Boston Properties Inc (BXP) — Q3 2019 Earnings Call Transcript

Thank you. Good morning and welcome to Boston Properties third 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, we'd like to inform you that certain statements made during this conference call which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions 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 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. Q3 marked another strong quarter for Boston Properties. Macro market trends of job growth, urbanization, and office usage remain favorable. Demand in our major markets continues to be strong and we continue to execute successfully on our revenue and earnings growth strategy. In terms of our key financial highlights for the quarter, we continue to outperform our sector with strong FFO growth in 2019. For the third quarter, our FFO per share was $0.04 above our guidance at the midpoint when adjusting for the refinancing transaction completed in the quarter and was $0.02 above market consensus. We also raised our full year 2019 FFO per share guidance by $0.10 at the midpoint net of the refinancing transaction. We are now projecting 11% FFO growth year-over-year in 2019 even after accounting for the refinancing, which is one of our strongest FFO growth years in recent history. Looking ahead to 2020, we are demonstrating the sustainability of our positive growth momentum with initial guidance of 8% FFO per share growth at the midpoint, again likely well above the peer average. In terms of operational highlights, we had a busy and productive third quarter. We completed 2 million feet of leasing which is well above our long-term quarterly average for the period bringing our total leasing to 5.9 million square feet year-to-date. We were once again recognized for our sustainability performance and leadership by earning an 8th consecutive Green Star recognition from the GRESB assessment and ranking among the top 4% of almost 1000 worldwide participants. We acquired 880 and 890 Winter Street, two office buildings in suburban Waltham. We entered into a joint venture agreement with Canada Pension Plan Investment Board for a 45% interest in our Platform 16 development in San Jose. And we completed $700 million and 10-year unsecured refinancing on attractive terms. Now moving to business conditions, our leasing activity remains healthy and is evidenced by the well above-average leasing volumes we have been reporting throughout 2019. That being said, most of the reported economic data we followed such as U.S. GDP growth, job creation and unemployment indicate healthy but moderating conditions. Economic growth outside the U.S. looks less favorable with China reporting its weakest numbers in three decades and Germany possibly already in recession. While geopolitical issues such as the U.S.-China trade war do not directly impact our business, these risks are clearly not constructive for the broader economy. As a result, the U.S. Federal Reserve and most central banks in the developed world have an accommodative posture. The significant drop in yield on long-term rates has held in the U.S. this past quarter and long-term rates actually remain negative in many developed economies such as Japan and Germany. In terms of impacts on Boston Properties, we do not anticipate a recession in the near term. The recession risks continue to rise despite slower economic growth, and lower interest rates provide a tailwind for financing costs and real estate valuations. We maintain a hedged capital allocation posture in that we continue to invest in new projects driven by tech and life science demand. But at the same time, we are protecting the downside by keeping leverage low, pre-leasing most of our developments and keeping our buildings full with credit-worthy tenants and increasingly long-term leases. The private real estate capital market for assets in our core markets remains healthy. Those significant office transaction volumes in the U.S. ended the third quarter down 18% from last quarter and down 7% from a year ago. We are still seeing reasonably strong investment demand in most of our markets. The private capital market for office product is becoming more discerning with a preference for tech-oriented market locations and minimal lease exposure for assets located in other markets. Yet again, there were numerous significant asset transactions in our markets this past quarter. Starting in Boston, 100 Summer Street in the Financial District sold for $806 million, $722 a foot and a 4.2% cap rate. This 1.1 million square foot office property is 87% leased and sold to a real estate advisory firm. In West LA, 5900 Wilshire Boulevard is under agreement to sell for $315 million, nearly $700 a square foot and a 4.3% cap rate. This 450,000 square foot office building is 86% leased and will be sold to a real estate advisory firm. In San Francisco, a 50% interest in 525 Market Street in the Financial District is under agreement to sell at a gross valuation of $1.2 billion or nearly $1200 a square foot and a 3.5% cap rate. This 1 million square foot office building is 97% leased and will be sold to a real estate investment manager. And finally, in Washington DC, 625 High Street in the Northwest Quarter sold for $259, $640 a square foot and a 3.5% cap rate. This 405,000 square foot building is 65% leased and sold to a real estate advisory firm. So to summarize, our completed and expected capital activities for 2019, we sold in whole or part five assets for $398 million in gross proceeds versus our goal of $300 million in sales. Several small transactions remained under agreement and could close by year-end. We completed three acquisitions so far for $336 million. We launched three new developments comprising a million square feet that are 65% pre-leased with an expected cost of $822 million and projected initial cash yields upon delivery of approximately 7.7%. We have delivered or expect to deliver into service by year-end two projects comprising 675,000 feet costing $508 million at forecast deals. Development continues to be our primary strategy for creating value for shareholders and our pipeline of current and future developments remains robust. This quarter we commenced our 2100 Pennsylvania Avenue development property in Washington DC. This office building located near our 2200 Pennsylvania Avenue asset will comprise 480,000 square feet, 61% pre-leased to Wilmer Hale and has an expected total investment of $356 million. We also commenced our 200 West Street redevelopment in Waltham, Mass. We are converting 126,000 square feet of this suburban office property to life science laboratory space and anticipate investing $48 million into the redevelopment project at double-digit incremental cash yield. With these additions, our current development pipeline stands at 14 office and residential developments and redevelopment comprising 6.3 million aggregate square feet and $3.6 billion of total investment for our share. The commercial component of this portfolio is 78% pre-leased and aggregate projected cash yields are approximately 7%. Most of the development pipeline is well underway and we have $1.6 billion of equity capital remaining to fund. Given selective 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 exceeding our leverage targets. 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 enhance our returns. To that end, this quarter we entered into a joint venture agreement with CPPIB to sell a 45% interest in our Platform 16 future development project. This anticipated 1.1 million square foot Class A urban office campus in downtown San Jose is adjacent to Google's planned 8 million square foot transit village and the Diridon station transit hub. With this joint venture, we were able to extend the use of our equity capital, diversify our risk and enhance our return to shareholders through property level fees and a carried interest arrangement. We are very pleased and honored to enter into this second significant joint venture with CPPIB, a leading global institutional investor. Lastly, this quarter, Boston Properties acquired 880 and 890 Winter Street in Waltham for $106 million or $270 a square foot. This two-building 392,000 square foot office campus, which is currently 82% leased, is located adjacent to our 1 million square foot Bay Colony property. With this acquisition, we increased our presence in Waltham to around 4 million square feet, further increasing our position as the largest owner and manager of Class A office space in this vibrant market. We plan to invest approximately $20 million of capital to refresh the building and upon lease-up and rolling existing rents to market expect to receive in excess of a 7% unleveraged cash return within five years. This is a good example of our acquisition strategy where we use our market presence and knowledge and real estate skills to create value. Before I conclude, as a major office market participant, I wanted to provide Boston Properties' perspective on WeWork and Co-Working given the intense media attention on the situation. We believe the shared workspace business, which provides flexible term turnkey space at a premium price, is an innovation that has aggregated user demand and has been a positive for the office market and will remain an important procurement option for certain occupier requirements. To put all this in perspective, shared workspace represents only 1.6% of office space in the U.S. and as high as 3.6% in New York and San Francisco. Its share of gross leasing activity and net absorption has been materially higher. Though we believe the shared workspace market has growth potential, we anticipate a pause given recent capital raising challenges in the industry. WeWork has built an important market position in the industry and has the potential for further growth assuming it executes well with the proceeds from its recent recapitalization. Regarding the potential impact on Boston Properties, the revenue we received from WeWork from five leases in Boston Properties' wholly and partially owned assets is about 1% of our total revenue. And all WeWork facilities in our portfolio that have been open for more than a year are substantially full. And lastly, we also have relationships with other shared workspace operators and our own offering called FLEX by BXP. So, to summarize BXP's performance in the third quarter, a year ago we told you we were at the inflection point of strong and sustainable growth. We've delivered on that commitment and are on track to exceed the growth targets we outlined for 2019 a year ago. We're also delighted with our forecast trajectory for 2020 with estimated FFO per share growth of 8% at the midpoint. Once again, we are delivering that growth through a balance of solid same property growth, pre-lease development coming into service and smart allocation of capital and expense control. We continue to outperform our sector along most key metrics: greatest scale, strongest credit rating, strongest FFO per share growth, greater geographic diversity across both West Coast and East Coast markets, a newer and higher quality portfolio of assets that we've either recently developed or modernized and an unwavering focus on customer satisfaction making BXP the developer and landlord of choice. Let me turn the call over to Doug for more details.

Thanks, Owen. Good morning, everyone. It's that time of year when we present our annual guidance, which you saw in our press release last night. Today, I will focus on the opportunities in our portfolio related to that guidance. Mike will provide a range for our same-store growth in 2020, and you can view my remarks as the context for that range. Over the past few years, we have significantly increased forward leasing, resulting in a very stable revenue stream and clear expectations for outcomes going forward, particularly for 2020. Let’s start with the Bay Area. In San Francisco, the vacancy rate is low, and availability is in the mid single digits. Leasing activity has slowed in 2019 due to a lack of available space. The timeline for the First and Mission projects, the only speculative building under construction, remains uncertain, likely not completing before 2023. A recent CBRE report highlighted that available large blocks over 30,000 square feet have asking rents averaging over $100 gross. In October, Prop M received its annual allocation of 875,000 square feet, bringing total availability to about 900,000 square feet. We plan to seek approval from the Planning Commission in December for a new project of 505,000 square feet and a partial allocation for another 255,000 square feet. We believe construction could start as early as Q4 2020, with occupancy projected by late 2022. Our San Francisco CBD portfolio's occupancy is currently at 96.8%, with commitments at 98.7%. So far in 2019, we have completed 490,000 square feet of leasing, seeing an average gross rent increase of about 34%. In 2020, we'll have five full floor expirations across our 5.6 million square foot CBD portfolio. One floor is currently under lease, we are taking another for our office expansion, and one is set aside for small enterprise users. This leaves one build-out floor with asking rents over $80 triple net and another at Easy 3. We're also managing one multi-floor expiration before the end of 2021, with that tenant requesting a renewal proposal. In Silicon Valley, we have numerous development opportunities. The market is experiencing robust growth, led by companies like Google, which purchased a substantial campus from Verizon. Other companies, including Uber, continue expanding, with significant interest from businesses looking for large blocks of space in the area. At Platform 16 in San Jose, we're actively presenting to tenants seeking large spaces adjacent to Caltrans. In our Mountain View portfolio, we are seeing strong demand with upcoming availability of 150,000 square feet. Turning to the East Coast, particularly Manhattan, demand remains strong despite changing market conditions. There are multiple technology tenants in discussions for substantial space requirements, and several other sectors, including law and media, are also considering significant relocations. Although there's existing supply, much of it requires renovation. This quarter, we renewed our lease at 599 Lex with our anchor law firm for a significant 20-year term. We've now extended all major leases above 140,000 square feet due to expire through 2024. At 399 Park Avenue and 601 Lex, we have successfully re-leased spaces entirely. Our New York portfolio, focused mainly at 399 Park Avenue and the General Motors building, is showing active leasing negotiations, with the hope that vacant spaces will yield revenue by the end of 2020. We have additional activities at 159 East 53rd Street, where we will start collecting rent soon. In DC, particularly Northern Virginia, which contributes almost 10% to our NOI, there are substantial opportunities to improve occupancy. Many tech companies aim to expand in this region, especially following major contracts like the JEDI cloud computing deal, creating significant office demand. In Boston, market conditions are very strong, with low availability in the CBD and more than 20 active requirements for space. Our portfolio is nearly fully leased, but we are seeing early renewals and expansions with notable rent increases. One of our new developments in Cambridge is opening soon and is fully leased. Overall, tenant demand for quality workspaces remains high, and there’s a significant competitive focus on talent acquisition among our clients. We anticipate strong market performance in San Francisco and Boston, alongside incremental revenue opportunities in Mountain View and Waltham. Our negotiations at 399 Park Avenue and the General Motors building are poised to enhance our revenue potential, while we expect to address the vacancy challenges in Reston. Michael will now translate our operational activity into the 2020 earnings guidance.

Great. Thanks Doug. Hello everybody. So, last night we released our 2019 and 2020 FFO guidance. We expect 2019 FFO growth of 11% and our initial guidance for 2020 FFO growth is 8% at the midpoint of our range. Our growth is being driven by a combination of strong fundamental operating performance in our portfolio and delivering accretive new developments. Before I jump into the details, I want to touch on our recent financing activities because we were quite busy this quarter. First, we closed a $400 million construction loan to fund the remaining costs to complete our 100 Causeway Office Tower at the Hub on Causeway development in Boston. The financing is attractively priced at LIBOR plus 150 basis points pointing to the strength of the project that is now 87% pre-leased and will start to be delivered in the second quarter of 2021. Second, we issued $700 million of new 10-year unsecured bonds at a 2.9% coupon. We used the proceeds to early redeem a $700 million existing bond that had a 5.6% interest rate, which was due to expire in November of 2020. As a result of this, we incurred a charge on debt extinguishment of $28 million, which is the redemption premium to prepay the old bonds. The charge totaling $0.16 per share is reflected in our FFO results for the third quarter and our guidance for the full year 2019. Although we don't expect interest rates to increase in the near-term, credit spreads are potentially more volatile and are also near all-time lows. We view this as an opportunistic trade and it significantly reduced our borrowing costs on $700 million by 270 basis points. The impact on our interest expense going forward is a reduction of approximately $18 million per year or $0.11 per share. Turning to our earnings results, we had a strong third quarter with our revenues up 8% and our FFO up 10% over last year after adjusting for the debt extinguishment charge. We had strong same property performance as well with our share of same property NOI up 7.1% and our share of same property NOI on a cash basis up 5.2% over last year. As we've described on prior calls, our same property NOI growth is moderating in the back half of 2019 as we track against higher comps. We expect our cash same property performance will be flat to slightly negative in the fourth quarter of 2019. This is due to the recently executed 20-year lease extension with a large tenant in New York City that included free rent at the end of 2019. We expect our cash same property performance to turn back to positive in the first quarter of 2020 and for all of 2020. For the third quarter, we reported funds from operations of $1.64 per share that was $0.04 per share or approximately $7 million higher than the midpoint of our updated guidance. The increases from $0.02 per share came from higher than projected portfolio NOI and $0.02 per share better than projected management and service fee income. The outperformance in the portfolio came primarily from earlier than projected leasing at higher rents and lower operating expenses that we expect will hit in the fourth quarter. For fee income, we earned leasing commissions on the new leasing this quarter at our Hub on Causeway developments and higher service fee income. For the full year 2019, we're updating our FFO guidance range to $6.98 to $7 per share. This equates to an increase of $0.10 per share at the midpoint versus our recent guidance. The increases from growth in our same property NOI that exceeded our assumptions by 25 basis points adding $0.02 per share; improvement in the contribution of our non-same properties including the acquisition of 880 and 890 Winter Street in Waltham of $0.02 per share; and higher fee income of $0.02 per share. We also project lower net interest expense of $0.04 per share primarily from the benefit of our lower borrowing rates. We provided detailed initial guidance for 2020 FFO last night in our supplemental report that's on our website. As we look ahead to 2020, we expect to continue our strong FFO growth trend. Our growth will be driven by higher NOI from our same property portfolio for both occupancy gains and higher rents, as well as the delivery of new developments. In the in-service portfolio, we anticipate ending this year at an occupancy rate of 92.5%. For 2020, we expect to increase occupancy by 100 basis points ending the year around 93.5%. In the Boston market, our urban portfolio in Boston and Cambridge is highly occupied, so our focus is on early renewals where we expect a roll in-place rents up to significantly higher market rents. In the suburban Boston portfolio, we lost 170,000 square feet of occupancy from expiring leases this quarter. As Doug described, the activity in Waltham is robust and we anticipate gaining occupancy back in 2020. In New York City, we have approximately 570,000 square feet of vacant space at the GM Building, 399 Park Avenue and Times Square Tower. 360,000 square feet of this or more than 60% has signed leases that will commence by mid-2020. We have good leasing activity on the remaining space and expect that a portion will be leased with revenue recognition by the end of 2020. Overall, we expect occupancy to be higher next year in the New York City portfolio. In Los Angeles, we're currently 97% leased with below market rents. We have the opportunity to increase our revenue through completing renewals at higher rents on most of the approximately 750,000 square feet of leases that expire at the end of 2020 through 2021. As Doug detailed, we're also highly occupied in San Francisco though we continue to have the opportunity to gain revenue on our rollover that has a strong positive mark-to-market in both the City and in Mountain View. Next year's earnings will also benefit from the full year of stabilized income at Salesforce Tower that reached 99% occupancy this quarter. Doug also described in detail the rollover exposure that we have in Reston where we will have temporary downtime impacting both our occupancy and our revenues in 2020. In the district, the majority of our rollover exposure is behind us having occurred in 2019 and our 2020 exposure is limited. Our guidance assumes strong growth in same property NOI and cash same property NOI of 3% to 4.75% in 2020 led by revenue growth in Boston and San Francisco. We are assuming non-cash rents to be $100 million to $130 million with the vast majority being free rent that will convert to cash rent. Fair value rent now contributes only $9 million of non-cash rent, that's a decrease from approximately $10 million from 2019. So our 2020 same property NOI growth would have been 50 basis points higher, if you exclude the negative impact of the burn-off of this non-cash fair value rent. We will also see growth in 2020 from the delivery of several key development properties and the acquisition this quarter of 880 and 890 Winter Street. Our assumption of incremental growth in NOI from development and acquisitions is $60 million to $70 million in 2020. The most significant of these is our 475,000 square foot 145 Broadway development in Cambridge and other key development deliveries contributing to our growth includes 1750 President Street in Reston, 20 City Point in Waltham and the Podium Office and retail phases as well as the 440 unit residential phase of the Hub on Causeway in Boston. Our 2019 and early 2020 deliveries totaled 2.3 million square feet and $1.1 billion of new investment. We expect termination income in 2020 to decline by approximately $10 million or $0.06 per share from 2019. This primarily relates to several lease terminations in 2019 instigated by us to accommodate new or relocating clients that we assume will not recur. We also expect our management and services fee income to decline in 2020. We're completing several large fee development projects. These include Dock 72, the first two phases of the Hub on Causeway and the development of the TSA Headquarters project in Springfield, Virginia that we are managing for a third-party. Our assumption for 2020 fee income is $25 million to $32 million and represents a decline of $10 million or $0.06 per share at the midpoint from 2019. Our assumption for net interest expenses in 2020 is $410 million to $430 million. In addition, we expect $9 million of incremental interest expense associated with our unconsolidated joint ventures that is contained in the income from joint ventures line of our income statement. In aggregate, this equates to a modest $3 million increase in interest expense for 2020 at the midpoint. The interest expense savings we've created by reducing our borrowing costs with our recent debt refinancing is offset by incremental interest expense from our $850 million June 2019 notes offering, higher expected line of credit usage from funding development costs and the cessation of capitalized interest from delivering developments. So to summarize, we are initiating our 2020 FFO guidance with a range of $7.45 to $7.65 per share. At the midpoint, this represents an increase of $0.56 per share over the midpoint of our 2019 guidance. The increase is comprised of $0.38 per share of NOI growth in our same property portfolio and $0.37 per share from development deliveries and acquisitions. That is partially offset by a $0.12 per share decline in termination and management service fee income, $0.02 per share of higher net interest expense, a $0.03 per share increase in G&A expense and $0.02 per share of lost income from asset sales. So in 2019, we're anticipating a sector-leading 11% FFO growth and we're following it up with guidance for 8% FFO growth in 2020 using the midpoint of our range another strong growth year. We continue to demonstrate terrific growth both internally through increased pricing and occupancy in our same property portfolio and externally by delivering substantial new development investments that are primarily pre-leased and generating very attractive investment returns. And looking further ahead, we have another $2.4 billion of development scheduled to come online between late 2020 and 2022. The commercial space in these projects is 83% pre-leased to a roster of high-quality companies. They include the new Marriott headquarters in Bethesda, a new building in Cambridge leased to Google, 100 Causeway in Boston leased to Verizon, 159 East 53rd Street in New York City leased to NYU, Reston Gateway leased to Fannie Mae and 2100 Pennsylvania Avenue anchored by Wilmer Hale. These developments and others that we are working to add to the pipeline will contribute meaningfully to our continuing growth over the next several years. That completes our formal remarks. Operator, can you open up the line for questions.

Thanks. I guess first off, Mike, in terms of the guidance for next year, can you quantify what is the negative impact to same-store NOI growth next year from GM Reston and any other kind of known move outs? And then, what are some of the other major move ins that are benefiting next year?

So, we talked on our last call about the rest and move outs, which I think was $17 million approximately and GM was about the same. We were recovering a little bit of the GM because we've actually been successful in renewing a couple of tenants. So, as Doug pointed out so eloquently we've had good activity in GM and we've done better there than we expected. Other than that, we're seeing strong activity in Boston; we have a lot of early renewals that we're doing at 200 Clarendon Street and at the Prudential Center; at 100 Fed, we'll get a full year of the renewal that we did with the Bank of America; and Cambridge continues to be an opportunity although there's no vacancy. The little bit of rollover we have is going to have a big roll up and we'll continue to work on some early renewal activity. Embarcadero Center is significant. We've been building that for a couple of years. We had a big four-floor tenant expiring in the middle of 2020; all of that space is basically leased. And we'll commence with big roll ups when it becomes available to us. And in New York City, we're also growing year-over-year. So, our NOI from that portfolio will grow, and the GM building is growing; all of the retail we expect to be leased and generating revenue in 2020 and as Doug described we've had some success in the office network.

I just sort of say the following which is that so the low end of our range assumes everything that we've got going that and all the things we've already done in the high-end of our range assumes that we have a little bit more success with some of the opportunities in front of us in the portfolio vacancy that I described.

Okay. That's helpful thanks. And then, just second question is on Platform 16. Can you give us a feel for when that project may start and how should we think about the cost expected yield? And I'm assuming you're not going to go spec, but there's not that much spec construction in that market right now, feel that there's a lot of demand. And we heard from brokers in the market, you're targeting something like $65, $70 dollar net rent. So, I mean how should we just think about the opportunity here and when it's going to begin? Thanks.

So, it's Owen. Just to talk a little bit about the marketplace, I think you're right, we are ahead of the other projects that are seeking entitlement and finalizing development plans. Google just made some progress on their entitlement for the project that they're building next to the Diridon Station, which is a positive. Much of the development that goes on in this area is not pre-leased. We are actively speaking with potential customers now and hope to acquire an anchor tenant for this project. We are incrementally investing in it today. We are clearing the site and preparing drawings; I would anticipate that this project would commence next year and we will leg into it based on the physical requirements of the site and market conditions. The forecast yields for the project based on our expected costs and the expected rents are in excess of 7%.

This is Doug. You should think about this as a phase project, right? So, there are three buildings to be built here. This is just under 500,000 square feet. And so, if we were to do something, we do something with one of the buildings, not all three of the buildings at the same time.

Hey. Good morning everyone. You talked about bringing in additional private equity sources especially in your JV developments. Can you just share with us your thoughts on developing within the JV rather than selling stabilized assets especially in more stabilized rather than growth markets, instead of giving up maybe some of the development upside?

So, Manny, it's Owen. It's a balance, as I mentioned, we are bringing in joint venture partners because of the robust pipeline of opportunities that we have in front of us. We are not intending to issue equity at our current share price. And we certainly don't want to exceed our leverage target. So that's the governor. We look perspective to what our leverage levels are and the capital needs from our development pipeline, then we make a decision as to whether we want to or need to bring in a JV partner on a specific deal. I would say also in the case of Platform 16, it's also a REIT mitigation decision as well because it's a site and it's not pre-leased. And there are definitely rewards from the investment, but there are also risks, and so we are diversifying our risks as well. In terms of asset sales, we continue to sell assets; I described nearly $400 million of sales that we conducted this year that is material. We will keep doing that. But, as I described before, selling major assets for us is an inefficient way of raising capital for the developments because most of our major assets have a significant embedded gain. And with the sale comes a requirement to make a special dividend, so we can't retain that capital to invest in that development and it brings down our forecast FFO growth. So that's how we think it. Mike or Doug, anything you guys want to add?

Doug, you mentioned the wildcard show lease that affects the statistics. Is there a way you could provide us with a summary of any significant leases from the past or those that are starting to impact earnings or other statistics now?

We can certainly try to provide some information. Our hesitation is that it's inappropriate for us to detail the economics of a specific tenant because they vary significantly in timing. Providing explicit information would not be appropriate. I can share that there was a notable increase in the gross rent with that tenant, along with a tenant improvement allowance. This includes the value of free rent, which affects the capital numbers, but they did not receive any free rent. These are the kinds of factors involved in the transactions, making it harder to accurately describe the capital intensity of leases across an office portfolio, as much of this is a result of negotiation. It’s true that we are in capital-intensive businesses regarding transaction costs. Sometimes, we exchange free rent for increased short-term revenue in order to secure additional capital. I'm not sure we can come up with a different approach, but if you have specific questions, we are happy to provide as much clarity as we can.

Great. And I don't want Mike to feel left out, so I've got one for him too. You talked about the same-store decline in 4Q '19. Can you quantify how much of a lift that then provides in 2020, if you were just to isolate that event?

I believe the first quarter of 2020 will show strong growth in same-store sales. However, in the second and third quarters, we will see a slowdown due to the rollouts in Reston. By the end of the year, we expect growth to pick up again. That's how I would answer your question.

Thank you. I just wanted to follow-up Mike on that fourth quarter swing into negative territory. You mentioned that was partially driven by free rent on a major lease in New York. When does that free rent period burn off next year?

It will be burned off before next year. December of 2019 was the free rent period.

So, I'll answer the first two questions, and I'll let Owen answer the third question. So, the leasing activity in New York City on buildings that have recapitalized or repositioned themselves is very strong. And there is significant amounts of demand for buildings both on Sixth Avenue or on Park Avenue or in the Plaza District that are not new construction that have taken the thought and energy of how to recapitalize and reposition those assets. And for us, that's both 399 Park Avenue, 601 Lexington Avenue, and the General Motors Building. With specifically regards to the GM building, I think I was pretty explicit that we've got a lot of activity going on. That's six months ago did not exist. So the activity in that building, which, while you may describe it as an older building, in terms of when it was built, has had a dramatic amount of new capital put into it. And so, and if you go there, it's a pretty spectacular entry experience now after a really tough sell for the last two or three years because of the construction. And we have a full floor lease out on the top of the building and we have two tenants that are going to renew two other floors in 2020. And we have other good activity in the building. So, we feel on a relative basis a lot better today than we did six months ago.

And then to answer your question on the capital market for New York, I think it's bifurcated. I think the market has softened up a little bit in New York for specific classes of assets. So, let me explain. So, we just sold 540 Madison in Midtown last quarter and had great execution on that in terms of cap rate. That as I mentioned last quarter was a smaller asset. It was just over $300 million. So I think for what I'd call bite size single assets in New York, I think there's still a very strong market as we demonstrated last quarter. I think the market is also very robust for buildings that are in tech-oriented areas of New York and for newer buildings. And I think the market has softened up a bit for more commodity-like buildings and certainly buildings including buildings that have some significant near-term rollover.

And last question, if I may. On South San Francisco, it's a very tight market. There's increased spillover of tech tenants moving into that submarket. Is there anything that you can do with 601 and 611 Gateway to capture some of this demand?

The answer is yes. We believe there are actions we can take. We are carefully considering how those buildings could be repositioned to support non-traditional office-based lab use. We are currently working on this and will have more information to share in the upcoming quarters.

This is Doug. A couple of things to note. First, there is no significant block space available in San Francisco. Therefore, anyone looking to expand significantly in the city will face considerable challenges until around 2020 when a new building is expected to be completed. We saw Pinterest and Salesforce make commitments at the time on sites that lacked entitlement, and one of these sites still remains unentitled. The workforce plays a critical role as well. As it becomes increasingly difficult to navigate Silicon Valley, some major companies headquartered there are considering establishing locations to attract additional talent that may not be in the city. This likely explains Uber's move, as well as two or three other companies currently seeking more space in Silicon Valley. Proximity to public transit is essential, and being close to Caltrain, especially near the bullet stops, significantly benefits companies. Regarding South San Francisco, Stripe's relocation reflects a trend among companies in the payments sector. For instance, Square has moved to Oakland, and Visa has indicated that it will not expand in San Francisco due to a gross receipts tax that is not conducive to businesses in payment transactions. As a result, it seems likely that these types of companies will grow less within the city and more in neighboring areas. The reality is that there are very few opportunities within the city for significant growth, which is naturally leading tenants to seek alternatives, especially those close to public transportation.

Great. Thank you. I was hoping Ray or the team can talk more about the comments on the JEDI project and what you think that might mean for office demand in Northern Virginia. And actually office end data center and maybe if you could talk about land availability and given how that's been gobbled up by the data center sector?

Hey Jamie, it's Ray. Obviously, JEDI is great news for the entire DC region, most specifically toward Virginia. The vast majority of cloud talent is in the Dulles corridor. And with the exposure of both data centers and the headquarters for major cyber-focused government agencies investing in Herndon's, all the three-letter agencies and 80% of the internet traffic going through Loudon County. Clearly, JEDI will be focusing on Northern Virginia. And as the dominant landlord in that corridor, we expect to get a lot of demand and owning the best office product, we expect to be the recipient of a lot of that demand. But, we're not in a position to make any comments on specific deals or requests for space at this point in time. I can just say the general demand from the tech community in the Dulles corridor and specifically Reston town center has never been stronger. And we talk about the vacancy in Reston. It's important to note that the large sector of that vacancy is a relocation of Leidos out of one building, doubling in size to the new building in 1750. So, the biggest issue there is not bad news, it's great news that we're meeting the demand of our existing tenants. But, I guess the JEDI to DC is almost as important as the match natural wind tonight. So, we'll be equally hopeful in both.

Is there any thought on how long it takes to actually translate into real demand?

I think the demand is going to be almost immediate.

Thanks. Good morning. I guess I wonder, Doug, could you maybe just talk about the sort of divergence we're seeing kind of in financial services, the announcements of JPMorgan recently potentially moving kind of jobs out versus kind of big tech coming into the city and how you sort of think that dynamic kind of plays out over the next couple of years and its impact on overall net absorption.

So, I'll make a general comment and I'll let Owen describe what's going on in the city from the phase perspective. So in general, Steve, there has not been a lot of what you would refer to as job growth in the financial services sector for quite some time. There has been job growth in the financial services technology business. So, the Marcus that the new bank's that Goldman Sachs is operating is being created. Presumably there are a lot of tech jobs because it's an online bank. I mean we've seen JPMorgan and others taking what we would refer to as tech kind of space for their technology-oriented businesses. But by and large, there has not been a lot of growth in the general online or in-person consumer-oriented or investment banking-oriented personnel associated with the financial services businesses. And there has been relatively little in the way of new hedge fund growth. There's been a lot of private equity growth and there's been a lot of alternative asset management growth. Numerically, those are not a lot of bodies. And you've seen tremendous amounts of technology businesses growing in these cities because the labor forces are there. And we've said this all repeatedly for the last four or five years, is that we clearly are in the business of trying to put ourselves in a position to take advantage of the growing customers that are in our marketplaces. And those happen to be technology and in the case of Boston and a place like South San Francisco, life science companies. And so it's very natural for us to see a continuation of that. And we're seeing the same group of kinds of customers that are growing in San Francisco and now in LA and now in Boston and now in New York, having similar names associated with them, which is, those are effectively the largest tech titans in the country these days. And they have significant plans for expansion.

Steve, I think we have the same information as you. We're not specialists in JPMorgan's personnel strategy, but it's important to note that JPMorgan and other major banks in New York consistently outsource portions of their workforce to different cities across the country. This isn't new information; it's simply a continuation of a trend that has been occurring since 2019 and 2020. I believe banks still see New York as the essential headquarters due to various talent and client considerations. In a broader sense, traditional businesses like banking are leveraging technology to expand with fewer employees, and most job growth in the U.S. currently is in technology sectors. These companies are driving innovations that enhance efficiency in traditional industries. When looking at job growth statistics, the technology and life sciences sectors have seen significant increases, while legacy industries like financial services have remained relatively stagnant. As a result, in terms of office demand, it's important to highlight that a significant portion of net absorption in the office sector during this cycle can be attributed to technology, life sciences, and shared workspace operators.

Thank you. I just wanted to follow up Mike on that fourth quarter swing into negative territory. You mentioned that was partially driven by free rent on a major lease in New York. When does that free rent period burn off next year?

It will be burned off before next year. December of 2019 was the free rent period.

At 2100 Penn, we won't be delivering it for another two and a half years, and we have more proposals for the space than available space. The demand for high-quality, brand-new space in prime locations in the city is stronger than ever, which reflects the overall market conditions. However, at 2100 Penn, we wish we had three or four more similar opportunities.

John Powers, why don't I turn it to you for 3 Hudson Boulevard?

3 Hudson Boulevard, we're still underway with their foundations. We had a couple of delays with that, but we expect to have that done sometime probably early in the second quarter. We're about 95% CDs now. We have lobby finishes and whatever, they're not finally selected, but the actual building is pretty much designed. I don't know, a dozen presentations to uses all over 300,000 feet. Buildings have been very, very well received. We're very, very proud of it, very excited about it, later than some of the developments. That's there now. We're probably a year and a half to two years behind other developments. If we went forward, which we have not committed to do. But, we're optimistic enough at this point that we're probably putting a steel order in for the first nine floors to give us a little quicker time to market when we do go.

Let me just add a little bit. So, the amount of speculative new construction that was in the New York City sort of vocabulary a year ago is dramatically reduced. So, their first deal was hit at the next building at Brookfield's project. There is a strong view that much of 50 Hudson Boulevard is going to be committed. There are additional deals in lease negotiation at the Spire building. So, the opportunity set is much more constricted today than it was a year ago, which I think gives us a lot more comfort that there is going to be somebody who is going to be legitimately serious about taking a slug of space from three Hudson Boulevard. Whether that's in 2020 or 2021, I don't know, in terms of when they make their commitment, but we feel a lot better about the opportunity set in front of us to get the next large requirement that is out there. Now there are some other buildings that we're going to be competing with. We think that we have a unique kind of product that, John has described before. But, we're clearly waiting for that anchor tenant before we make any kind of commitment to move forward.

Yes. And I would just add to that, in addition to the supply side, which Doug talked about. John mentioned all the pitches that we've already made. We also see a strong pipeline of prospective new customers that are going to be coming into the market over the next couple of years. So timing is uncertain, but we're certainly confident in the project.

Hey, thanks. Good morning. If we could just, I know you touched on Dock 72 and everything that's going on there with Wegmans and all that. But, it's been sitting at the WeWork 33% pre-leased forever. And I'm wondering your level of concern there in terms of attracting new tenancy in the face of WeWork problems. Is there an indirect issue to be concerned about? Is there a direct issue about WeWork sort of backing away to some degree? Would you be willing to bring in FLEX by Boston Properties to supplement some of that? Just any kind of moving part type of commentary would be interesting. Thanks.

So, on Dock 72, clearly the lease up of this property has been slower than we expected. That being said, it is an incredibly high-quality offering and building. And we haven't fully completed it yet. The buildings open, WeWork is taking occupancy, but all the amenities in the project are not even completed yet. So it's a great show. It had great views. It's got every amenity you can imagine. It's got a ferry at the end of the dock. And I think it's an emerging office location. So Doug talked about the Wegmans opening, the Navy Yard people have done a wonderful job on all of their place making. And we're confident in this project for the longer term. In terms of WeWork, they have opened their facility and they started to sell desks and they're off to a good start.

No problem.