Boston Properties Inc (BXP) — Q3 2017 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 Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website. At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Wednesday's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements. Having said that, I'd like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchie, 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. First, I'd like to thank everyone who attended or listened to our Investor Conference in early October. Given that we just completed a thorough review of our portfolio and markets, we're going to focus our remarks this morning on the quarterly results, 2018 guidance and anything else that's new since the conference. On current results, our FFO per share for the quarter was $0.04 above our prior forecast and $0.03 above Street consensus. We also, as a result, increased the midpoint of our full year 2017 guidance by $0.02. We leased 2.6 million square feet in the third quarter, which is significantly above our long-term quarterly average for the period. Year-to-date, we've leased 4.1 million square feet, and are on track for above-average leasing for 2017. Our in-service office portfolio occupancy declined by about 60 basis points to 90.2% from the end of the second quarter, primarily due to the previously-discussed occupancy reduction at 399 Park Avenue. Rent roll-ups in the aggregate for the third quarter on commenced leases were up modestly on a net and gross basis. In the quarter, we also commenced 1.4 million square feet in two new developments that are 100% leased and delivered a 417,000-square foot project. Lastly, we've had a very active and successful year financing our business. Year-to-date, we've raised $5.1 billion in financings and increased our weighted average debt maturity from 4.7 to 6.1 years. Now moving to the macro environment. Economic growth has improved marginally to 3.1% for the second quarter, and advanced estimates for the third quarter are 3%. And though recent hurricanes have had a negative impact on the September job data, unemployment did decline to 4.2%. Consistent with my Investor Conference commentary, tepid but steady economic growth continues, and we're not making any investment or operational decisions based on improvements that might result from current tax reform efforts. Moving to the financial markets. The 10-year U.S. Treasury has had a substantial upward move, rising nearly 35 basis points since early September. Demand for credit also remains robust with tight credit spreads in most sectors. Though we would expect another round of Fed tightening in December and a measured unwind of quantitative easing, inflation remains low at 2.2%, and interest rates are higher in the U.S. than the rest of the developed world. Though we believe interest rates could rise further, we expect to continue to operate in a relatively low and constructive interest rate environment for the foreseeable future. The five major office markets where we operate are, taken as a whole, in general equilibrium. Economic growth continues to create jobs and net absorption of office space, which is currently in balance with new development or additions to supply. Specifically, for our five markets, net absorption for the third quarter was 1.2 million square feet or 0.2% of total occupied space, while deliveries were 1.7 million square feet or 0.2% of total stock. Vacancy remained flat at 8.3%, while rents grew 0.2% for the quarter. Leasing activity remains healthy, with the strongest activity continuing to be in the technology and life science segments. And as a result, San Francisco and Boston are outperforming New York and Washington, D.C. among our markets. Though significant liquidity and a healthy bid still exists for high-quality, well-leased office assets in our core portfolio, office sale transaction volume is down 27% through the end of the third quarter in the United States. I think there are two primary reasons for this decline. First, there are fewer high-quality assets in the market, given more of these assets are now owned by long-term institutional holders. Second, the market has become more exacting regarding asset quality and is requiring higher returns for less well-located and less well-leased assets. Notwithstanding the slowdown, once again, this past quarter, several significant office transactions were completed at attractive valuations in our market. In New York, a Japanese property company purchased a 90% interest in 50 Hudson Yards, which is a 2.8 million-square foot Class A office building currently under construction. The price was $3.9 billion or over $1,400 a square foot. The cap rate is not meaningful given the property is currently 30% pre-leased. In Santa Monica, one block away from Colorado Center, Arboretum Courtyard, which is a 147,000-square foot office building, sold for $152 million to a domestic manager. Pricing was $1,030 a square foot and a 4% cap rate. In two separate transactions to the same buyer, 9401 and 9665 Wilshire Boulevard in Beverly Hills are being sold to a domestic REIT partnered with Offshore Capital. Together, the buildings represent over 300,000 square feet, are being sold for $334 million. Pricing is $1,075 a square foot and under a 4% initial cap rate. And lastly, in San Francisco, the developer of 222 2nd Street recapitalized the building for an aggregate value of $530 million or $1,171 a square foot and a 4% cap rate. The asset is a newly constructed 450,000-square foot office building located in the SOMA District and fully leased to LinkedIn. Our capital strategy posture remains unchanged. We are cautiously constructive on the environment and investing in pre-leased developments and redevelopments that make sense. We do not need to raise equity capital and are selectively selling non-core assets to continuously upgrade our portfolio. Though we do not anticipate a near-term downturn in the market, we are hedged for such an occurrence, given our low leverage and increasing FFO from developments, both of which should provide us access to capital for the resultant opportunity set. Now moving to our capital activities. In the third quarter, we sold a land parcel in Reston to a major corporate user for its headquarters for $14 million, and we currently have a small number of non-core assets in the market in Washington, D.C. and suburban Boston. Our estimate for total dispositions for 2017 is just under $200 million. Our development activity remains very active. This past quarter, we placed fully in service 888 Boylston Street at the Prudential Center, again which is a 417,000-square foot office and retail building that is 93% leased. We also added to our development pipeline 7750 Wisconsin Avenue in Bethesda, which will become Marriott's 740,000 square foot new world headquarters and 6595 Springfield Center Drive, which is a 637,000 square foot development in Springfield, Virginia fully leased to the TSA. These two deals alone represent $525 million in new investment for us with attractive yield characteristics and no leasing risk. In the pre-development pipeline, we are close to an anchor lease commitment for 2100 Pennsylvania Avenue and are competing for major corporate users to launch projects at 20 CityPoint in Waltham, 1001 6th Street in Washington, D.C., as well as several major build-to-suit opportunities in and around Reston Town Center. While there is uncertainty whether these tenant prospects can be secured, if we are successful, these projects aggregate 2.5 million square feet of new development; are 100% owned, except for 1001 6th Street; provide initial cash returns consistent with our office development targets; and will be a primary engine for additional company growth beyond 2020. In the third quarter, our development pipeline grew modestly and now consists of nine new projects and two redevelopments, totaling 5.7 million square feet and $3.1 billion in our share of projected costs, of which we have funded $1.7 billion through the end of the third quarter. Our projected cash NOI yield for these developments remains approximately 7%. And the pre-leasing component of the commercial component increased 9% in the quarter to 75%. So to conclude, we continue to be confident about our prospects for growth and ability to create shareholder value in the quarters and years ahead. We continue to make 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 growth beyond 2020 is now becoming more clear and likely, given the new developments we've added to our pipeline and our progress on pre-development. Now let me turn it over to Doug.

Thanks, Owen. Good morning, everybody. I've truncated my comments this morning since we provided you with a pretty robust view of the portfolio at the conference less than 30 days ago. Let me start with the mark-to-market comparisons because that's something that everyone sort of latches on to, and that's on Page 42 of our supplemental. So our second-generation leasing statistics. We're really pretty much in sync with all those rollover charts that we provided are part of our investor package, all available on the website. In Boston, there was about 300,000 square feet of space that we hit the second-generation stat this quarter. The majority of it was in Waltham, our suburban assets, and we were up about 12% on a net basis. In San Francisco, it was a smaller portfolio. It's about 144,000 square feet, and it was heavily weighted to Embarcadero Center, and we were up 24%. In New York City, it included about 191,000 square feet. And remember, I explicitly talked about a roll-down that we were going to see during the quarter on about 38,000 square feet, one of the low-rise floors at 767 Fifth Avenue, and I mentioned that we were moving from $160 to $115. Now that's obviously with no very little transaction costs, low TIs, no downtime. And yet we were still only down 4% in New York City with that big rollover, which was down almost 50% on a net basis. And then in D.C., the pool was about 386,000 square feet. And it was dominated by a 15-year, 190,000 square foot renewal with the GSA at 500 East Street, again, very low transaction costs, only $7 of TIs, and that D.C. pool was down about 10%. So let me start with my regional comments. At Salesforce Tower, we received our temporary certificate of occupancy, which is a great milestone. And during 2017, we've now completed 350,000 square feet of leasing. So we are at 1.23 million square feet done on that 1.412 million-square foot building. We have lease negotiations out on 152,000 square feet of the remaining 177,000 square feet. That would bring us to 98% leased. And unfortunately, that means Mr. Pester will not meet his goal of being 100% leased by the end of the year. Every lease we've signed or negotiating is scheduled to commence by the third quarter of 2019. So pretty much in sync with those numbers that we showed you again at the conference in terms of the timing of our deliveries. Turning to the other new construction in the CBD of San Francisco. 181 Fremont is now 100% leased. You heard The Exchange is now 100% leased, and there are leases in progress for 100% of 350 Bush. So that means that Park Tower's 750,000 square foot building, which is likely to be available in late 2018, is it. That is the only new product until 1st and Mission delivers in 2021 and beyond that is under construction in San Francisco. Large blocks of contiguous direct available space are basically absent from the market. This quarter, our 56,000 square foot tenant at 50 Hawthorne announced they were closing their San Francisco office, which is leased at $65 gross. They are negotiating an as-is sublet for the entire space for basically the entire remaining term, starting rents mid 80s. We will share in the sublet profits. Sublet space inventory is very low, though it's expected that Dropbox will put a large block on the market as part of their transaction. So I guess if you're looking for the less robust view in San Francisco, you'd have to point to the limited growth and activity from the nontraditional technology office users. Yet, we have two law firms at Embarcadero Center that are expanding. And all the remaining leasing at Salesforce Tower is with traditional tenants, and three of those deals at 152,000 square feet are adding space as part of their requirement. In Boston, we completed another 167,000 square feet of leasing at 120 St. James and 200 Clarendon during the quarter and another 60,000 square feet this week. We hope to complete our lease negotiations at The Hub on Causeway for 140,000 square feet of the 180,000 square feet of podium space this month. And we reached agreements with retail users for 36,000 square feet of the retail space. That gets us to 95% leased on all the retail space at The Hub. While there are not a lot of large exploration-driven requirements in the Boston CBD, we have seen some inbound activity and some tech growth continue. During the third quarter, two tenants made commitments to move into the city, one from Needham and the other from Lexington. Both tenants have leases in Boston Properties assets, one for 80,000 square feet that goes through December 31 of '19, and the other for 320,000 square feet that goes through November 30 of 2022. There continue to be a handful of modest-sized tenants that are expanding and exploring new space alternatives in the CBD, and that includes the tenants that we are talking to at The Hub on Causeway. In our Waltham suburban portfolio, our largest lease this quarter involved recapturing and then re-leasing 40,000 square feet at our Reservoir Place asset as well as a 125,000-square foot extension. One of the new build-to-suit proposals at our CityPoint land, as Owen suggested, appears to be moving forward. And if we're able to sign a lease for between 50% and 60% of the space in that building, we will start construction in early '18 and deliver for occupancy in the third quarter of '19. This is about a 200,000-square foot project. As we said at the Investor Conference, the most significant opportunity for high contribution occupancy improvements in the portfolio is in New York City. We completed our space trade at the base of 399 Park, leaving us with a 192,000 square foot block on floors seven, eight and nine. And with the addition of a 10th floor 60,000 square feet that's expiring in 2018, we have a very attractively-priced 250,000-square foot block on Park Avenue at the base of the building. In addition, we completed a lease for the entire 14th floor, 40,000 square feet, and we are in active discussions with multiple tenants all currently in the Midtown for between 65,000 and 250,000 square feet of that low-rise space as well as some 1- and 2-floor requirements for the tower space, where we have 190,000 square feet available. Given the condition of the space and the build-out, future executed leases for the space won't run through our income in 2018 and are not part of our 2018 projections, as Michael described. I also mentioned the early lease extensions we were working on in New York City during the conference. Well, we did one of them this week. We completed a long-term renewal with Ann Taylor at Times Square Tower for their 2020 expiration. While there's been lots of leasing on the far West Side, Midtown continues to support major lease commitments. Since the beginning of this year, we've seen 19 deals, over 95,000 square feet each, and nine of those have been new leases, not renewals. If you define the high end of the market as over $100 a square foot, there's been a tremendous amount of activity completed this quarter, as a lot of products on the far west side got leases done. Three leases by themselves totaled over 465,000 square feet. But if you push the pricing thresholds to deals with starting rents at over $135 a square foot, the activity continues to involve much smaller users, 15,000 square feet and under, and there is more high-end space competing for those tenants. Our activities in Washington, D.C. follows three themes. The first is that our franchise has been able to match sites and tenants together to spur an unprecedented series of build-to-suits. Owen said we completed the Marriott and TSA this quarter, and we're working to complete a deal at 2100 Penn. We're in active dialogue at 17Fifty in Reston. We have a large consolidation requirement we're talking to about Reston Phase 3, and we are chasing an anchor tenant for our site at 1001 6th Street, a tremendous amount of activity. All construction would commence upon signing leases. The second theme is the strength in our Reston Town Center market as a real magnet for private-sector contractors and tech tenants. This quarter, we completed 7 transactions for 71,000 square feet of leasing. And we are working on 200,000 square feet, one of which, 135,000 square feet, signed 2 days ago. The third is the highly-competitive leasing market for existing D.C. assets, including the multitude of repositioned B buildings. The good news is that we don't have a lot of this space. The challenge is that there are lots of options for smaller tenants. So summing things up. As of today, we've completed leases that we expect will add $81 million to our goal of $155 million for net growth towards our $111 million of annualized in-service NOI, our 'revenue bridge.' This is up about $12 million versus last quarter. And finally, we added 200 basis points to our development component of our bridge. We're at 73%, where we anticipate the 2020 annualized incremental NOI of $242 million. Now I just want to point out that, that portfolio does not include any of the new leasing that Owen described at TSA or Marriott, and it doesn't include any of the new developments that we will commence on a going-forward basis. So we're trying to keep that pool tight together and describe the $242 million and the percentage of that that's been committed. I'm going to stop here, and I'll let Mike review the quarter, and then provide the assumptions behind our 2018 estimates.

Thank you, Doug. Good morning. I want to express my gratitude to everyone who attended our Investor Conference last month. We had excellent attendance both in person and through our webcast, and we sincerely appreciate your interest in BXP. You were able to hear from more than 30 team members across various disciplines discussing their projects and initiatives, showcasing the depth and talent present in our company. This quarter, we successfully closed two new financings: a $550 million 10-year mortgage on Colorado Center, with a fixed interest rate of 3.56%, and a $205 million construction loan for our Hub on Causeway joint venture, priced at LIBOR plus 2.25%, which will cover all remaining development costs for the project's first phase. In terms of our earnings, our third quarter funds from operations came in at $1.57 per share, surpassing the midpoint of our guidance by about $6.5 million or $0.04 per share. Our portfolio contributed around $0.01 per share of this overperformance, with half attributed to increased rental revenues and the rest from reductions in operating expenses. We reported an additional $3 million in development and service fee income, mostly from completing services at one of our third-party development projects, which we had anticipated but did not project to accelerate into the third quarter. Additionally, we saw lower-than-expected general and administrative expenses by about $0.01 per share due to decreased healthcare and professional service costs, a trend we do not expect to continue into the next quarter. Our same-property NOI growth for the third quarter compared to the same period last year increased by 3.4%, with a cash basis growth of 2.7%, slightly higher than we projected. However, for the fourth quarter, we anticipate our same-property NOI growth to decline due to the full quarter loss of 325,000 square feet of occupancy at 399 Park Avenue. We're raising our fourth quarter funds from operations projections based on improved portfolio assumptions and additional development services income from the Marriott joint venture project. Overall, we're increasing our full-year guidance for diluted funds from operations for 2017 by $0.02 per share at the midpoint, bringing it to a range of $6.24 to $6.25 per share. At $6.25 per share, our growth in FFO for 2017 will be 3.6% compared to 2016, despite the loss of $0.20 per share in termination income and $0.10 per share in the second half from 399 Park Avenue. In 2018, we expect to experience a full year of downtime at the building, potentially resulting in $0.18 per share of lost FFO. The impact of 399 Park Avenue is reflected in our same-property portfolio NOI growth. As mentioned, we expect this space to be completely rebuilt by new tenants, meaning there will be no revenue from the vacant areas in 2018, even after they are leased, leading to a 200 basis point reduction in our same-property NOI growth year-over-year. Although we expect NOI growth in the rest of our New York City portfolio, it will not be enough to mitigate the income loss from 399 Park. We anticipate improvements in other locations, particularly in Boston, where we expect a 200 basis point increase in occupancy, aided by the leasing of 200 Clarendon Street and a significant portion of vacancies at the Prudential Center. We are also expecting year-over-year increases in San Francisco, reflecting strong rent growth from leasing activities, projecting growth between 2% and 3%. This growth estimate assumes no revenue from 80,000 square feet that will be vacated at Embarcadero Center when Bain moves to Salesforce Tower in early 2018. Cash basis NOI growth in San Francisco is projected to exceed 6% due to early renewal activity completed over the past couple of years. Our Washington D.C. CBD portfolio is stable with minimal rollover exposure, while in Reston, where we are currently 97% leased in our 3.6 million-square-foot town center properties, we expect some downtime impacting NOI growth due to known move-outs at lease expiration. Overall, we project that same-property portfolio NOI growth in 2018 will be between 0.5% and 2.5% on both a GAAP and cash basis compared to 2017. If it weren't for two early renewals in New York City, our cash NOI same-property growth projections would be 100 basis points higher. Our same-property assumptions have consistently excluded termination income's impact, with expectations of approximately $24 million for 2017, mostly from two floors at 767 Fifth Avenue and 399 Park Avenue. In 2018, we anticipate termination income to be between $4 million and $8 million, resulting in an expected year-over-year loss of approximately $18 million. We foresee strong contributions in 2018 from our non-same-property portfolio, mainly from development deliveries, with an incremental contribution projected to be between $40 million and $50 million. Major growth contributors will include 888 Boylston Street and the initial tenants moving into Salesforce Tower, along with a reduction of about $7 million from demolition expenses booked this year that we do not expect to recur in 2018. We expect a slight decline in income from development and management services in 2018, projected between $29 million and $34 million, primarily due to new revenue recognition rules that negatively impact our income by about $3 million compared to prior accounting methods. Regarding interest expense, the refinancing of our GM Building loan significantly affects our interest expense, as accounting for the previous loan included a fair value adjustment that reduced reported interest expenses to half of what was actually paid. Additionally, we expect an increase in our debt next year by about $550 million to support our expanding development pipeline. Capitalized interest in 2018 should remain on par with this year, as new development capitalized interest offsets deliveries from 888 Boylston Street this year and projects like Salesforce Tower and residential projects next year. Therefore, we project our net interest expense for 2018 to range between $375 million and $390 million, representing a $25 million increase at the midpoint from the 2017 midpoint. This increase includes $15 million due to changes in noncash interest from the GM Building refinancing and a $5 million rise in our share of interest expense from unconsolidated joint ventures, reflecting a full year of interest from Colorado Center financing. In summary, starting from the $6.25 per share for 2017, at the midpoint of our 2018 assumptions, we expect an increase of $0.13 per share from the same-property portfolio and $0.26 per share from development deliveries. This is somewhat offset by a $0.10 per share reduction in termination income and a $0.17 per share increase in interest expenses. We anticipate slightly lower fee income, a rise in non-controlling interest, and higher G&A costs that will reduce projections by $0.09 per share. This culminates in a midpoint projected funds from operations of $6.28 per share and a new guidance range of $6.20 to $6.36 per share. In conclusion, our portfolio continues to drive growth, and we are anticipating substantial external growth from our developments. Net of termination income, we expect portfolio revenues to rise approximately 5.7% at the midpoint of our guidance range. Our projections do not take into account the effects of any acquisitions or dispositions. We currently have two operational properties on the market for disposal, contributing roughly $0.05 per share to NOI. As mentioned during our Investor Conference, we foresee stronger growth in 2019 as we lease vacant and expiring space at 399 Park Avenue, and NOI from the remaining portfolio is expected to keep growing. We also anticipate a significant uptick in development contributions throughout 2019, with plans to deliver $2.25 billion of our pipeline, a large portion of which is already leased. We will continue to pursue new development investments, similar to what we've done this quarter. That concludes my formal remarks. Operator, please open the lines for questions.

I've got a bunch of questions. Let me just ask a couple then I'll get back in the queue. First, if I'm looking at your numbers on Salesforce Tower, is the all-in development cost $766 a foot? And is there any chance that Salesforce Tower will actually be a double in terms of valuation at stabilization? And then my second question is, Marriott doesn't stabilize until 2022. I'm imagining you're trying to tie that to Ray Ritchey's 50th birthday, but why so long?

On your first question about Salesforce, we don't want to speculate on how someone might value the building. We generally believe that high-quality CBD assets have been trading at valuations with initial cap rates ranging from the high 3s to the low 5s, depending on the rent roll. The most notable aspect of Salesforce.com Tower is that it is currently underleased. Given the significant growth in rents in San Francisco, there is a considerable mark-to-market potential in that building. Therefore, we see substantial value creation there. Regarding Marriott, it simply depends on when their lease expires in Bethesda and when we can begin construction. We are working as quickly as possible, and we hope to start our foundation work in the middle of 2018, which would enable us to deliver the shell and core to Marriott for their tenant improvements by the middle of 2021.

John, I want to add to what Doug mentioned about Salesforce. We are committed to delivering the building with a yield exceeding 7. As Doug has pointed out, the comparisons for new buildings in San Francisco are definitely in the 4s in terms of cap rates. Additionally, per square foot values have been increasing, having surpassed $1,000 per square foot in the past year, with several transactions occurring above that amount.

I think also, on Marriott, the one thing that Doug pointed out that's important is we're not going to be done with our obligation in 2021, which is building the shell. So it's kind of a 2.5-year, maybe a 3-year process. But Marriott is then going to do all their TI work and get into occupancy, and we can't recognize any revenue until they're done with that. So we're kind of dependent upon them to kind of finish that and be in sometime in '22 before we can actually book any revenue.

Let me ask another quick question. Is Morrison Foerster a major tenant in D.C., and are they planning to move to the OFC development site, or are they located in a different city? Also, Owen, you mentioned that inflation is low. When considering development costs, operating expenses, and labor, do you think inflation is truly as low as the national statistics suggest?

Morrison Foerster is a tenant at 250 West 55th Street, so we don’t have any exposure in Washington, D.C. I meet with people in Boston every 90 days to discuss these topics with the head of the Federal Reserve there. In our conversations, I have noted two main trends regarding the inputs for new buildings. First, labor costs are rising at a reasonable rate, with average union contracts reflecting a 3% to 3.5% annualized increase occurring semi-annually. Second, activity levels among subcontractors impact their willingness to bid on new projects, often leading them to inflate their profit margins. A particular area of concern is the increasing cost of concrete and the construction methods being employed in Washington, D.C., where significant pricing hikes are noticeable due to high demand. As a result, we are experiencing a faster increase in our construction costs, which we are incorporating into all of our project budgets. Consequently, all return estimates provided assume these escalated costs when we finalize bids with our subcontractors.

You've talked about a pretty active near-term development pipeline I think 2.5 million square feet you guys outlined. Is there a cap? I guess a couple of questions on that. I mean is there a cap that you guys would consider for sort of the development as a percent of total assets? How are you guys thinking about financing that growth? And then would any of that leasing be coming out of existing BXP space?

To answer your question, we don't have a cap on our development. We do keep track of how much development we have as a percentage of our total enterprise, which we believe is around $3 billion. Our enterprise value is over $30 billion, so we find that reasonable. Additionally, the developments we added this quarter are fully leased, resulting in very attractive development yields. While we do face theoretical credit risks with tenants and potential delivery risks regarding costs and timelines, these are different from the risks associated with building speculative or partially leased buildings. We maintain that there is no cap, and all the development I've mentioned is either fully pre-leased or significantly pre-leased, which will remain a condition going forward.

And only one of the tenants we're talking to in Washington has a presence with us in one of our buildings.

And I guess two kind of housekeeping items on guidance for next year. I might have missed this, but are you projecting any dispositions for next year? And then in terms of your year-end 2018 occupancy, what type of growth or sort of backfilling of the 399 Park space does that project?

So the guidance doesn't include any dispositions or acquisitions at all for 2018. And as I mentioned, at 399 Park, we do not expect any of that space to be in our occupancy figures in 2018. As I mentioned, the space, really, it's 20-year-old Citibank space that needs to be demoed and rebuilt. The new tenants coming in are going to be putting in their tenant improvements, and they won't be able to get those tenant improvements complete before the end of 2018 even if we signed a lease today. So we won't be able to get any revenue or any occupancy, we believe, in 399.

You've had some activity in Reston this quarter. Can you just comment on why you decided to sell the land to the corporate buyer rather than develop for them?

The parcel of land that Ray will describe is more of a greenbelt parcel rather than an urban parcel in the center of Reston. We've owned this site for about 15 years, and it's not part of the Reston Town Center development. It's actually located approximately 1.5 miles to the south. A corporate user approached us asking to build a building for them, and we expressed our willingness to construct and lease it. However, they preferred to own the property, leading us to ultimately decide to sell it.

And any time you can add a Fortune 50 name to the Reston tenant occupancy list, that's a plus. So it was not a strategically-important site, and it really just continues to validate Reston as the premier corporate location in the suburbs of Washington.

Who is that company? And also, can you also discuss the additional 3 million of FAR that you're looking to entitle as far as the cost and the use of that land?

I guess we can release that it's General Dynamics. It's actually 3 million to 4 million square feet. This will involve rezoning the land currently occupied by Reston Corporate Center, which is directly across the street from the Reston Town Center Metro stop. As we introduce additional density with the new Metro line to Reston Town Center, it will comprise a mix of 3 million to 4 million square feet, with half designated for residential use and half for commercial use. We're bringing this forward at a very competitive basis since it's land we've owned and a building we've had for over 20 years. Peter, do you have anything to add?

No, I think that sums it up. It's just going to be a continuation of the mixed-use development we've got in the urban core town center.

At the GM Building, it's been over a year since you signed Under Armour for some of the retail space. Since then, their share price is down over 60%. Is there any risk that this lease does not go through?

So the lease is in full force and effect, and we expect Under Armour will occupy the building. We're not delivering the space to Under Armour probably until the very end of 2018, and then they're going to have to build it out. So my guess is their plans don't assume that they're going to be in there for quite some time. Remember, Under Armour had $1.4 billion of sales this quarter. They still expect to be over $5 billion for 2017. Even after a restructuring charge, they had positive net income. They have a net debt-to-EBITDA of just 1.5 times. This is a real strong company, and there's no question that their growth trajectory has changed over the last two quarters. But we're believers.

Mike, maybe just to help us with modeling or thinking about growth for next year. If you were to reaggregate NOI contribution from the same-store properties as well as the development properties and other external growth, how much year-over-year just NOI growth in general on both a GAAP and cash basis do you expect next year?

I think that's a question he needs to answer after doing some calculations. We tried to address that by explaining the increase in our revenue from 2017 to 2018. The challenge with looking at it on an NOI basis is that the contribution from development relies on when the buildings come online, and the margin from those development projects varies each quarter as space is delivered. So, I believe Mike will need to follow up on that one.

I mean, the size of our same-store pool is $1.460 billion approximately. That's the kind of 2017 roughly same-store contribution. So if you want to add the $40 million to $50 million of development NOI to the guidance that I provided on the same-store of 0.5% to 2.5%, I guess, that's how you would get it.

Got it, that's helpful. And then, Mike, at the Investor Day, you gave a few nuggets of 2018 guidance without giving us full guidance. One of them was interest expense being up $25 million to $45 million. It looks like that increase is now smaller given the guidance last night. Is there anything specific driving that?

No, there’s nothing specific. We conduct re-projections every quarter regarding our development outflows and how we will fund them through cash or our line of credit based on our projections. We still need to refinance a couple of loans that expire in 2018. This requires us to adjust our expectations for interest rates and timing. Last quarter, we anticipated being in our line in December, but we now expect it will be February due to changes in development outflows. When we factor in all these aspects, it has slightly reduced the interest expense.

One of the most interesting aspects of development is our provision of TI dollars to many customers. A significant number of them use the funds, but it often takes time for them to request reimbursement. Therefore, the outflow at Salesforce Tower related to TI is substantial, and we have not yet seen much of a draw. This situation allows us to delay capital payments longer than we originally anticipated.

Just two questions for me. The first one is on 2018 guidance. You guys gave a midpoint of $6.28, which is below where The Street is. Just wondering if you had any insight into what the major items that The Street is missing that caused that disconnect?

We made efforts during our Investor Conference and over the last few quarters to outline how 399 Park would influence our same-store growth. Without the impact of those 200 basis points, our same-store growth would be around 2.5% to 4.5%, which is quite strong, in my opinion. We believe we addressed all the key points. The decline in termination income by $18 million might not have received adequate attention from some. However, all termination income for 2017 is already accounted for, and we have secured $22.5 million of the projected $24 million. Generally, we and the market are aware that we do not forecast significant terminations for the following year that are unforeseen. The refinancing of the GM Building has also been somewhat confusing due to its effects on our non-controlling interest and interest expense. I am pleased that this issue has been clarified, although it's still challenging to assess until we complete a full year or achieve a full run rate. The guidance includes a rise of $8 million in our non-controlling interest at the midpoint, which translates to about $0.05. This might not have been fully recognized, and it is related to their share of the demolition expense no longer being a factor in the GM Building refinance. Those are the key areas to consider.

And separately, given the desire to expand in L.A. and the CBS Studios being up for sale, do you guys have any interest in that asset?

We won't provide details on the specific investments we are pursuing. Our objective is to grow in L.A., and we plan to do so in a measured way. We are actively exploring both development opportunities and acquisitions. I believe our pipeline has strengthened over the past month since the Investor Conference, as we have identified more options. Additionally, having Jon Lange on the ground in L.A. has been very beneficial.

Mike, thanks for the detailed guidance and a very comprehensive Investor Day. Can you talk about what the guidance means for your AFFO outlook? And also, any thoughts on dividend coverage and prospects for maybe a bump next year?

So I think that our AFFO is going to be up. For 2017, we think it's going to be somewhere in the $4.20 to $4.25 range. And for 2018, I think that our range will be closer to kind of $4.35 to $4.65 range. Our same-store rents are going to be lower. I mean, our noncash rents are going to be lower. We've provided guidance of that. And I think our tenant transaction costs we've got to do about 2.8 million square feet of leasing to meet our occupancy goals. So we think that that's probably somewhere between $180 million and $210 million of leasing transaction costs. And we should have a return CapEx of somewhere around $80 million to $90 million. And then if you kind of look at what our run rate is for stock compensation and straight-line ground rent and other stuff, you get adjustments of probably somewhere in the high 200s, $275 million to $300 million. So I think we're going to be up pretty strongly at the midpoint. That's up 8% over 2017, and it's actually up 40% since 2015. So our AFFO has been very, very strong growth over the last few years, as we've burned off a lot of free rent and things like that. What was the other question, Jamie?

Just whether you'll start pushing up against the need to bump the dividend?

Yes. So I mean, we've talked before about where we are and where we expect to be in 2017 from a taxable income perspective and our dividend, which is I think fairly close in line. We haven't made any decisions on our dividend for the fourth quarter of 2017. We're going to be meeting with our board in the fourth quarter to talk more about it. I mean, I can say that we believe our cash NOI is going to grow significantly over the next few years. And if we don't sell a lot of assets, which are not currently in our business plan, our expectation over the next few years is we would have dividend growth in line with what that growth is. But we haven't made any decisions yet about this year.

And then I know at your Investor Day, you guys spent a lot of time talking about WeWork and coworking. Since that time, we've seen WeWork go direct into owning assets, buying assets. I'm just curious, is that something you guys expected to happen? And what are your general thoughts as a landlord as they do seem to be looking to own more assets going forward?

Our stance on coworking and WeWork remains unchanged. As we've indicated in various ways, coworking, and specifically WeWork, has been beneficial for the office business during this cycle. We mentioned at the Investor Conference that coworking accounted for about 20% of net absorption in the nation, which is quite positive. Regarding WeWork's investments in real estate, it's noteworthy that they're not managing everything independently. They have partnered with an external fund manager. While I don't know the exact details of the ownership percentages in all the properties, WeWork is not acquiring these buildings entirely on their own balance sheet; they are doing so in collaboration with a partner. Furthermore, we have not encountered any competition with them in relation to investing in specific buildings.

Any other color from anyone else?

No, I think that's it.

Well, clearly, we've been through a two-year or three-year cycle, where they've really been focused on cutting costs and perhaps uncertainty in the defense budget, and now we're seeing more clarity. We see more contracts being funded. We still see those defense users looking to be efficient in their space use and consolidate. And we see them going to locations like Reston Town Center, where they can recruit, retain and motivate the best and brightest. So it's always been a situation in Northern Virginia where the demand for space can rise and fall on the defense budget. But for now, right now, we're getting very good direction from these users that they'll continue to be taking down space, and it's obviously very helpful for our specific market in Reston.

So if I heard you correctly, you said that the rent roll-down at 767 was about 50% on a net basis. But overall, New York City was only down about 4%. I guess can you give a little color on the mark-to-market leasing for the rest of the New York portfolio? And I guess, was 767 the only space with a rent roll-down this quarter?

From a weighting perspective, it bore way more than its fair share of the roll-down. As I said, we had about 190,000 square feet of space rolling over. And most of the space in New York City was rolling up. We had a couple of small pieces of space that rolled down. But if you were to pull that one out, we would have had a significant roll-up in New York City.

And then I may have missed this earlier on, but could you give us an update on the leasing activity at 159 East 53rd?

Yes. I think we have two good prospects at 159. Both would take more than half the building. We hope we make one of those deals. And we have a number of smaller prospects, so I think it's going well. The curtain wall is almost done now, and it's showing much better than it did.

I was on mute. I have a quick question about the incremental debt. Mike, I think you mentioned it was about $550 million related to the term facility and the credit line. Is that funding requirement solely associated with the existing development pipeline, or does it also include any future developments? Additionally, I have a quick follow-up regarding interest expense.

That's only assuming the existing pipeline that we've shown everybody. So it does not assume that we're successful in signing additional leases at some of the other properties that both Owen and Doug talked about, which would increase our pipeline. And some of those properties would start to fund in 2018, so that would increase the requirement to fund those and also increase our capitalized interest, however. Again, normally, funding development projects doesn't necessarily increase your interest expense because you've got a capitalized interest offset. But in this case, we're delivering a lot of stuff in '17 and '18, which causes us not to kind of get the benefit of that, which is why almost all of the funding that we have projected so far for '18 kind of just drops into the interest expense bucket as an increase in interest expense.

And then one final last question. Mike, you mentioned that the Colorado Center financing was going to increase your share of interest expense from unconsolidated by about $5 million. The range that you guys provide for guidance, is that only on a consolidated basis? Or is that inclusive of your share of all interest expense, just for clarity?

The range we provide is only on a consolidated basis. It's unusual for us to see a significant change in the unconsolidated joint ventures, which usually remain small due to the size of that portfolio. However, I wanted to highlight this quarter's change because it impacts 2018. In terms of net operating income for the unconsolidated properties, we include our share in the same-store guidance. The only aspect we don't account for is any changes in interest expense that could affect year-to-year comparisons. Typically, this doesn't have much of an impact, but this year it does, which is why I wanted to mention it during the call and include it in our press release.

That completes our call. Thank you for your questions. Thank you for your interest in Boston Properties, and we look forward to seeing many of you at NAREIT in Dallas in a couple of weeks. Thank you.