Boston Properties Inc (BXP) — Q2 2019 Earnings Call Transcript

Thank you, good morning everybody and welcome to the Boston Properties Second Quarter 2019 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 on the Investor Relations section of our website at bxp.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website. At this time, I'd like to inform you that certain statements made during this conference call which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although, Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions that can give no assurances that the expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in yesterday's press release and from time to time in the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statements. I'd like to welcome Owen Thomas, Chief Executive Officer, Douglas 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. And now I'd like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Sara and good morning everyone. We had another quarter of accomplishments and continue to execute successfully on our revenue and earnings growth strategy. Let me start with key financial highlights. In terms of FFO per share growth this year we continue to outperform every Company in our sector and a vast majority of REITs overall. This past quarter, we grew FFO per share by 13% over the second quarter of 2018, which was also $0.04 per share above the midpoint of our guidance for the quarter and $0.04 above the street. Our share of cash same property NOI growth was also very strong at 9% for the quarter. We also raised our full year 2019 FFO per share guidance by $0.06 at the midpoint, which would result in 12% FFO growth year-over-year, again, well ahead of peers. We increased occupancy for our in-service office and retail portfolio by 50 basis points from last quarter to 93.4%. This also marks a 300 basis point increase from a year ago and our highest occupancy in over five years. Our growth is well balanced coming from both the delivery of new developments and same-property performance. And in terms of operational highlights, we had a busy and productive quarter. We completed over 2.4 million square feet of leasing, which is well above our long-term quarterly average for the period. We began construction of 225 Main Street in Cambridge for Google Hub on Causeway, which is starting to come online as Rapid7 moves in and the retail components activate in our podium's first phase, and we completed Boston Properties' second green bond offering raising $150 million at attractive terms in the unsecured debt market. So let me transition to business conditions. Our primary lens on the economy is leasing activity which remains vibrant throughout the vast majority of our portfolio. In fact, markets driven by technology and life science demand are experiencing historic highs in rents and leasing activity. Through the lens of reported economic data, the US economy also appears healthy with 2.1% GDP growth in the second quarter, so that was down from 3.1% in the first quarter, 512,000 jobs were created in the second quarter, there was a 3.7% unemployment rate and inflation is in check at 1.6%. Notwithstanding this favorable backdrop, the Fed has turned increasingly dovish and is signaling a potential interest rate cut because of the risks they see in the economy, which also has our attention. Growth outside the US has slowed with China reporting its weakest numbers in 27 years and Germany's manufacturing sector, which accounts for a large portion of its economy, is in a deepening recession. As a result, central banks around the world are turning accommodative. There are also geopolitical risks, including a US trade war with China, no deal Brexit, and tensions in the Middle East. Lastly, in the US, growth has become more narrow and consumer reliance and corporate earnings were also down modestly in 2019. So what does all this mean for Boston Properties? We are not calling for a recession in the near term, but clearly the global and US economies are slowing and recession risks, as a result, are rising. Central bank action in the US and around the world should help, and low interest rates are a clear tailwind for commercial real estate demand evaluation. We are cautiously bullish and continue to actively pursue and selectively make new investments. So we are considering a number of investments in all our core markets. We are more enthusiastic about taking incremental risks in our markets, driven by technology and life science demand, including most of our Boston and San Francisco Bay Area footprint, West LA, segments of New York City, and Northern Virginia. That all being said, Boston Properties is hedged and well prepared for a downturn, if and when it emerges. Our corporate leverage remains modest. We are completing new leases and early renewing a large number of tenants. Our weighted average in-service lease term is approximately eight years and rising. And our development pipeline has modest risks given the buildings under construction are 81% pre-leased. Now moving to the private real estate capital market for assets in our core markets. It remains strong and liquid. Every on-market transaction we have pursued this year, either buildings or sites, has been hotly competitive with multiple qualified investors. There are many very large institutional investors globally interested in making private equity real estate investments across sectors and geographies. Significant office transaction volume in the US ended the second quarter at $25.4 billion, which is up 42.3% from last quarter and over 24% from a year ago. Yet again, there were numerous significant asset transactions in our markets this past quarter. Starting in Boston, a 90% leasehold interest in Ombudsman Triangle in Cambridge sold for $1.1 billion, which is about $16.50 a square foot and a 4.3% cap rate; this is a 680,000 square foot office and lab complex that is fully leased and sold to a joint venture of a private equity investment manager and a local operator. The seller retained the freehold interest. In West LA, Culver Creative Campus sold for $260 million or $920 a square foot and a 4.8% cap rate; this is a 280,000 square foot creative office property that's fully leased and sold to a fund manager. Moving to San Francisco, 650 Townsend in the Mission Bay District sold for just under $700 million, at about $1,040 a square foot and a 5 cap; this is a 670,000 square foot office building that's fully leased and sold to a private real estate investment firm. And then finally, in Washington DC, a 49% interest in Trail Place is under agreement to sell for $475 million, about $1,050 a square foot, and just under a 5 cap. This is a 451,000 square foot office building 95% leased sold to a sovereign wealth fund. So sticking with dispositions, we are targeting approximately $300 million in asset sales this year and are well on our way to achieving this goal having completed $251 million in dispositions year-to-date. Notably, this quarter we closed on the sale of 540 Madison Avenue in Midtown Manhattan, of which we earned a 60% interest. Our partners in the project exercised their right to sell their 40% interest in the asset and we elected to join them to market the entire building. After seeing significant interest in the property, we closed on the sale of the 284,000 square feet office building to an advisor on behalf of the US pension fund for $310 million, which is $1,092 per square foot and a 3.8% yield on current NOI, stabilizing at 4.5%. The pricing was very attractive to us relative to the growth potential we saw on the asset, given its market position. The sale also served as an opportunity to prune our New York City portfolio at the same time we are reinvesting in our 53rd Street campus and the GM Building. And lastly, of course, asset sales enable capital for our development pipeline and other new investments. The competitive process we experienced during the sale renewed our confidence in the depth of the market for Midtown Manhattan office buildings, particularly for assets of this scale. Moving to other capital activities, development continues to be our primary strategy for creating value for shareholders, and our pipeline of current and future developments remains robust. As mentioned, this quarter we added 325 Main Street in Kendall Center to our development pipeline, representing an additional $418 million in expected investment. Not only does this development grow our relationship with Google, an important client, but we also extended our other leases with Google, creating an 850,000 square feet relationship across three buildings in Cambridge through 2037. With this addition, our current development pipeline stands at 12 office and residential developments and redevelopments, comprising 5.7 million square feet and $3.2 billion of investment for our share. The commercial component of this portfolio is 81% pre-leased and aggregate projected cash yields are approximately 7%. We also expect to add 2100 Pennsylvania Avenue to the development pipeline next quarter. This 480,000 square foot building with 66% of the office space pre-leased will add an estimated $360 million in investment. Most of the development pipeline is well underway and we have $1.5 billion of capital remaining to fund. Given selected asset sales, the scheduled delivery of our current development pipeline, and forecast NOI growth from our in-service portfolio, we anticipate being able to fund the current development pipeline without either accessing the public equity markets or increasing our leverage ratios. As we pursue and add additional new investment opportunities to the pipeline, we will be increasingly accessing private equity partners to extend the use of our equity capital and hence our returns. For example, we are close to completing a joint venture with a private capital partner for our Platform 16 future development project in San Jose. So to conclude, tenant demand remains robust in our core markets; companies across sectors continue to make long-term commitments to our high quality properties, allowing them to attract and retain talent with leading-edge workspaces and amenities. Financially, we are delivering the highest FFO per share growth in our sector and among most REITs overall this year, while maintaining modest levels of leverage. Our focus on new development has been and will continue to be our differentiator and advantage, allowing us to drive strong growth and returns and create long-term value for shareholders. And given our robust current development pipeline and new investments under pursuit, coupled with our strong balance sheet and available financial resources, we are confident of continued growth and value creation in the years ahead. And I will turn it over to Doug.

Thanks, Owen, good morning everybody. Last quarter we described pretty healthy leasing activity across all of our markets, except the District of Columbia, and to the extent that there have been adjustments to these conditions over the past 90 days, the changes have been positive expressed in the form of more active requirements, more early renewals, and more tenant growth. While the slowdown in global economic growth and the trade dispute Owen referenced are impacting sectors of the economy, the tenants in our buildings and the tenants that are considering new space in our markets are showing great resiliency or have not been impacted to the extent that their behaviors, when it comes to using space to attract, recruit, and retain employees, remained constant. We are not seeing tenants put requirements on hold, move to short-term decisions, or list based on the sublet market. The demographics of the labor markets, the tight unemployment rate for the workforce with college or graduate degrees, and the continued changes to how businesses workforce will be impacted from technological innovation are creating continued demand for our markets in our buildings. The demand is, as Owen said, driven by growth from technology, life science media, but also some financial service tenants. In San Francisco, CBRE reported in 2013 that tech made up about 22% of the embedded occupied market or about 15 million square feet. As of the end of the second quarter of 2019, tech made up 38% of the market and 31 million square feet. In Midtown Manhattan in 2010, CBRE reported that 5.5% of the market, where 70.6 million square feet was occupied by technology companies. At the end of the first quarter of '19 the texture had increased to 8.8 million, or 8.8% or 32.5 million square feet, and this excludes jobs in traditional financial service organizations like banks that have significant technology employment. There is more tech occupancy in New York than there is in San Francisco. As we said at the NAREIT Conference in June, the technology leasing we have seen in Manhattan over the past few years is obscured by the size of the market and the significant speculative supply that has been delivered. Demand in Manhattan remains robust. At this moment, there are at least four technology companies in active discussions on requirements of between 400,000 and 1.5 million square feet, and they represent significant growth for each tenant. In addition, there are a dozen non-technology firms, including law firms, banks, media companies, and insurance companies, with requirements in excess of 300,000 square feet that are seriously considering relocation to either new construction or renovated product. Some of these non-tech clients are growing, while others are contracting their footprint, but on balance, demand remains strong. Interest in new development, including our project at 3 Hudson Boulevard, has picked up. Large blocks in the new product, which in almost every case, price, starting rents in excess of $100 a square foot are leasing up more quickly than we anticipated. There will still be significant existing supply from known relocations. So while we are optimistic about the shrinking availability of newly constructed space in the medium term, we continue to have a cautious view of transaction economics over the next few years. Boston Properties has one lease expiration in excess of 150,000 square feet during the next five years in our Manhattan portfolio, and we are in renewal discussions with that tenant today. Our portfolio in New York focus remains at the General Motors Building and our remaining block at 399 Park Avenue. We completed a lease on one floor at the GM this quarter. The high-end market. The final space with starting rents in excess of $120 a square foot really hasn't changed much over the last 90 days. As I said previously, leasing activity in this submarket is not about incremental price or concessions; it's simply about a smaller demand pool and that demand remains light today. I describe the economic impact of our known 2020 Manhattan availability last quarter and it hasn't changed. We have about $13 million of income in 2019 from space that is expiring in 2020 at the GM Building. When combined with the currently vacant space here in 399 Park, we should see future revenue of about $27 million from those spaces. I also want to note that at 1590 E 53rd Street we will be collecting cash rent in November of '19 on a 195,000 square feet. But as we sit here in July, our incoming tenant has yet to begin their improvement construction, which means they are unlikely to be completed in 2019 and this will push our revenue recognition date into 2020. Dock 72 is expected to open in September for WeWork and we expect to open the amenity space in October. We continue to have some tenant discussions, but there are no imminent lease signings in our sector. In Northern Virginia, we're almost 10% of the company's NOI that originates from the tech tenants, that have identified the DC Metro employment as a fertile area for growth, are continuing to grow. In addition, the contractors that service defense and homeland security are expanding the demand picture, which is robust. In Reston Town Center, we have active lease discussions involving 285,000 square feet with seven tenants, including 160,000 square feet of positive absorption to take up the space we're getting back in 2020. We have three other technology and defense contractors that currently occupy 85,000 square feet looking at 63,000 square feet of expansion in early stage discussions. We have a new leasing leader in DC, Jake Stralman, and he and his team are aggressively working to cover that 2020 availability. Just west of the town center, a few weeks ago the team completed a 15-year renewal with a defense-related government entity for 492,000 square feet. We anticipated this renewal and it's not part of the known availability in Reston. In Boston, we're operating in a market where there is very limited availability; the vacancy rate is stated under 6%. Fully committed build-to-suit seem to be announced every quarter at this time as a raw subsidiary for more than 575,000 square feet part lab and part office. The speculative portions of new construction aren't delivering until 2022 or later and there are very few blocks of contiguous space. New construction rents are close to $100 on a gross basis. In Cambridge the availability rate is even lower, under 2% and even with the departure of tenants moving to new construction in Boston or the western suburbs, office rents are over $90 triple-net and lab rents are over $100 triple-net with a higher TI allowance. In Waltham and Lexington, the growth in migration of lab tenants has resulted in over 1 million square feet of new requirements in this market with less than a million square feet of available product, much of which was converted office space. This has pushed office rents for older space into the mid '40s, while growth and new construction into the mid '50s. Our Boston CBD portfolio is 99% leased and hence the majority of our CBD portfolio activity involves expansions and early renewals at higher rents. At 200 Clarence Street year-to-date Pat Mobinil, who has recently taken over the leadership of the Boston leasing region, and his team have completed 118,000 square feet, including 75,000 square feet of 2022 early renewals this year, and they are currently negotiating leases for another 140,000 square feet of 2022 expirations with existing tenants, including 34,000 square feet of expansion. Our largest ongoing transaction at the Prudential Center involves the recapture of a floor from one tenant along with an immediate release to a growing financial services firm that is also committing to two additional floors in late 2023. To date in 2019, we've completed 775,000 square feet of Boston CBD deals on an existing space with an average increase in rents up by 21% on a gross basis. In the development pipeline, in addition to increasing our pre-leasing at 100 Causeway with the lease for 67,000 square feet, we have two other leases in negotiation totaling 77,000 square feet, which when signed would bring pre-leasing to 93%. Last quarter, I described our plans to terminate leases in anticipation of converting 200 West Street to a lab infrastructure starting in the fourth quarter that's a Waltham suburban properties. And this, in fact, is happening. Hence, the decline in occupancy this quarter. Occupancy will drop as we vacate 50% of the building to enable the lab conversion. We'll be investing about $40 million on the Apple Google square footage to convert the base building systems, provide enhanced TI transaction costs, and carry the development while the space is out of service. Lab rents are between $48 and $63 triple-net in the Waltham Lexington market. We expect high single, if not double-digit return on this incremental investment. As we permit and draw our new suburban product, it is all being designed as lab-ready. 180 City Point our next development site in Waltham is a 300,000 square foot building that's fully permitted that fits this store. We recently made 180,000 square feet proposal to a lab user and a 120,000 square feet proposal to an office user for the same building. We have a few additional known move-outs in Waltham in 2019 and we are reviewing whether these buildings can also support a lab conversion. Similar to Boston, San Francisco has a vacancy rate in the low single digits. While we can point to significant future development opportunities in the Boston market, in San Francisco, the issues with Proposition and the city's environment create a much more constrained situation. Nothing has changed with the sequel litigation involving the Central Solar Plan, but the city has moved forward and approved LPA's large project authorizations for 598 Brandon, the tennis club, and other sites and subsequently authorize partial Proposition M allocations. The city is currently processing our LPA for Fourth in Harrison and we expect to formally go before the Planning Commission in the fall and receive our LPA and Proposition M allocation for 500,000 square feet, a partial allocation. Recently a proposition was proposed for the March 2020 election that would allow for a full Proposition M allocation for the current Central Summer Superblock sites including ours but tie future allocations to citywide affordable housing goals, further tightening future supply of office space in the city. The vacancy rate in San Francisco is at its lowest level since this last cycle began after the great financial crisis. Our city portfolio ended the quarter at 93% occupied, but we have expiring leases for 285,000 square feet that have not commenced that would bring it to 98% occupied. This quarter, we completed 160,000 square feet of leasing at Embarcadero Center. To date in 2019 we've completed 435,000 square feet with an average gross rent increase of 34%. If a tenant wants a full floor receipt, he has one option prior to July of 2020. We have only one multi-floor expiration prior to the end of '21, but if a tenant is looking for an available block of space, a good comparable to the Embarcadero Center or other properties we have is the low-rise at 101 Market with an asking rent for that block starting at over $100 a square foot. We have a large portfolio development opportunities in the Silicon Valley. This market continues to experience strong growth led by Google, Apple, and Facebook. Google recently purchased the former Yahoo campus from Verizon, and Verizon has leased 650,000 square feet in close proximity to the Caltrans station in Santa Clara, and Uber has taken 300,000 square feet in Sunnyvale, again close to a Caltrans station. We are aware of other San Francisco headquartered companies that are looking in the valley for large blocks of space, as well as value companies that are continuing to grow. At Platform 16 in San Jose, we are enabling the site and making presentations to tenants that are looking for large blocks of space. In our existing Mountain View prior portfolio, we continue to release or renew space at rents in excess of $60 triple net for single-storey product. This quarter we completed three leases for 130,000 square feet with an average rental increase of over 90% on the net rents. So to summarize, in New York, the headline is that the market is active and our growth is going to be driven by the lease-up of our limited high-end space availability. In DC, we're making good progress with leasing our 2020 availability in Reston. In Boston and San Francisco, the strong rental growth along with occupancy increases is really what's driving our overall portfolio performance. When we add the contribution from our $3.2 billion development pipeline, which will deliver in '19, '20, '21, '22, and '23 we are excited about our continued growth prospects. I'll stop here and turn it over to Mike.

Great, thanks Doug. Good morning everybody. As Owen described, we had another strong quarter. We increased our full-year FFO guidance again and we're now projecting 12% year-over-year FFO growth at the midpoint. Before I get into the financial results, I would like to touch a little on our capital raising because we've been very active in the capital markets, raising capital through both debt issuances and property sales. We raised $150 million with the sales of 540 Madison Avenue and two smaller non-core suburban assets this quarter. We raised $850 million in the bond market in June with our second 10-year green bond at a very attractive 3.4% fixed interest rate. We also closed on $255 million of construction financing for the Marriott headquarters development where we have a 50% joint venture interest. And we are in the final stages of closing a $400 million construction financing to fund the development of our 50-50 joint venture 100 Causeway Street office development in Boston. We now have over $1 billion of cash on hand, plus our full $1.5 billion credit facility available. We are in a strong position to fund the remaining $1.5 billion of costs to complete our development pipeline, which total $3.2 billion of total investment. We continue to have no need to issue public equity to complete our pipeline and we expect that our overall leverage, currently at a reasonable 6.3 times net debt to EBITDA, will improve as these projects deliver. We are pleased with our balance sheet and our ability to maintain modest leverage and strong liquidity while funding a growing development pipeline that will drive future growth and shareholder return. Now, let's get into the details for the quarter. Our second quarter results were strong and exceeded our expectations with revenue up 10% and FFO up 13% respectively over last year. We again demonstrated gains in our portfolio occupancy, which is up 50 basis points and now at 93.4%, and the roll-up in our replacement rents was outstanding, up 25% on a net basis over the prior lease on approximately 600,000 square feet of leasing that commenced this quarter. Our FAD this quarter came in at $224 million, which is an improvement over last quarter's results due to higher revenues and lower leasing costs. This provides a strong dividend coverage with an FAD payout ratio of 73%. Our FFO for the second quarter was $1.78 per share, it exceeded the midpoint of our guidance range by $0.04 per share or about $7 million dollars, and $0.02 per share of our beat came primarily from higher portfolio revenues, where we commenced two leases earlier than our prior projections. We also gained $0.02 per share from lower operating expenses; this consisted of repair and maintenance items not completed as quickly as we expected, and we anticipate incurring these expenses in the back half of the year. So of this quarter's $0.04 per share earnings beat, only $0.02 per share will benefit the full year. This quarter our share of same-property NOI is up 7.6% and on a cash basis of 9%, coming from a combination of increases in occupancy and achieving higher rents as we release our expiring spaces. We anticipate that this growth rate will not be as high in the back half of 2019, partially due to higher comparable periods in the second half of 2018. We also project our occupancy to moderate for the rest of 2019 due to pending explorations primarily in suburban Boston and suburban San Francisco, where we will see some downtime before new leases come in. We expect our occupancy to hover around 93% for the rest of the year. For the full year 2019, our assumptions include growth in our share of same-property NOI of 6% to 6.75% over 2018. This represents an increase of 25 basis points at the midpoint from our guidance last quarter and is from the combination of the revenue outperformance in the second quarter and continued strong leasing activity in most of our markets. We have activity on nearly all of our available space in San Francisco and we're working on a number of early renewals at higher rents in Boston, New York City, and West LA. At the end of the second quarter we sold 540 Madison Avenue for $310 million of which we owned 60%. The loss of our share of the NOI for the next six months is $3.1 million or $0.02 per share to our 2019 full-year projections. We transferred the mortgage on the property, so our share of interest expense will be $1 million lower, we've also reduced our net interest expense assumptions due to higher cash balances from asset sales, lower interest rates, the impact of our bond deal, as well as changes in the timing of our development funding. We expect net interest expense for the year of $398 million to $410 million, a reduction of $8 million at the midpoint from our guidance last quarter. And we have modestly increased our fee income projections by $2 million at the midpoint, coming from higher projected construction management fees. So overall, we are increasing our 2018 guidance for funds from operations by $0.06 per share at the midpoint, to a new range of $7.02 to $7.08 per share. The increase consists of $0.02 per share from higher projected portfolio NOI, $0.05 per share from lower net interest expense, and $0.01 per share from higher fee revenue, offset by the loss of $0.02 per share in NOI from the sale of 540 Madison Avenue. In summary, we are projecting an industry-leading 12% FFO growth in 2019 at the midpoint of our guidance range. We are executing effectively in the leasing markets, which is driving strong organic growth through increases in occupancy and locking in higher rents as leases roll. Given our higher starting occupancy revenue level, our 2020 organic growth will likely not match the roughly 6.4% same-property NOI growth and 200 basis points of occupancy gain that we project this year. However, the portfolio continues to offer opportunities for 2020 growth by capturing incremental occupancy as well as a positive mark-to-market on near-term expiring leases. We also have a substantial pipeline of developments that are now 81% pre-leased and will contribute to our growth in 2020 and for multiple years beyond. That completes our formal remarks. Operator, can you open the line for questions?

Thanks. Owen, you talked about how the macro environment is slowing and that asset pricing is still very strong. So I guess I'm wondering how that changes your thinking on capital allocation. Does this mean we'll see more JV capital for new developments you start, you did mention San Jose is a candidate there or maybe and how are you thinking about sales of buildings or JV stakes in the core portfolio?

Yeah. So let me break that question down talk about sales and then talk about new investments. I think on sales, we're going to continue to sell non-core assets as we've done successfully, and I would say, fairly aggressively over the last few years, and that's been always in the kind of a $100 to $300 million range. Our core assets are not being sold but from time to time something opportunistic presents itself as it did with 540 Madison, and we certainly want to take advantage of that. On the new investments, I'm not sure there's going to be a big change; we will continue to not be purchasing stabilized assets in our marketplace. I give these examples every quarter, and I can pick a deal or two out in almost every one of our cities that trades at a 4% cap rate, and that's dilutive to what we're trying to do, and those kinds of opportunities don't have the same growth that our development opportunities do. So we're not focused on buying core assets. But relative to that interest rate environment and relative to that cap rate environment, we continue to add new developments through our pipeline that are approaching or at 7% cash yields, which we think are very accretive to shareholders, both from a NOI perspective and NAV perspective. And then lastly, on your question about JV partners, we are spending more time in the private capital markets, we are meeting new partners that we've entered into a number of joint ventures. Recently we talked about Platform 16. That decision is really more about our willing — our ability to fund. As we mentioned, we don't want to issue our equity given our share price. We don't want to increase our leverage, given where we are with the economy. So if our investment pipeline exceeds our financial resources given those constraints, that's when the financial private equity partners get introduced, and that's been our logic.

All right, that's helpful. I just — one other question is, you've mentioned how 2020 is — there are some items in 2020 that create some slowing in same-store growth, move-outs, GM, some other buildings that are known. But I guess, can you remind us about how you can what the benefit could be to next year, if you've got some of the vacancy leased this year at 399 Park and GM, how that could actually then be a benefit to 2020?

Sure. So, this is Doug. The reality of the situation, just to be perfectly blunt, is that the space at 399 is in a sale condition. And so, if we do at least today in all likelihood there won't be a build-out for a significant period of time in 2020, but net — the space that is available today and the space that is rolling over in the General Motors Building would have a positive contribution of about $27 million and we currently have $13 million from that pool of assets today. So you can divide by 12 months and figure out how you want to think about that. And then the other major exposure we have is we have, I said this before, in excess of 0.5 million square feet of known expirations in our restaurant portfolio in the beginning of 2020 and the average rent is about $50 a square foot. So you can put a number of about $25 million on that. So there is a higher probability of us getting some of that back sooner because we have tenants that are in some of that space that are expanding and we have some — we have space that is currently built out and ready for occupancy, and therefore we can recognize revenue earlier. So, those are the sort of the two big building blocks. One more thing, and the other thing which is important is that we have cash revenue at 1590 East 53rd Street, and because that's when our leases they have to start, but they have been delayed in their planning and their construction documents for the 195,000 square feet, and you'll notice in our supplemental we pushed out the stabilization date because we just were a little unsure as to right now as to when they're going to complete their build-out of that space, and so that will impact our 2020 numbers.

Okay. I guess, just one follow-up here. There is just any commentary on how the leasing is going, discussions are going for that remaining space at 399 and GM that you're trying to get done?

John, do you want to cover that?

Yeah. We have a good action on trade 399. We've got some proposals and some people going back and forth, some of it for 4.5 or a 4. So I think we'll make progress on that this year. GM we have a number of prospects for this space, some of them are looking hard at the market and there is a little more supply in the market on the high end than there has been in the past. Thanks everyone.

Hey, good morning everyone. Maybe Owen or Doug on 3 Hudson remind us, given the amount of demand in a number of large tenants looking for space. What level of pre-leasing do you have to be at to get the project started or is that high level of demand giving you the confidence to go more spec on that better?

Manny, we've answered this question in the past. Let me talk a little bit about the building, and then I'll talk about the pre-leasing. So as Doug described, there is a lot of activity, a very positive activity in the marketplace, both from new requirements from tech companies but also more traditional companies relocating. We've been very encouraged by the level of activity that we're seeing and we've been very encouraged by how the market has been receiving our offering. It's an exciting building and again, it's being well received. We won't start the property without a very significant pre-lease. We are not going to state a specific number.

Okay. And then Mike, the expenses being delayed, are those the same expenses that were delayed last quarter and how do we think about how they're actually going to come in for the rest of the year?

I don't necessarily think it was the same expenses that were delayed last quarter, but it is typically this R&M item that our property management teams have. I think they're just conservatively projecting these things. And then I think the time of year when most of the stuff gets done is kind of later in the year, third quarter is a very big period for that. So I would think that the third quarter expenses are seasonally higher anyway. And I think that much of this will be pushed into the third quarter. However, I think that some of it may drip also into the fourth quarter, but I do expect it all to get done in 2019. So I don't expect to see kind of savings associated with some of the stuff just dropping off.

Great. And one final one from me. The LA second generation cash rent spreads were negative I realize it's on a small amount of space. Is there something specific with that space or is there something broader going on in sort of your submarkets there?

There is nothing broader going on. The reason I didn't talk about LA this quarter mainly it was because all we're doing right now is the large renewal discussions and we have very little available space and interestingly I think the one thing about the Santa Monica Business Park, which by the way is where all that space came from, is that we're actually seeing lower transaction costs than we anticipated because we're talking about basically five to seven-year renewals, which probably is the right thing for us given the relative issues associated with the ground lease and the repositioning of the property.

Thank you. Actually just sticking with Santa Monica, there was a discussion on another call about Snap downsizing their New York presence and I'm wondering if there's a similar situation in your portfolio.

Our interaction with Snap at the Santa Monica Business Park is that they're going to sequentially through all of their must-take space and they're building it out and occupying it.

Okay. GM Building retail, I think the last official update you provided a couple of calls ago is that Apple moving in the first half of this year, has that delay impacted cash NOI at all and if you could just provide an update?

No, it hasn't impacted our cash NOI. Apple is at the very late stages of opening the store, and I think we're excited about what that's going to do not only for the retail, but for the environment on the corner of 59th Street and 5th Avenue, which has been a rather laborious construction site for the past couple of years, and we're excited to have it all come to a conclusion.

My final question is whether the delay has impacted cash NOI at all and if you could provide an update.

This is John. I would just say the store is spectacular when it opened you all have to come to see it. It's going to be amazing.

And just on that, when is Under Armour, when you expect Under Armour to open?

Right now we expect Under Armour to take possession of the space sometime in early 2020 and we expect that they'll be working on their plans and hopefully opening before the end of the year. But we — again, we're not aware specifically of what their timing is and how that vis-à-vis deals with their product launches and their store openings and their seasonal issues. So we just don't know.

And then final one and that shall make two, I think last quarter you mentioned interest is picking up. It doesn't sound like you're as bullish on leasing prospects this quarter, I don't know if that's accurate, but can you provide an update? And also what is the impact to 2020 FFO would be at that asset?

So I'll start, and I will let John comment. I would say that the reason that you're not hearing me be more bullish than I was last quarter is because the tenants that we're talking to last quarter are the same times we're talking to this quarter; there aren't any additional ones. And so things are just sort of being drawn out. Our assumptions for the revenue pickup for that building assume a pretty prolonged lease-up, which is why we extended out the stabilization last quarter to sometime in 2021.

And obviously the space has to be built out, so recognize revenue on those future tenants until they build out their space. So we work is building out their space now so we will get some incremental benefit in 2020 from that space, but other space would need to be leased and built out. So Doug says we've kind of elongated the revenue projections for some of that.

Understood. Thank you.

I think, sorry, go ahead.

Okay. I think that concludes our remarks and concludes all the questions. Thank you very much for your attention and interest in Boston Properties, have a good day.