Boston Properties, Inc. (NYSE:BXP)
Q4 2009 Earnings Call
January 27, 2010 10:00 a.m. ET
Arista Joyner - IR
Mortimer Zuckerman - Chairman of the Board
Doug Linde - President
Mike LaBelle - CFO
Peter Johnston - SVP
Jamie Feldman - Bank of America/Merrill Lynch
Good morning and welcome to Boston Properties fourth quarter earnings call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question and answer session.
At this time, I invite to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties please go ahead.
Good morning and welcome to Boston Properties fourth quarter earnings call. The press release and supplemental package were distributed last night as well as well as furnished on Form 8-K. In this supplemental package the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg-G requirement. If you did not receive a copy of these documents they 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 the 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 Mortimer Zuckerman, Chairman of the Board and 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 turn the call over to Mortimer Zuckerman for his formal remarks.
Good morning everybody. Thank you for joining us. Let me begin just by acknowledging with sadness the passing of Ed Linde who our Chief Executive Officer for many, many years and was for 41 years my close friend and colleague. We started the company together and had a wonderful stint of personalities and abilities and is somebody whom I shall miss enormously, it's hard really to imagine the boy that he leaves after all these many years.
We will all try and make up for the work which he did with the company expanding our various duties, Doug, myself and a number of others, but he was truly remarkable man and a remarkable businessman and a remarkable friend and a remarkable colleague. So, with that, I'll just if I may say just one or two things about the company and the environment in which we work.
I think we had a very difficult patch as an industry over the last several years. All of you I know are familiar with what's been going on, I must say that I think we in a sense have had for a very long time a basic strategy that I think demonstrated its relevance and viability in the past 18 months in particular, and that is we have stayed in by and large supply constrained market, and we have concentrated on the very upper end of those markets, and I think we found this was perhaps more particularly illustrative in New York City where this is a perfect sort of illustration of this how it works. We have been very successful I might say in leasing all of the space which we had available mostly because of bankruptcies, Lehman Brothers and (inaudible) and General Motors etcetera.
And the reason is implicit in the thinking that went in to this strategy which is that these kinds of buildings we feel do better in good markets, but much better relatively in difficult markets and the reason is that in difficult markets when rents go down and they have gone down and we are not immune to that. A lot of people who want to be in the best buildings take advantage of these lower rents and move in to them and that's exactly what we have found. So, I think we will be in a position to have remarkably high occupancy rates compared to the overall market in New York, compared to other cities in part because we have found that tenants really are anxious to go in to the buildings that we have this is particularly two buildings like 399 Park Avenue, the General Motors building, 601 Lexington the formerly what we used to call a Citigroup building. We've really had a very very good experience in terms of filling up those buildings to the extent that we had vacancies. And now that the rents that as they used to be, but the rents have been fairly good and they have been firming up, so we think the strategy that we have does give us some protection against the kind of headwinds that the commercial office building market has encountered in many-many areas of the country.
So, I think we go in to this coming period the next year frankly feeling fairly good about the business. I don't want to underestimate the fact that many of you probably know from what I’ve said and what I’ve written that I have not been a [bull] over the last two years, but I've been much more bearish than most and I have to say that it is pessimist who have been proven right.
And I still think we are facing headwinds on the employment front. Nevertheless in the financial area of the office market, I think there has been a major turnaround, that industry has stabilized and has grown the intense freeze up of various aspects of the financial markets has become solid for all kinds of reasons not at least of which is the actions of the Federal Reserve board and if I ever have any advice to any of you who want to express political opinions believe me support Ben Bernanke, for the Chairman of the Federal Reserve if he came up with some of the most innovative programs to make sure that the financial system has liquidity and credit when the normal ways of feeding the channels just got all blocked up by the fact that the major banks and the minor banks had such incredibly difficult loan books and credit losses that they were looking at.
So, anyways whatever was the mix I think the mood is changed, there is more confidence in the operations of the financial world, I am not saying this is necessary [anybody] in terms of the views of the economy and I still think that most people are little bit more bullish then I am, but I hope they are right and I hope I am wrong, but I think most people within the financial world feel that the real crisis in the financial world is pretty much behind us. And we reflect some of that in terms the tenants that we have in our various markets. It feeds as well into the legal world which is another big source of tenancy for firms like (inaudible) but I will give you another sort of demonstration of why I think this is the case. Most of the people in the financial world cannot do without their [Bloombergs] and I can tell you that Bloomberg has been leasing a lot more machines as a lot of people have spun out of the larger financial firms or start and started new firms or other people have gone into the financial world because they feel that there is an opportunity.
So I think we, in that regard, are benefiting from the fact that we had these very high quality buildings into some very good markets. The Washington market itself is strong and some of other markets are still strong and some of them are weaker particularly those out in the suburbs but I leave that to others to comment on and with that I will end my comments and ask Doug to take over the description to you of Boston Properties and its progress in the last year and its prospects for the next Doug.
Thanks, Mort. Good morning everybody. Personally and on behalf of my family, Boston Properties family I want to just express my thanks for all the calls and letters that we have received over the past few days. I am listening to people in the speaker of the messages they have left, and reading what people have written about how my father made an impact on their lives and just a unique personal connection, he was able to make with so many people has really been a really wonderful tribute to him.
His presence is going to be missed, but the values that he instilled, his approach to running our business and the example he set for everybody at Boston Property should conduct themselves and interact with their tenants. Our contractors, our vendors, other officials, industry colleagues, lenders and investors is really the foundation of everything we are and everything we do at Boston Properties.
Ed was incredibly proud of the organization that he and Mort founded more than 40 years ago. The opportunities that came when we transitioned to a public company back in 1997 really allowed Boston properties to capitalize on its expertise and to grow and then most importantly strengthen its management team and provide an enduring platform.
Ray Ritchey, Mitch Norville, Peter Johnson, Robert Selsam, Bob Pester, Bryan Koop, Mickey Landis and Mike LaBelle all have unique skills and talents but they all also have the opportunity and good fortune to be led and mentored by Ed for many years ensuring that this legacy is going to live on. So we have a lot to look forward to and a lot to be thankful for.
Let me get to real estate markets now. In some ways the markets really have come a long way over the past 12 months. Leasing activity was largely non-existent when we were talking to you last year at this time but we ended 2009 with significantly more activity than anybody had predicted including ourselves particularly in New York city as Mort has suggested where we actually leased 1 million square feet in 2009.
The leasing activity has also become more consistent in our other markets as tenants have begun to act on a new level of lease economics and they appear much less constrained about investing capital in their premises. During the fourth quarter, we completed 573,000 square foot of leases in Washington DC, 400,000 square feet in Boston, 290,000 square feet in New York, 125,000 square feet in San Francisco for a total of 1.4 million. So our total portfolio leasing in 2009 was 3.6 million square feet and that was after just 250,000 square feet of leasing in the first quarter and as a point of comparison in 2007 and 2008 we completed about 4.6 million square feet. So things really feel like they have come back and there is velocity.
A year ago we had, there was basically no capital for real estate assets yet today equity capitals are readily available from the public REITS have all been capitalized. Foreign sources that are actively trying to invest equity in U.S. property and from private equity groups that have either uncommitted close funds or believe they have the financial partners that will write big checks. Appropriately structured secured debt is being offered to low regarded operators at attractive pricing levels from life insurance companies and commercial banks be there foreign and domestic and even the investment banks are starting to aggregate loans again within expectation of completing securitized scarce so I’m going to say this, CMBS deals. And Mike is going to discuss success we are having are rolling over (RJV) property secured debt in his remarks.
Now this is all balanced by the measure of rent levels and concessions, they can see an absorption and the fact that the office market do continue to struggle. Our second generation leasing transaction this quarter were down 13%, they are pretty good indicator of the decline over last year in rental rate economics in our markets. The data this quarter represents 98 leases, the majority of which negotiated in 2009 and it does include 114,000 square feet of the former Lehman space that Mort discussed whether rent was just about $100 a square foot.
Now if you look at Washington DC, you’ll start to see the exceptions of the rule, where we actually had a positive mark-to-market, and that was really led by a 200,000 square foot renewal we do with the GSA at 1301, New York Avenue.
The availability takes of space, the conjunction with the absence of meaningful new tenant expansion has clearly lead to a significant change in lease economics. Rents have declined and transaction cost have increased, every transaction is different and tenants maybe looking for a higher landlord contribution or no contribution so the overall level of rents can vary greatly. Tenant improvement cost and I want to spend a (inaudible) answer of giving you a sense of where they are. For new long term deals and high quality CBD assets are in the 60s in Boston, New York and San Francisco. And they are probably 10 to 15% higher in Washington DC which is probably one of the reasons that why their rent levels have held that better there.
Suburban cost for PIs are more variable since lease lines tend to be shorter and can run anywhere from $10 to as much as $50 a square foot in a market like suburban Virginia. Historically, our blended transaction cost have been close to $30 a square foot given that we do give a number of renewals each quarter. And that particularly is the case when we have lots of activity in New York City. This quarter we went lower, we were $25 a square foot and our average leasing this quarter for the leases that we signed were 6.3 years. The market rents we usually compete our mark-to-market are always based on long-term deals with a full market transaction cost package.
Now let me just give you a sense of where we see market rents and there are some variability but I'll give you the ranges. In New York city gross rents today probably are from the low 60s to the mid 80s in our portfolio now the exceptions there are two grand central where rents are a little bit lower, they probably start in the low 50s and then again in the General Motors buildings where things are much higher, rents at the bottom of the building are in the high 80s and can reach over $140 a square foot at the top.
In Boston, in our CBD the rents are between the mid-40s and the high 50s again then these rents are all gross, in San Francisco between the high 30s and the mid 50s and DC between the mid 30s and the high 50s but those are on a net basis and operating expenses for high quality building in DC are somewhere between $20 and $22 a square foot. The Greater Waltham suburban market is in the mid 20s to low 30s again gross, Cambridge is the high 30s to the mid 40s, Reston Town Center where we have a pretty significant presence low 30s to the low 40s, Suburban Maryland from the low 30s in Rockville to the low-50s in Chevy Chase and in Princeton rents are pretty constant in the low 30s. So this leads to a mark-to-market including our share of RJVs of a negative $1.74 per square feet today.
In 2010 our average expiring lease is $39.68, and using these figure that I just described our market rent is about 36.85. In 2011 the average expiring went to lot higher its 45.81 versus a market rent of 39.03, and again I think I said this before but it really is its about San Francisco in 2011 where we have a couple of 100,000 square feet of space rolling over at close to $100.
Overall, our peak rents were in the second quarter of 2008 and since then they have come down across our entire portfolio of about 20% on the gross basis with New York City being down the most (inaudible) about 35% and they are pretty flat in DC.
Published with [macro] perspective in a journal last week and I am sure there'll be some questions about that in our Q&A. And it's pretty given minded while there are signs of the economic conditions improving. But the labor market still in fact remain challenged and it's pretty hard to predict any improvement in real estate economic over the next 12 months.
But this doesn’t mean we are not going to either renew our expiring leases also our vacant space. As Mort described in 2009, we experienced some pretty significant falls in our New York City portfolio and today we have leased 87% of that space and that includes 304 floors that Citi Group center 601 Lexington Ave that General Motors gave back.
Transaction block continues at a very strong (inaudible) New York City is clearly where it's more strong and that's where we derive 42% of our net operating income. We have negotiations on going on the remaining 50,000 square feet at 399. The last available floor is 599 [lakhs]. As I said we have leased three out of the four floors that were left taken by GM at 601 and then that to an expanding tenant by the way.
We are in an active discussion for all of our available space and all of our 2010 expiration at the General Motors building as reported we did complete lease at the top of the building at economics that reflected the quality of the space in the building it was a big number. And we are in dialogues with prospective tenants on much of our 2012 rollover at 125 West 55th Street.
While many of the largest financial institutions are still rationalizing the (inaudible) the recovery of the financial services industry has clearly led the formation of new companies as Mort described and there is new demand and we are seeing this first hand in our leasing transaction.
Our near-term exposure in New York City is really limited. We have about 100,000 square feet at 601 Lex and 187,000 square feet at Two Grand Central Tower. And that includes 80,000 square feet at the bottom of that building that we are going to get back because the US Mission for the UN is moving to an owned building in the middle of August.
Statistically, the east end market in Washington DC is our strongest market. And they have a direct vacancy of about 9.3%, but that’s up from 6% three years ago, so even Washington DC is feeling you know the challenges of the labor markets. This is probably the highest vacancy we've seen in decades there in the district.
The other challenge in Washington DC continues to be the availability of the space in those secondary markets, North Capital which is really southeast, southwest and the Ballpark Waterfront areas. Practically speaking the only tenants for those buildings are the GSA or our government users and given the significant availability exactly about four million square feet of fully completed vacant new product in that market, gross rent are only in the high 30s gross rents with the CPI escalations in full tenant improvement allowance and since the government is the primary expanding user in a district, clearly slower than anybody I think anticipated from as a GSA completes existing leased expiration, it is becoming a little bit less inclined to take prime locations which it might have done in the past and so that's having some issues on the overall economics in DC. But our portfolio is 99% leased and we have 285,000 square feet of expiration in 2010 and '11 combined. We were able to complete a 120,000 square foot leased and extension expansion with one of our major tenants in market square north this quarter.
That covered a major portion of our near-term rollover. We continue to make progress at 2200 Pennsylvania Avenue and we are now negotiating our second large lease in that building. Our efforts in Suburban DC continue to be focused on early renewals. We documented the first of the main leases we have with the GSA or their direct contractors that have expired and yet the users are all in the space and have every intention of remaining, we have about 750,000 square feet of similar expired leases in our Northern Virginia portfolio that are included in our 2010 expiration schedule where we expect to complete leases up between 2 and 5 years extensions with either the GSA or the GSA contractor.
In Reston we are actively working on our 2011 and 2012 rollover, we completed our first extension this last quarter and 80,000 lease at One Discovery Square and we're in active dialogue in all the remaining rollover at Two Discovery, One Overlook and One Freedom Square.
In San Francisco, which is probably our slowest market, leasing activity was slower than the other places yet we still completed the two (inaudible) location in expansion with an existing locker, they've actually been adding partners as other firms have been expanding. And we are in lease negotiations with the replacement tenant to backfill their spaces to the full floor in one of the other building when it comes they can enable.
In addition, we did complete 13 other smaller transactions in Embarcardero Center which is really where the market seems to be most focused today small 5000 to 10,000 square feet deal. The Silicon Valley is probably the weakest market that we are in the country availability is over 20% and just to give you a perspective this 46 million square feet of available space and about 15 million square feet of that space is Class A and that includes 3 million square feet that was delivered in 2009. So the Silicon Valley has quite a long way to go before things start to feel even core.
Our single storey new product continues to have somewhat good activity and we completed another 17,000 square feet deal this quarter bringing our total activity in 2009 to about 92,000 square feet, so that's about 600,000 square foot property.
In the Weston Boston suburbs, we are continuing to see a pretty consistent follow of small medium and some large requirements and I would define larger kind of over 30,000 square feet and this continues to be a handful of expanding technology in pharmaceutical tenants that are taking advantage of the recent pullback to upgrade their premises, but there also have been a number of mergers and there has been some additional space delivery which has lead to an increase in available space in Suburban Boston. And unfortunately as we previously discussed our largest uncovered exposure next year is really in the greater Waltham market where we have about 525,000 square feet of available space. Some of it currently vacant and some of it is known vacancy.
The good news is our 350,000 square foot fully leased development in Weston is going to be put into service in the second quarter fully leased and give a major boost to our suburban revenues. There continues to be a little bit of optimism in Cambridge as its clearly become the critical R&D location for many of the leading technology and bio-tech companies and we are actually in discussions with two office technology companies that are considering meaningful expansions.
The Boston CBD has seen an increase in activity this quarter, but that really lease expiration not growth. Active loss from renewals are seem to be accompanied by a reduction in leased area there are number of 2011 and '12 and '13 exploration law firm tenancies that are currently in the market. We did complete a [12 year] 188,000 square foot renewal with our largest (inaudible) from it 111 Huntington Avenue this quarter, but a part of that they gave back two floors. We also completed a 40,000 square foot extension with another law firm and that one had no confession, we continue to focus on renewing our tenants with 2011 lease explorations (inaudible) and we have begun to actively market the remaining space to be delivered at the base of the Atlantic Wharf which was recently re-permitted as office space.
Mike will talk a little bit about that. I would summarize our outlook as follows, rents have declined, but leasing velocity is becoming much more consistent. In markets where ownership is stable lease economics affirming and tenants are taking advantage of the reprising of high quality space. In addition to lease expiration during transaction, there are pockets of tenant expansion both in our portfolio and in the market which will acquire incremental real estate. So they are some signs of life. I am not suggesting we are going to see positive absorption, but the expansion activity is certainly not absent.
Expanding tenant care about the future and they also care about underwriting ownership which I think really bodes well for Boston Properties. Our strategy has been to own and operate the highest quality assets in our markets. Again reiterating what Mort started up the conversation with, to design buildings and tenant spaces suited to our customers needs and to continue and most importantly invest and upgrade these assets.
Our assets are not going to be capital throughout. This will give us an advantage as we fight and we will be fighting for tenants in a challenging market. For all the headlines about the burden our problem real estate assets, lender [led] foreclosures or discounting note sales, they have really been the exception not the rule to date. There is very little office products on the market today. It's unclear whether the various price involved and upside down real estate properties will either confused the absentee or unmotivated ownership have an appreciation for the current level of these leased economies, tenant demand and a significant capital necessary to operate office properties.
Operating are [parts of this] building, judging how long it will take to stabilize, developing the right plan to position it in the market place, including making speculative capital investments and then executing is challenging and management intensive. We believe, we are in an era in the office building business where investors are going to have to operate assets and not trade assets and then overtime this is going to provide us with opportunities to make acquisitions.
Our critical component will be our judgment of the underwriting real estate fundamentals and we eat the cooking everyday. It's hard to predict when we are going to able to deploy our capital for productive growth we are staying in touch with the market and we are actively seeking out opportunities and it's just as important as keeping out portfolio leased and managing our financial requirements.
And with that I'll turn the call over to Mike.
Thank you, Doug. Good morning everybody. I want to start with a little bit of a discussion about what's going on in the debt capital markets. We're working on several sizable mortgage refinancing now and we are continuing to seek positive momentum in this market. Overall, we have a strong capital position with cash balances of $1.04 billion and at comfortable leverage position, so we are not necessarily seeking to raise additional funds now, but simply replacing existing debt.
However, if we see opportunities we are confident that we can successfully raise significant new capital at attractive long-term rates. The unsecured markets have continued their tightening trend with our spreads in another 100 basis points in the last several weeks. Today, we could raise 10 year, senior unsecured debt in the mid 5% range, 30 to 50 basis points lower than the 5.88% coupon from our $700 million October offering.
(Inaudible) spreads continue to be wide of other comparable corporate pointing to the potential for further improvement. We are also tracking the convertible debt markets, which should have come back to life after a near debt experience less than 12 months ago.
We're now seeing [convert] pricing with [72%] coupons for five years and a 20% to 25% premium. We are currently in the market with three opportunities to refinance expiring mortgages on our joint venture assets. These three buildings consisting of 125, West 53rd Street, two Grand Central Tower and Metropolitan Square are high quality CBD buildings in New York City and Washington DC and we have found considerable interest from traditional life insurance bank, and pension fund lenders that are willing to underwrite loans in the $150 million to $200 million size range.
We have executed a commitment on one of these deals and have attractive term sheets on the others. As we have mentioned before, we expect to make a pay down on the two New York City properties, albeit the smaller one at $40 million than our prior expectation, reflecting the improvement in this market. We anticipate borrowing additional proceeds and metropolitan square, so the three financings will be close to cash neutral for us. Coupons in the secured mortgage markets have come in by a 150 to 200 basis points and are now in the low 6% range on a long term basis.
During 2010, we expect to pay off our other pending maturities including our loans on several buildings that are (inaudible) centered project in Flintstone and a (inaudible) center which have a total outstanding balance of approximately $80 million. We also have several in expensive libor based construction loans expiring at the end of the year, where we have short-term extension option that we may exercise. These consistent loans on South of market Democracy Tower and [our share] of Annapolis junction and total $267 million.
Although the market has substantially improved, underwriting standards and particularly available leverage continues to be front end center for vendors. Valuations are very conservative, and the ability to use junior financing is highly distress, if not completely prohibited.
We believe that currently over leveraged assets in the markets will still be forced to inject significant equity to obtain refinancing, otherwise they will continue to be a standoff between lenders and borrowers. These situations may still garner short term extensions, but only if the cash flow of the building support debt service payments.
Turning to our earnings for the fourth quarter, we reported fourth quarter funds from operation of $1.04 per share and full year FFO $4.59 per share, both within our guidance range. Our core operating performance exceeded our budget by $2.5 per share. There were no real significant individual drivers of our portfolio out performance, but a lot of small items that added up including on the expense side of the ledger, where expense reduction programs initiated over the last couple of quarters are starting to flow through and positively impact our earnings.
In total, we realized savings of $500,000 in net operating expenses this quarter. We produced about 1.07 million of unbudgeted rental revenue, a good piece of which came in New York City where we executed another new lease of 399 Park Avenue for 60,000 square feet that commence straight line rental revenue in the quarter. As with most of our leasing in New York City the tenants are completing their own tenant improvement work so they have three rent periods of 6 to 12 months. This will show up in our 2010 revenue where our straight line rent will be higher than typical.
Our hotel exceeded its projections for the second consecutive quarter by $575,000 with rev par up by 5% due to higher than expected occupancy, specially our room rates however remains a factor as is reflected by year-over-year decline of 14% in our average daily room rate.
Outflows of temporary cost related to the suspension of our work at 250 West 55th Street were delayed, because temporary costs have no long term value for the project. They are expensed as incurred and the delay resulted in 700,000 of savings for the fourth quarter. These costs will roll into and be incurred in the first quarter 2010.
We did complete all of the permanent work related to the suspension in the fourth quarter and as of December 1, 2009 we have ceased the capitalization of interest and wages for the project. As we mentioned before this will result in a $25 million incremental increase in our interest expense until we restart the project. We also re-categorize this project from construction and progress into land, which is the reason our land investment on our balance sheet increased this quarter.
Our G&A was in line with our projections on a year-over-year basis, G&A was higher than the fourth quarter of 2008. But this is was due to the impact of our voluntary deferred compensation plan which incurred losses [in demit] to the equity market for last fall. While this year we have experienced gains.
This gains and losses run through our G&A lines, but they have no impact on our bottom-line as they are offset in gains and losses in investment as our plan is fully funded. On the non-operating side of our P&L, we are taking a $6.2 million non-cash impairment charge to our carrying value for the California assets held in our value added front.
As Doug mentioned, the market in the Silicon Valley and the San Francisco Peninsula has been negatively impacted by both an increase in speculative supply space and a weakness in demand.
The bulk of the impairment is associated with our Circle Star buildings in San Carlos of which we own a 25% interest. At Circle Star which will be fully vacant in February, leasing activity continues to be challenging and rents have declined significantly. Our carrying value is now below the amount of our non recourse mortgage loan on the property.
GAAP accounting requires that we separately evaluate the building for impairment and record any reductions independent of financing. The loan expires in 2013 and has cash escrows in place to fund the interest expense and carrying cost through mid 2010. We are currently in discussions with the lender to modify this loan, but if we are unable to workout a modification which had recorded gain offsetting a portion of this impairment charge.
Our remaining equity value in the value added fund is $12 million. Now, I want to spend a few minutes on our projections for 2010. As we discussed in detail last quarter, there are several non-operating items that impact our FFO in 2010 and are important for you to understand. We raised both Fed and equity capital in 2009 to put us in an advantageous position to quickly act on new opportunities.
The majority of this new capital remains in cash and is currently dilutive as it is invested in low yielding short-term liquid investments. The impact of the increased share count from our equity offering is a reduction in 2010 FFO of $0.22 a share and the interest expense associated with our bond offering as an incremental interest expense of $31 million reducing our FFO by $0.17 per share net of interest earnings. This puts us $0.39 per share behind our 2009 results off the bat. We have not projected any new acquisitions in our forecast. So our guidance assumes that our cash remains dilutive for the full year.
Looking at the portfolio, on a same-store basis we continue to expect moderate declines due to the impact of negative leasing spreads from expiring leases over the next few years based on current market rents combined with generally flat occupancy rates.
Our current occupancy at 92.4% is up from last quarter, which reflects the positive leasing activity in New York City. We are now back above 95% leased in mid-town, up nearly 400 basis points since June. While our supplemental accurately defines our 400,000 square feet of immediately available space, and just over 400,000 square feet of rollover exposure in 2010, as Doug discussed, we are in active dialogue on much of this space.
Our 2010 rollover has in place rents of $73 a foot, in alignment with the market rents that Doug spoke of. And as such we expect any roll down on this space that we experienced to be more muted in 2010.
In Washington DC, we have minimal vacancy other than our Maryland portfolio where we have 160,000 square feet available, net of a 56,000 square foot tenant that took occupancy in January and in Western Virginia we have 100,000 square feet. We now have only 50,000 square feet left in our software market development where we signed an additional 15,000 square feet of leases this past quarter.
In San Francisco, we had positive absorption in the fourth quarter, but we are really cautious about our ability to gaining meaningful improvement in our 460,000 square feet of current vacancy, a little less than half of which is at Embarcadero Center. Our largest exposure in 2010 is that our Zanker Road Business Park project where 544,000 square foot lease expires on the last day of the year. This is a relatively low rent building mid-teens per square foot and we currently spent a renewal in 50% of the space, but there'll be no impact in 2010. Other than the Zanker Road our rollover exposure is pretty late in 2010, with only 188,000 square feet or 5.6% of our lease is expiring in Embarcadero Center.
In Boston, as we had mentioned on previous calls the expected increase in our vacancy has occurred, when we lost over 100 basis points of occupancy almost all of it in the suburbs and in the fourth quarter. We have some high quality available space including close to 300,000 square feet at 200 West Street, Waltham Weston Corporate Center, City Point and Reservoir Place. Additionally our 2010 rollover in Boston is nearly 700,000 square feet with 430,000 square feet in the suburbs, 125,000 square feet in Cambridge which includes 80,000 square feet when Biogen relocates to Weston in second quarter and 130,000 square feet at the Peru.
Given the overall market's client demand, we are not expecting any meaningful additional revenue in 2010 and may end up losing occupancy this year in the Boston region.
Our lease termination income with a relatively large component of our 2009 portfolio revenue at the $17.5 million. We traditionally see substantially lower amounts and are projecting four million for 2010. Overall, and as I touched on a minute ago, we expect our same-store results to be moderately down with GAAP same-store NOI down 1% to 2% and cash same-store NOI down 3.5% to 4.5%.
These ranges exclude the impact of termination income due to the change in its run-rate from year-to-year. On a GAAP basis this is an improvement from our view last quarter owing to our stronger leasing velocity.
Straight line rents for our in-service portfolio will be up from last year and we project $60 million to $70 million from straight line rents in 2010. This is up from $46 million last year. The major drivers behind the difference which is also a key factor in our projected same store cash NOI decline, are the pre-rents periods contained within the almost 500,000 square feet of leases that we completed at 399 Park Avenue and 601 Lexington Avenue, in addition about 485,000 square foot Roxanne (inaudible) for the productional tower that commences this month but has 12 month pre rent page to provide content build out this larger space.
Our development properties will add an incremental $18 million to $20 million in 2010 with the full year impact of our 2009 pipeline, including Democracy Tower, 701 Carnegie Center and Wisconsin Place which are collectively 96% leased as well as the delivery this summer of Weston corporate center which is a 100% leased to Biogen.
At our Atlantic work development we have received final approval to convert a portion of the residentially owned space to office with the conversion we have increased the office square footage by 200,000 square feet with the denominator factor resulting in a decrease and our leasing percentage to 58% although there is no actually change in leasing at the project. We have also increased our budget by $50 million to reflect the tenant improvement and leasing commission cost, necessary to lease this place, as well as the cost to build out the residential interior for the 70,000 square feet of remaining residential space. The conversion is not expected to materially change our overall return expectations for the project.
We expect our joint ventures to contribute a $130 million to a $140 million to our FFO in 2010. The overall contribution is down from 2009 due to the burn off of $15 million of non-cash, FASB 141 income. Our 2010 JB contribution is better than we discussed last quarter due to the leasing we have completed at the GM building, combined with additional activity we are seeing in Washington DC.
Our hotel is showing signs of stabilizing, but we are still projecting it to be down by roughly $1 million to a projected contribution of approximately $6 million to $6.5 million in 2010. Our development in management services speed income is projected to also be lower than in 2009, with the roll off several large development projects including the completion of 20-F Street in the first quarter and Wisconsin Place in mid 2009. We rent approximately $7.5 million on these projects in 2009 that will not recur in 2010.
We have had some success in obtaining additional fee work, but not at a scale that will approach our activity in 2009. We are currently projecting $24 million to $27 million in fee income for 2010. Our G&A expenses projected to be $81 million to $83 million, this is up from 2009, primarily due to $4.5 million of incremental investing of non-cash stock compensation. Also impacting our G&A is a significant reduction in our capitalized wages down 22% or $2.5 million. For 2010, we continue to have $5 million in non-cash expense related to our OPP plan.
Our net interest expense is expected to be $355 million to $365 million consistent with our prior guidance. This is $46 million higher than 2009 due to the incremental expense associated with our October bond offering I mentioned earlier and a reduction in capitalized interest associated with the suspension of 250 West 55th Street.
These negative items are offset by slightly higher interest income on our cash balances, the additional capitalized interest associated with projected spending at Atlantic Wharf 2200 Pennsylvania Avenue and Weston Corporate Center and the $80 million in debt repayments that I discussed earlier.
As detailed in our press release, we have reached a settlement agreement of the lease termination related to our 250 West 55th Project. We had approved $20 million for this cost in the second quarter of 2009 and have now settled for $12.8 million. We will recognize this previously unbudgeted $7.2 million difference as FFO in the first quarter of 2010.
Taking all of these assumptions into account results in our increasing our full year 2010 FFO guidance range to $4.10 to $4.25 per share. For the first quarter, we project funds from operations of $1.2 to $1.4 per share. Our first quarter FFO is positively impacted by the $7.2 million non-recurring lease termination settlement at 250 West 55th Street. This is offset by a similarly sized one time increase to our G&A that relates to the acceleration of Weston of long-term compensation associated with the passing of Ed.
Our first quarter FFO run rate is lower than last quarter due to the seasonality of our hotel which is down $0.02 per share and the additional two months this quarter where we are not capitalizing interest on 250 West 55th Street, equating to $0.03 per share reduction.
Overall, we are pleased with the improvement in our leasing velocity, although we still have a long way to go to reach a landlord friendly leasing environment. Despite one of the most challenging economic periods, with widespread market weakness and rental rate declines, we are able to project a stable portfolio NOI for 2010 net of the changes in termination income and non-cash FASB 141 amortization.
Not only does point to the quality of our assets our team and the length of our lease terms, but it's due to the quality of our leasing and property management teams who have aggressively achieved positive leasing in New York City and maintained our occupancy levels in Washington DC and San Francisco. We also have the benefit of our development pipeline that is consistently delivered well leased strong yielding projects such as Weston Corporate Center, which delivers this summer in our Boston region providing a double digit unleveraged return with no leasing risk.
As I mentioned at the beginning of my comments, we continue to hold $1.4 billion invested in short-term cash investments that is dilutive to our earnings. The incremental FFO that we can achieve if we're successful investing this capital into income producing real estate can be substantial and have a meaningful impact on our earnings.
That's all of our prepared remarks. So, I believe we are ready to open up the line for questions.
(Operators Instructions). And your first question is from John Guinee.
Thank you. Doug can you walk through a little bit on how your underwriting taken assets and assets worth a lot of lease up for example it was pretty easy to take the purchase price, the deferred CapEx, the TI's and leasing commission, how are you dealing with all of the OPEX query and an imputed cost of capital in order to arrive at your bases and a stabilized return on cost?
Well, obviously it depends on where the asset is and how much risk there is in the asset. I will tell you and I think we in general are in agreement on this although it varies that we are looking to invest capital that will allow us to generate leverage returns in the low to mid teens and whether or not we get that upfront in cash flow or appreciation in the form of increases in rents overtimes is really very much depended on the particular asset and that obviously includes a cost of capital sort of factor as well. So that sort of big picture how we are thinking about it. We also look at if we are putting our money in at a rate of return where would we be on a basis when the building is (inaudible) stabilized and how do we feel about that basis relative to where market rents are and where market rents might be going or a reasonable period of time is because you may feel more comfortable in a market where you think there is a lot of opportunity for growth to be at a higher relative basis which will either have a higher cost of capital imputed in that I mean those are sort of the ways we think about it.
Are you specifically putting in numbers for an imputed cost of (inaudible) doing the lease up whether it be dead equity or operating expenses?
Absolute yes. I mean its inferred in [IRI] and as I said when we look at what our total cost on a total dollars value basis and what our returns at the end of the day that is a factor as I said depending upon our views on the asset and where the asset is and what the risk of the asset is, that number is different so its not the same for a CBD building in Midtown Manhattan and available a vacant building in the Silicon Valley.
Your next question comes from Alexander Goldfarb
Good morning Mort just a following up from your lunch yesterday, what was the take away as far as the populous town is it a sense that Washington wants to make New York the next Detroit or is there a sense of the other some populous talk but in reality they want New York and the financial industry to thrive to create jobs for the New York Metro area.
I am in an awkward position here they did release the names of the people who attended for those of you who don’t know what we are referring to there was a lunch in yesterday with the President with about 4 or 5 folks happen to be one of them, but they have also asked us to keep the content of that conversation off the record and confidential, so I am just not in a position to take any questions on it. If I were I can assure I would even write about it.
Well then I guess we'll have to wait some time to read another editorial. Then the second question would be just on the financing side. As you guys look to use different parts of the capital stack you talked about converts, I didn't hear you mention 30 offering which Simon did the other week given some of the converts that have comeback to company, so it ended up being really just short-term financing, how do weigh not being in the position where the paper may comeback sooner than you want versus taking advantage of the low rates now and maybe locking in 30 year. How much demand do you think there is of the unsecured buyers for that duration bond?
I am going to answer the first part of your question and I'll let Mike answer the second part. When we think about convertible debt, I will be honest with you, we look at it as a debt instrument that is going to have to be refinanced when it matures.
We don't look at it as permanent capital, and we look at it as, Hey you know what if we are lucky enough to have our stock price rise to the point where the convertible debt is excelling the money and people want to convert, that's a wonderful result, but it's not something that we are expecting when we actually go out there and issue the paper from a liability perspective. I'll let Mike comment on the market for long-term paper.
I think that we obviously look at the full maturity spectrum and look at where interest rates and where we think interest rates will be, and in the current interest rate environment longer dated debt is very, very attractive to us whether you need to go 30 years or not, I think it's something we talked about and we consider and at this point, we haven’t deemed it necessary to pay the additional spread to go to 30 years. I do think that there would be demand from investors for that paper and I think that was proven by Simon who successfully was able to raise a certain amount of that capital, but if you look at 10 to 12 years, that's a long maturity debt as well. So we really think about all of those things when we consider it.
And your next question is from Jay Habermann.
Doug, you've mentioned in the past looking at possibly investing in debt. I know the recent 510 Madison deal that SL Green announced, but are those types of opportunities out there, and I guess just to take it a bit further, obviously you mentioned California being weak, in the past you've mentioned New York City and midtown is a focus for acquisitions, but how much of an opportunity do you think California could become?
I'll answer your first question first, which is we are I think realistic about the fact that the way that one might be able to involve themselves in a additional piece of real estate may in fact be through a portion of the death sack, because quite frankly we think that waiting for assets to be sold on the open market with a broker trying to garner the highest price its going to be a very-very long wait. And the people who are controlling the various pieces of the capital stack may in fact find it less objectionable to simply get rid of their investment in the form that they currently have in it and we will go through the brain damage and the negotiation hopefully in a cooperative way with the parties who are involved in those real estate transactions. So I do think that as an organization we are geared up for and prepared to make investments in the various capital structures that would make sense for us in order to garner ownership over a reasonable amount of time.
Clearly Midtown Manhattan has been a market where we have both demonstrated a proclivity to buy the best assets and to really know how to operate and so I think we have a very strong focus there. I think the Silicon Valley is an opportunity it's a I guess I'm not an investor so I don't know what the right way a very-very high beta market and the issue that you have in Silicon Valley is not whether or not there is going to be a company that’s going to grow it’s the sheer volume of the over hand of high quality space and the challenges that that state is having from an economic perspective and whether or not you can make a rational underwriting of how long and what overall rental structure you can make an investment in a Silicon Valley type of a real estate property because it's a really tough one to underwrite there.
And the second question, can you give us an update just on I guess the DC 2200 Pennsylvania at this point you mentioned the second large tenant, how close are you in terms of assigning and I guess also stepping back to Russia Wharf, do you anticipate any change at all in the yield given the change from residential to the additional office space?
Let me answer the first question and Peter feel free to chime in. As Ed always used to say at [least his is cynical side] and so predicting whether or not a lease is going to get signed or when they get signed is sort of a (inaudible) I will tell you that we are in deep negotiation, exchanging piece of paper with another large tenant. We have additional proposals that we have received, we have received economic responses from other tenants and their transactions that we may or may not chose to go forward on, but the overall level of our activity is actually pretty consistent in for that building in DC. Peter do you have any other comments on that one?
I would say that the reference to lease we are, I'd like to thank within the next two to four weeks we'll have that executed and the activity has been very very good considering the pricing of the asset which is at the top of the market.
With regards to Atlantic Wharf not Russia Wharf, the overall yield we don’t anticipate to really be affected I think we are probably taking a little risk of the table because the ability to lead another 190,000 square feet of residential unit, which many of which we are going to have somewhat challenged layout is probably less than the opportunity than I think we have a better chance of leasing that as office space, but in terms of where we stock the economics we are going to be I think we are in a pretty similar position.
And your next question comes from Michael Bilerman.
Hi, this is Rosh (inaudible) with Michael. Can you walk through the change to 2010 FFO guidance, its up $0.08 at the mid-point, it seems like $0.04 of that is related to West 55th, but if that $0.04 was offset by higher G&A can we assume that all of the $0.08 is due to better fourth quarter leasing?
Unidentified Company Speaker
The G&A numbers that we gave last quarter and the G&A numbers we gave this quarter, are very similar. So you could look at it that the $7.2 million of one time income from the settlement to 250 West 55th is one component and the remainder is spread throughout the portfolio most of it attributable to the leasing that Mike LaBelle talked about.
Okay. How much of the $1.4 million of leasing done in the fourth quarter was for 2010, '11 and '12 expirations and is that now reflected in the supplemental because it seems like the 2000 and lease actually went up this quarter versus last quarter?
I think there was a pressure of the few expirations that was schedule for 2010 that we did short-term renewals that are now in 2009 to 2010 I apologize.
I mean as I described we have this 750,000 square feet of space that’s expired and its very hard to sort of say that the lease expired in 2009 and not pushing up 2010 because in fact the tenant is still on occupancy and so until we actually have a legal document with those tenants we are sort of stuck with sort of basically looking at them as month-to-month roll over and so they sort of they will kick into the year which we're in.
And your next question comes from Jordon Adler.
Thanks good morning. You again this quarter referred to investors having to operate assets as a possible source of future opportunity where sort of the rubber meets the road. How long of a period do you expect this to play out over number one and second do you think these opportunities will play out in the high quality segment of the market that you guys target?
I think we've all been disappointed at the inability of the various parties to reach accommodations with regards to capital structures that are clearly either underwater or over leveraged, however you want to describe it and for various institutions, just sort of as people have said that sort of kick the can down the road. As I said in the past Jordon the issue we think is going to, the rubber is going to meet the road when capital in fact require to be invested in these buildings because the lenders is not going to invest capital once they know they have an ownership interest and the equity owner is not getting less capital unless as they've done a workout with the lender to at least perfect a priority for any additional capital that's put in to the asset and guess what, tenants aren't going to wait around and so there is a natural evolution of change that is going to have to occur and we are seeing it in what I guess people would refer to as some pretty high quality suburban assets in both the Washington DC and the Boston portfolio areas right now and a little bit in Silicon Valley in terms of there is sort of being a point in time where there is going to have to be a resolution. I think with some of the CBD assets I think its going to be a little bit more challenging for the timing of those assets and so our approach maybe to be more of the white knight in a situation as opposed to grab a piece of the death structure and rattle a sword and trying to sort of grab control of something.
Will it be fair to expect that you guys maybe to play in the suburban markets a little bit in those higher quality assets, earlier?
In the markets that we are in, we are going to be actively engaged in looking at the assets 75% of our portfolio is in the CBD, I think we'd like to make sure that we are maintaining a similar proportion or assets in the CBD, but if the opportunities are in the suburbs first then we'll look at the suburban opportunities first, but they're going to have to be pretty compelling. We're not doing this just to get bigger we're doing this because we want to make money.
Lastly one on DC and I guess Northern Virginia maybe could you speak to the potential impact of a discretionary spending freeze that we may see in the region for three years.
Well with regards to Northern Virginia I think the good news about Northern Virginia is that the bulk of the occupancy is in general terms the defense industry see the defense homeland security, intelligent agencies and my sense is that that's not an area where there was going to be a freeze on spending, so for Northern Virginia I don’t think that that will have much of an impact. Peter you can describe what your views are on the overall Federal budget and its effects on the overall market in Washington DC?
Up until the recent announcement about the freeze the projection for 2010 job growth in the region was about 24,000 which obviously makes us unique across the country. Doug I think correctly points out the bulk particularly in Northern Virginia of the Tennessee is really defense and in particular intelligence driven and from what the announcement was it doesn’t seem like those things are going to be impacted by the projected phrase.
Okay so just at the margin maybe.
That’s what I would suggest, may be the larger agencies are more social service linked there unfortunately are going to feel the impact but those are not really where the bulk of the growth has been in black from an employment prospective over the last couple of years.
And your next question comes from Jana Galan.
Jamie Feldman - Bank of America/Merrill Lynch
Thank you this is Jamie Feldman from BoA-Merrill with Jana. Two questions first of all we have been hearing lately that even others a lot of capital looking at (inaudible) or CBDS that some of the expectations for the money that's been raised so far are too high. Can you comment on what you are seeing in terms of competitive capital that may be looking at some other type deals?
Is your question does the money have a higher return expectation that what sellers are looking for?
Jamie Feldman - Bank of America/Merrill Lynch
Well both sellers looking for and then also what you would be willing to take a lower return as we stabilize long term owner as opposed to some of the opportunistic funds we have seen raised over the last couple of years?
I'll say what I said before. I mean I think I said this in both casual conversations as well as on these types of phone calls. We don’t think that there are opportunities to put money to work at 18% leverage return. We don’t see it there is too much capital out there and we just haven’t you can't put enough leverage on the asset to provide yourself with a large enough spread on whatever you think the overall return on a cash on cash basis is going to be to get yourself there. So anybody who has that type of an expectation in our mind is looking at very (inaudible) type of real estate and (inaudible) types of products. They are not looking at high quality CBD buildings in Washington DC, San Francisco, New York City but let just not what they think that both things don’t seem to go together at least in our opinion.
To date the capital that is interested in perusing those types of assets I think is trying to find an asset or two to bid on in which to determine whether or not they are prepared to make the investment and bids happen (inaudible) product any consequence in the market to sort of really determine whether those numbers are going to come out like as I said before my view is that if a high quality well leased New York city office were on the market and the leases were at current market terms or marginally above that somebody would be prepared to pay a going on and going in basis a return that is probably close to 6% and maybe even lower. I guess that percent that we get from the compensations we are having with the people who come and talk to us about wanting to make investments in those types of assets in a market like New York city. But there hasn’t been, unfortunately there hasn’t been any evidence because there hasn’t been any products to sell.
And on a risk adjusted basis for property where there is a lot of operating risk I don’t thinks that’s capital is interested in it because I don’t think it has either the patients with a stomach for the risk associated with it.
Jamie Feldman - Bank of America/Merrill Lynch
So I guess the question is how deep you think the pools of capital looking at the same kind of return you are looking at I mean we keep hearing about the billions and billions of dollars that have been raised but maybe its not necessarily competitive.
I don’t have a sense of that Jamie but it's certainly not significant. I am sure there are billions of dollars the competitive recheck are all pretty smart operators, and I wouldn't expect a Brookfield or (inaudible) or an SL Green to not be looking at a billion, we're looking at in big time Manhattan and instead of I think ready to do check in and have access to capital. In other markets, it maybe slightly different, but I think that there is certainly [Audio Gap] amount of capital out there and the question really I think is going to come down to, do we have a different underwriting expectation and the view on how long it's going to take for a particular asset to come around, and or how the economics of new activity in that building are going to play out, and that's where I think the difference is going to be in terms of how we might price of may be some else price up.
Jamie Feldman - Bank of America/Merrill Lynch
We've also been hearing that assets that could trade, may trade off, what they call off market kind of quietly, do you sense that for any other types of assets you won on that it would not be decent marketing process?
I guess the only question that you have to ask yourselves is how would, how do you define off market if, off market is going to five people, it becomes the market to process, and I'm not aware of very many situations where somebody is getting something on a one off basis where anybody else looking at it unless there is a very unusual circumstance.
Jamie Feldman - Bank of America/Merrill Lynch
Okay and then finally back to the New York market, we've been hearing that there maybe (inaudible) quite as close to having a lease at [11 times square], can you talk a little bit about what a big chunk of space off the market 11 times square does to that market in terms of big blocking and brand new modern building and whether that may increase, or has increased so far prospects or 250 West 55th Street, and then also what kind of rents you need to see to restart that project?
That’s a lot of questions. I'll try and answer them as distinctly as possible. We have heard like others have heard that Proskauer is negotiating in discussions with doing a lease with the folks at 11 Time Square, knowing Proskauer the way we know them don’t be surprised if that leasing takes a long time. I think if a deal gets done at the types of economics that we are hearing about and I'm not going to talk about what someone else is how somebody else is tunically spaced I think there will be a surprise at the level of those economics in terms of them being higher and people might have anticipated and I think that speaks to the lack of available larger blocks of space with the ability to grow in Midtown Manhattan. And I think that in itself pertains well for 250 West 55th Street.
The one thing that I would caution is that the size of the Proskauer tenancy has dramatically changed at least from what we've heard in terms of how large that user is and so the size at which a large user really does have to think seriously about new product as probably is smaller than you might imagine its not 600,000 square feet its probably 350,000 square feet of space because those blocks are very hard to combine. But for our purposes at 250 West 55th Street starting a million square foot building with a 350,000 square foot tenancy I think would be hard for us because you have to lease the other 650,000 square feet of space and knowing how long its going to take to lease that space and at what economic terms is going to determine whether or not we're comfortable starting that building at whatever those high rates might be and I am not sure at the moment where that it makes incremental sense but if the tenant were large enough I think that it would be something that we would seriously consider.
So what kind of tenant rents would you need to see to restart that project?
I am not going to give you a number, I guess its going to depend on the tenancy, I think we have been pretty clear that the incremental capital that we have put into that (inaudible) on a going forward basis is about $450 million and we are going to want a pretty healthy return on that $450 million.
And your next question comes from [Shane Buckner]
Yeah so if you can talk a little bit about market rents in some of your markets as well as seeing improvement in leasing cost, can you give us some idea of other types of (inaudible) used in the labels and some of the bigger (inaudible).
The only other incentive that I guess sort of comes into play is free rent and free rent is really a more market oriented concession tool in a market like Midtown Manhattan traditionally free rent is being used to build out space as Mike LaBelle discussed because the tenants generally are responsible for their own work and it is gotten extended out modestly it used to be eight months and now its 10 to 12 months. In the other markets free rent has really not been a major tool that's been used other than by landlords in the past who have attempted to increase the face rent on a particular property because perhaps they might want to sell that property you know at some point in the future in doing so increase the cash flow associated with that property and sort of basically recognize that they have a better chances of recapitalizing their asset in terms of evaluation by having a higher phase rent which has obviously a higher potential value. The basic economics for most tenants are really what are driving things and whether or not you are doing it in the form of free rent or lower starting rent is for the most part it becomes interchangeable.
Okay and I would have said the same goes for in (inaudible) imbursements?
(inaudible) imbursements I really haven’t been affected by the market, everybody still understands that there is a base here where you set operating expenses until the most part escalations above that base are just sort of part of that market.
And your next question comes from Michael (inaudible).
Talk a little bit about your Cambridge land acquisition and then also just a little more color on that market are you going to be thinking about developing traditional offers or potentially the large space of the office technical?
So, there is one last site in Cambridge center, the site had been under the domain and control of (inaudible) when they moved and signed their lease with us I would add in Weston they agreed to relinquish those development right back to us. We had provided them those rights 15 years ago and they built out all their other buildings except for that site. We bought the land from the Cambridge redevelopment authority late in the fourth quarter. Just to close on it, the building has been designed from a box perspective to accommodate either lab in or office technical types of users.
Unlikely that we are going to do anything without a commitment from somebody. We have been approached by users on both sides and our view is it’s the last side in Cambridge Center. There are very few entitled pieces of property in Cambridge. If you look at the alignment of the Stars Cambridge seems to right in center over there. The MIT led media lab, the research associated with the office technology users, the new resurgence of activity on the biotech side with companies like Novartis and Genentech and their acquisition of additional companies. All through bodes well for the long terms viability of Cambridge Center and so our view, this is a long term hold. We are going to build the building for somebody and it maybe not building, maybe an RB building and the good news is we have the ability to do higher.
Okay. Your basis there is $100 a foot?
Yeah, something like that. I think it’s little bit less.
Okay. And then on your comment just a second ago on New York, it sounded like you guys think cap rates, initial cap rates for certain buildings would be right around 6% based on what you hear from market participants.
As I said for a fully stabilized this is a building with no rollout for the next eight or nine years at rents that our current market or slightly above. So someone feels good that when the building rolls over in 2020 something that the [spreads] is going to be below market.
And Boston property is a buyer or a seller at that cap rate?
I think we are a buyer of opportunities and we had a long term perspective and a long term believe and optimism with regards to midtown Manhattan and where we as I said before, we're looking for moderately leveraged low to mid double digit IRR's and if that right building showed up and we could do that than it would be something we would look how seriously at.
And your next question comes from Mitch Germaine.
Hi guys my questions are all answered thanks.
And your next question comes from Andrew (inaudible).
We were just wondering if you can give any FAD guidance the tight year 2010 FFO expectation?
FAD guidance we have a obviously a page in our supplemental that provides some good information on what our FAD has been and has been historically. On the capital expenditure side, in general on annual basis its somewhere around $30 million annually it has been a little bit higher than that in a couple of last few years because we did some pretty big individual capital jobs for example we did the entire lobby at the Prudential Tower, we did the new entrance in the lobby at 601 Lexington Avenue, both of which caused that to be a little bit higher. The other item is the tenant improvements and the leasing cost associated with the leasing that we plan to do. And we expect our occupancy in 2010 to be relatively static, we have a little over three million square feet of space that is expiring in 2010. And as Doug mentioned the tenant improvements and leasing cost that we've been experiencing in a range from kind of $25 to $30 a foot on that space. So that's what we would expect to see with respect to those tender improvements and leasing costs.
And your next question comes from Michael [Odel]
Just two questions on the financing side of business in terms of revolver adjuster plans on the re-financing there or if plan to just to use your expansion option and in terms of the most recent (inaudible) just curious in terms of what the rational was for only the cap rate on the asset valuation and just the given existing market conditions?
I will respond to both of those with regard to our revolver we have $1 billion revolver that expires in August of this year and we have a one year extension that is available to us that will take it to August of 2011 and if you look at the market for these types of facilities my existing facility is priced at below what the current market is for these types of facilities. You are going to see some of the other companies have gone out and priced these revolvers at in the 200-250 basis points range with unused fees that are much more significant than they used to be in the 30 to 50 basis point range where our current unused fee is 12.5 basis points. So we don’t get any pressured and have to renew that revolver earlier and you know we expect unless something changes in the market place where it becomes more price attractive to do it earlier we would expect to likely extend it. With regard to the unsecured debt markets the cap rates that are in our unsecured debt indentures we feel are higher than they should be and despite the fact that the market was still little bit weak from what happened last year early last and the year before, we feel comfortable that we can go to that market and have a decrease in our CBD cap rate. Which we still believe is higher than it should be. But we were trying to work with our unsecured debt investors and settle level that they would feel very comfortable with that was the reason and the rationale for pushing that a little bit.
So would you plans be to lower the cap rate hence going forward or are you comfortable with the percent of level.
I mean it really depends upon where the market is at the time and what we are comfortable with our leverage structure today, so we are comfortable with the cap rate where we are which is why we agreed to set them at those levels which were generally where the market was for these unsecured debt indentures at that time. I would say that there were other’s that have that reduce their cap rates down further than we have. And if the market will allow us to do that we would likely try to do that again just to provide additional room, not that we necessarily need that additional room or want to add leverage to the company, simply just to provide that.
And your next questions comes from [David Harris].
Good morning and thank you for taking my question (inaudible)…Well I wonder if I can get bounce to you then Doug I am sure you can answer this question. As Mort made several references over recent quarters through his relative optimism for New York over London I am not asking you to make comment on that, but today we are looking at an environment where we'll either be looking at (inaudible) and the (inaudible) we would have in New York, 50% taxes on bank bonuses as an talk of imposition of (inaudible) impacts in London. I'm wondering how you guys think about the long-term flow space demand from tax payerback, financial institutions in the city like New York?
It's a very fair question, David and I think the overall answer we have is that in certain circumstances, I think it will mute the growth of some of these large institutions. I guess what I would also is I don't believe that the bodies who were doing this things, there have been number of institutions and the brain power that is there is going to simply evaporate. It's going to move to organizations that don't have the same restrictions that are being put on those same institutions, and quite frankly that means there will be more business formations and more opportunities for modest sized tenants to fill our buildings, as opposed to large tenants who are looking for mega projects in order to sort of rationalize their ability to grow in a market like New York city.
So, if a Morgan Stanley, as in instance decides to sell off its private equity businesses than those private equity businesses are going to go locate another places in midtown Manhattan and they will become tenants as opposed to Morgan Stanley being the tenant, they will be (inaudible), one or the other entities that are currently there. I don't think it signals a decline in the opportunities of tenants that grow in New York city, I just think it potentially, it shuffles the deck a little bit and the size of the tiers may be different.
It may make the operational challenge of dealing with more credit challenge or shuffling all questionable credit, kind of credit and what more of a challenges to go forward [may enough]?
Perhaps, but to be honest with you, we didn't think Lehman Brothers was a credit issue and guess what it came up and bite us in a pretty significant way and so if we are going to take credit exposure taking credit exposure in smaller increments may not be a bad things as long as I am comfortable with their way that we're underwriting those leases and security that I have and the way those leases are structured from an investment perspective.
Well you and I both on the Lehman question. The second question is maybe I missed this is there anything happening on foot that would cause you to be further encouraged about overseas investment coming in to the US?
We haven’t heard of anything of any significance that would suggest that foreigners can own a larger share of private real estate company that with public real estate company and provided impetus for additional capital in to the public market I think the first of rules have been a fact of life for quite some time and the investors from foreign nations have figured out ways to sort of adjust to those tax ramifications of ownership or real estate as best they can, but I'm not sure that the capital has so I don’t think the capital has necessarily been scared away, perhaps if the tax rates change there might be an impetus for additional investing on the private side, but we haven’t heard anything about the ownership of public companies that would suggest that there is going to be an ability for them to take more meaningful stakes in public company.
And your next question comes from Chris Kayton.
Hi good morning, my two point question one is on market ranks and concessions how do you see that trending over some of your stronger market versus weaker market in the next kind of 12 to 18 months? And then on cash renewals I think the spread was down [70%] in the quarter? So how do you see that trending over the same time period?
With regard to economics, Chris I really don’t think we are going to see much in the way of improvement in real estate economics even in the strong markets, because I don’t believe that there is enough incremental demand to really effectuate any sort of significant change in absorption, and therefore I think where we are is where we are going to be, now that’s definitely overall market. We may in fact be able to have some pricing power in a particular building because, I will give you the example like 399 Park Avenue the only space we have available right now is 10,000 square feet on the 15th floor and 40,000 square feet on the sixth floor and I would say that we are being more aggressive with our responses to tenants, because we don’t have much exposure and though we had really demonstrated that it’s a very highly sought after product.
And so we have been able to push rent I would say if you looked across Park Avenue there are still deals that are not deal being done at similar price points that you feel comfortable where rents are because you don't really see much in the way of significant improvement and I don’t think we are going to see that in the strong market, in the weaker markets I do think things are going to continue to just sort of decelerate but though head down in a very modest way because as much as we would like it there are weaker landlords in various markets and there are people who are taking the prospective that some income is better than no income. They just simply want to cover debt service, if they have debt services or they simply want to cash flow if they have no cash flow and they are taking some desperate actions.
And those desperate actions unfortunately do have a psychological impact on the market place and so to the extent that you have a weaker marketing and you have those types of activities going on. Its hard to mitigate what those effects are and they tend to have a detrimental impact on sort of where rents are. And where concessions are going and so we really do start to see serious incremental demand I think that’s going to continue to be the case in the next 12 months.
Thanks. You know just a follow-up question on expense reimbursement, hedge down I think probably mostly because operating expenses were down but it also looks like its down as a proportion of operating expenses. Would you attribute this some of the renewals you have done, and how would you expect that to trend over the next coming quarters?
When we do leases it's going into the base rent. So you might see it go down as we do additional leases because it's converted into base rent.
And that this time I would like to turn the call back to Doug Linde for any additional remarks.
We are all set, thank you very much. Again we appreciate your patience with us. We try and give you as much information as we can so that we have this many deep conversations with you on a one-on-one basis and not skirt the FD rules. So apologize for lengthening the call and we'll see you guys at the very conferences that are occurring over the next couple of weeks and months and talk to you again in three months. Thanks.
And this concludes today's Boston Properties conference call. Thank you again for attending and have a good day.
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