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Executives

Arista Joyner – IR Manager

Doug Linde – President

Mike LaBelle – SVP and CFO

Mort Zuckerman – Chairman

Ed Linde – CEO

Analysts

Chris Kessen [ph] – Morgan Stanley

Mark Biffert – Oppenheimer & Co.

Jordan Sadler – KeyBanc Capital Markets

Ross Nussbaum – UBS

Jay Habermann – Goldman Sachs

Jamie Feldman – Bank of America-Merrill Lynch

Alexander Goldfarb – Sandler O'Neill

Michael Bilerman – Citi

Josh Attie – Citi

Shane Buckner [ph] – Royal Capital Management

Anthony Paolone – JP Morgan

Michael Knott – Green Street Advisors

Nick Pirsos – Macquarie Securities

Boston Properties, Inc. (BXP) Q3 2009 Earnings Call Transcript October 28, 2009 10:00 AM ET

Operator

Good morning, and welcome to Boston Properties third quarter earnings call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your question at the end of the presentation during the question-and-answer session.

At this time, I would like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Arista Joyner

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 Tuesday's press release, and from time to time in the Company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements.

Having said that, I'd like to welcome Mort Zuckerman, Chairman of the Board; Ed Linde, Chief Executive Officer; Doug Linde, President and Mike LaBelle, Chief Financial Officer. Also during the question-and-answer portion of our call, our regional management team will be available to answer questions as well.

I would now like to turn the call over to Doug Linde for his formal remarks.

Doug Linde

Good morning, everybody and thanks for joining us for the third quarter conference call. It's been pretty eventful year and we still have two months to go and we will see bunch of you folks out in Phoenix in about ten days at NAREIT

On the capital front, we have come a long, long way considering the fear that during the first quarter the financial system might actually be at the precipice of a collapse. And from an operating perspective, we are now living through the repercussions of the rapid increase in unemployment driven by significant job cuts by both public and private employers.

The impact of the current employment situation and prospects for job growth have on vacancy, rental rate concessions varies in degree by each market that we are in and, quite frankly, by assets in each market, as will the pace of recovery.

In a couple of minutes, I'm going to discuss the current state of the markets, achievable rental rates and the magnitude of concessions, probably giving you more information than you'd care to have, but first I thought I'd spend a couple of minutes talking about the reasons why we think maybe it's going to take a little bit longer than anyone is expecting to see us complete attractive acquisition opportunities.

There continues to be tremendous trepidation about the balance sheet of the commercial real estate sector. There is universal acknowledgement that the availability of financing in recent years has led to a situation where individual properties carry debt at levels that couldn't be refinanced today and in many cases greatly exceed the property value.

We see the wave of CMBS loans that are going to mature over the next few years, and we know that many financial institutions have loans that are greater than the current value of the underlying property, yet examples of ownership transfer are few and far between. So we would offer the following observations. For high-quality assets, which are really the assets that Boston Properties is going to be interested in pursuing, debt is available though it may be in a limited amount when loans start to get above $400 million or more.

Property owners either have not yet been forced to raise the equity necessary to recapitalize assets based on current and much more conservative underwriting standards or have determined that using property cash flow to meet debt service requirements today makes sense for them as long as they don't have to come out of pocket with new money and they can afford a default.

As has been demonstrated over the past couple of months, there is certainly equity capital available from the public REITs. And if the chatter is true, there are lots of financial institutions from foreign sources that are prepared to invest equity in US properties.

Property valuation is the crux of the issue. Almost one-half of commercial real estate debt is with the banking sector, 10% with life insurance companies and 25% in the CMBS market.

Our sense is that the prevailing thinking of financial institutions is that, if they are able to either kick the can or extend and pretend all of what you want. It’s much preferred to having to have a loan go non-performing and end up on the bank's books, resulting in a write down. And with LIBOR at 25 basis points, financial institutions can even increase the interest rates and their net margin while still keeping performing loans as performing assets.

Current monetary policy is allowing banks to sustain a very high net interest margin and rebuild the capital base. And while this may soften the impact, at some point, the banks are going to have to deal with over-financed assets. In many instances, long-term finance ownership may have already been transferred, but legal ownership and in many cases operational control remain intact.

In situations like these, the current owner, borrower, whose original equity has been wiped out, has little incentive to invest capital. Until operating control is realigned with financial ownership, either through a property transfer or an infusion of capital, assets face the real risk that their value will deteriorate even further.

We are aware of many situations where property is generating cash flow after debt service, has no lock box or sweep requirements, and the landlord is simply not prepared to complete lease extensions since they would result in either a reduction of current income and or require the landlord to come out-of-pocket for debt service or transaction costs in a situation where the landlord has no equity. When these assets begin to need capital and they will begin to need capital, we think the situation is going to have to change.

Unless operating fundamentals recover dramatically or at least are anticipated to recover in a very short time, we think this valuation problem is going to force action, and we are going to see assets trade.

We are mining our markets for situations that might result in opportunities for Boston Properties to use our resources, our reputation, our currency and their capital to aid in the recapitalization of assets with a deficient capital structure.

Opportunities may come in the form of equity investments and undercapitalized assets, senior debt purchases, mezzanine purchases or outright purchases. A critical component of any investment is going to be our judgment on the underlying real estate fundamentals. It is hard to predict when we will be able to deploy our capital for productive growth, but staying in touch with the market and actively seeking out opportunities has become a priority equal in importance to keeping our portfolio well-leased and managing our financial requirements.

We completed a very successful quarter from a leasing perspective. There is no question that leasing velocity has picked up in all our markets. Overall, we completed over 1.4 million square feet of total transactions during the quarter, and just during the last two week, we signed three more leases totaling 170,000 square feet covering additional vacant space.

Now, while our overall occupancy did not move this quarter, we significantly outperformed our internal expectations. Our most significant activity was in New York City. You'll recall that it was a year-ago that we were hit by almost 570,000 square feet of tenant defaults in New York City and the loss of $50 million of top-line revenue.

Last quarter, we said we had good activity on our larger blocks of available space. Well, as of today, we have released just over 500,000 square feet of that space, including 370,000 square feet at 399 Park Avenue. And in 2010, we will have replaced $34 million of that GAAP income. If we release the remaining space at market rents, we will recover $38 million of that $50 million of lost revenue.

Now, this was not without cost, as we had to provide tenant improvement allowances and pay leasing commissions, but its a pretty extraordinary accomplishment. There are three takeaways. First, rents have declined dramatically in Midtown and tenants are taking advantage of the re-pricing of high-quality space.

Second, leasing velocity is much, much stronger than we or anyone imagined. In addition to lease expiration-driven transactions, there is tenant expansion, both in our portfolio and in the market which requires incremental real estate. Now, I am not suggesting we're going to see positive absorption overall, but the expansion activity in Midtown Manhattan is far greater than anyone expected.

And finally, our conviction that the best buildings, which typically have high-quality tenant installations outperform the market in difficult periods, continues to be true. Our strategy has been to own and operate the highest-quality assets in our selective submarkets, to design buildings and tenant spaces suited to customers' current needs, and to continue to invest and upgrade these assets.

We continue to believe we will gain market share in difficult markets, and I think we have the evidence to prove it. You will also recall that we lost General Motors as a tenant in a 120,000 square feet at 601 Lexington, formerly the Citicorp building, last quarter when they entered bankruptcy protection.

We can report that we were able to retain General Motors in 114,000 square feet for 10 years at 767 Fifth Avenue, the GM building. As part of the lease, we recaptured the right to name the building in the future.

As you know, we do not discuss specific tenant lease economics, but we will tell you the following about market rents. At the base of 766 [ph] Fifth Avenue, we are asking $90. At the base of 399 Park, we are asking in the mid 60s. Our other major block of vacant space is at 601 Lex; it's floors 27 through 31, and we are asking in the 70s. Concessions on well-built space have run from 0 to about $45 a square foot and free rent associated with build-out time has again ranged from 0 to 12 months.

Conditions in the Midtown market have changed much quicker than anyone expected. Leasing activity is picking up in our other markets as well, as tenants have begun to act on the new level of lease economics and feel better about investing capital in their premises. The key difference is that, in contrast to examples of expansion we are seeing in New York City, many central business district tenants in Boston, San Francisco and Washington are evaluating their business models and believe they now have underutilized space.

As one might expect, the layoffs over the past 12 months are working their way through companies' real estate needs. We are a lagging indicator. This trend is particularly acute at law firms where there have been both layoffs and the deferral or reduction in hiring incoming attorneys. Other than firms that have grown through mergers and by the way, we have some of those in our portfolio. There are very few law firms with near-term lease expirations that are looking for more space than they currently occupy, and many in fact are looking at modest reductions of their current footprint.

In many cases, there really isn't an inexpensive way for these tenants to restack their spaces, so it is not adding much incremental sub-lease space. But as leases expire, there could be incremental additional availability in the market. In San Francisco, we completed a 74,000 square feet lease with Genentech at 601 Gateway, which will cover most of our vacant space and near-term rollover on that property. The first portion of the lease doesn't commence until December, so it hasn't hit our occupancy statistics yet. Rents in south San Francisco are in the low $30s.We also completed 70,000 square feet of leasing at our Mountain View R&D assets, over five separate transactions where asking rents are around $19 triple-net.

Turning to the city, we completed two full-floor renewals. One was with a sub tenant and a two-floor lease which includes expansion space from an existing law firm that has been adding partners from other firms. We are in lease negotiations with a replacement tenant to backfill their space when it becomes vacant next year. Rents in Embarcadero Center range from the high $30s to the low $60s, and tenant improvement concessions for new tenants have escalated, in some cases to $60 per square foot. That is really where we are seeing the impact there. Activity in Cambridge and in the western Boston suburbs still feels pretty good and we are seeing a consistent flow of small, medium and large requirements with large being defined as anything over 30,000 square feet.

There continues to be a handful of expanding technology and pharmaceutical biotech tenants that are taking advantage of the recent pullback in the market to upgrade or expand their premises. But there have also been a number of mergers that have resulted in space consolidation, in the tech space in particular and four new building deliveries that have led to significant increases in available space. Our largest uncovered exposure measured by square footage next year will be in the Boston suburban market.

This quarter, we completed over 100,000 square feet of renewals in Waltham and we have another 100,000 square feet in process. Rents in Waltham are in the mid $30s for the best space, but as is renewals are being completed in the upper $20s. Reducing current rental obligations are now part of almost every discussion and many tenants are in fact renewing, which has acted to hold down tenant improvement costs. Our biggest disappointment in the quarter was the cancellation of a pending lease we've been working on in Cambridge from an expanding tenant that was going to commence in January. Yet there is still continues to be cause for optimism in Cambridge as it has become the critical R&D location for many leading technology and biotech companies on the East Coast.

Cambridge rents are currently in the mid $40s for office space. The Boston CBD have seen an increase in activity this quarter but it is very much a lease expiration-driven market. Active law firm renewals are often accompanied by a reduction in leased area and there are a number of 2011, 2012 and 2013 law firm tenants currently in the market today. Asking rents for CBD space range from the low $40s to the high $50s. We are focused on renewing our tenants with 2011 lease expirations at the Prudential Center, and we have begun to actively market the remaining space to be delivered at the base of Atlantic Wharf, which will occur in early 2011.

Our efforts in Washington D.C. continue to be focused on early renewal negotiations. We have almost 635,000 square feet of expired leases with the GSA, or their direct contractors, that we are working to extend but have yet to document. We have an additional 426,000 square feet of 2010 expirations, which are in a comparable status, other than the fact that the lease hasn't expired. We have just over 400,000 square feet of private-sector tenant with leases spending, for a total of almost 1.5 million square feet of renewals that we're going to get done in the next few months. If I had to make a generalization about these deals, it would be that they are all being completed with very minimal, if any, tenant improvements.

In some cases, the rents may be lower than the current contractual rents and in other cases they are actually going to be higher. Rents in Reston range from the low $30s to low $40s, but significant free rent and $50 or more in concessions are now the norms for new lease deals, not renewals. We have made significant progress at our One Preserve project with an 80,000 square foot expansion this quarter that has brought us to almost 65% leased. Now, the lease doesn't commence until 2010 so again, it is not in our occupancy numbers. Rents in Rockville are in the mid $30s with significant free rent and tenant improvement concessions.

In the District, where our portfolio is still 99% leased, our focus again is on lease rollover in '10 and’ll and this quarter, we completed 116,000 square feet of renewals. Rents are holding up in the CBD of the East End and still are in the $45 to $58 triple-net range. But again, tenant improvement concessions have jumped up to $65 or more for existing space and are even higher on new construction. We continue to have active discussions on the remaining space at 2200 Pennsylvania Avenue, including an additional lease negotiation, but nothing signed yet.

The leasing data we've provided in our supplemental I think reflects the market conditions I've been describing over the last few minutes, and I expect it comes as no surprise to anyone. You will note a 17% reduction in overall gross rent and then an almost 30% reduction in New York City based upon the recent transactions versus prior rents. The results include the impact from the New York City properties of the releasing of 399 in Times Square Tower and the corresponding reduction in market rents – again, no surprise.

In San Francisco, the data represents one transaction involving a 15-month as-is renewal, so it skews things, but in Princeton, we've completed a large, ten-year lease extension, which included an immediate rent reduction of about 11% for the last two years of the lease, which works out to about $3.50 per year but only $5 of tenant improvements – again, getting back to the theme of renewing and reducing our capital costs by giving rent relief as a way to capture tenant demand. While we may or may not have hit bottom, rents have reached a level where transactions are happening in all of our markets, providing us with pretty good data, which really improves I think the reliability of our mark-to-market calculation.

The overall portfolio of mark-to-market today is negative $1.38, which is just under 3% of our average in-place rent. Our peak rents were in the second quarter of 2008, and since then, overall, they've come down about 20% on a gross basis and 30% on a net basis, obviously more in some markets and a lot less in others. The mark-to-market for space coming available in 2010 is about $1 negative, pretty consistent with the overall portfolio.

Mike is going to provide some more specifics on our near-term rollover and our same-store expectations as part of his remarks. I will now turn the call over to Mike.

Mike LaBelle

Thanks, Doug. Good morning everybody. I want to start with a quick discussion of our balance sheet and the financing activities that we have. This year, we enhanced our liquidity by raising $860 million of equity in June and just three weeks ago raised an additional $700 million in the bond market. Our debt offering was for a ten-year term at all-in pricing under 6%. We experienced tremendous demand, enabling us to upsize the deal by 40% and demonstrating the strong support we have from institutional fixed income investors.

We now have $1.5 billion of cash on our balance sheet and are in a great position to take advantage of investment opportunities in our markets. As I will touch on later, our cash position will be dilutive in the short term and have a negative impact on our 2010 guidance, but looking forward, should enable us to make highly attractive investments. In addition to our superb liquidity position, our balance sheet is conservatively leveraged with a net debt to EBITDA ratio of 6.1 based upon our current quarter annualized GAAP EBITDA with net debt meaning total combined debt less our cash balances. On a cash EBITDA basis, this ratio is 6.9 but it excludes much of our recent leasing where cash rent has not commenced.

Our 2010 financing activity includes the expected payoff of our loans related to 738 8th Avenue, 8 Cambridge Center and our remaining debt on Carnegie Center. We plan to exercise one-year extensions on our expiring construction loans for South of Market, Democracy Tower and Annapolis Junction, and we expect to refinance our expiring joint venture mortgages at a fixed rate of between 6% and 7.5%, including a pay down of roughly $80 million. The expiring joint venture mortgages include $263 million for 125 West 55th Street, $190 million on Two Grand Central Tower, $125 million on Metropolitan Square and about $80 million on Market Square North.

We are currently in the market and discussing term sheets with lenders on the two New York City mortgages and have multiple alternatives from which to choose. Our goal is to finalize discussions and move towards closing in late 2009 or early 2010 on these two loans.

The debt markets have continued to improve with the corporate markets accessible both for senior unsecured debt, as our recent issuance at a sub 6% coupon suggests, and convertible debt. The convertible market has become very aggressive with coupons in the 2% range or even below and a conversion premium of 20% to 25%.

The secured mortgage markets are also available for moderately leveraged properties, meaning debt yields in the 12% to 15% plus range. Lenders are still only targeting the highest quality low-risk properties and there is healthy competition for these assets, driving pricing into the mid 6% to mid 7% area for five to ten-year terms.

Now, I would like to go over our third-quarter results. Last night, we reported third-quarter FFO of $1.13 per share, exceeding our prior guidance by about $.03. The better than expected results were due to the portfolio exceeding our expectations, plus we earned some additional fee income. The portfolio was above budget by about $4.5 million.

As Doug detailed, we have had better than expected success in leasing our vacant space in Midtown Manhattan with 215,000 square feet of these leases signed and commencing this quarter. We had anticipated that this space would be vacant for the rest of the year and into 2010. We also experienced another quarter of cost savings, coming in $1.2 million better than budget net of reimbursements.

I would like to note the drop in our operating margin this quarter to 66%. This reflects the impact of the loss of revenue in New York City. At 399 Park, Lehman Brothers paid rent for nearly the full second quarter. This space produced no income for most of the third quarter, as our new leasing did not hit until late in the quarter. As we complete the lease-up of this space, we expect our margins to improve.

On the development and management services fee income side, we were up about $1.4 million. The vast majority of this came from leasing commissions earned at our joint venture properties. This quarter we completed a number of new leases in our Mountain View assets. And in New York City, we signed leases in 540 Madison, 125 West 55th Street, and the largest a 114,000 square foot renewal with General Motors at 767 5th Avenue.

Moving to the remainder of 2009, we anticipate that we will be in line with our prior guidance. Big picture, we outperformed in the third quarter and our leasing in New York City has been faster than we had expected, but we also have higher net interest expense associated with our debt offering. With the low investment rates endemic in high-quality short-term cash deposits today, our debt offering will cost us nearly $.06 a share in the fourth quarter in additional net interest expense.

Other than the additional leasing at 399 Park and the Genentech lease at 601 Gateway, we do not project substantial lease-up of our vacancy in the fourth quarter and expect to end the year basically flat to our current occupancy. As detailed in our supplemental, we have just over 1 million square feet of leases expiring this quarter, but it includes 635,000 square feet of space leased to the US Government or Government contractors that Doug referred to in his comments, where we are in active renewal discussions and know that the government will not vacate.

Our same-store projections for the full year 2009 are comparable to last quarter on a cash basis and slightly better on a GAAP basis with the impact of our recent New York City leasing, which generates straight-line rent during the remainder of 2009. For 2009, cash same-store NOI is expected to be down 1.5% to 2%, while GAAP same-store NOI is expected to be up 1% to 1.5%. Straight-line rent, excluding our development properties, is expected to be $11 million to $13 million and we are projecting $1 million of termination income in the fourth quarter.

We have completed all of our 2009 developments with the delivery earlier this month of our Princeton University build-to-suit at Carnegie Center. In addition to Princeton, which is 100% leased, these projects include Democracy Tower in Reston, which is 100% leased, and Wisconsin Place, which is 91% leased.

At One Preserve Parkway, our leasing has improved dramatically with the execution of an 80,000 square foot lease that will commence in early 2010 and a 13,000 square foot letter of intent, bringing this building to over 70% committed from just 20% last quarter.

The FFO yield on our 2009 development investment of $270 million is projected at just under 10%.

Our hotel met its reduced projections for the third quarter but is still facing a tough climate. We expect its full year NOI contribution to be $6 million to $6.5 million. Our joint venture properties are projected to contribute $35 million to $37 million in the fourth quarter and third-party fee and tenant services income should contribute $7 million to $8 million.

We anticipate our full-year G&A will come in at $74 million to $75 million. Our 2009 G&A budget includes non-cash stock compensation of approximately $19 million, $4.5 million associated with our Out Performance Plan that is currently well out of the money, and $2 million of expense associated with our deferred compensation plan, that we record an offsetting entry in gains from investment securities.

Net interest expense is projected to be higher at roughly $318 million to $322 million for the year. The increase is mainly due to the interest expense associated with our debt offering, net of the investment income we are earning on the cash balances. The non-cash portion of our interest expense associated with APB 14-1, which is now known as ASC 470-20, and amortization of financing costs is $46 million.

We expect capitalized interest of $47 million to $50 million for the full year. We still anticipate completing work on 250 West 55th Street such that we reach a fully-suspended status midway through the fourth quarter. This project accounts for roughly 50% of our capitalized interest for 2009. Once we suspend work, we will stop capitalizing interest, which will increase our reported interest expense going forward into 2010.

Overall, our expectation for FFO for the full year 2009 is unchanged, even with the dilution associated with our recent debt offering. We anticipate FFO of $4.59 to $4.61 per share for the year, which is based upon our projected average share count of 153.2 million shares, including operating partnership units. For the fourth quarter, we are projecting FFO of between $1.04 and $1.06 per share using our current diluted share count of 161.1 million shares and units.

We talked a little bit last quarter about some of the items that will negatively impact 2010 and I would like to go into more detail now, including some specific guidance. The changes to our capital structure from our 2009 equity and debt offerings have a significant impact on our near term FFO. Both of these capital events are dilutive in the near term as we hold our cash in low-yielding short-term investments until we uncover opportunities to put this capital to work.

The increase in our share count alone results in $0.23 per share of dilution for 2010 versus 2009. Our debt offering will result in incremental additional interest expense of approximately $0.20 per share in 2010. Offsetting this is a few cents of incremental interest income from our cash balances. But before even looking at the portfolio, we expect to be down by $.40 per share just due to capital events.

As Doug discussed, we are looking for opportunities to employ our capital, but we are going to be patient and disciplined. Our 2010 guidance does not assume any acquisitions, so our guidance will be down this $0.40.

Turning to our projections for the portfolio, our expectations are for a continued difficult leasing environment in 2010. While leasing velocity has increased, we are seeing soft fundamentals in each of our markets. We currently have 7.9% vacancy in the portfolio, which is about 2.8 million square feet. At the end of the quarter, in Midtown Manhattan, we had 550,000 square feet of vacancy, which included 120,000 square feet in our joint venture properties where we own 60%.

Since the end of the quarter, we have leased an additional 120,000 square feet in 399 Park Avenue and now have only 50,000 square feet of above-grade space and 30,000 square feet of concourse space available in the building. We've now leased over 80% of the Lehman space. Our remaining Manhattan vacancy is in smaller spaces, except at 601 Lexington Avenue, where we have a block of 150,000 square feet, the space we got back last quarter from the default by General Motors.

We also have a number of quality blocks of space in our other regions where we have highly marketable space but where we will be fighting for tenants as leases roll over in other owners' buildings. This includes 300,000 square feet of vacancy at Embarcadero Center, 180,000 square feet in Cambridge and the Prudential Center, 150,000 square feet in suburban Boston, and 90,000 square feet at Reston Town Center.

Much of the rest of our existing vacancy is in suburban Boston, Maryland, Silicon Valley and Princeton, including about 850,000 square feet in buildings where absorption could be a long time come, but the economic impact of the vacancy is less due to relatively low market rental rates for this space.

Our rollover exposure of 1 million square feet for the rest of '09 and 2.9 million square feet in 2010 is diversified among the regions. Our largest exposure is in Washington DC where we have 1.6 million square feet expiring between today and the end of 2010. We are in renewal discussions on much of this space, and overall we expect to maintain stable occupancy in DC.

Our most significant exposure is in Boston with just over 900,000 square feet expiring over the next 15 months, about half of which is in the suburbs where we are anticipating weaker absorption in 2010. In Midtown Manhattan, our primary 2010 rollover is 100,000 square feet at 601, Lexington Avenue, and 190,000 square feet at 2 Grand Central Tower. And in San Francisco, we have 550,000 square feet expiring on December 31, 2010 at our Zanker Road Business Park, where we anticipate losing almost 300,000 square feet of occupancy. Rents are in the mid teens, so the economic impact associated with this rollover is moderate and it will not be felt at all until 2011.

Our space-by-space projections conclude that our occupancy should remain relatively flat in 2010. We experienced an unusually high level of termination income at $16.5 million through the first three quarters of 2009 and expect another $1 million in the fourth quarter. We do not expect this to recur in 2010, and our projections assume $13.5 million of reduction year to year. Excluding the impact of the change in termination income, our projections result in same-store declines with GAAP same-store NOI projected to be down 2% to 3% and cash same-store NOI down 3.5% to 4.5% for 2010.

Our NOI performance is impacted by the rolldown in rents in New York City where the space leased at 399 Park is down over 30% from the former rent paid by Lehman Brothers, and where we have approximately 100,000 square feet expiring at 601, Lexington Avenue at rents in the low $80s per square foot. We also expect increased vacancy in suburban Boston and extended downtime in San Francisco which is negatively impacting our same-store projections.

There are some very large GAAP-to-cash differences in 2010, the result of a number of significant signed leases that will be in free rent periods for portions of the year, including the new leases at 399 Park in New York City and our 480,000 square foot Ropes & Gray lease at the Prudential Center in Boston, which will commence in the first quarter and provides the tenant with a 12-month free rent period to build out their space.

We expect straight-line rents next year of $55 million to $65 million. Our recent developments will provide a boost with a full year of our 2009 development deliveries and the delivery of Weston Corporate Center in 2010. Weston Corporate Center is a 100% leased to Biogen and is scheduled to deliver early in the third quarter. In aggregate, our development properties will add an incremental $18 million to $22 million to our 2010 NOI.

Combining the developments with the same-store portfolio, net of the swing in termination income, results in an operating portfolio GAAP NOI that is basically flat from 2009-2010. We expect our hotel to generate $6 million to $6.5 million of NOI in 2010, comparable to its 2009 contribution.

Our joint venture properties are projected to be stable on a cash basis, but down $10 million to $15 million on a GAAP basis due to the burn off of FASB 141 income as leases roll on. We expect the FFO from joint ventures to contribute $125 million to $135 million, including FASB 141 income of $80 million to $85 million. Our third-party fee income will be lower in 2010 due to the completion of Wisconsin Place midway through 2009 and our 20 F Street development project in January 2010.

Although we are actively seeking additional fee work and have been awarded a planning job in Washington DC that we hope will become a full-scale development assignment, given the slowdown in development nationally, we are not projecting to replace this income. We are also seeing pressure on tenant services income as tenants are more cognizant of their expenditures and are using fewer services. Overall, our development and management services fee income is projected to be $20 million to $25 million, which is down $10 million to $12 million from 2009. 2009 was an unusually strong year because of the success we had at our 20 F Street fee development job.

Our G&A is projected to be $80 million to $82 million in 2010, an increase of $6 million to $8 million. The majority of the increase in G&A is due to the vesting of non-cash stock compensation and a reduction in capitalized wages as our development work slows. Excluding these items, our G&A is only projected to be up approximately 1%. We project 2010 net interest expense of $355 million to $365 million; this represents an increase of $40 million to $45 million over 2009. The non-cash portion consists of $41.2 million associated with our convertible debt and $8.5 million in amortization of deferred financing costs.

As I mentioned, our recent debt offering adds an incremental $32 million to our 2010 interest expense. The other significant item is the cessation of capitalization of interest at our 250 West 55th Street project, which results in a $25 million increase in our interest expense in 2010. We will have additional capitalized interest related to our other development at Atlantic Wharf, 2200 Pennsylvania Avenue, and Weston Corporate Center that offsets a portion of that increase.

When you combine all of these projections together, it results in our 2010 guidance range per FFO of $4.00 to $4.20 per share. I want to reiterate that a substantial portion of this change in our 2009 to 2010 FFO projection, approximately $0.70 per share is due to items unrelated to our core portfolio cash flows, including changes in our capital structure, third-party fee income, non-cash FASB 141 income recognition and the affect of stopping interest capitalization at 250 West 55th Street.

Our core portfolio NOI, including our development deliveries and our joint venture properties, excluding the change of FASB 141, is expected to be relatively flat from year to year. This is despite the tough current market conditions and is a testament to the quality of our portfolio and our proactive leasing strategies.

We have raised over $1.5 billion of new capital and are currently investing in short-term cash deposits and treasury securities earning about 50 basis points. Our guidance assumes that we do not deploy this capital in 2010, and it is expected to cost us $0.40 per share. Even a 6% incremental return would increase our earnings by $90 million or $0.56 per share on an annualized basis. As Doug stated, we are not sure if we will see opportunities next year, but we are confident that at some point, we will be able to invest this capital accretively into high-quality real estate assets.

I now would like to turn the call over to Mort for his comments.

Mort Zuckerman

Well, good morning, everybody. I think you've heard a comprehensive discussion of the various real estate markets. I will just spend a couple of minutes on the overall economic environment, which I think, still remains problematic, at least as far as my own assessment is concerned. We do, I think, live in a very strange time because of huge budget deficits; we have interest rates that are continuing to go down, by and large; and we have unemployment that continues to go up. I don't think we are out of the credit crunch. I think the unemployment numbers are going to be very, very serious through the next year. I think they're going to dominate the politics of the Congressional election. I think the Obama Administration is going to lose not only political prestige, but I think, they will lose a large number of seats in the House and a number of seats in the Senate.

One in every three homes has either a family member or a close friend who has lost a job. We have not seen unemployment numbers, if you add them all up, really in 70 years in this country, the ostensible unemployment number rate is about 9.8%, although I think it is inching up. Quite high of an unemployment rate would take that total up to 17%, the other 2.5 million people who basically are around the economy but not looking for a job – they’ve given up or decided to become full-time parents. But add it all up together, and we are close to a real unemployment rate or part-time unemployment rate of close to 20% with the average work week down to 33 hours, the lowest it has been in 60 years.

And I think companies are not going to be hiring if they can possibly avoid it. They’ve learned to operate with fewer people; they’ve learned to operate with fewer discretionary costs, sadly including advertising. And I think they are going to stay pretty much with that kind of an approach because nobody has any great deal of confidence in the economy going forward. The stock market has really done well because – not so much because of revenue increases, but because of cost reductions. And that’s helped, but it has not dealt with the issue of declining home equity values and still stock portfolios that are below where they were 18 months ago.

And I think we are still faced with a major-league credit crunch particularly affecting credit cards, both to individuals and to businesses. And I just can’t see yet to where the components are that are going to bring about a major transformation in the economy. I think we are in for a couple of years of a very slow economic times and nobody quite know what’s going to happen. I happened to have been on the pessimistic side of things for the last several years, for which I have to say I'm quite grateful. I remain relatively pessimistic to know that the administration and the Congress are all struggling with the issue of unemployment and nobody has any easy answers.

The administration has lost a great deal of credibility in terms of dealing with the Congress because of the failure of their stimulus program which has created unbelievably small amounts of additional employment compared to the dollars that were spent, and nobody wants to take another bite out of that apple. So, how will this affect us as a real estate company?

Well, I will just again reiterate the reasons why we here – we are in the markets we are in and with the kind of buildings that we have in those markets. We are still basically in supply-constrained markets. Cambridge is an example; even Boston is an example. Certainly, Midtown Manhattan on the east side is an example. Washington is always an example. Downtown San Francisco has always been an example as well for various reasons.

I think, to the extent that there is activity and there is a lot of activity. We are going to do relatively well because we have, in almost all cases, office buildings that are at the top end of the market. We are not escaping the decline in rents, as Doug indicated, but when rents do go down in these buildings, a lot of other tenants, when they have a chance to move into them, really look at them very seriously. I think we're going to continue to show relatively good progress.

When I say 'relatively', I think we are going to beat most expectations and the performance of other people who have slightly less quality buildings or commodity space as we call it now. The big issue for us and one of the reasons why we've done what we've done financially is because we do expect that we will have opportunities for additional acquisitions, and we are clearly positioned financially to be able to move and to move quickly. This we think is something we're going to be spending a lot of time on over the next 18 months. We think there will be opportunities.

Nobody ever expects to buy at the absolute perfect price; certainly we don't. But we think we will be able to buy buildings that are going to be attractive holds for the longer-term and dramatically increase the current yield that we are experiencing on the net cash reserves that we have. So, we are in very, very good financial shape. We are doing reasonably well in our leasing and re-leasing.

I think the next major opportunity for us to accelerate growth in the company will come opportunistically from new acquisitions. Now, I will tell you that our basic view of these acquisitions is not so much sort of the initial return in year one or year two. We continue to take a very longer-term, much longer-term perspective on it because we think we can build up substantial equity values if we have that approach on a better basis and if we look for, shall we say a higher initial return.

This has been our approach and will continue to be our approach. This is the lady we took to the dance and we are going to stay with that lady because we still believe it’s the best approach in the business that we are in. So with that, I will just end my comments and thank you for giving us the time to talk with you. I presume we will have some questions now.

Doug Linde

Okay, operator.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from Chris Kessen [ph] from Morgan Stanley.

Chris Kessen – Morgan Stanley

Good morning. Thanks for commentary on the leasing environment and on the economy. I’d like to ask you to drill in, if you could, on the competitive environment and specifically sub-leasing activity. Looking through brokers' reports, it looks like subleasing hasn't really meaningfully – submarket leasing vacancies hasn't really meaningfully improved into the third quarter. I'm wondering how competitive you see that. Looking across Boston, do you see those levels are still elevated and how do you see that unfolding into 2010?

Doug Linde

I guess, unfortunately, this is going to be sort of a self-fulfilling answer to your question. But much of the subleasing activity that or space that is available in the markets we are in is probably not as competitive with our product and our tenants as you would sort of think of from a big-picture perspective. The type of tenant who's looking to do a lease in a building like ours in Midtown Manhattan is probably looking to do a minimum of a 10-year lease. Hopefully, they do a 15 and maybe a 20-year lease.

The capital associated with doing those type of transactions is pretty significant and they are probably not able to get a landlord to provide a stub on top of a sublet. Now, there may be a particular instance where there is a seven or an eight-year sublet from a financial institution or a law firm where they can go in and they can sort of live in that space for a period of time and then say they will make another decision.

But for the most part, the tenants that we are leasing to are tenants who have much longer-term perspectives than that. That's not to say that the sublet market isn’t – it doesn't have an impact on the market; it clearly does. Sublet rents are generally 15% to 20% lower than direct landlord competitive rents. I would say, as a gross generalization, the smallest of tenant the more options there are in the sublet as well as the tenants that are less interested in having their real estate be a key component to retain and recruit their employees are more interested in sublet space because they're looking for a deal and they are prepared to potentially be more migrant users of space as opposed to people who want to have that space on a long-term basis.

So there is no question that it's going to impact the market. I'm not sure that, on a space-by-space basis, when we are dealing with an existing tenant on our own properties that we are going to be competing with sublet space. I think, depending upon the particular tenant that's in the marketplace, we are not going to be able to price competitively with sublet space. To the extent that those tenants have a different outlook on what they want to use their space for, they will probably go to sublet space and not our space.

Chris Kessen – Morgan Stanley

Thanks.

Operator

Your next question comes from Mark Biffert of Oppenheimer & Co.

Mark Biffert – Oppenheimer & Co.

Good morning. Doug, I was wondering if you could maybe talk about as the rent levels that you've seen. Obviously, we saw the sharp declines, which I think most of us expected, but I'm just wondering if you think that we've kind of seen a stabilization of rents across most of your markets?

Doug Linde

I would say the answer is yes. It doesn't mean that we might not have some more downward pressure on rents, depending upon what I call the discipline or the desperation of a particular landlord to do something depending upon what their financial situation is and how that potentially drives the overall market. But I think we are seeing enough transactional activity in all of our markets to feel like the tenant rep brokers and the landlords are both feeling pretty good about sort of where the overall level of transactions are.

I think the big difference, in terms of where the rents are, is what's really going on with that particular user. Is that user looking for an as-is deal? And they are looking for rent relief? Or are they looking for, is that user coming into a space saying I want a big tenant improvement package because I want to do a lot of things with my work – with my space from a work perspective and therefore I'm going to be looking at a different rent level? So from – on a net effective basis, you may get the same place or you may even have a higher number with a lower rent. But I would say, overall, we have seen a coming together from a transactional perspective and are seeing a lot more transactional volume because of that.

Mark Biffert – Oppenheimer & Co.

Okay, and then just jumping over to acquisition opportunities. I am just wondering what you view as the potential catalyst for you to start putting money to work. Is it further deterioration in the fundamentals of a specific asset that you are looking at, or is it banks starting to pull back assets? If you can provide some more color on that?

Doug Linde

I guess, I would caveat the question by we are not sure where it's going to come from necessarily. I think the fundamental belief that we have is that there are many assets who have deficient capital structures; there are many assets where the leasing fundamentals have gone down significantly. Therefore, there should be a recognition that the value of the property is not what it was. The question will be what the friction point will be for those particular assets and the constituents in the capital structure in terms of resolving that issue.

As I said, we are seeing assets in the market today where they are slowly but surely going through the various owners on the capital stack and people are taking as much time as they possibly can to try and work a deal, in many cases unsuccessfully, recognizing that they are no longer in an equity position and there may be term left on a particular securitization tranche or the structure of a particular debt asset so that, over time, it’s going to get to the appropriate parties. When it gets there, that party is going to say 'I'm not sure I want to be in the ownership position; I'm not sure I want to be the person who's going to have to take care of stabilizing this asset from a leasing or a capital repositioning perspective, and I'm going to want to get rid of it.' Our expectation is that, that's where much of the stuff will come.

Mark Biffert – Oppenheimer & Co.

So in terms of pricing, given the amount of capital that’s been sitting on the sideline or everybody is talking about sitting on the sideline, what is your anticipation for some of these higher-quality assets that you are targeting in terms of cap rates and where you think those might go in your individual markets?

Doug Linde

Mort, do you want to take care of that?

Mort Zuckerman

I don't think there is any easy way to predict that at this stage of the game. So much depends on the specifics of a property, but if you wanted to take a relatively ideal acquisition where somebody has a big lease that's coming up and doesn't want to take the risk or to pay the money that takes to renew it or find another tenant, or somebody has a financing that's coming due and can't handle the obligations there, I would say that you're going to be talking certainly a sub 7% cap rate for the best properties or the best potential properties.

And that's where I think, if when I say that, that is sort of going in. We don't look at it just in terms of the current cap rate. We just look at it as much in terms of what do we look like on, say, on a five to ten-year IRR. And this is what our sort of basic philosophy is to take the longer-term. That may give us a particular edge, since we are in a position to nurture these properties and manage these properties and lease these properties and we hope maximize the value in these properties. And we generally have been able to do that. So but if you ask me what the, whether its kind of properties we're looking at, I suspect it is going to be a sub 7% cap rate.

Doug Linde

Can I just add something to that answer? I urge you all not to just get fixated on cap rates. If you think back to the properties that were let's call them over-financed, there were two things that were at work. One was cap rate compression. The other with bad underwriting. And underwriting is just as important as cap rates. What are rent levels going to be two and three years out, or four and five years out, or six and seven years out? So let's not I think you fool yourselves if you think cap rate sort of gives you the answer to the question. It doesn't and you have to look, you have to drill down into the asset itself.

Mark Biffert – Oppenheimer & Co.

Okay, thanks. And then lastly, Mike, I was just wondering if you could give an update. As you are looking to pay down some of the mortgages next year, what are underwriters coming back to you with in terms of loan to values and the rates that you are seeing, if those stayed pretty low in terms of the spreads?

Mike Labelle

I think that debt coupons have come down a little bit, and I think that is because the whole loan lenders, which are the lenders that are really out there, which are banks, foreign banks, life insurance companies and pension funds, are not really putting out much money. And we have talked to several insurance, major insurance companies that are saying to us that they've put out 20% to 40% of what they would like to put out this year and that they are interested in trying to put out a significant amount just in the last few months of the year.

And if they can't, that's going to kind of roll into next year because they realized that they can’t continue to invest all of this liquidity they have in short-term type of cash instruments. They want to put it into longer-term investments and a portion of that is to, it’s a real estate. So we have seen the coupon requests, again, on high quality assets, go from what was the mid-sevens to low-eights to more the mid-six to the low-sevens for five to ten-year terms. With respect to leverage, 50% to 60% on an LTV basis, but on an LTV basis, they are looking at things very conservatively.

They are using pretty high vacancy rates. Where there are rents in the buildings that are above market, they are going to be marking those rents down. And they are being pretty severe about the kind of roll over estimates in terms of the costs that it's going to take. They are making assumptions that all of the tenants that are rolling are going to be leaving, and you're going to need full TI and commission to replace those tenants. And when you throw that into a DCF, it really does impact the value. So although they may be saying 60%, in reality it’s probably more conservative than that.

Mark Biffert – Oppenheimer & Co.

Okay. So then when they use up that capital, that excess that they haven't invested yet, is it your anticipation that rates will widen back out again and that capital will be less available, say, towards the second half of next year?

Doug Linde

My sense is, on the life company side, they have money coming in every month and they’ve got to employ that money. And the issues that they have right now is they are unwilling to bend on their underwriting standards. They are only looking at a certain quality of real estate investment. And I don't see their chief investment officers changing that for them any time in the near future, given that it was not too long ago that they made some mistakes. So my expectation is that they will continue to have trouble putting out their capital.

Mark Biffert – Oppenheimer & Co.

Okay thanks.

Mort Zuckerman

Everybody tends to fight the last war; that's the problem you have to cope with.

Operator

Your next question comes from Jordan Sadler of KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Thank you. I just wanted to come back to Ed's follow-up on Mort's answer on the cap rate question. The, what are you guys underwriting? And I know it’s different by asset and by market, but maybe you can give us some generalizations. Given sort of, Mort, your overlay, what are you underwriting in terms of expectations, either on the job front and how that translates into market rents over the let's say, a five-year period?

Mort Zuckerman

Well, again, it is so difficult to give you a specific answer. Obviously, you have a tremendous diminution and new supply coming on. There's virtually no new supply coming on in many of the markets, unless these buildings where we're well underway. So you have to imagine what that means in terms of the, what you're trying to project as demand. And my belief for example, I’ve said this before. I think New York as a market it is going to recover faster than other people seem to expect.

And I will tell you why, because when the world of global finance really begins to re-energize itself, it is going to still, in my judgment center in New York City because one of its major competitors, London, has suffered much more than New York has and the intellectual firepower in New York, in my judgment, still is preeminent and there are a lot of firms that have done extremely well and will continue to do well and can organize a lot of capital.

So I think we are going to come back and we already have come back to a degree that I think surprises a lot of people. And particularly the kind of real estate that we have has come back in ways that have surprised a lot of people and frankly to some extent, including ourselves, although this is always being our philosophy, when you see it work as well as it worked, still a bit of a surprise. So, my own view is that where we are now may, which is frankly a high unemployment rate that I believe that it is going to be same double digits in the simple terms for a couple of years.

But my own view is that parts of the city of New York, for example where we are in Cambridge or even in Boston with Prudential Center, I think we are going to continue well with these assets because I think there will be, in a period of three to five years, perhaps not the kind of boom we had in the last five years that ended up in the bursting of that boom, but I think we are going to have a very strong period after a couple of years.

And it's going to reflect itself not only in growth and employment but in the fact that there is no new supply coming on the market. So we, we’re if you look out five years and depending upon the assets, and you can be I think reasonably optimistic about where the markets will be. And if you are and we are one is in a position to finance it on those terms and takes that longer-term perspective, I think there are going to be some very good opportunities for acquisition and even for development. If you take New York City, there are a number of very large tenants around in the city that are, nobody has made a decision to commit. But there are very large tenants that cannot find a building, except a new building.

So it would be interesting to see who is going to get the first one and really be able to get going with another building. I think that's going to happen. It'll change the mood, I might add, in the city, but I think that's sort of I think and given, I don't know whether it's going to happen in a year or two years, but it's going to happen because there are firms that just need that. And there are firms that are always growing and they are looking to go into new space for all kinds of good reasons and particularly those people who want to be in prestigious space, for all kinds of good reasons.

So we are aware, we are aware we have, I frankly think we are very, very well-positioned in terms of our financial structure, in terms of our credibility, in terms of the management team we have. We have 40 million, almost 50 million feet of space that we are running that we own. I think it's going to we're going to have a shorter, a slower period for a year or two, but I still think that you go out three or four or five years, I think there's a reason, I feel there is a reason to be optimistic for the office-building market, in the markets we are in, in the part of the markets we are and which is the upper end of those markets, and always in supply-constrained markets.

I am always reminded of a conversation I had with the Mayor of Chicago, a great guy by the name of Richard Daley, and he wanted – his brother, Bill Daley, was on our Board for five years. He wanted us to develop in Chicago, and I said 'We can't do that.' And he said, 'Why?' And I said, 'Because the city is to well-managed.' 'What do you mean?' I said, 'because when you have an increase in demand, you can arrange for an increase in supply.

We don't want an increase in supply; we want increases in pricing for the existing buildings that we have.' We stay away from those buildings and stay in those buildings where there are real supply constraints. Those are the markets we are in. I think, when there is a turnaround and there will be, I believe, in several years later – you're going to see a big change in the whole rental market, so that will be sustainable for both acquisitions and developments.

Jordan Sadler – KeyBanc Capital Markets

That's helpful. Then just a clarification on the occupancy, previously you guys had guided towards 91%, I think, occupancy by year end. Now, I'm just curious where you expect that to be and maybe the timing on these New York lease commencements.

Ed Linde

I think now we believe and what I mentioned in my comments is that our occupancy is going to be flat by year end, and the impact is from the leasing that happened this quarter in New York City and then the leasing – some of the leasing that we mentioned that we have done that hasn't hit the occupancy numbers yet, such as the deal in San Francisco and a couple of deals in New York City.

Jordan Sadler – KeyBanc Capital Markets

But the Lehman space, most of that will be occupied by when?

Doug Linde

Some of it is already occupied, and the rest is going to hit sometime around January 1st.

Jordan Sadler – KeyBanc Capital Markets

Thank you.

Operator

Your next question comes from Ross Nussbaum of UBS.

Ross Nussbaum – UBS

Good morning. I'm curious. Right now, the cost of your long-term debt in the unsecured market, whether that is just straight unsecured or converts, is so low relative to where you maybe able to potentially buy assets. Why not go out and raise as much debt in the public markets as you humanly can today, build a massive war chest and go from there? I mean, do you believe that debt costs are going to be as low or lower than they are today in one or two or three years?

Mort Zuckerman

I think that's a very good question, actually. We sort of go back and forth on that. We've done two fairly significant financings, one an equity financing and one a debt financing. We are not closed to looking at this again, and not in too long a period of time. I think we also want to get a feel for – we will see where rates are and what we can do, but I also think we want to get a feel for what our potential is to put that money to work.

We don't want to excessively overburden the short-term. But in a sense what we have done is exactly consistent with what you're talking about. We have raised a fair amount of money and I think we are open to raising more money, particularly if we begin to see some opportunities for investing this money, and we are, believe me, going to be working hard on that.

Ross Nussbaum – UBS

Do you see – as a follow-up to that, given that the cost of your long-term unsecured debt is significantly cheaper than where you can go get secured financing today. Do you see shifting the balance sheet completely over to an unsecured strategy if this persists?

Mort Zuckerman

Well, not necessarily but I mean we are not adverse to it. Obviously, what has happened is there is going to be in my judgment, because of the availability of financing to a number of REITs as compared to securitized financing on individual buildings. There's going to be a shift and this is a part of the reason why we are going to be in a position, I believe, to make some interesting acquisitions, both for investment properties and development properties.

I think those REITs that are strong enough to have raised the kind of money that we have and strong enough to continue to be raising that kind of money are really going to have a comparative advantage and will do disproportionately well. So I think we are in a very, very strong position to take advantage of whatever opportunities are available in the market. As I say, we are not doing it on the basis of a short-term perspective. We really are taking a longer-term perspective and I think were going to be able to do this, but the proof will be in the pudding.

We've been able to do a lot of acquisitions in the past, as well as a lot of developments. Those are still the two prongs of our basic growth strategy. We are going to stay in the markets that we think we are very comfortable with, or at least have the characteristics that we are comfortable with. On some level, it is an opportunistic business and it is an entrepreneurial business. That's what we've got to sort of – we've had some good experience in that regard. We have a lot of credibility, I hope, and we are certainly going to be out there beating the bushes.

Doug Linde

Please remember that we have been advantaged by the fact that we can, because of who we are and the confidence that lenders have in us, to be able, at the appropriate time, to go secured and at the appropriate time to go unsecured. Nothing is static in these markets. So the key to our success is to be nimble and also to be able to go to the lenders, whether they be secured or unsecured, with the kind of track record that we have been able to demonstrate.

Mort Zuckerman

Not only to lenders but to property owners.

Doug Linde

Well, that's in terms of acquisition, obviously.

Mort Zuckerman

Yes.

Ross Nussbaum – UBS

Thank you.

Operator

Your next question comes from the line of Jay Habermann of Goldman Sachs.

Jay Habermann – Goldman Sachs

Good morning. I just want to follow-up a bit on Ross' question. I mean, clearly you have raised a lot of capital at this point. Can you give us a sense of just what you might even be looking at? It sounds like it is more trophy assets, given the sub 7% cap rates, but I guess the implication is you're going to need to do deal size somewhere between 2 billion and maybe 4 billion, if you bring in foreign partners, and obviously just balancing that versus the kick the can down the road comments you made.

Ed Linde

You said a couple of things. I think, Mort, made it clear that we are probably not interested in going far a field in terms of the markets that we are in, nor the property types that we are in, which would suggest that we are looking for more iconic, high quality trophy, whatever you want to call them assets and our marketplaces, but that doesn't –

Doug Linde

I don't like the term 'trophy' because that sort of implies that you buy something because it looks good. We buy things, we will buy things that are consistent with our existing portfolio that will operate good, to use poor English. Sorry. So, I mean that's where we are going to focus our time and our energy. We will continue to, obviously, to the extent that it makes sense, look at some of the other markets that we've thought about in the past, but I think the fundamentals of those markets are probably going to point us in a direction of sort of sticking to our knitting.

With regards to the size of the assets, yes, the advantages we have are on the capital side with size. I'm not sure those necessarily are going to be where the immediate opportunities are, so we maybe doing some smaller things in the short-term to – if that's where the opportunities avail themselves. With regards to partners, I'm not sure where that came from. We may do things with other people; we may do things on ourselves, by ourselves. We have, we believe, access to capital. So, the issue isn't the capital; the issue is the opportunity, and to the extent we find really terrific opportunities, I think the markets would be hospitable to us discussing what those opportunities are and potentially giving us more capital to go out and do them again.

Jay Habermann – Goldman Sachs

Can you talk about the mezz investments? I know historically you have looked more at acquiring assets, but can you give us a sense of investing in debt and what opportunities might present themselves there? Is that a smaller portion of the total pie?

Ed Linde

Sure. We don't know where it's going to come from, but I think the thing you said there that I wanted to sort of highlight is we are not looking to invest in mezzanine financing. What we're looking to do is figure out whether or not the mezzanine position is really the equity position in a particular deal, and how or when that position might allow us to become the owner of the property.

So I don't think we would be a party that would go out and make mezzanine loans and help other people recapitalize their assets. But to the extent there are mezzanine positions that are available and they are a means to an end in terms of being able to utilize our operating expertise to fix a property, that's really I think where our focus would be.

Jay Habermann – Goldman Sachs

Great. Thank you.

Operator

Your next question comes from Jamie Feldman of Bank of America-Merrill Lynch.

Jamie Feldman – Bank of America-Merrill Lynch

Thank you. Good morning. So the BofA and Merrill economists just came out with a report saying that corporations in this country cut too many jobs this cycle. When you look at the GDP decline, do you expect a GDP decline versus job cuts in other countries versus their GDP declines? Are you sensing that from your tenants?

I know you mentioned a pickup in velocity. We are just trying to get a sense of how sustainable that pickup is, and what your view is of what your tenants are thinking in terms of, if things pick up, how much more they do need to hire?

Ed Linde

Well, Jamie, I think, unfortunately, it varies by market. I think in the city that you sit in, there are more financial firms who are going back to the colleges and universities to hire people in calendar year 2010 than anybody expected there would have been. I believe that the service industries associated with the transactional experts, meaning the legal profession and the accounting profession are probably still struggling with the level of financing activity that has fallen off and the number of bodies that were employed in structured finance and other non-transactional related activities that haven't come back yet.

With regards to asset management and money management, again I think we are starting to see as capital looks for more – is more comfortable taking a higher-return investments, that some of the alternative asset class fund managers are starting to gain traction again and are looking for people and are raising capital. I don't think it is a significant change from what it might have been two or three years ago, but it's certainly much better than it was six months ago.

In other cities where we are not as tuned into the financial economy as New York City is, I think it is going to be slower going, because most of the users of office space in those other cities are sort of one step removed from the transactional work that gets done in Midtown Manhattan and/or on a global basis.

Ed Linde

Just to add something to that, I do spend a fair amount of time talking to non-real estate corporate CEOs, and not necessarily in the financial industry. I would say that the tone of those conversations has gotten far more optimistic about where they're going. Now, I agree with Mort. That doesn't immediately translate itself into job growth, which is what we need.

They may not be direct tenants of us. But I think the tone of the marketplace in general has improved tremendously. Ultimately, that works its way through and does impact real estate and does impact people's prospects about job hiring. Now, I do point out that I am the optimist in the crowd. So, there may be descending dissenting views within Boston Properties. But that seems to be my observation of what's going on.

Jamie Feldman – Bank of America-Merrill Lynch

So, those non-financial CEOs mentioned that they cut too far, are they just saying business won't grew, so they’ll need more body [ph].

Doug Linde

I have not heard somebody admit that they have cut too far. And probably they've learned how to make money and lots of money with their current workforce. I'm sure they are going to be very cautious about adding people, but it has to happen, and I think it will happen. I'm not saying it's going to happen in 2010 or even 2011, but it's going to happen.

Jamie Feldman – Bank of America-Merrill Lynch

Okay. And then, we are hearing a lot of more pressure on small businesses in this country. What do you see – I know that's not the focus of your portfolio, but what are you seeing from your smaller tenants in terms of their health and their ability to take more space?

Doug Linde

It's the big tenants that defaulted on us.

Ed Linde

I think that we have not had much in the way of small tenant defaults, other than small tenant retailers. We've had sort of what I would call the mom-and-shop retailers, the deli providers in many of our buildings who sort of have really started to struggle. I think, in the buildings that we have lots of small tenants there in some of our weaker markets. So, for example, Burlington, Massachusetts.

And there I think, they are struggling but they also are seeing that there is an opportunity to really dramatically reduce their occupancy expense. The question is do they have viable business models? So we are not seeing much in the way of growth from those tenants, but we are not seeing wholesale closing of the business and walking away from leases.

Jamie Feldman – Bank of America-Merrill Lynch

Okay. Then finally, we are hearing about discussions on Capitol Hill about potential changes in regulations for how banks are accounting for their commercial real estate loans. What are you guys hearing along those lines and what is your view going forward?

Ed Linde

We haven't heard anything that's changed. We have heard lots of rumblings from the owners of those loans that they would prefer not to have to mark those to market, and they would like to figure out ways to keep them on their balance sheets as long as possible, so that to the extent that they recover, they don't look like they looked like when the FDIC took over all of the savings and loans back in the late '80s/early '90s.

The one disconnect that I keep hearing is, I hear people saying 'We are prepared to operate these properties.' It's hard for me to believe that a financial institution is set up to make decisions and to invest additional capital, particularly in the office sector, where the pulse of the market and the underwriting of the tenant and the understanding of how that building may or maybe not be viewed from the market perspective are so critical to those decisions. I am just not sure that they have necessarily the prerequisite skills and aptitude to do that in a very meaningful way.

So I question whether or not they will be successful if they are in fact able to retain these assets for a longer basis.

Jamie Feldman – Bank of America-Merrill Lynch

Okay, thank you very much.

Operator

Your next question comes from Alexander Goldfarb of Sandler O'Neill.

Alexander Goldfarb – Sandler O'Neill

Yes, hi, good morning. Mort, I just want to go back to your New York comments. You sounded pretty optimistic on the city and living here is certainly – we want to see the city do well. But caps in executive compensation certainly hit New York hard and the Journal this morning highlighted the high tax cost of living in a city is driving people out. So, how do you balance those two where the State and the city are being hit on the budget side? It is an expensive place to live and yet the optimistic side that says the city will rebound would be a good place going forward?

Mort Zuckerman

Well, let me just say this. The best part of New York City I might say is its human capital. It attracts talented people from all around the country and from all around the world in virtually every phase of it. Now, you look at the hotel occupancies in New York and they are astonishingly high. They have barely fallen off, so the tourism coming into the city and the people-visitors coming into the city are still extraordinary.

The retail sales, which were down are now beginning to pick up again. I just do think that there are – you look at the theater district, et cetera, the activity is really quite remarkable. I have gone over it with the city financial people quite recently, and I don't remember all of the individual categories, but I must say I was astonished at how well the city is doing, hotel rates and hotel occupancy being one of the things, but particularly occupancy I was really astonished at how well they are doing.

So, I do think that this city has extraordinary assets as an attractive city on so many levels, there are so many people. And in particular, for a lot of the financial firms who want to hire people who are really talented people and really able people, those people, the younger people, want to come and live in New York or in cities like New York. And nothing compares to New York. so I do think.

Washington is another city that works that way. I do think that these are cities that are going to continue to do very well, but I particularly think New York is going to do very well. It will take a while because we have to work through some issues, without question.

But if you look at the salary caps, the salary caps affect people wherever they are going to be working. So I think, in New York, where there has been a real drop in residential prices, it is now more affordable for a lot of people on many ways, in terms of living here. But the basic thing is, my favorite phrase in these days when people ask me, how it is affecting me, as I always say, 'My net worth is now down to a level I never thought it would get up to.'

I do think a lot of people here have lost money, but still a lot of people have a lot of money in this city and are making a lot of money in this city. It's not quite what it was before, but still there are going to be enormous bonuses being paid from some of the firms. I still think there's going to be – and I see it in the residential market. Because I've spoken to brokers in the residential market; it's doing better than a lot of people expected.

So I remain bullish about New York, frankly more bullish about New York and Washington than almost any other city that I know of anywhere. So as I say, I think London is going through a terribly difficult time, so too are many of the European cities which have really seen enormous damage. But we have a kind of resilience in terms of human talent. And by and large, I assume Bloomberg is going to win in the sense that there's going to be a pretty good city. So I still think this city, it's the city of the future, not the city of the past, be more optimistic than most of us in this city, but I really do think this city is going to continue to do very, very well.

Alexander Goldfarb – Sandler O'Neill

Okay. Then just separately, going to the mortgage comments earlier, did you say that mortgages are attainable up to $400 million, or is the cap still around $200 million but if you have an existing $400 million mortgage, the lenders would work with you?

Mike Labelle

I think that you can raise – do a $400 million mortgage on a well-leased, relatively modest valued property from our LTV debt concept [ph] perspective, that you can put together one or two insurance companies who would be more than happy to provide you with a couple of hundred million dollars a piece.

Doug Linde

I think the other thing that I would add that changed a little bit from maybe our prior comments, or that again these insurance companies aren’t putting out any money. So, wherein the first and second quarter they were saying, “Well, maybe we could do a $100 million or $150 million deal”, they have found that if they increase their size a little bit, they may be able to capture a little bit more. So, some of them are saying “The loan is a little bit big, but it’s still a very high-quality asset. It’s got good cash flow, it’s got a good rent roll.” We should be doing that deal in order to be able to put out the type of capital that we need to.

Alexander Goldfarb – Sandler O'Neill

Okay. Thank you.

Operator

Your next question comes from Michael Bilerman of Citi.

Michael Bilerman – Citi

Good morning. Josh Attie is on the phone with me as well. Doug, in your opening comments, you’ve talked about chatter on foreign capital sources looking to buy US assets, and clearly, with the dollar where it is, I am sure those interests have peaked up. Are you working with any foreign capital sources in terms of trying to enter US, or are you thinking more so about – you’ll find an opportunity and then, if you need more capital than you already have today, you will go out and do it?

Doug Linde

I guess I characterized our philosophy and our thought process as follows, Michael. There are a number of foreign capital parties who call us on a periodic basis, and we engage those conversations actually with an active dialogue.

What we generally find is that, unless there is a deal, a real deal, those conversations are interesting and they are informative, but they are not actionable. But when you have a transaction, they are much more actionable, and that’s sort of when the rubber meets the road and you determine whether or not the capital is really serious or not about transaction.

The typical entrée today for a foreign capital source is, “We are interested in buying an interest in or out – one of your properties. Do you have anything for sale?” And they are from – I am not exaggerating – from Mexico, from Spain, from Germany, from South Korea, from China, from Singapore. And we have these conversations, and we have interesting dialogues with them, and we understand what their investment objectives are.

And to the extent that there is something that we think makes sense to do with partners, I think that we would continue to engage those conversations. But until you have a real concrete deal that you’re talking about, I think it’s hard to sort of be actionable with those parties.

Michael Bilerman – Citi

And then you talked about this whole opportunistic acquisition or some development deals being as important or as a biggest priority relative to keeping the portfolio leased. How internally are things being done? You have a task force set up. How are things logistically working internally in terms of scouring for opportunities? Have you bought other people on board? Using existing? Have roles changed at all?

Doug Linde

Well I think, Michael, that we have had a – you may recall we have purchased properties in the past, and so we have a reasonable operating strategy where we have regional managers [ph] who are very strong and who have talented people in their offices. Some of them are leasing people, some of them are development people. And those people are talking to people in the marketplace on a day-to-day basis and their job is to churn up stuff.

Then we have relationship-driven people who are talking to lenders and foreign institutions and investment managers and such, and their – one of their prime objectives is to churn stuff up. And to the extent that there is something that makes sense, we figure a way to marshal the resources to actually work on it. But I think it’s going to become a more and more focused pursuit by the whole organization, and I think that it has transformed from where we were nine months ago.

Six months ago or nine months ago, every time a deal came through from one of these guys, we said, thanks but no thanks. We are just not interested in looking at it. We are worried about, quite frankly, whether or not our credit markets are going to come back and the equity markets are going to come back, and we have to worry more about protecting our flank than we do about looking to the outside. And that's really I think where the change has come.

Ed Linde

And frankly, we do think we have the talent, and if we didn’t have the talent then we have the wrong people working for us right now to do this without having to go out and hire specialists from the outside.

I think, if our regional managers and the people that work for them are not fully current about what’s going on in each of the major buildings or buildings that we would be interested in, in their regions, then I would be very both disappointed and really quite surprised. I think we do have the talent in-house to do this.

Josh Attie – Citi

Thanks. This is Josh, just one more question. You guys mentioned earlier that you are seeing some companies actually expand. Can you give us some color on what type of companies or industries you are seeing this from, and also if you are seeing any companies or industries that are still contracting?

Ed Linde

Well, the expansion that we are seeing is really primarily been in New York City, as I said, and I used the word “financial services-oriented” but C.V. Starr lease space, and they’ve leased more space than they currently have under their footprint. Avenue Financial leased more space than they had; Studley leased more space than they had.

We have two companies that are in the effectively in – the consulting businesses of helping analytic litigation, one in Boston and one in 599; they have both expanded. We have another hedge fund that is merging with a public company, and they are expanding. They are sort of those types of situations.

From a contraction perspective, we really haven’t seen, in our portfolio, much in the way of contractions other than, as I said, in the legal industry. You know, law firms for the most part who made leasing decision in calendar year 2005, ‘06 and ‘07 probably took more space than they thought – than they currently think they will need, and they are looking to reduce that square footage either through a re-stacking, if it is at all possible, or as their leases expire through some sort of a change in the amount of space that they occupy. In our portfolio, I would say that’s where most of the, if you want to call it “underutilized spaces.”

Mort Zuckerman

This is Mort. I want to just add one other thing to a question that was asked to me before that sort of ties into what we were just talking about. It is true that there are sort of pay CAPs [ph] as we say, and indeed even some financial firms that are clearly contracting. As I try to – the talent is still there; the talent is still in New York. And a lot of the people are spinning out of these firms and starting smaller firms, and some of them are really growing very rapidly. And I think that’s going to be a hallmark of what’s going to happen over the next several years.

You’re going to have a lot of startup firms or a lot of smaller firms that are attracting a lot of people out of the major financial institutions. They don’t want the hassle of having the government looking over their shoulder. These are still people with a lot of talent. That’s why I thought, the whole system of pay caps is asinine, because it really means that you are going to have the least talented people be stuck back in the firms in which the government is going to have, I don’t know, $750 billion is either invested or guaranteed. And the talented people are going to leave and start other firms or join other firms and accelerate their growth. But I think a lot of that is happening in any event.

I think we have probably exhausted all of you. So why don’t, at this stage, we call this…

Doug Linde

We’ve got a couple more – we have a few more, unfortunately there are a few more people in the queue.

Mort Zuckerman

No, I am sorry, I am sorry, it’s not unfortunate.

Ed Linde

It's fortunate! Operator, keep going.

Operator

Okay. Your next question comes from Shane Buckner [ph] of Royal Capital Management.

Shane Buckner – Royal Capital Management

Yes, my question is more an accounting question. As market rents declined below the allocation to below market rents from past acquisitions, and those below-market rents aren’t quite as below-market as they used to be, is there any need to reduce the value allocated to that from an accounting standpoint, or reduce the income that’s amortized to fair value lease revenue?

Mike LaBelle

Are you talking about FASB 141?

Shane Buckner – Royal Capital Management

Yes.

Mike LaBelle

The one thing I did mention with respect to FASB 141 is that we are expecting a decline from our contribution of joint ventures next year. And that's because FASB 141 to a certain extent is rolling off. And the reason it’s creating a decline is because rents are going down, and rents are off from where they were when we acquired the assets and set up with the FASB 141 was for each of these leases. So, as I mentioned, I think it was $10 million to $15 million in our joint ventures is rolling off, and that’s a non-cash P&L impact.

With respect to our joint ventures again, only, we also do impairment testing in every quarter. And to the extent that there was significant further decline in rents, we would do additional impairment testing every quarter and there could be impairment charges. Now we have not – we have seen more of a plateauing in lease rates, and we did not – we did our impairment testing this quarter, and we did not come up with any impairment on any of our joint ventures.

Again, that really – that accounting impact only affects our joint ventures. We do an analysis of our consolidated assets as well every quarter, but it’s a different analysis based on an un-discounted valuation, assuming that our intent is to hold those assets for the long term, which it is today on all of those assets. I hope that answers the question?

Shane Buckner – Royal Capital Management

It does. If I could follow-up with the impairment testing, if I understand correctly, the value allocated to below-market rents is a liability on the balance sheet?

Ed Linde

If they are below market, they are, and the analysis is done once upon acquisition and then it’s not readjusted. So, as Mike said, as the leases expire, it will burn off.

Shane Buckner – Royal Capital Management

Right, but do you test the liability for impairment?

Mike LaBelle

No, we do not need to.

Ed Linde

The impairment testing is based on our equity investment in the asset, so just our pure equity.

Shane Buckner – Royal Capital Management

Okay, if…

Doug Linde

If you want to have an off-line conversation, we are happy to do that.

Shane Buckner – Royal Capital Management

Okay, sure. Thanks.

Operator

Your next question comes from Anthony Paolone of JP Morgan.

Anthony Paolone – JP Morgan

Thank you. I just had two small ones left on the development pipeline. The first is, with respect to the 200,000 square feet that you're looking to add to Atlantic Wharf, what is the status of that? Is there at some point along the construction plan where you just can't add anymore?

Doug Linde

200,000 square feet is really a reclassification of the space from residential to office. It is going to be office space. It’s being marketed as office space; it is being designed as office space.

Anthony Paolone – JP Morgan

Okay.

Doug Linde

It's already there. It's not an expansion of the building.

Anthony Paolone – JP Morgan

Okay. Then I guess you noted 170,000 square feet of development rights that you went to contract for in Cambridge. One, am I looking at that right? Can you give us a price, and can we glean a land comp out of that?

Ed Linde

Probably not. Basically, there was a transaction. When we did our transaction with Biogen a year ago, they had the rights to one last development site in Cambridge Center. They agreed to relinquish that site to us. So it all sort of got – it got tied into their decision to move to Reston, and then we basically reclaimed that right, and the right we had to buy the property was clearly a right that was based upon a contract that was done 20 years ago. So, I don't think it is a fair allocation of what the value of that land might be.

Anthony Paolone – JP Morgan

Okay, thanks.

Operator

Your next question comes from Michael Knott of Green Street Advisors.

Michael Knott – Green Street Advisors

Hi, Mort, I have a question for you. What’s your view as to how the bulging national debt will ultimately impact the dollar interest rates and thus real estate values?

Mort Zuckerman

Well, that's one of the really great questions. I have to say that, for the next several years, I just think the economy is going to be weak enough of – that interest rates will remain low. I don't think that this is going to be a serious problem.

If there is a problem, it is that I think will be much less anxious to buy dollar denominated debt securities, if they think inflation is going to basically undermine the value. They would naturally think and probably rightly think that governments would rather have inflation to really reduce the cost of overseas debt holdings or to the governments than any other approach, if they don't want to fault and they wouldn't like to pay that money back. But I just don't see that we are going to have any kind of inflationary pressures for a while.

I mean, I have to say I think the – my own view is that this whole healthcare issue is a fiscal disaster for the country. I mean if you look through and see what governments have stated, what the estimated costs would be, they are off by multiples of what the real costs are. I think we are in an era where there will be a whole range of medical discoveries which, genetics, the whole stem cell research, bionic – people being created, all kinds of – search on the brain, etc., which are not really incorporated into our estimated future healthcare costs any more than longevity was back when we did Medicare and Medicaid. Longevity, one-third of all medical costs are now in the last year of life, and more than that go to nursing homes than for Medicaid.

So, I think that is going to be, at some point, a fiscal disaster. But the question is will we ever have a government in Washington that in a sense is going to prepared to do that? The reason why I think there may be a tipping point is that Americans have finally come to realize that debt matters. When you have a mortgage that now exceeds the value of your home, and you have credit cards that are now above what you can afford to pay for them, particularly if you're worried about your job or working fewer hours, you suddenly realize your mortgage payments don't go down and your credit card payments don't go down.

I think there's going to be this extent to a national picture, and I think, sooner or later, somebody is going to come up there with the idea of getting our deficits and debts under control. Now, maybe that's an optimistic view of it, but I think, for the first time in the polling, the debt and the deficits have become a really serious issue. So, somebody's going to be able to capture that at some point.

For the moment, though, I think that's a real risk that you are describing. If we cannot get any kind of fiscal control over this country's as deficits and overall national debt, which is going to climb dramatically over the next half dozen years, we could be faced with a real drop in the value of a dollar because otherwise people will be very reluctant to buy, to invest in dollars. We still attract a lot of money. We are exporting T-bills. At some point, we are going to have to export goods. But at least they are still buying T-bills or a bond.

I just still think we are going to be the preferred place for this kind of surplus funds for a while until there is a conclusion that basically this country has no ability to get its fiscal health in order and fiscal balances in order. You know, I think what you are raising is a real risk. I have some awareness. I mean, if you look at the polls, the country is against the healthcare program, probably 55%, 56% to 41%; 61% we’d rather not have any healthcare program that increases their costs. It doesn't mean that the Democrats are paying attention to it. The Democrats right now are proposing a program that is in the center of the Democratic Party, not in the center of the country. But I think they're going to lose tremendous political support in the next congressional election.

I think you're going to see a difference in terms of what we're going to be doing from that point on. Certainly, there will be no expenditures that just pay no attention to what our deficit is. The one that really gets me riled up, in case you hadn't noticed that I am already riled up, is that when they offer $250 as an additional payment to 57 million seniors in America, a $13 billion cost, absolutely no justification other than political pandering, to be honest with you.

The theory was, well, there was no increase in the social security payments because the cost of living didn't go up. Well, the cost of living didn't go up, but more than that, they got a 5.8% increase last year because of a quirk in the way we calculate the cost of living index, which is we calculate it at the end of the third quarter and it was in the fourth quarter when the cost of living index went down or stayed flat. Yet here we are saying "Oh well, they didn't get enough of an increase because there was no cost of living increase."

You know, I just – this to me – it is unsustainable and therefore, I believe, will ultimately not be continued, but it will not be this administration, in my judgment, that's going to take this into account. It will be the Congress that blocks him in the first place and may force him in the second place.

Michael Knott – Green Street Advisors

Okay, thanks for that. Amen, by the way. Thank you. Now that you have recaptured the naming rights to the GM building, can you just update us on how you're thinking about maximizing the value of that opportunity and what the timetable is?

Mort Zuckerman

We have recaptured the naming rights, and the ability to capitalize on it is under the heading of TK – to come.

There will be somebody, some company, that's going to want to have that building named, there is. If I venture to say along perhaps with – it's certainly the most famous new building built in the last 50 years in the world. I mean, when we bought the General Motors building, I cannot tell you the number of stories that were sent into us from countries all around the world. So somebody is going to want to have that acknowledgement. We really – this has all just has become, shall we say, available more recently. We will just have to see who it is, who would like to have that naming and what they will pay for it.

Michael Knott – Green Street Advisors

Just to be clear, is it an explicit payment that you would get or would it be just baked into maybe a rent for a tenant or –?

Mort Zuckerman

We would just as soon have it be baked into a rent with a tenant. We would rather have it be tenant that occupies the building, even if we, shall we say, take a little bit less. I just think that's – it's just there is a better feel for it when that's the circumstance. But it may not be possible because we are going to have virtually no space in that building at this point, given what's going on in that building.

Michael Knott – Green Street Advisors

Okay, thank you. That's all for me.

Doug Linde

The last question, operator.

Operator

Your last question comes from Nick Pirsos of Macquarie Securities.

Nick Pirsos – Macquarie Securities

Good morning. Two quick questions, first, has the trend of tenants inquiring for rent relief abated from earlier this year?

Doug Linde

I would say the answer is a definitive yes.

Nick Pirsos – Macquarie Securities

Great. And then secondly, in today's acquisition comments had been accompanied with a focus on long-term value creation. But just to be clear, does that preclude day one accretive deals from possibly occurring, despite current market conditions?

Doug Linde

No, absolutely not.

Mort Zuckerman

Not at all. Bear in mind, as I think Mike made a reference before, I mean, given where we are able to invest a lot of the capital that we've just raised, if we are able to do, I think Mike used a 6% rate, Mike?

Mike LaBelle

Yes.

Mort Zuckerman

I mean, we would add, what, 50 what –?

Mike LaBelle

Yes, 56 [ph] –

Mort Zuckerman

$0.56 [ph], give or take, to our earnings. So, it would have to be an extraordinary long-term value that we saw if we were going in on a 6% cap rate or a 6% yield. So, we will just have to see how it works out. But the important thing for us is, in a sense, I think whether or not we can buy or build buildings that really are consistent with where we think the best place to be, both in good times and in bad times.

We've really seen why the quality of buildings that we have really works out so well in more difficult times. It's been our experience in the past whenever there would be downturns in the real estate market. We're going to stay in that space because that's what we do, and that's what we do well, and that's where we have a lot of shall we say market context, credibility, name it what you would like. I think that's still going to be our principal focus.

I mean, we are basically opportunistic. You have to be that way. You don't sort of – we generally don't tend to buy companies; we buy individual buildings. You never know when they're going to come up or what the opportunities are going to be. Sometimes, alas, our opportunities are somebody else's problems. Sometimes you don't know what somebody else's problems are until they break out. So we will just have to see where it comes out.

But we now feel we have the capital to be able to commit and to move very quickly and not to be dependent upon financing commitments which we think we can get later on, so it will give us an ability to move quickly and to move decisively and to move with credibility. I think that's going to be a comparative advantage in terms of going out and trying to do acquisitions.

Nick Pirsos – Macquarie Securities

Great, thank you.

Doug Linde

Okay. Thank you, operator. We will see many of you, I guess, in Phoenix in a couple of weeks. If you have follow-up questions, we’re more than happy to try and answer them to the extent we can under Reg FD. We will talk to you next quarter. Thank you.

Operator

This concludes today's Boston Properties conference call. Thank you again for attending and have a good day.

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Source: Boston Properties, Inc. Q3 2009 Earnings Call Transcript
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