. James and 200 Clarendon Street, which is where the bulk of the vacancy is, because those rents were so low. You recall when we bought the property, we told you that the rents were $35 to $38 at the base of the building and in the mid-50s at the face of the top of the building, and we're obviously doing deals in the mid-50s at the base and then in the 60s, 70s, and 80s up at the top of the building. In the Washington D.C. portfolio, the challenge with the mark-to-market is that every single year we're able to negotiate leases with 2.5% to 3% increases. So as those increases occur, obviously the rents go up, so generally, when you get to the end of the lease in Washington D.C., there’s not much of a jump in the mark-to-market. And then in New York City, as I've described before, it's very hit or miss. So at 399, which has been very clear about, we're basically going to be moderately higher overall in that building on the 500 plus or minus 1,000 square feet that's rolling over because when you're in a big lease to Citibank with its terms, where they are obviously going to be bumped and then where they would be in the new calculation payment. Then we'll see good increases at all of the space that's rolling over at 767 the General Motors building, and then the other portfolios very space dependent; there are spaces that are way above market and spaces that are way below market.

Okay. And just a final question. Can you just talk more about the Bay Area market conditions in Silicon Valley versus the CBD in terms of tenant demand and how would supply is in back in those different markets?

Sure. I'll start now and let Bob Pester make some comments as well. Overall, I've seen a very consistent stream of demand in the CBD and the vast majority has been growth. While the ticket size has declined from the large scale 500,000 to 700,000 square foot requirements that were growth requirements that we saw in 2014 and 2015, there's a pretty strong number of 100 plus 1000 square foot new tenant demand drivers that are in the CBD. In the Silicon Valley, there are two or three primary drivers of growth that have been occurring for the past three or four years. Google is the first, Apple is the second, and to some degree, Facebook has been the third; they have been exceedingly large absorbers of space. There are a lot of opportunities to build new buildings in and around the Silicon Valley, most of which have been tear downs. While there is a plethora of midsize and other companies, I would say that those are generally not; we see young growing companies; those are stable engineering firms that have a more stable and less expansive growth trajectory than the three companies that I described. Overall, I would say that there’s been less incremental demand down in the valley. Now, there have obviously been new companies that have gone down there like LinkedIn that are big growers on a relative basis compared to the first three, but they are smaller. Bob, if you want to add anything?

Yeah. I think if you talk to the brokers in the Silicon Valley, they would say that the quarter was somewhat flat, but there still were several transactions that happened. I mean, Amazon took almost 550,000 square feet in a couple of projects. Applied materials took another 28,000 square feet in Sunnyvale. Bosch signed a lease in Sunnyvale for 104,000 feet. Adobe is one more to be looking at downtown San Jose for expansion of another 300,000 to 400,000, and Google, who has been rumored for quite some time in downtown San Jose, is looking at the Diridon station site that Temescal has potentially could be in the market for a million square feet. So overall, I would say the activity is still pretty good from an expansion standpoint down there. In San Francisco, just in the past month we've had three tenants go through Salesforce Tower all four between 150,000 square feet and 300,000 square feet, and we have another one coming by Friday, a tech tenant for 300,000 feet. That's probably the best activity of the large tenants that we've seen in any one time in the marketplace in the CBD; I would say in the past two and a half years.

Hey everyone. Just curious, I mean I know you've touched on the deal flow in the private markets and still very attractive cap rates that you're seeing. Just curious in L.A. outside of the Santa Monica deal that you mentioned, what are the opportunities you're seeing in that market to expand beyond Colorado Center now that you are 93% or so pre-leased or leased there?

Well, as I mentioned in my remarks, it is a focus for us in terms of the new investment activity. We do have a broader geography perimeter that we're focusing on beyond just Santa Monica, and I think as described in prior calls, we've been looking at things including other communities in West L.A. I would say right now, we are chasing with various levels of intensity probably half a dozen different types of investment. Some are existing buildings that require some rehabilitation or value-added, and in a handful of situations, we're also looking at development. Though West L.A. will remain a priority for us in terms of new investment, and we intend to stay disciplined, we don't have a target by year-end or by year-end 2018 of a certain dollar amount that we want to invest. We want to do we want to continue to do what we did in Colorado Center, which is to invest in the property at what we think is a reasonable price and create value with asset level for shareholders. We're not going to make investments just to grow in L.A.

Right. Okay. And that market has seen some slowdown in job growth for a couple of months now, and it sounds like the commentary was if there's some moderation in certain market leasing activity perspectives. Is that having any impact on the opportunity set things like that or cap rates in the end market besides obviously the same market that you mentioned?

I think the pricing is at elevated levels in West L.A. But honestly, it's true in other markets that we operate in; the capital markets are very robust. I've described deals from prior quarters and other markets like Washington that are weaker than Santa Monica that are also at high levels relative to history on a per square foot basis. So I don't think some of those underlying fundamentals that you're describing are impacting the capital market for buildings in West L.A.

Hey Owen.

Yes, sir.

This is Ray. I just did that virtually everything we look at in Los Angeles is off-market transactions, because if we get a book on something, we know it's probably going to be overpriced. So we're really focusing on identifying opportunities that haven't hit the market yet and the Boston Properties story is being very well received by some of the local smaller developers as great partners for their vertical development, so we're excited about that.

Yes, I agree.

Okay, thanks. And just last question from me; just going back to the East Coast, Reston Town Center just sounds like there's good demand there, and you mentioned that one of the blocks, the smaller ones that you're working on. Just curious, we saw kind of an interesting article out there just talking about the paid parking transition and some tenants complaining about how that's hurting their business, so I just curious to be any commentary on that.

Yes. So we did implement paid parking at Reston Town Center at the beginning of the year. As you know, Reston is an urban location; it has structured parking primarily, and there is going to be the arrival of mass transit to the region, and certainly not uncommon for areas with this kind of density to have paid parking. We are utilizing a state-of-the-art parking system that is being used in cities all over the U.S., and actually the use of these systems is growing around the U.S. In Reston specifically, the system has been adopted by 140,000 users so far. Now that being said, as you suggest, certainly not all of our customers, some but certainly not all of our customers, have expressed some concerns about the system or simply having to pay for parking and we are continuing to evaluate our execution and make adjustments to ensure that Reston remains a preeminent location for business and residents in Northern Virginia.

Hey, it's good morning. It's Michael Bellaman here with Manny. I was wondering if we can go back to your discussion during the call about private capital and you made mention of dialogue we are having. I'm just curious if you can elaborate a little bit on the type of dialogue you're having. Is it around purchasing properties, is it to sell additional properties, and can you just delve a little deeper into those sorts of conversations and what you're hearing and learning from them?

So let me just say, Michael. First, don't read anything into that. We are having dialogues with capital sources as we should be, but you shouldn't read anything more into it than that. Look, as you might expect, onshore and offshore investors that are interested in Class A office are interested in partnering with us, purchasing buildings, investing in our development, and we talk to those kinds of groups. There are intermediaries that work with those groups that also approach us about such opportunities. And so that, in addition to watching the transactions that are going on in the market, and I try to describe them for all of you in each quarter. We are having some direct dialogues with these folks. But as I mentioned, our disposition targets for this year are more in the $200 million range.

So you're looking at predominantly any big acquisitions with capital partners, and I guess how they think about those acquisitions versus how you would be underwriting them?

How the capital partners would underwrite acquisitions versus how we would underwrite them? Yeah. Well, I'd say that generally Michael, as you know, we haven't been acquiring stabilized assets without upside at the cap rates where the market has been trading over the last several years; if anything, we've sold more than we've bought in that kind of market environment. We did these very significant joint ventures with North just a few years ago to raise capital for our development pipeline. So when we look at acquisitions, there are more things like I would say like Colorado Center where the building initially was 66% leased; the cap rate was quite low, but upon leasing and then rolling the existing tenants to market, the yield on the investment is much higher than where stabilized buildings will trade. So in general, we haven't been prepared to purchase buildings at the yield that I described earlier in the call, and therefore we haven't done a lot of acquisitions joint ventures with these groups.

And then just a question, and maybe for LaBelle just on the GM building refinance, can you talk a little bit about sort of the underwriting of that asset? So where was it targeted from a leverage perspective to underwriting value, a coverage perspective to cash flow, and then of proceeds, how much are you going to be able to pull out on to property's balance sheet versus help with some of the redevelopment efforts and tenant work that you're doing in the building? So honestly, I really don’t want to touch on the characteristics of the financing until it closes. It's not going to close until June, so we're still kind of going through the process, but we've got a number of institutions that are sharing what they have underwritten and agreed to lock in the commitment with us. With regard to the excess proceeds, there's a pretty significant amount of closing costs, because we've anticipated that we're going to be paying mortgage tax, and obviously we underlined it around hedged, so if the closing costs are probably north of $40 in total. My expectation is that we would hold back somewhere between $50 million and $75 million for CIs and capital improvements at the asset level. So if you pull out $100 million or $120 million from the $700 million of excess proceeds and you take our share, you're talking about $300 million to $275 million that we would be able to distribute to ourselves and, you know, some to our partners obviously to fund the remainder of our development pipeline that we have as well as future development pipeline.

Can you give me a range on leverage level at $2.3 billion that you've targeted? I'm trying to figure out how to leverage the asset to get the rate that you were able to lock in.

I would say that the leverage is low. Look, this is a fully investment-grade institutionally priced loan at these credit spreads. We haven't completed an appraisal yet, but there's certainly been an analysis of it, and our view on how we finance these assets is that we want to maintain a reasonable amount of leverage, but we want to put sufficient capital on the assets so that we are borrowing at very, very attractive rates, and it's kind of get up into beyond the kind of BBBs on CMBS into the DDs; you start to get into a credit spread that is significantly higher than what we can borrow from the corporate side. We kind of shy away from that. The LTVs for investment grade, CMBS kind of range depending on the characteristics of the asset. This asset obviously has great cash flow characteristics, long-term leases and still has a lot of built-in growth because of the below market in place leases.

Hi guys, good morning. My first question has to do with just general activity with the GSA and the contractor community. I think you guys mentioned one lease with the GSA and then conversations with the contractor of VA 95, but can you comment overall about what kind of optimism you're seeing in that community, and its way ended now that Trump is approaching 100 days?

Sure. There's still a lot of people waiting on the sidelines. I can't tell you how many tenants at Annapolis Junction, which is our project up near the NSA, have proposals from us contract appended. First of all, I want to confirm that it's our belief that the budget will get resolved this week and have minimal impact on the real estate market, so that should not be a concern. But there's still a tremendous amount of demand on the contracting side, especially in intelligence and defense. We think that those sectors will come back very strong under the Trump Administration. Life sciences, social services, maybe not so much, but fortunately, with our focus in Northern Virginia, we're in really good shape to take advantage of a recovering market there. The headline is still a tad uncertainty, but the prospects look very good for increased demand on the contractor side.

Appreciate that. And then one last one on Colorado Center. I believe you mentioned that one of the remaining few spaces had been leased subsequent to quarter end. Am I correct in understanding that there's just one space left?

Yes, there is one block. And we have—we could do that; we could do a deal there tomorrow on that space. We're just trying to make the right decision in the last piece of space.

Hey, good morning, guys. Can you give us an update on the entitlement process at the Oakland residential side? And does that deal signal that you may be interested in Oakland office eventually?

We are fully entitled on the Oakland side as of a couple of weeks ago, and we've looked in downtown Oakland, but before at office opportunities I just don't see it as something that we would have an interest in at this point.

Okay. And separately, you mentioned that New York City leasing tempo of loss views accelerating; I mean to what extent do you think that's a function of overall market health improving or are those more BXP's specific factors? And then would you say market rents are falling for spaces above $100 a foot in New York at this point?

John, you want to take that?

I think the market has been pretty flat here; the availability rate didn't move in the first quarter, moved one-tenth of 1% in Manhattan, and the leasing velocity was up just a shade from the 12-year average, so it’s pretty flat.

And about the sort of high-end market rents, any changes you're seeing there?

Yeah, I think there's a little more interest in the high-end market rent than there has been. I think that the sticker shock that was there a year or two ago is not necessarily there now, but it's all on the margin.

No worries. Yeah, so good morning. Quick question on—it sounds like you heard the commentary, I guess preliminary commentary on 2018; when do you expect same-store NOI growth to actually start to pick up for BXP?

I think that our same-store growth has continued to be positive. The cash same-store was over 4% in 2016; it's a little bit less based upon our projections in 2017 because we've got this big rollover that we mentioned, that Doug mentioned we’ve got basically we're going to lose $30 million from year-to-year. So there's other growth in the portfolio we still believe we're going to have positive rental rate growth obviously in 2017 and also in 2018, and it's just going to be more moderate. I think the cash growth actually in 2018 will outstrip the GAAP growth. We've built in a lot of these early renewals that we've done where in California, the Embarcadero Center and Cambridge that we've kind of been blending in, that had 2018 expiration. Cash rents are going to start to hit that in 2018, so I think the cash will be better in 2018 than the GAAP picture. But if you think about 2% down kind of starting, I mean again we're going to be positive, but until we release that 399 space, which we believe won't occur, won't hit the books until 2019, I think seeing real acceleration beyond kind of more of an inflation level is going to be difficult. But we did comment that we anticipate the $110 million to come from the handful of assets, which is again only eight or nine assets. I mean $110 million is about 7%, so we are expecting 7% growth just from that select group of assets over a two-and-a-half-year approximate period. And then there's the rest of the portfolio that obviously is going to grow at some level. So if you kind of look out through that whole period, I think we will see good same-store growth; it's just, again, a little lumpy because the expirations and when they are.

Thanks. A couple of questions. Mike, I was wondering if you could give a little bit more of a feel for when you talked about the development NOI that's going to come in 2018, 2019; there being a split, kind of an early sense of what that split might look like?

This is hard for me to say right now. I mean, I think what I said was $25 million to $30 million is signed leases that we have a good projection for when those tenants are going to take occupancy, so we feel very confident about that. There is additional leasing that we should be able to get done in 2017 for tenants that need to be in occupancy in 2018. I think we will do some more leasing at Salesforce Tower, for example, for tenants that need to be in space sometime in 2018, but some of those tenants are going to be in 2019. We're talking the tenants that have kind of both requirements, and again, we can't book revenue until we have energy in a new development. If you look at the residential property, we've got 600-plus or minus units to deliver; we're delivering them in the first quarter of 2018. Our expectation is there's a 12 to 24 month lease-up time frame for that type of residence development; obviously the expenses for residence development you have to kind of experience them early on. So I would think that we're probably going to get 25% to 30% of the NOI out of those residential developments in aggregate in 2018, and then the rest will come in 2019. Those are kind of two of the bigger development that we have. 888 Boylston Street is going to be basically going to be end of 2017, and there's only 4.5 left, that I think that we should be at least that and get occupancy sometime in 2018, those are the big ones.

Okay. That's helpful. Just last question; you also talked about it could take some additional near-term expiring space back. I assume you meant that 399 Park. Based on what that possibility is today, what would the financial impact be? Specifically, would this create another adjustment down in your same-store NOI guidance if you did this?

I think it could. I mean, that's why I said it. To the extent that we can get the tenant to pay the full amount of rent, so we can get the space back and start to work on this space, we may elect to do that. If we think it's going to help us lease this space on the backside more quickly, obviously we have our rule that we don't include termination in common same store, and we do that because it can be more volatile, and we want to get that with the same store is, but in situations like this, unfortunately, it pulls away. We try to be very clear about the ins and outs because it's not a reduction in the overall revenue that we're going to be getting or expected to get in 2017; it’s just into the bucket. We could be looking at another couple hundred thousand square feet, as we get closer to the expiry. Right, I mean in the expiry of these leases that are in August and September they get less terminations; it's just like time.

Hey, Good Morning. Mike, so just continue on the 2018 conversation. You had outlined cap interest coming off next year; that's going to cause the GAAP interest rate to increase. From a GAAP perspective, is that not a cash, but from a GAAP perspective should we expect the NOI coming from those developments to equally offset the cap interest or is there going to be drag so that as we're revising our models or updating them, we're probably going to see a negative impact as more cap interest comes off versus GAAP contribution from the NOI from the developments next year?

I mean the developments are generating a yield of around 7%. So it's well in excess of what our capitalized interest rate is, which is currently around 4%. So that won't be a drag; it'll be an improvement.

So we are consistently seeing the customer, the tenant looking at power of how do they attract talent to their location, and the restaurants and the total mix of not only the base is a building but the entire neighborhood is becoming more important. Like never before we've seen companies do analysis on this in terms of what that mix is about the demographics of the neighborhood and how they're going to use it in their strategy in talent. But it comes right on with the response that we've received from the repositioning of the Prudential Center with the addition of Eadly versus the food court we had before, which was absolutely a strong performer, one of the best in the country. The response from our customers has just been really outstanding from all our existing clients. We're seeing the same thing at the hub as well where they focus on the geography of neighborhoods. With our additional anchor that are going out today, we're seeing an increase in terms of what does that play in terms of how they're going to use the office space. We have one particular user who's very focused on the fact that we landed Live Nation. They see it as a place that they can further events and again attract talent for their internal purposes.

Okay, that's helpful; thank you.

Colorado Center, the deal that you mentioned, are those contingent on redeveloping the property? And what's your sort of plan redevelopment budget for the properties?

None of the leases that we have signed are contingent on doing anything from a legal perspective. We have an expectation that we've set with our tenants that we're going to do the right thing by the property, and we've shown them the conceptual plans and the architectural changes that we're going to be making, and we've told the city of Santa Monica we intend on doing these things, and we're going to get this stuff done, you know, sometime in the next 12 plus months. It's somewhere between $12 million to $20 million probably in that sort of big-picture ballpark redeveloping budget.

Thanks very much.

You're welcome.

And then on Salesforce Tower, I think you mentioned amongst the potential tenants co-working companies. Can you just give us an update on how you think about co-working in sort of a user space, especially in trophy assets like that?

We have been a supporter of the co-working platforms; we have a handful of leases with WeWork, and we have been in discussions with other operators. We have considered co-working phenomena, for lack of a better word, as positive for the office markets. These companies have aggregated demand from individual users that we, as a major landlord, have a more difficult time doing direct leases with; they've aggregated this demand and created significant net absorption in most of the markets where we operate. We think it's been a positive for us. And then lastly, we think the tenants when they're in our building actually are positive for the building. We think they create energy and activity around the space, and we've been positive about it. We continue to monitor the industry carefully. There are evolutions going on; some of these groups are doing more business with corporations as opposed to supporting larger users rather than individuals, and we're certainly monitoring that, and we are considering additional leasing with some of these groups in some of our assets. But again, the good example, Bob, you might want to comment. WeWork is in 535, and we think which is a brand new building we completed a couple of years ago, and we think it's been a positive.

Yeah, they actually refer to that as their flagship in San Francisco, and it's been extremely positive on both the building and the surrounding marketplace. So looking, now looking at space where to cross the street at 560 mission, because they can't get any more in 535, because it's fully leased. The experience we have at the Embarcadero Center, which has been very short, because they just opened earlier this year, has been nothing short of phenomenal. They leased out major blocks of space to companies like Twitch and a few others, and actually are potentially looking at more space in Embarcadero Center.