Boston Properties Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.29.14 | About: Boston Properties, (BXP)

Boston Properties (NYSE:BXP)

Q4 2013 Earnings Call

January 29, 2014 10:00 am ET

Executives

Arista Joyner - Investor Relations Manager

Mortimer B. Zuckerman - Co-Founder and Executive Chairman

Owen D. Thomas - Chief Executive Officer and Director

John Francis Powers - Senior Vice President and Regional Manager of New York Office

Douglas T. Linde - Director and President

Michael E. LaBelle - Chief Financial Officer, Senior Vice President and Treasurer

Raymond A. Ritchey - Executive Vice President, Head of The Washington, D.C. Office, National Director of Acquisitions & Development and Member of Office of The Chairman

Analysts

James C. Feldman - BofA Merrill Lynch, Research Division

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Joshua Attie - Citigroup Inc, Research Division

David Toti - Cantor Fitzgerald & Co., Research Division

Michael Knott - Green Street Advisors, Inc., Research Division

Vance H. Edelson - Morgan Stanley, Research Division

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Vincent Chao - Deutsche Bank AG, Research Division

Erin T. Aslakson - Stifel, Nicolaus & Co., Inc., Research Division

Ron J. Perrotta - Goldman Sachs Group Inc., Research Division

David Harris - Imperial Capital, LLC, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Operator

Good morning, and welcome to Boston Properties' Fourth Quarter Earnings Call. This call is being recorded. [Operator Instructions] At this time, I'd 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' Fourth 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 these 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, Executive Chairman; Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchey, our Executive Vice President of Acquisitions and Development, and our regional management teams will be available to address any questions. I would now like to turn the call over to Mort Zuckerman for his formal remarks.

Mortimer B. Zuckerman

Good morning, everybody. This is Mort Zuckerman speaking. As you all probably know and as you read in all the newspapers, there is a general sense that our economy is still moving forward but at a slower-than-expected pace. What is interesting for Boston Properties frankly is that we still seem to be quite active, perhaps not to the same extent with large tenants, but certainly the combination of large tenants and small tenants is very encouraging to our basic strategy of having the best buildings in the best locations in the best markets. And that strategy, I think, has helped us, I think, do relatively -- and perform relatively well in the atmosphere of what a couple of firms have called the Great Recession because we had a very subpar period, a very long period of subpar economic growth in macroeconomic terms.

And yet in the markets that we are in and in the locations that we are in, in those markets, we still continue to have a lot of activity. And I think this is going to continue from all that we can tell in terms of our interaction with the various tenants in the various markets we are in. Nobody can quite predict what the overall economy can do because we are 4 or 5 years into an attempt on the part of both fiscal and monetary policy to stimulate a stronger rate of growth than we are experiencing now. And in particular, we are seeing, according to various surveys, one of which was just published this past week in the Financial Times, that American business is constraining its capital spending on plant and equipment to a fairly low level going forward. Now nobody knows how accurate these assessments will be, because a lot depends on whether or not there is a perception of a stronger growth in the economy. And if that happens, I think we'll see an even more active investment policy on the part of a lot of American business.

But in the buildings that we are in and in the markets that we are in, we continue to see an encouraging amount of activity and we are comfortable that we're going to continue to see this going forward. We have relatively little vacancy in our existing buildings. We have a number of additional building projects that we will describe. And in particular, I urge you to listen to the folks from our Boston office talk about some of the projects that we're doing there. We had a review of one of them this past day or 2, and it's really going to be an extraordinary project and one of the best projects in the history of Boston, much less in the history of Boston Properties.

So with that, if I may, I'll turn it over to my colleagues, who will fill in and expand on where we are in our various markets. And I thank you for your attention.

Owen D. Thomas

Thank you, Mort. This is Owen Thomas. Good morning, everyone. I'm joined here in Boston by Doug and Mike, as well as our team here. I'll touch on our overall performance for the quarter, provide an update on our capital allocation strategy and discuss some organizational changes that we made as a company last quarter. Doug will then discuss our markets and operational performance, and Mike will provide some more color on our financial results for the fourth quarter.

Just quickly, building a bit on Mort's comments, despite the economic weakness overall that Mort described, our market exposure to technology companies, to health care and small-scale financials has continued to serve us well. And we continue to experience very favorable market conditions in a number of our core markets, including San Francisco, Cambridge, suburban Boston and to some degree, Midtown Manhattan.

Switching to performance. In the fourth quarter, I believe we performed well overall. Three things I would highlight. First and specifically, we executed 97 leases representing 1.3 million square feet, with reasonable balance across our portfolio nationally. However, San Francisco and Boston were the largest contributors. Our in-service properties in the aggregate are now 93.4% leased, and that's up 60 basis points for the fourth quarter and up 200 basis points for calendar year 2013.

Second, on the leasing side, we also continue to make significant progress leasing our development pipeline. And as Mort touched on and Doug is going to describe in greater detail, we've made some substantial and exciting progress on a number of new developments, which again we're going to talk about further later in the call. And then lastly and you're going to hear more about this as well, we were able to complete in the last quarter several planned asset sales that were part of our strategy and plan.

Now second, turning to capital strategy. Interest rate increases, as all of you know, have been fairly benign over the past quarter. It's likely -- it's our belief that it's likely that interest rates will continue to rise, but the timing and the pace of such increases are obviously difficult to forecast. We're finding private capital for real estate remains plentiful and continues to aggressively pursue real estate investments, particularly for high-quality office in our core markets.

Our capital strategy remains consistent with what we've communicated to you in the past. And specifically, number one, we continue to actively monetize assets and, in fact, sold 2 suburban assets in the fourth quarter. For 2013 in the aggregate, we sold 7 assets, raising $1.25 billion in proceeds, which created a $2.25 per share special dividend, which we announced at the end of last year. You should expect our selected monetization activity to continue. Second, we have and will continue to actively pursue acquisitions. But we continue to find that either our underwriting assumptions and/or our return requirements are not aligned with the pricing being offered by others for high-quality office assets in our focus markets. And therefore, we have been less active making acquisitions over the last few quarters. And then third, we continue to see interesting opportunities in development, where we believe we can deliver new properties at lower cost per square foot and higher yields than where existing older properties are trading. Our development pipeline remains robust, as you know, with $2.5 billion in active projects plus a number of additional high-quality developments under consideration.

Then lastly, I want to touch on a few organizational changes. As you know, our New York Regional Manager, Robert Selsam, retired after 33 years with Boston Properties at the end of 2013. We engaged last year in a search to find Robert's replacement. And we are absolutely delighted to have hired John Powers, who commenced his duties at the beginning of the year. John is a 27-year veteran of CBRE and has been a key advisor to Mort, Doug and Boston Properties in the New York market for over 15 years. Given that John is well-known within Boston Properties and has extensive knowledge of the company, particularly in New York, the transition has been seamless and he's been able to get off to a great start overall.

Lastly, on the organizational side, this past quarter, we announced that we will merge our Princeton operation into the New York region under John. We think this makes more organizational sense for us going forward because Princeton is not of the same scale as the other regions of Boston Properties and all of the regions of our company, except New York, have both a CBD and a suburban component. Boston Properties is now organized into 4 significant regions: New York, Boston, Washington, D.C., and San Francisco.

Before turning it over to Doug, I wanted to ask John if he would join the call, introduce himself, and perhaps make a few comments.

John Francis Powers

Thanks very much, Owen. Yes, I've worked with Mort, Doug and all the people here in New York for many years, numerous transactions, 3 major developments and millions of square feet. So my ramp-up has been very quick and I'm now fully engaged with every aspect of our operations in New York and Princeton. I'm very excited to be here. Thank you.

Owen D. Thomas

Terrific, excited to have you, John. Over to Doug.

Douglas T. Linde

Good morning, everybody. I'm going to start with a couple of comments on our divestitures because I just sort of want to give you a context of sort of how we're thinking about things.

So our asset sales fall into 2 buckets. The first of those assets that are located in sub [ph] markets, where our expectations of achieving long-term cash flow growth are really suboptimal, relative to the rest of the portfolio. And in 2013, I would characterize those as the sales of 303 Almaden, which is the building in San Jose; our 2 Mall Road assets, which are legacy Boston Properties pre-IPO assets; and then One Preserve Parkway, which is in Rockville, Maryland. And those are just markets that we're -- our view is that really are not part of the same growth profile as our other markets.

And then there's a second group of assets, which are really what we consider to be core assets for the company, but where we've been very successful at populating them with really terrific long-term contractual cash flows. And they're just an ideal mechanism for harvesting in the current capital markets environment. And those are the buildings like 125 West 55th and 1301 New York Avenue and Times Square Tower. So that's sort of how we're thinking about our asset dispositions. And we continually review the portfolio. And I think as Owen said, we're going to be marketing additional assets for sale or recapitalization, a.k.a., the way we dealt with Times Square Tower in 2014.

I also want to spend some time talking about our development activities today. And I'm going to do a little bit of that upfront, and then I'll sort of intermix it with my remarks on the markets. So this is clearly an area where we have a distinct advantage. And really what it does is it avails itself of our platform and our operational expertise. It does, in fact, makes us a different kind of a company.

As we close out the year, we received formal entitlements for 2 new development projects in Boston. The first is in Cambridge, where we received approval for a new 200,000 square foot residential building on a underutilized parcel at Cambridge Center. That's about a $100 million project. We're actively designing that project with an eye towards breaking ground early next year. This will be our fourth residential development. The project may have up to 20,000 square feet of street-level retail adjoining our other Cambridge Center assets.

Additionally, we received approvals for a 1.8 million square foot mixed-used development at North Station in Boston. And I know there's been a lot of press on this and people have asked questions, so let me try and give you a little bit of color on what the project potentially is going to look like. The project was approved for 235,000 square feet of retail podium. So that's a basement and 1, 2 or 3 levels of retail at the ground floor and rising just in front of the North Station at TD Boston Garden today. There'll be 142,000 square feet of what we refer to as low-rise office space, which will sort of be on the same plane as that retail space. And then there are going to be 3 towers on top of that platform. There's a 200,000 square foot parcel, which is zoned for a 300-plus-or-minus-room hotel; a 560,000 square foot residential tower, which right now looks like it's around 497 units, obviously that's the number that was just in our approvals; and then a 668,000 square foot tower, an office tower. And all of that is on top of about 800 below-grade parking spaces. So that's the sort of sum total of the 1.8 million square feet.

Now this is a project that we are doing as a venture with the owners of the land, which are Delaware North, the owners of the Boston Bruins and the Boston Garden. And we don't expect much to be going on in 2014. But based upon some preleasing and some interest we're having, particularly on the retail side, we're optimistic that something will happen early in 2015. Our share of the asset will be determined largely dependent upon what Delaware North desires are in terms of how much equity and desire they have to go forward on the development piece as vis–à–vis just owning the land. So I can't really give you a sense of sort of what our interest is going to be versus theirs. But overall, it's around $1 billion project sum total in terms of cost.

Let me switch to the operating environment now. So I think I would characterize the operating environment really as pretty unchanged from where we were in October, when we went through our market activity and we put forward our 2014 earnings guidance. But let me give you some color on sort of what we see going on.

If you look at our second-generation statistics, there's a couple of thoughts. In Boston, there's one transaction, which sort of skews things. There's a 41,000 square foot lease, where we actually relocated the tenants to some vacant space and backfilled that lease on an as-is basis. And if you sort of knock that transaction out because the tenant that moved to the vacant space is not included in those second-generation statistics, the increase in rent in Boston was about 7.2%. In New York City, the number looks pretty large, but it's skewed by a small deal at the General Motors Building, about 7,500 square feet, where the rent went from $83 to $100 a square foot at the low portion of that building. And then in San Francisco, most of the deals last quarter were in the retail side. But if you pull out the retail and you just look at the office leases, the jump is about 11% on a net basis, which is probably a lot more consistent with where people, I think, are thinking what rents are and our mark-to-market is, particularly in Boston and in San Francisco.

In the Greater Boston region, Cambridge clearly is still the strongest submarket that we are a part of. We are effectively 100% occupied, but that doesn't mean that we're not going to see some meaningful gains in our cash flows in 2014 and 2015. So this quarter, we did our first large renewal. The mark-to-market on about a 67,000 square foot lease was over 70% on a net basis. We're now in negotiations on an additional 225,000 square feet of 2014 and 2015 lease expirations. And there, we think the mark-to-market is going to be somewhere between 45% and 50% on a net basis. Office rents in Cambridge are now in the mid-60s, and that's about a 30% increase year-over-year. Now in addition to our new residential development, we are actively working right now with the city of Cambridge on entitlements for another 1 million square feet of density on our Cambridge Center project. That would be in 2 parts, about 600,000 square feet of office, 400,000 square feet of residential. So that's another 1 million square feet of development in Cambridge Center.

Going across the river to the Back Bay. Rents in the towers are now in the mid-70s. In the bottoms of the buildings in the Class A buildings in the Back Bay, they are in the mid-40s, which by the way is a real shock -- it's actually a shock to us. Sort of historically, it's a big discount to Cambridge. And the question is going to be as Cambridge gets hotter and hotter, how much of that activity will migrate into the city of Boston? At the Hancock Tower, we completed 40,000 square feet of renewals during the quarter. We signed a 57,000 square foot relocation in January. And we have 4 more leases involving another 141,000 square feet that are expected to be completed in the next couple of weeks. So thus far, we've done about 500,000 square feet of early renewals or relocations related to our 2015 lease expirations. 275,000 square feet of those [ph] transactions -- so the good and bad news is that they're done, but they won't actually impact our revenues until 2015 because the space is currently leased to Manulife, the former owner of the building. And when they become direct leases with Boston Properties, we will get the roll-up. On average, that roll-up is about $15 a square foot or 27% on the average in-place rent in the building.

At the Pru, we leased our last floor at 111 Huntington Avenue. That's this transaction I was describing before. And we are now in lease negotiations with an anchor tenant for our new development at 888 Boylston Street at the Pru Center. That's a 425,000 square foot, 17-storey building that we received approvals on a few years ago. It's got 365,000 square feet of office space and about 60,000 square feet of retail space. That's basically going to be an expansion of our highly productive Prudential Center retail complex. So that's very, very productive retail space. If we sign a lease, we would begin construction in late 2014 with a completion in mid-2016. That's about a $225 million development.

At 100 Federal Street in downtown, we did 2 new renewals this quarter, in the top 1/3 of the building, with average starting rents just above $60 a square foot, which is just in line with our target when we purchased the building a few years ago. We did get a 52,000 square foot floor back. Part of the lease was BofA, that we negotiated, they had the right to give a floor back, which we expected. And we're going to experience a little bit of downtime on that for this year. Again, that's all baked into our guidance. The downtown market is not nearly as hot as the Back Bay from a rental rate perspective, but it is showing some modest improvements. Rents there are from the low-40s at the base of the buildings to in the low-60s at the top of the towers.

The suburban Boston market continues to be very, very active. Large lots of space have all but disappeared, and rents in Waltham are up 10% to 15% over the last few months, not year, months. We completed another 80,000 square feet of leases at Bay Colony during the quarter, bringing our total in that project to 245,000 square feet for the year. We're in negotiations with 4 additional tenants involving another 132,000 square feet. These include a 55,000 square foot lease with our fourth biotech life science company that would come to Bay Colony, as well as an expanding software company moving, not only from another part of the city but also from another state. We continue to see strong activity in our Waltham assets, with much of it stemming from the life sciences and the technology companies, tenants that we're now referring to as TAMI. We responded to 2 build-to-suit proposals for blocks in excess of 160,000 square feet during the quarter for the next phase of our 420,000 square foot CityPoint development in Waltham. We're not in lease negotiations, but we are in active discussions.

Going to New York City. Our fourth quarter in New York City activity on the in-service portfolio was really a continuation of the activity again that we described last quarter. We did 11 transactions with about 102,000 square feet in the operating portfolio, 3 deals at 540 Madison, which brought our total in that building to 16 for 2013. We did 2 more full floors at 510 Madison, so we did 5 full floor deals at 510 Madison. And 510 Madison now sits at 80% leased. And that's a little different from what you're seeing in the supplemental because the supplemental only shows leases that have commenced. But it's actually 80% leased at this point. Our acting and our taking rents at 540 Madison and 510 really haven't changed over the last year. And we don't foresee any increases in 2014. We think we've priced them appropriately. And we will do deals where we expect the rents are today.

Demand from our high-end financial services firms continue well into the year. Just sort of giving you a perspective on sort of the high end of the market in Midtown. So in 2013 in total, there were about 54 transactions, totaling 760,000 square feet of leases that were over $100 a square foot in the city. So this is a pickup from 2012. In 2012, there were 38 transactions for 550,000 square feet, but it's still way off the 2008 highs, when you had a 105 deals totaling almost 2.5 million square feet. As Owen and Mort suggested, our predominant user and the target tenant for the available space in our high-end Midtown buildings are hedge funds and asset managers, advisors and other entities involved in the financial services industries, but these are smaller tenants. And while the tenant activity for this market segment continues to be very encouraging, the breadth of the demand has its limits, which in fact leads us to the reason why it's been slower than we would've like getting the leasing completed at 510 Madison. It's just the tenant sizes are relatively small.

When we discussed 250 West 55th last quarter, we said we had a number of multifloor prospects that were considering the building. Well, we signed a lease with Soros Fund Management for 95,000 square feet and we are in lease negotiations with 4 additional tenants for space totaling over 175,000 square feet, so we've currently leased 571,000. And if we do all the deals that are currently in negotiation, it'd bring us to 745,000 square feet of leased or about 75% leased on the building. We continue to have active pipeline of 1- and 2-floor prospects that continue to tour the remaining space. And we have lots of users now looking at our prebuilt product, which is on the 16th and 25th floors.

At Carnegie Center, we continue to gain occupancy and extend leases. During the quarter, we did 7 more leases for 187,000 square feet. And while the life science sector is clearly at the core of the expansion, we also, as we outlined in our press release, completed a 15-year lease with NRG for a build-to-suit. NRG is an energy company, and they're moving from 90,000 square feet today to 130,000 square feet, when we deliver that building in 2016. That's about a $40 million development. It should be noted that 18 months ago, our occupancy rate at Carnegie was 82%, and today we're over 90%.

In Washington, D.C., the short-term resolution of the budget and the modification to sequestration are clearly a positive development. Now it hasn't resulted in any significant increase in GSA requirements, but the atmosphere is clearly much more constructive for office owners. Now I do want to point out that our exposure in the D.C. market is limited, particularly in the CBD. In 2013, 21% of our NOI came from our D.C. region. D.C. region being defined as Northern Virginia, Montgomery County, as well as the district. But only 38% of our income in the D.C. is generated from our CBD portfolio.

Now why is that? Well, the first thing is -- reason is that our strategy in D.C. has always been to do development. And doing development in D.C. has generally been entering into joint ventures with landowners. So while we control 4.2 million square feet in the district, our company's NOI, as a percentage from the D.C. CBD, so our in-city buildings, is only 8% of our total portfolio. Consistent with this approach, we've entered into negotiations with another landowner on a parcel that would support another 520,000 square foot development based upon some leasing. We have no 2014 lease exposure, but we will have some legal firms relocating, and we're going to have to backfill some space in '15 and '16. Our D.C. team is out in front of the transactions, and we are actively working on replacement tenants now. Currently, the D.C. CBD portfolio is 96% leased.

Now the other reason why our D.C. CBD NOI is relatively low is because the bulk of our regional activity is concentrated in Reston, which is unequivocally the strongest submarket in the entire D.C. region. We covered the vast majority of our Town Center expirations last quarter with the renewals of L-3 and the relocation of Litos [ph] from Tysons Corner to Reston. That was 368,000 square feet of transaction. And our largest near-term exposure in Reston, which is in '15, is with the GSA. And they've already given us notice that they intend to extend on a 261,000 square foot lease. Interestingly, we are in the awkward position of having 4 million square feet of space and no inventory. In fact, we're actually working with a tenant that wants to expand and we are canvassing our larger other users in an attempt to take back space to accommodate their growth. Rent in Reston Town Center continue to be between $15 to $25 a square foot above the market on the Toll Road.

Finally, going to San Francisco. In San Francisco, the CBD continues to be the strongest urban market in our portfolio, led again by the growth in demand from tech users, who continue to expand into traditional office buildings. Google expanded and renewed at Hills Plaza. Salesforce took additional space at Rincon Center. Visa moved into One Market Place (sic)] [One Market Plaza]. Neustar took space at 505 Howard, which is Foundry III, the new building from Tishman. Supercell and Microsoft leased space at 55 Cal, the former BofA building. In the last few weeks, Twitter, Dropbox and Zoom have all expanded. And LinkedIn and Trulia and Pinterest are all in the market looking for 100,000 square feet or more of expansion. The pace of activity in the city in '13 was right in line with 2012, [indiscernible] of change, 8.2 million square feet of additional activity. Activity from the technology industry actually as a percentage of the market went down in 2013 from about 2/3 in '12 to 50% in '13. Yet the tech activity actually didn't decline, but there were more traditional users back in the market and there are more traditional lease expirations in the '15 to '17 timeframe, which are hitting the market today.

At Boston Properties, we leased all of our available space at 50 Hawthorne, 56,000 square feet, to athenahealth for occupancy during the second quarter of 2014. And this quarter, we completed another 100,000 square feet of leasing at EC. Three more full floors, 1 of them at EC4 in the middle of the building at starting rents in the mid-70s. These space rents in the city continue to be running from the mid-70s to over $90 a square foot. Our 2014 to 2016 mark-to-market at Embarcadero Center runs between 15% and 25% on a lease-by-lease basis. The construction of 535 Mission is on schedule, and we are in active lease negotiations with a technology tenant for the lower floors of the building, somewhere between 80,000 and 100,000 square feet, with an expected occupancy in the fourth quarter of 2014, contemporaneous with the building delivery. When we commenced the development, we expected to start to see demand as the building structure and the skin began to take form, and this is exactly what is going on. We are very encouraged by the inquiries and [indiscernible] plans that tenants are putting through us in the building.

If we average leases with starting rents in the mid-60s, that's on a gross basis, this investment will generate a low 7% cash NOI return. And I want to sort of compare that to the latest building sale in the city, which is at 101 Second Avenue, high-quality building built in the late '90s, sold for $767 a square foot, a sub-4% current return, about 20% availability, some below-market rents, but it doesn't get to a stabilized number for 3 or 4 years. Compared to this building, which we're developing for about $700 a square foot and our building at 680 Folsom Street, which we're developing for about $620 a square foot and is going to yield somewhere in excess of 6%. The subgrade work at Transbay is progressing and our marketing program is in full swing. We are in active discussions with a number of tenants and could deliver the building in late '16 or early '17 based on our current schedule. But we have not made a decision yet to move forward on the structure out of the ground.

As we head into 2014, our investment activities obviously are now focused highly on our development pipeline. Just to summarize, 680 Hawthorne [ph] and 50 Folsom [ph], $340 million dollars, is going to deliver in the second quarter. 535 Mission, $215 million investment, is going to deliver at end of 2014. AJ 7 [ph], which is fully leased to the GSA up in Annapolis Junction, $18 million is our share of that, is going to be delivering in the second quarter of 2015. 601 Mass Ave, which is leased to Arnold & Porter, $350 million investment, is going to deliver in the fourth quarter of '15. 804 Carnegie Center, fully leased to NRG, $40 million investment, is going to deliver in the first half of 2016. And now our potential future developments include: 888 Boylston Street, $225 million; our Cambridge Center residential, $100 million; North Station, which is our $1 billion investment I described; 10 and 20 CityPoint, which is about $150 million investment; and the Transbay Tower, $1 billion. We also have active projects in D.C. and Reston and our New York City team is in active discussions on a number of new projects.

I'm going to stop there and turn things over to Mike.

Michael E. LaBelle

Thanks, Doug. Good morning, everybody. As Doug talked about, we had a pretty busy quarter. We closed on 3 sales. We raised about $760 million in proceeds. And all 3 of these sales had significant gains, aggregating almost $400 million and demonstrating the value creation we bring through the development and the management of our properties.

Our cash balances now total almost $2.4 billion. As a reminder, we announced the $2.25 per share special dividend that totals $385 million. That actually gets paid today. We also plan to repay our $748 million of exchangeable notes that mature on February 15. So after these payments, we will still continue to have substantial liquidity. And because of that position, we don't necessarily project raising any additional debt capital or equity capital in 2014, though as Doug and Owen mentioned, additional asset sales remain a possibility.

Our portfolio continues to generate really strong performance. And as we anticipated, our fourth quarter 2013 cash same-store NOI growth was 5.9% over the fourth quarter of 2012. For the full year 2013, we generated over 5% cash same-store NOI growth from 2012 and our same-store occupancy improved by 210 basis points during the year to 93.2%.

For the fourth quarter, we reported funds from operations of $1.29 per share. That was $0.05 per share or about $8 million above the midpoint of our guidance range. Our portfolio was about $3.5 million ahead of our budget. This was mostly due to lower-than-projected operating expenses. Part of this was in our real estate taxes where we've received actual assessments for several of our municipalities that were lower than our projections were. We generated $2.5 million stronger fee income than we projected with better-than-expected services income, tenant improvement and development fees. And then we just completed our annual compensation process and our G&A expenses came in at the low end of our guidance, reducing the expense by about $2 million from the midpoint.

Looking forward to 2014, our projections will be impacted by the sale of One Preserve Parkway and 10 & 20 Mall Road, which were not included in our prior guidance. These 2 properties were projected to generate $6.5 million in 2014. So the sales impact our FFO guidance by about $0.04 per share. As Doug talked about, we continue to have good leasing activity, particularly in the Boston region. The strengthening activity in Boston is outperforming our prior expectations and is projected to offset the loss of income from the sales during 2014. As we discussed on last quarter's call, we have a few large lease expirations at the Prudential Center in Boston and in suburban San Francisco that is built into our guidance. This will temporarily reduce our occupancy by over 300,000 square feet at 101 Huntington Avenue at the Prudential Center until Blue Cross Blue Shield commences their lease in early 2015. Overall, these vacancies will cost about 100 basis points of occupancy in the portfolio and $12 million of revenue loss year-over-year. We have positive absorption though elsewhere in the portfolio, and overall, we continue to expect our occupancy to remain relatively stable through 2014, averaging between 92.5% and 93.5%. The lost revenue from these move outs will temper our NOI growth, but due to strong growth at other properties, that include Bay Colony, 510 Madison Avenue, Reston Town Center, Embarcadero Center and others, we're projecting same-store GAAP NOI will grow in 2014 by 1.25% to 2.5% over 2013. This is a slight increase over last quarter's guidance. In line with what we guided last quarter on a cash basis, we project our 2014 same-store NOI to be up substantially by 5% to 6% over 2013. That equates to $60 million to $70 million of additional cash net operating income. Some of the improvement emanates from the burn off of free rent at buildings like the Hancock Tower, at Cambridge Center and at 399 Park Avenue, with the rest coming from leasing activity.

Our non-cash, straight line and fair value lease revenue for 2014 is projected to be $80 million to $90 million. That's up $5 million from last quarter's guidance and it includes $30 million from our developments. We improved the pre-leasing in our development pipeline this quarter with the signing of 56,000 square feet at 680 Folsom, bringing the project to 96% leased and the signing of 95,000 square feet at 250 West 55th Street where we're now 58% leased. Both of these projects, as well as The Avant residential building in Reston will be in lease-up during 2014 and they'll only contribute a fraction of their fully stabilized run rate. The contribution from our development deliveries to 2014 is in line with our prior guidance and is projected to add $28 million to $30 million of incremental NOI from last year. When stabilized, these projects, that total $1.5 billion of investment, are projected to generate an aggregate return in the low- to mid-6% range and contribute meaningful earnings growth.

The projection for our hotel is in line with last quarter. It's expected to generate 2014 NOI of $12 million to $13 million. The contribution to FFO from our unconsolidated joint ventures is also in line with our prior guidance and it's projected to be $29 million to $34 million in 2014. We project our fee income from development and management services to be $19 million to $22 million in 2014. Our outperformance in fees generated in the fourth quarter were primarily nonrecurring in nature, so our 2014 quarterly run rate is expected to be lower than the fourth quarter of '13 performance.

For our G&A line item, we are projecting expense of $100 million to $104 million for the year. Our interest expense projections are in line with last quarter. With a pay-off of $748 million of exchangeable notes that have a GAAP interest rate of 6% in February and a $63 million 5.5% rate expiring mortgage loan in October, our interest expense run rate will drop significantly in 2014. The expense reduction from a lower debt balance will be partially offset by a decline in capitalized interest as several of our developments deliver. We're projecting ceasing capitalized interest on The Avant project in February, 680 Folsom in midyear and 250 West 55th Street in October. We currently project net interest expense of $448 million to $452 million and that includes capitalized interest of $54 million to $58 million for the full year of '14. Combining all of our assumptions, we're projecting 2014 funds from operations of $5.20 to $5.33 per share. After accounting for the loss of $0.04 per share from the sale of One Preserve Parkway and 10 & 20 Mall Road, our guidance represents an increase of $0.03 per share at the midpoint of our guidance from last quarter. All of it is emanating from stronger core portfolio performance.

For the first quarter, we project funds from operation of $1.21 to $1.23 per share. As you probably recall from previous years, the first quarter is projected to be down from the fourth quarter in '13, happens every year, due to the seasonality of our hotel and the first quarter G&A, which is typically higher that includes higher vesting and payroll tax expense. This year, we also have the lost income from our property sales that we sold in the fourth quarter and that's partially offset by lower projected interest expense. Once again, our projections do not include the impact of any potential acquisition or disposition activity. As we've discussed today, we anticipate, we'll be marketing additional properties for sale in 2014, which, if we execute on them, will reduce our funds from operation until the proceeds can be reinvested, which would most likely be in our growing development opportunities. That completes our formal remarks for today. Operator, if you could open the line up for questions, that will be great. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Jeff Spector from Bank of America Merrill Lynch.

James C. Feldman - BofA Merrill Lynch, Research Division

This is Jamie. I'm here with Jeff. I thought your comments on D.C. were particularly interesting, that there's been a bit of change in tone and sentiment. Ray, do you mind talking a little bit more about what you're seeing in the market and what you see going forward, given a more cooperative environment on Capitol Hill?

Raymond A. Ritchey

Well, it's very hard for us to comment, Jamie, because we don't have tremendous amount of vacancy. As was mentioned, we did get notice from one of our major defense contractor agencies out in Reston that they plan to renew and extend their lease there, which is very positive. We're obviously making similar plans to renew and keep many of our R&D tenants down in our Springfield development, VA 95. Just anecdotally, hearing from our friends in the other buildings, there is activity, but no real major commitments. The Rosslyn-Ballston corridor is still is pretty challenged. I think Pornaydo [ph] is doing a great job backfilling their vacancy, but still not the big GSA deals we anticipate. We're hopeful that FBI is going to come out. We're one of the finalists for that. That would be a tremendous boom, not only for us, but to the entire Northern Virginia market. So while there is an uptick and good vibes, still no -- will go to leases we can point to as really changing the tide in the market.

James C. Feldman - BofA Merrill Lynch, Research Division

Okay, and then just a follow-up. Can you talk a little bit about how we should be thinking about city space and given the lease renewal downtown, what you think will happen in your portfolio? And then I think we also heard maybe Reed Smith would be signing somewhere else? Can you talk about that? And then I think you also -- I thought I heard Doug mention, you're in active discussions over a few potential new development projects in New York. I just want to make sure I heard that right and if so, can you provide a little more color?

Douglas T. Linde

So you asked 3 questions. I'll try and hit them sequentially in reverse order. We are talking about a number of developments in New York City and there's nothing that we're, at this point, prepared to talk about specifically, in terms of the location of the site. With regards to our law firm tenants in our portfolio, we're in active discussions with each and every law firm tenant that we have as a lease expiration between 2015 and 2020 and as we are not aware of any tenant that has made a decision to leave any of our buildings. With regards to Citibank, there's no question that Citibank is going to be relocating out of 399. That headquarter's requirement has hardly been used on a relative basis in terms of the efficiency of the space for them for a number of years and much of it has been sub-let. Some of it is retail. I mean, we think we said last quarter, that of 500,000-plus-or-minus square feet, about 350,000 square feet of that is Citibank office space that we're going to get back sometime in 2017. At 601 Lexington Avenue, Citibank has a large requirement. They have the right to give back 1 floor or 2 in 2000 -- I think '16 or '17. And the rest of it is for lease until 2026. And I'm sure that as they think about how they're going to handle the various users they have in Long Island City and downtown and in Midtown, that's going to be part of the equation and we're going to have conversations with them about whether or not they want to use that space. And if they don't want to use that space, how we both might profit from their decision to no longer want to pay rent there.

Operator

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

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

I just like to hear if you could elaborate a little bit on [indiscernible] generally. It seems that there's quite a bit of availability still downtown. Hudson Yards, developments potentially, approaching tenants 7 by [ph] Park was just mentioned in the previous [indiscernible]. I am curious about the sort of the [indiscernible] development that you'd be considering. Would it be office? And just general thoughts on the market and tenant demand outside of maybe the high-end financial service tenants.

Douglas T. Linde

Sure, I'll start, and John Powers, if you'd like to make some comments, feel free to add on. So, the developments that we're looking at are, I think, what you would consider to be in sync with our views on where we think the demand is going to be coming from in the short- to medium-term in New York City, a.k.a., buildings that would be more apropos for the growing technology companies and the media companies and the content delivery companies, not the large financial institutions. And so obviously, to the extent that those locations are slightly different than where those tenants currently, our portfolio currently is tilted, obviously those are the types of places that we're looking at. I think we've also been pretty clear that we think we have a residential expertise that we're now capitalizing on in New York, Boston and in Washington, D.C., and there are a number of sites that have been identified to us and that we have made inquiries on the residential side as well in New York City. I don't think those there would be considered to be mixed-use centers. There would be residential projects where we think we have the competency and the capability to execute at a highly attractive return. So those are the kinds of things that we're talking about on the development side. John, if you want to comment on sort of the amount of new construction that's potentially going up and sort of the environment is back [ph], feel free [ph].

John Francis Powers

Well, certainly, the downtown market has a lot of availability in large blocks. It's about 6 million feet that's available or will be available shortly there. Obviously, we don't have any product downtown. Also, the Midtown South market is very, very hot right now. There's been a number of deals that were just done over the last couple of months there and rents have really started to spike in some of those buildings. So there's going to be tenants in that Midtown South market that are going to be squeezed out because many of those tenants went there because their businesses did not have the margins to be in Midtown. So there's a transition with technology expanding in New York and I think that there will be some tenants that moved from Midtown to downtown to take advantage of the new product or the repositioned product with large blocks and attractive prices. But the Midtown market and the Manhattan market overall is very, very large. So when you're dealing with a market of over 350 million square feet, even a few million here and a few million there don't change the aggregate supply and demand ratio. And the Midtown, the market is still solid. I wouldn't say it's moving up tremendously, but there's very little downward pressure on it, on rents.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

That's helpful, and quick follow-up for that [ph]. Ray, I saw the Lerner's project in Tysons get announced. I'm curious, given sort of the availability to accommodate expansion, because you're full in Reston. Are you concerned about migrating into the Tysons [indiscernible] getting a little bit more traction?

Raymond A. Ritchey

Well, it's interesting, Jordan. The tenant that was -- the Reston tenant that was referenced earlier, is one of the highest profile tenants in the United States currently in the Reston Town Center and are literally begging us to buy out existing tenants so they don't have to go to Tysons. And we have seen absolutely no departures from Reston to Tysons and in fact, the major deal we secured earlier this year was the Litos [ph] deal, well, was a mainstay at Tysons who came to Reston at a probably about a 50% premium in rent to move just the 6 miles out to Reston. And this is before Metro even came. Now where as they left Tysons with Metro to come to Town Center, pay more without Metro. So I think that's a very strong indication of how we feel about the Reston versus Tyson dynamic.

Operator

Your next question comes from the line of Josh Attie from Citi.

Joshua Attie - Citigroup Inc, Research Division

On Transbay, can you elaborate on the activity you're seeing in terms of the size of the tenants you're speaking with, their industries and also from a timing perspective, can you remind us when you need to move forward on construction in order to deliver in early 2017?

Raymond A. Ritchey

So, I am going to -- I apologize that my answer is not going to be as forthright as you would like it to be, but it's the reality of sort of the situation. We are talking to a number of tenants that are in a broad range of industries. We are clearly talking to technology tenants and we are clearly talking to traditional [indiscernible] tenants, i.e., financial institutions and law firms and other sort of money manager advisor types about the building. Obviously, anybody who we're talking to is in excess of 100,000 square feet. That sort of -- we're not prepared to enter into any conversations with smaller tenants at this point. The building is currently on a program, just as I said, to be completed, if we were not to cease construction, in '16 or '17, and the decision as to when we stop is a decision that gets made in the middle of 2014. We can obviously delay that even longer. There's just some cost implications associated with that.

Joshua Attie - Citigroup Inc, Research Division

And if and when you decide to move forward, have you kind of given thought to bringing in a capital partner and have you kind of decided internally whether that's something that you want to do or not want to do?

Owen D. Thomas

Josh, this is Owen Thomas. I don't think our posture on that question has changed since the last quarter. We, I would say firmly believe it's an option that we have, given the quality of the building and the capital that's available in the marketplace for real estate. But we haven't made that decision yet, but it's an option that we may elect to hit at a future date. But again, no decision has been made.

Operator

Your next question comes from the line of David Toti from Cantor Fitzgerald.

David Toti - Cantor Fitzgerald & Co., Research Division

I just want to follow-up on Josh's questions, just a quick one on Transbay. Are there any tax incentives from the city or the state around this project? And if there are, do they impact timing and construction and does this put any constraints on the marketing process?

Owen D. Thomas

Unfortunately, there are no tax incentives that are sort of egging on demand. As you might appreciate, given the amount of absorption that the city of San Francisco has seen and the amount of activity in the marketplace and the desirability of being in the urban area, the city really doesn't have much in the way of incentives. Interesting thing is that as I think we talked about in the past, we're subject actually to an additional tax because we are in an area where there are Mello-Roos bonds that were -- had to be floated to pay for the Transbay Terminal. So it's sort of actually in the opposite direction. We have a slightly higher tax base than a traditional office building. Not one obviously that's being sold at $800 a square foot because our cost is not going to be there. But overall, there are no tax incentives that would incentivize tenants to move forward.

David Toti - Cantor Fitzgerald & Co., Research Division

Okay, and then this may be a bit premature, but I was just curious, are there standards that you're designing to relative to the occupancy sort of per person on a square foot basis? I would think you'd have to begin to incorporate some of that into egress and elevators and bathrooms and so forth. And does that impact the -- I guess my question is, does that impact the tenant type that you can really target through the marketing process?

Douglas T. Linde

This building -- and Bob Pester, if you want to comment, please feel free. This building is being designed to probably be maximize the density with which one can populate a floor in a high-rise building. There are 3 exit stairs. There are a number of extra capacity HVAC and electrical supplies in the building for cooling and for power usage and we have a Miconic destination elevator system that we believe will be able to push people through the building as rapidly as you can possibly find. So it's -- our view is it's sort of at the cutting edge in all of those indices. And it's about as good as it can get.

David Toti - Cantor Fitzgerald & Co., Research Division

Okay, and then just one final question, more of a big picture. Given the timing on this project, which is quite long on a relative basis, are there any reasons for caution in your view relative to your employment expectations a couple of years out? Or do you feel that the strength of the market is really still quite broad and is a relatively safe zone for you guys to market this project?

Mortimer B. Zuckerman

This is Mort Zuckerman speaking. When we go and explore the possibility of starting a building like this, we have extended meetings with the brokerage community, which I was fortunate to attend. And I will tell you that -- and I'm not exaggerating, and all the ridiculous number of years that I've been in the real estate business, I never heard from the brokerage community a list and a detailed list of the kind of action that there is in the San Francisco market in terms of tenants who are not only new tenants coming into the market, but tenants that were in the market and are growing. And way overwhelming the amount of new space coming in. And since this building we believe will be the iconic building in San Francisco, we have found that the kind of interest that we are receiving to reflect that kind of activity. So we didn't start it just in a vacuum. We started it within the context of the most bullish description of the market based on specific information about tenants that were growing or tenants that were making new commitments or new tenants coming into the market. I can recall at that point, when I was asked to comment on it, I happened to have a sore throat and I said the sore throat I got was from privately cheering when I listened to this kind of report. So I think we've had a lot of experience in terms of making these kinds of judgments in various markets. But I will tell you, that this was the single by far, the single most, shall we say enthusiastic or bullish, name it as you would like, description of active tenants, specific tenants in the marketplace and units of demand that made us feel very comfortable about going ahead with the buildings. And I think we will be able to justify that to you in reasonable time zones, so that you will understand why we are as enthusiastic about it as we were and made the commitments that we did.

Operator

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

Michael Knott - Green Street Advisors, Inc., Research Division

Just one more question on Transbay and then 535 Mission. On Transbay, I'm just curious if you can give us any color on maybe how intense or numerous your leasing discussions are versus maybe 3 months ago? And then also just curious on 535, how the activity is there and will success or not there still translate into your decision on Transbay?

Douglas T. Linde

I'll repeat what I said previously and I hope this is more satisfactory. 535, we are in active lease negotiations with a major technology tenant for the bottom of that building and assuming that, that lease gets signed, we're going to be over 100,000 square feet committed, and they're not the only tenant that we are talking to. We have single-floor and multi-floor tenants that we're in negotiations with and there is great demand for that building right now. So I guess net, net, I'd say the optimistic end of our expectations in terms of where we thought rents would be and where we thought the overall demand would be are being realized in a consistent manner. With regards to the Transbay Tower, we are now working in the ground, pouring our footings, doing our foundation work and there is a consistency of conversations, both within Boston Properties and direct tenant negotiations, as well as Boston Properties brokers and other brokers asking for information on a pretty consistent basis. And I would say that the overall tone of the market in the first quarter of 2014 is probably slightly better than the tone of the market was in the fourth quarter of 2013. That doesn't mean that we feel like we're going to announce a major lease in the next 3 days, but like I said, we're feeling good about the overall market demand, as Mort just described. If you would see what the statistics look like in the first quarter, you're going to see a number of large users that have committed to expansion in San Francisco. The Transbay Tower is very much a building and a project that is on anybody and everyone's radar screen when it comes to looking to fulfill their growth needs, because there's just relatively little other demand in the marketplace. And Bob, you can describe some of the other buildings that are being discussed and sort of where the demand is. So we're feeling as good as we did last quarter and the market is feeling a little bit better.

Michael Knott - Green Street Advisors, Inc., Research Division

And then 2 quick ones on my last question. 250 West, you still going to hit 90% by the end of the year? And then 888 Boylston has always struck me as a home run waiting to happen, but curious if you can just talk about the dynamics of maybe competing with yourself there versus Hancock and maybe you feel better about that now?

Owen D. Thomas

Sure. So, on 250 West 55th Street, like I said, if we get all the leases that John and his team are negotiating right now, we'll be at 75%. Do I think we'll get to 90% by the end of December of 2014? I think it's a stretch. Do I think we'll get to 80% or 85%, I hope. That's sort of where our goal is. And a lot of those tenants, obviously, are going to be in occupancy, not in '14, but in '15. So leases that have commenced and leases that have been signed are slightly different. With regards to 888 Boylston Street, it's a building that we have been very patient about in terms of starting, given the profile of the building, where it sits and the fact that there's both retail and office demand. The tenant that we are talking to is the tenant that would be taking the lower portion of the building, which would leave us with the better base, relatively speaking, from a view perspective. And the space that we now have available at the Hancock Tower, as we look into our leasing expirations in 2015 and beyond, are at the base of the building. So the actual mix of where the product is in the marketplace actually sort of works well together and puts us, we think, in the best position to be successful with both projects.

Operator

Your next question comes from the line of Vance Edelson from Morgan Stanley.

Vance H. Edelson - Morgan Stanley, Research Division

So given that some of the approvals you're getting for development has a multi-family component and you mentioned the residential expertise, how do you view this long-term? Would you say there are plans to increase the multi-family mix meaningfully? As something that's complementary to office and less cyclical even in strong office markets like San Francisco? Do you have any evolving views on the target mix?

Owen D. Thomas

So, I'll answer the question in the following manner, which is: Boston Properties has a development expertise, which we believe is wholly transferable to urban residential development projects. And so, as we think about utilizing our knowledge of the markets and our expertise in identifying sites and our credibility with public officials where you need approvals for residential, we think it aligns significantly well with our other competencies and capabilities. And so that's where our focus is. I would not want us to give you the impression that we are suddenly becoming a residential company or that we're trying to effectuate our mix. But I think the reality is, is that there are a number of sites that are better utilized for residential development in these urban markets that we happen to be wholly involved in and we think we have the capabilities to take advantage of those marketplaces and we think we should do that.

Vance H. Edelson - Morgan Stanley, Research Division

Okay, that makes sense. And then the lower G&A, it helped a bit in informing [ph] your guidance range for the New Year and it's going to be seasonally higher in the first quarter. But do you think we could see additional efficiencies if you're successful in monetizing assets? In other words, what do you think the sensitivity is on the G&A line to portfolio shifts going forward?

Michael E. LaBelle

It will depend on if we become a recapitalized partner of those assets or a seller of those assets. In terms of sort of creating additional management fees. But I think, on the margin, it's not going to make much of an impact because we don't expect to do anything that's going to dramatically change our overall overhead.

Vance H. Edelson - Morgan Stanley, Research Division

Okay. Got it. And then Mike had mentioned real estate taxes in general. Can anyone share the latest thoughts on working with Mayor de Blasio in the New Year and which way do you think property taxes are headed in New York?

Mortimer B. Zuckerman

Well, I'll make a comment on that. Now that -- I doubt if there is going to be a special tax on those people whose incomes are in excess of $500 million -- or net worth is in excess of $500 million or whatever his criteria is. I certainly think that like all other cities, there's going to be some pressure on the real estate tax basis, but I don't think it's going to be anything dramatic. I think it'll be just within the normal range of expectations, in part because I think the idea that there's going to be major increases in city expenses that is unprecedented or unanticipated, I think it has been narrowed by the -- shall we say, the experience that the mayor has had with the governor on these issues, and not to be able to go too far, as to the governor said, the major program that he had, which was pre-K education, is now going to be funded by the state government and not by the city. So I think the city is going to be in better shape financially and able to handle whatever the increase in expenses will be.

Operator

Your next question comes from the line of Alex Goldfarb from Sandler O'Neill.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Two questions for me. The first up, as you guys look at potentially doing some development in New York, would all this be market rate, or are you underwriting some degree of incentives? If we just think about some of the big developments that are underway right now, they're clearly benefiting from attractive financing, whether it's the far West Side or downtown that allows them to price new construction sort of below where market rate new construction would price. So if you could just give some thoughts on that?

Owen D. Thomas

Alex, it's Owen Thomas. I think the types of things that we're looking at are all over the map. I wouldn't say they're necessarily driven by the incentives that you're describing.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay, appreciate that response. The next question is just as you think about disposition activity and capital retention, can you just sort of break out how you think about the development activity, how much capital you'll need? And then as you look at dispositions as a source, clearly, the smaller ones, you can retain the cash. But the bigger assets like Times Square Tower, you have to dividend out. So if you can just walk us through how you think about using dispositions to fund versus the potential to see another Times-Square-Tower-like disposition where we would see a special dividend?

Owen D. Thomas

Again, I apologize if this answer doesn't wholly satisfy you, but we actually don't link the 2 things together. The decisions that we're making to sell assets when we're selling assets, as I said earlier, are sort of in those 2 buckets, and they're wholly unconnected to our capital needs. One of the most -- more interesting things about our portfolio is that as we deliver all of these developments over the next 3 or 4 years, our ability to have capacity to increase the overall debt capabilities and capacity of the company actually increases pretty dramatically because we have a lot more income coming online relative to how we're currently funding ourselves. And so we don't look out over the next 3 or 4 years and say, "Geez, in order to fund ourselves at a comparable leverage position as we're in today, we need to sell assets and have to retain that capital." So the decisions are really not linked together.

Michael E. LaBelle

And I would also add that our liquidity position today is more than sufficient to complete what is left to fund on the pipeline. There's -- we have a $2.5 million pipeline with about $750 million left to go over the next few years. So if you assume we pay off the exchangeables, we pay the special dividend, and we pay all of those development dollars, we still have significant cash balances to fund some of these future developments that Doug talked about, in addition to the cash flows generated by the portfolio on an annual basis.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. So Doug, if I hear you correctly, it almost sounds like a Times-Square-Tower-type situation where you would get -- where shareholders would get a special would almost be sort of like a reverse inquiry or where you just saw just cap rate demand in the market so strong that it was too good to pass up. It almost sounds like it's that way. Is that fair?

Douglas T. Linde

Yes. I wouldn't characterize it as being that reactive. I think Owen and Mort and I and the rest of the managers are spending time looking at our assets and saying, "Geez, let's look at the cash flows in a particular building over the next decade or so and how do we feel about the growth from this cash flow and how do we feel about how the market might value this asset. And should we think, is this the right time to, in some way, shape or form liquidate that investment?" And if we can put that capital into a better use in order -- if we have to return to shareholders, we'll return it to our shareholders relative to what our own expectations are. And so it's that type of a mental process that's going on with regards to how we're thinking about our dispositions, not one where we're saying, "Okay. We have X million dollars of development, and we have a limited resource base. And therefore, we have to sell some assets in order to invest assets in other buildings." Because as I said, the cash flow profile of all the activity we currently have going on in our development pipeline is pretty significant in terms of the overall cash flow growth, and it really allows us to feel very comfortable about what our overall capitalization is and our leverage ratios and our coverage ratios on a going-forward basis without having to really be too concerned about what the impacts of reducing our overall balance sheet are in terms of selling assets and being in a situation where we may have to provide a special dividend.

Mortimer B. Zuckerman

If I may, I'd like to just add one other comment to that. In 2006, you may recall we sold a number of buildings, actually, 14 of them to be exact. And we did that because we thought it was the right time to establish the values that we had created, and we didn't do it in terms of, as Doug said, because we were looking forward to having the money to spend on new developments. We really do feel that we have that financial capacity in our -- in the ordinary course of life. And when we do decide to sell, it's because we think it's the right time to sell the assets that we're selling. And I think this is -- given, as we all know, the level of interest rates today, there has been a dramatic appreciation in the value of the kinds of assets that we have, and we get a lot of inquiries. And so it's something that we feel is appropriate to respond to in exactly the terms that Doug has just described, just as we did in 2000 -- let's say 6 years ago.

Operator

Your next question comes from the line of Vincent Chao from Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

Just wanted to follow up on the disposition side a little bit. Just curious if the environment has changed much over the last 90 days in terms of buyer being more aggressive? You had mentioned that it's still hard to make the acquisitions pencil for yourselves. Are people -- is there more demand for those core assets than there was 90 days ago? And maybe the same question on the suburban assets. I know you sold the 2 this quarter. But are you seeing an increasing demand for those types of assets?

Owen D. Thomas

It's Owen. I would say that for the core CBD assets, I think the market interest in those assets and the capital that's interested in pursuing those types of assets has been high, and it's been pretty consistent from 2013 to today. As you know, interest rates, the 10-year has risen substantially from its lows in the middle of 2013, and I think that's had pretty minimal impact on cap rates, except for what I'd describe as highly leverageable assets. But for the types of assets that we own, core, multi-tenant, real estate in urban locations, I think the intensity of the capital will stay pretty consistent. For suburban, I don't think that the level of market enthusiasm for suburban office is certainly as high as it is for urban office. I don't think that the cap rate for suburban office are -- relative to history, are as interesting to us as a seller as they are for the CBD, if you look at the cap rates versus history. With that being said, I think if the economy improves, I think investors will do what they've done in the past. They'll look for -- they'll take additional risk and chase higher yields. And my guess is if the economy continues to improve that the interest level in suburban office will increase. This coming year would be my guess.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. But it sounds like there hasn't been a [indiscernible].

Mortimer B. Zuckerman

Can I comment to that? Hello?

Vincent Chao - Deutsche Bank AG, Research Division

Yes, sure.

Mortimer B. Zuckerman

This is Mort. Look, one of the unique features of the inventory of buildings in Boston Properties is that a lot of them are iconic buildings that are known not just in the markets we are in, but literally across the country and, in fact, in many other international markets, okay? So we get an interest from investors who are really outside the United States because they understand and recognize our buildings, and we don't have to, in a sense, shall we say, persuade people as to the quality of the buildings we have. We have such an array of iconic and high-quality buildings that are recognized everywhere, but there is a demand for that, that is not totally independent of interest rates, obviously, but much more dependent upon, shall we say, and compared to many other purchasers, just sort of the recognition of the assets and the understanding that these are iconic assets with great long-term values.

Vincent Chao - Deutsche Bank AG, Research Division

Okay. And if I could add just one more question on the North Station project. As you think about sort of start to finish after factoring all the phasing of the different components, I mean, how long a development process does that look like?

Owen D. Thomas

You're asking me to look at a crystal ball and describe what the demand's going to be for all the various product types. I believe that our current plan is as follows, which is: we're going to try and get as much leasing as we possibly can on the retail and the low-rise office, and we're going to commence on either 1 or 2 of those phases. And there are sort of 2 different sides of the site. Hopefully, sometime in early 2015, knock on wood, tenant demand being with us. And then the other -- the 3 towers, I think, are going to be predicated on market conditions at that time. We're creating the structure for the towers in the buildings. So we'll be in a position where we can actually get going whenever we want to on the vertical portions of the site. But look, it's going to be $1 billion-plus-or-minus of investment is going to take a minimum of 5 years to get out the door in totality. And it could take longer than that.

Michael E. LaBelle

[indiscernible] Doug's point on the phase-ability is a key attribute of this particular project, but we're also blessed with having a partner with the Jacobs family in the Delaware North that has the same type of perspective we have, which is long term, and then also making sure that it's absolutely the right product at the right time. This is a legacy project for them and property, and they've been very patient in the development of putting in infrastructure into the site, and we couldn't ask for a better partner that has the same type of long-term perspective that we do.

Mortimer B. Zuckerman

And if I may say, when you get a sense of the quality of the -- and integration of all the different uses and the quality of the design, I think this will be recognized almost instantaneously as another iconic development that as we hope being our hallmark. So I think this is just going to have a unique appeal for all the reasons that have just been mentioned.

Operator

Your next question comes from the line of Erin Aslakson from Stifel, Nicolaus.

Erin T. Aslakson - Stifel, Nicolaus & Co., Inc., Research Division

I wondered if you could -- you kind of already hit on this a little bit, Doug, earlier, but if you could just kind of walk through the development costs for your major developments that are underway on a per-square-foot basis, which I guess we can calculate there in the supplement, but then also what you think those costs will be relative to the potential stabilized value of each of those projects?

Douglas T. Linde

That could take 20 or 30 minutes to do, Erin.

Erin T. Aslakson - Stifel, Nicolaus & Co., Inc., Research Division

I don't want to take that much time.

Douglas T. Linde

I'll just say -- I'll say the following: For the most part, the developments that we have, where we haven't articulated what the first group [ph] of costs are, are interesting for the portfolio because our land basis is relatively small, and what we're sort of -- how we describe the returns on these assets is predicated on what a market value for the land is. So when you -- at the end of the day, when you look at what the cost that we put into the building is from a GAAP perspective and the returns, it's going to look higher than what we're describing because the market land value is a figment of our internal imaginations. It's not reality. It's not what we actually paid for these sites. In general, we are building our buildings today on a lease basis, hopefully with a starting cash-on-cash return in the high-6s to low-7s, include -- that's with the market value of land, and somewhere that we believe is $100 or $200 a square foot below where other people are currently purchasing assets at lower returns. I mean, that's sort of the logic for why we are developing as opposed to, as Owen said, beating ourselves up trying to buy low-yielding assets with operating cash flow risk associated with them. And each and every one of our assets is on that spectrum in one place or another, and there are some [ph] in every single one of the leases that we are negotiating, so those early returns obviously go up over time. So on a GAAP basis, they're higher, and we think we're creating significant value each and every time. I mean, I've said from day 1 and I'll say it again, at the end of the day, after all of the starting and stopping, the cash-on-cash return at 250 West 55th Street, which I don't consider to be our strongest performer, is going to be in excess of 6%, and that includes rents on a 1 million square feet that are going to go up by $7 or $8 a square foot every 5 years. So you can figure out sort of what the average returns are. And in general, we're signing 15- or 20-year leases. I mean, that was sort of a -- in my opinion, a underperforming asset in terms of where we had hoped to be when we started it. And everything that we're doing now, we have a higher expectation of where we think we're going to come out on a return basis.

Michael E. LaBelle

I would just add that, as Doug mentioned, we're using the market value for the land, which is driving some of those return numbers that you quoted, and some of these developments, for example, at 888 Boylston Street and others that we have, we've owned this land for a long time. So there's a pretty significant difference in some of these cases between the market value of the land and what we actually have in the land.

Operator

Your next question comes from the line of Ron Perrotta from Goldman Sachs.

Ron J. Perrotta - Goldman Sachs Group Inc., Research Division

Just real quick. Given this emphasis on development, anything that we should think about as far as leverage targets or where you see the balance sheet going over the next few quarters or years as that pipeline continues to ramp up? I know you touched on it -- a little bit about the debt repayments coming this year, but anything else to add on that front?

Michael E. LaBelle

As Doug started to mention, as we kind of look forward, we're talking about increasing our cash NOI. We're talking about putting $2.5 billion of development pipeline into service without raising additional debt, where a big portion of the cash is already out the door. So our leverage is going to naturally go down as that happens. Right now, if you look at a net cash EBITDA, we've been in the high-6s to low-7s. That will come down as that occurs. And I would not expect that we're going to modify the leverage policies that we have, which is somewhere in the low-6s to low-7s on a net debt EBITDA over time, as we continue to make investments in our development or dispose of assets.

Operator

Your next question comes from the line of David Harris from Imperial Capital.

David Harris - Imperial Capital, LLC, Research Division

In your prepared remarks, you made reference to your expectation that rates would be rising. How difficult is it to underwrite developments with that expectation in mind? Are we taking to rent projections in those numbers today?

Owen D. Thomas

Well, we do factor it in when we think about returns that we'd like to achieve. And any financing that would be used for developments, we don't use the current rates. We assume some level of increases. So we're -- again, as I mentioned, it's very hard to predict interest rates. I think the general feeling we have and the market has is they're going to rise. Given some of the mixed signals that we're getting from the marketplace economically, the pace of that rise and when it's going to occur and how large it will be is the hard part to predict. But we are factoring in rate rises into our development analysis.

Douglas T. Linde

So David, when we provide information to the Street and when you look at our supplemental, we obviously have a cost of capital in every single one of our developments. There's a cost of equity, and there's a cost of debt. And those numbers, as interest rates move up, obviously move up. Overall, we also look at our -- we don't look at things on an incremental basis. We sort of look at what our average cost of capital is and what our average cost of debt is and what might happen to that on a portfolio basis over time. And interestingly, we just sort of went through a strong long analysis of sort of where our overall debt has been, and we're basically funding on an overall basis right now of just under 5%. And we have a modest amount of maturities that are going to actually bring that number down slightly over the next 2 to 3 years, assuming no dramatic increase in rates, and we don't have much in the way of rollover during that period of time. So the good news about our balance sheet is that we've done, I believe -- I think, a pretty good job of timing our exposures to the marketplace and extending out our maturities over the past 2 or 3 years to really put ourselves in a pretty good position, certainly for the next 7 to 10 years. And so we -- I think we have a good handle on where our fundamental cost of capital is on the debt side. And so as we do these developments, there is no question that there's a potential being -- there's a squeeze that could happen if you say, "Well, you're developing to a 7% return and interest rates have gone from 4% to 7% on an "incremental basis." But that's not how we are looking at these investments, and that's not how we look at our balance sheet.

David Harris - Imperial Capital, LLC, Research Division

Well, let me ask you this on a more precise basis. If you were contemplating a development today, would you be looking for higher returns today than you would've been 12 to 9 months ago when rates were in the -- with the 1 handle on the 10-year treasury yield?

Owen D. Thomas

I'll answer the question in the following manner: I would say that every conversation that our senior management team has with our development people, we say to them, "Hey, guys, interest rates are going up. And if interest rates are going up, we need to think about what our return levels are going to be because obviously our cost of development and our cost of capital is a factor in that transaction."

David Harris - Imperial Capital, LLC, Research Division

Okay. Are you including rent projections in these calculations today?

Owen D. Thomas

We never include rent projections in our development deals in terms of increases in rent projections. We only assume where we think rents are today and where we think we're going to be able to lease. But if there's -- if we're doing a build-to-suit, obviously, the rent is going to be what the rent is and where we think the rent is going to be on the other space. And there are so many other factors associated with the other spaces. Where is it located in the building? Is it going to be encumbered by a right of first offer, or is it going to be space-pocketed? Is it -- which means it has a shorter duration. I mean, there's just lots of factors that impact that, but we don't generally say, "Well, we're going to do this development, and we're going to assume rents go up by 5% a year, so that makes it all pencil up." That's not the way we approach things.

David Harris - Imperial Capital, LLC, Research Division

I have a question on the common dividend. It's not -- it's remained unchanged now for 5 quarters and still actually is below the level at which it peaked out in 2008. Are you ruling out, or is there any comment, perhaps, you, Mort, can make with regard to the prospects for any growth this year?

Owen D. Thomas

Let me just answer the question in the following manner: So in 2008, during the aftermath of the meltdown, we brought our dividend down to our taxable income. And we said, "That's probably the appropriate level for our dividend to grow at." As we look out forward, on a going-concern basis, as I think we've tried to allude to, we're going to have a lot of cash flow growth. And as our cash flow grows, our taxable income is going to go up. And therefore, as a REIT that pays out, effectively, 100% of its taxable income, our dividends are going to grow. We are not doing that artificially, David. So we're not saying, "Well, we think our dividend should grow by 2.3% a year every year, and we're just sort of using -- establishing that." We've established a taxable income metric sort of to move our dividend up, and that's the way we've planned for it. And obviously, with the special dividend that we're doing this year and the reduction in the income that, that caused on a going-forward basis, it's given us a little bit of room.

David Harris - Imperial Capital, LLC, Research Division

Is it set for the year, or is that something that could be reviewed by the board during the period of 2014?

Owen D. Thomas

We review the dividend policy and our taxable income with the board a couple of quarters a year, generally as we move towards the middle of the year, and we say, "Here's where we think our dividend likely will be on a taxable income basis." What do we all sort of think about the timing might be for announcing a dividend increase is dependent upon where the taxable income is.

Operator

Your next question comes from the line of Jeff Spector from Bank of America Merrill Lynch.

James C. Feldman - BofA Merrill Lynch, Research Division

It's Jamie Feldman again with just a quick follow-up. Mike, based on the updated guidance, what are your thoughts on AFFO for 2014?

Michael E. LaBelle

So our AFFO, our FAD has shown pretty good growth. From '12 to '13, it went up like 8%. And as I mentioned, we expect our cash NOI to go up by $60 million, $70 million, I think, I said, so I would expect that our AFFO is going to show a pretty good increase again. I talked about what our occupancy projections were expected to be. So if you kind of look at what our rollover is, we're looking at doing somewhere between 3.5 million and 4 million square feet of leasing to achieve those occupancy projections. And I think that our CapEx -- recurring CapEx is going to be somewhere in the $40 million to $50 million range. So I think we're at 362 in '13. I would expect it to -- the AFFO to be something like 385 to 395 or something like that in 2014, so a pretty good growth over '13.

Operator

Your last question comes from the line of Josh Attie from Citi.

Michael Bilerman - Citigroup Inc, Research Division

Yes, it's Michael Bilerman, just a quick follow up on just the asset sale program. Maybe Doug or Owen, as I think back to this time last year or even a little bit before that, before you embarked on this most recent round of asset sales, you sort of prepped the market a little bit in terms of sizing, and I'm just curious as it sounds like you're teeing up a number of assets for sale. Where should the market be thinking about both in terms of the suburban asset sales and the more core asset sales, either as a recap in the case of Times Square Tower or just outright sales? I mean, how should we think about the potential size overall of proceeds that your -- that you potentially could generate?

Owen D. Thomas

It's Owen. I don't think we'd be prepared to discuss a size level at this juncture. I would like to just kind of step back for a minute and describe again the philosophy around the asset sales. I think as Doug and I and Mort have been describing, the assets that we've been selecting for sale have really been in 2 categories: One, which Doug was talking about earlier on the call, which is where our views of the growth and the cash flows may be just different from the marketplace. And therefore, we feel that the price that we're able to attract for the asset is very interesting for shareholders over the long term. So that's one category. And then the other category are assets where -- that characteristic may be the case, but also it's in an area that is just nonstrategic for us as a company going forward. So a couple of the suburban assets that we sold at the end of last year were clearly in that category, despite the comments I made earlier about cap rates in the suburban markets. So again, I don't think we'd be prepared to make any specific remarks about sizing at this point. I think the other interesting aspect that you touched on in your question is, are these sales, or are these "recapitalizations?" And what we found in the case of Times Square Tower was that we thought the best outcome for us was to do what we did, which is to actually sell only 45% of the asset and retain the leasing and the management. And based on the options that we were considering, we felt that was the best outcome. And as we consider additional monetization activity going forward, that could be also a model.

Michael Bilerman - Citigroup Inc, Research Division

Right. I guess there's just an element of -- if you have 2 different types of investors, some people that focus on earnings and earnings growth and a large percentage that focus on NAV. These sales and capital-raising activities have been dilutive to current earnings. Arguably, from an NAV perspective, I think they've been enhancing. But from a prepping-the-market perspective, I think we're all just trying to understand the capital side of the equation, both in terms of potential new financings, but also capital raising in the form of asset sales and what that can do, at least, in the near term to earnings, and arguably, over the long-term, they're going to be accretive as you reinvest those proceeds, but just trying to understand those dynamics. And if you think back to what happened last year, it clearly weighed on the stock amongst other things. And that's where I'm just trying to get my arms around, so at least we can be prepped for what may occur.

Owen D. Thomas

Understood.

Operator

I would now like to turn the call back over to Mort Zuckerman for his formal remarks.

Mortimer B. Zuckerman

Well, I think we appreciate the Q&A and the opportunity to not only explain our general strategy and our general experience these days, but in response to your questions, I think we've tried to give you a more comprehensive and a more detailed analysis of it. There's never a single principle that explains everything that we do because, frankly, the markets change and the interest rates change and the general economic environment changes, and we try and be responsive to it. And we've, I think, shown that we can be responsive to it for as long as we've been a public company, and we intend to continue to do that. But that's all possible because we have a very good interaction with all of you, and we appreciate it, and we look forward to our next conversation after our next quarter. So I thank you, all, very much.

Owen D. Thomas

And Mort, I would just add to what you said. Just to maybe recap a couple of things from the call that are important. We -- as Mike mentioned earlier, we bumped our guidance for 2014 when factoring in the small asset sales that we did in the end of last year. Hopefully, we've been able to demonstrate, I think, very strong leasing momentum in our existing assets and our development pipeline, and I think also we've made great progress over the last quarter identifying a longer-term investment pipeline with some exciting new developments. So again, thank you, all, for your attention and your questions, and we look forward to next quarter.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!