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Boston Properties, Inc. (NYSE:BXP)

Q1 2010 Earnings Call

April 28, 2010 10:00 am ET

Executives

Arista Joyner – Investor Relations Manager

Mortimer B. Zuckerman – Chairman of the Board & Chief Executive Officer

Douglas T. Linde – President & Director

Michael E. LaBella – Chief Financial Officer, Senior Vice President & Treasurer

Raymond A. Ritchey – Executive Vice President & National Director of Acquisitions and Development

Analysts

Michael Bilerman – Citigroup

John Guinee – Stifel Nicolaus & Company

Steve Sakwa – ISI Group

Chris Caton – Morgan Stanley

Ross Nussbaum – UBS Securities

Jordan Sadler – KeyBanc Capital Markets

Jamie Feldman – Bank of America Merrill Lynch

Jay Habermann – Goldman Sachs

Alexander Goldfarb – Sandler O’Neill

Michael Knott – Green Street Advisors, Inc.

Mitch Germaine – JMP Securities

George Auerbach – ISI Group

Operator

Welcome to Boston Properties first quarter earnings call. This call is being recorded. All audience lines are currently in a listen only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. At this time I would like to turn the conference over to Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Arista Joyner

Welcome to Boston Properties first quarter earnings conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8K. 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 the investor relations section of our website. At this time we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions it can give no assurance that its expectations will be obtained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statement were detailed in Tuesday’s press release and from time-to-time in the company’s filings with the SEC. The company does not undertake a duty to update any forward-looking statements.

Having said that, I’d like to welcome Mort Zuckerman, Chairman of the Board and Chief Executive Officer; Doug Linde, President; and Michael LaBelle, Chief Financial Officer. Also during the question and answer portion of our call our regional management team will be available to answer questions as well. I would now like to turn the call over to Doug Linde for his formal remarks.

Douglas T. Linde

Mort, I think you’re going to start today, right?

Mortimer B. Zuckerman

Well we are I think continuing to do fairly well as a company in what has been a very, very difficult environment but one which I must say I think is getting somewhat moderated and easier and improving. The economy in general as we all know has been through a very, very difficult patch and the recovery I suspect will be slower than the typical recovery from a different kind of recession, this being a recession that was obviously provoked by a financial crisis that came about as a result of the collapse of the housing market and what it all did to the securitization, the world of securitization and through that the world of finance.

As all of the serious studies of these kinds of recessions that are provoked by a financial crisis indicate recoveries from this kind of recession is longer and slower than the typically recovery from the kinds of recessions we have had since the end of World War II. I guess that’s one reason why this is going to be called the great recession and let’s just hope it’s just a recession and I still think it will just be a recession. We are certainly in an area of the economy that has been affected by it in this sense in that a lot of office building activities of the American business world, the corporate life of America has been under the cost controls and concerns about over expansion I think was spread throughout the business economy.

Nevertheless, I think as I’m sure you’ve heard from us before and probably have heard from other people who are in this world of commercial office space before. We are in the same markets that we have underscored before, namely supply constraint markets. Supply constraint for difference reasons, in Washington it’s because of a height limit, in New York because of the lack of available sites, in Boston because of an unbelievably complicated approval process and in Cambridge because there are no sites, etc. was a lot less difficult to deal with and the demand situation has been affected by the fact that there has been a drop in rents and when these buildings, the better buildings become available at somewhat lower prices there are a lot of tenants that say, “Well, I couldn’t afford it before but I can afford it now.”

I think this is particularly true in our New York activities where we are really in the range of 98% occupancy in terms of either lease space or space that we’re just drawing leases on so we’re in very, very good shape in that market in part because the buildings that we have and if we had more space of that kind I suspect we would continue to do very well with it. If we could add a couple of hundred thousand square feet to any number of our buildings in New York we could lease that space within a matter of a few months.

In that sense, I think we are fairing quite well. We are also trying to position ourselves to take advantage of what opportunities we think will be coming down the pike over the next year or 18 months. Amongst other things, to do this we have been very diligent in terms of trying to take advantage of where we think the financial markets provide very good financing opportunities for us. As you all may know we raised $700 million several weeks ago on what we thought were very, very good terms, just shy of 11 years of maturity and I think the basic rate was somewhere around 5.6% to 5.5%.

Now, the reason why this is valuable for us is I am sure obvious to all of you but I’ll just repeat it, it does give us the opportunity to be in the market for certain opportunities that will be coming forth. That gives us a cost of money that makes it possible for us to get some decent leverage or positive leverage when we can finance them at the kinds of yields that we were able to do on a corporate financing. We really have close to $3 billion in effect in one form or another of available equity to use for activities.

We hope that we will be able to put a good chunk of that money to work over the next year. I think this will be advantageous to the company’s growth over the medium term and over the longer term. So we are I think not in the strongest market we’ve ever been, to put that mildly. There are certain markets as you will hear from subsequent reports which are not as good as say the New York area or the Washington area but frankly we believe that these markets are steadily firming up.

One of the things that is going to contribute to that is that there is very, very, very much reduced new supply coming on the market over the next several years. I would say that the new construction of the kind of office space that is competitive with us has probably dropped at least 80% if not more and I think it will be very difficult for a lot of companies to finance new construction. I think we are going to be in an improving market as demand slowly, slowly begins to increase relative to the amount of available space and the supply is just going to be virtually non-existent.

So we are fairly comfortable, maybe even modestly optimistic about the next several years and what it will mean for us in terms of occupancy and rentals. With that, I will turn this over to Doug who will give you a specific report on the company and then we can have a Q and A afterwards when we’ve given you a detailed report on the company. Thank you all very much for listening.

Douglas T. Linde

We sit here I guess in sort of the middle of earnings season for corporate America and it’s clear that the story is no longer about margin improvement through aggressive cost cutting which we think of as another way of just describing job cuts and people aren’t even talking about inventory restocking anymore. I think there are clearly signs that there is top line revenue growth across a pretty broad spectrum of the economy and everybody’s commentary, including Mort’s this morning I think, is a much more positive tone. We are actually seeing some isolated announcements of renewed hiring.

A year ago I think everybody was just keeping everything in check because there were so many job reductions and we had rising unemployment and we were having lots of personal and corporate distress and while I think Mort would clearly say unemployment is still a pretty high number and we still do have this foreclosure issue, but it feels like business sentiment and consumer confidence is really starting to look through these negatives. While we are not yet seeing any consistent hiring trends from our customers, our tenants, there is clearly a change in psychology and velocity is starting to pick up.

If I bring you back to last year in the first quarter of 2009, Boston Properties completed 250,000 square feet of leasing transactions. In the first quarter of 2010, we completed over 1.8 million square feet in 71 separate transactions. 730,000 of it was in Washington, 212,000 in Boston, 437,000 in New York City and another 400,000 in San Francisco. It is by far the most active quarter we’ve had in the last few years and if we even adjust for those one large 500,000 square foot transaction which was really a set of short term extensions with Lockheed Martin Reston, we are still more than 50% greater than our average first quarter activity.

Our second generation leasing statistics felt at least when you looked at them more like 2006 than 2009. We showed double digit increases in net rents. Now, I have to say that’s a little bit of an anomaly and it’s largely because of the aggregate numbers are really more a historical representation than an actual representation and I do want to clarify what’s going on there.

This quarter you have to adjust for three things, one is that the Ropes & Gray lease at the Prudential Center, that’s the replacement of Gillette, that’s 480,000 square feet, that kicks in this quarter. Remember that was completed in ’07. We’ve had about 91,000 square feet that we did in 2008 in New York City where a tenant took additional space and again, that clicked in this quarter and then we did a short term deal with Lockheed Martin for a 264,000 square foot, one of the leases of that 500,000 square feet that I referred to a moment ago, and if you exclude those, second generation statistics are pretty similar to where they were last quarter. We’re down about 9% on a gross basis and about 15% on a net basis which feels right for where we are today.

Even with the headwinds from significant available space in all the markets, we really are seeing velocity continue to build though. Tenants are more confident, they’re seeing availability of the best space declining and there is clearly growing consensus that overall rental levels have bottomed out and that there really is not much in the way of value in delaying a leasing decision. It’s time to sort of move on because things are not going to get much lower.

It doesn’t mean that the lease negotiation leverage has suddenly shifted to the landlords or that we’re even predicting strong rental rate growth and declining concessions but there are a few green shoots in the portfolio. Let me give you a couple of example of some encouraging signs. In the Boston suburbs and that includes Cambridge which are dominated by technology, healthcare and biotech life sciences companies we are seeing expansion, actual expansion from tenants such as Shire Pharmaceuticals, Cubist Pharmaceuticals, Google, Microsoft, IrObex, Dassault Systemes, Constant Contact, Lincoln Labs and A123.

Now the optimism has to be tempered by the fact that there’s overall availability in [Center 128] in Cambridge in excess of 20% and there are some tenants that are actually still going to be reducing their headcount because they have reduced jobs over the past several year and they are going to be resizing their facilities. While we don’t expect the market to make a quick recovery, there is clearly visibility on growth which is something we haven’t really been able to see up to this date.

In New York City which Mort was describing, where again we derive almost 42% of our net operating income, the best space in the best buildings that was in move in conditions is really rapidly shrinking. Leasing velocity in the first three months was at 94% of the historical levels over the last five years. The quarterly volume of signed leases in midtown was 3.4 million square feet against a five year average of 3.6 million. Clearly, the velocity continues at a very strong clip.

While many of the larger financial institutions are still rationalizing their space needs, the recovery and the changing landscape of the financial services industry has led to the formation or growth of smaller organizations and we are seeing this first hand in our leasing transactions. We’ve now completed the leasing of all the remaining office space at 399 Park. We’ve completed two renewal expansions at the General Motors building and availability in that asset is now limited to two 9,000 square foot suites that expire later this year. We completed 175,000 square foot renewal at 125 W 55th Street and we’re in discussions with tenants on all of the remaining 2012 rollover in that building.

Our overall availability in top buildings in midtown Manhattan which we sort of characterize as about 34 buildings and about 40 million square feet dropped this quarter by 100 basis points and it’s about 12% and our portfolio is just over 96% leased right now at the end of the quarter with existing leasing transactions that are completed, it will be a little bit higher than that at the end of the next quarter.

Tenants in all of our markets have begun to act on the new level of lease economics and clearly appear much less constrained about investing capital in their premises. Now, clearly one obstacle to growth we have, and I think this is important to think about, is that in the CBD markets, we do have a predominance of legal industry participants and the legal industry has in fact contracted over the last couple of years and as law firms today look at their premises they do have excess space.

So as law firms renew over the next few years, we expect that there will be an accompanying reduction in the amount of leased area that they take but they will continue to be a very important part of the CBD office markets and their demand will be a driver of rental rate appreciation but we’re going to have to adjust to a smaller base in the short term.

In DC, the two primary drivers are the law firms and the GSA, the government. We have clearly begun to see the GSA growth predominately from the financial services side of the government. The Treasury and SEC are actively hiring and searching for additional office space and the law firms are actually hiring lawyers to staff their government regulatory practice groups which is no surprise.

The government is actually using recovery money from the last act that was passed by Congress to refurbish buildings and this is actually translating in to additional leasing activity because they’re moving tenants out of GSA buildings in to swing space for the next few years and when the government moves someone in to another building it’s not for six months or nine months, it’s generally for two, to three, to five years at a time.

The short term challenges in the district will continue to be the availability of space in the secondary markets in the North Capital, Southwest and Ballpark Waterfront areas and practically speaking the only tenants for those buildings are the GSA or other government associated users and there is pretty significant availability still, probably close to four million square feet and rents on those buildings are going in the high 30s with CPI escalations and full tenant improvement allowances. So we expect that is where the GSA is going to focus, it’s not going to focus on the primary locations in the east end in the CBD although certain specific users, for example Treasury who’s going to want to locate their people closer to Treasury’s headquarters and so there may be some additional expansion in the GSA’s use in the east end and the CBD from them.

Our DC portfolio is 98% leased. We have about 225,000 square feet expiring in 2010 and 2011. We’ve completed another lease at 2200 Pennsylvania and we have pretty strong interest in the remainder of that space. Now, I want to mention the 500,000 square foot holder over renewal that we completed with Lockheed Martin. Lockheed’s contract with NGA is being relocated as part of [BRACK] and we will be getting back these buildings plus another 180,000 square feet in 2010.

The good news is that we are actively competing for another government user to back fill the space. We’re also actively working on our 2011 rollover in Reston which totals 445,000 square feet and we’re in lease negotiations with a 180,000 square foot user for a late 2011 lease expiration and active dialog with two other tenants, one about 105,000 square feet and the other 90,000 to take the predominate amount of that square footage that is rolling over.

While the toll road market continues to struggle we are clearly the beneficiary of tenants that are upgrading both their location and the quality of their premises to Reston Town Center. Highly marketable space in the highest quality buildings has the best chance to be successful in a difficult market and once again we are seeing that loud and clear.

In San Francisco, leasing activity was pretty modest but tour activity has truly started to pick up in the last few months and we completed another two full floor transactions. In the Peninsula and Silicon Valley, those are tough, tough markets still. Genentech has continued to expand in our Gateway project in South San Francisco and our occupancy there has reached 87%. Unfortunately, in the Silicon Valley, Lockheed Martin renewed on only half, 270,000 square feet of our Zanker Road Business Park in north San Jose so we are going to be stuck with about 270,000 square feet of additional vacancy there. The good news is the rents in those buildings are about $1 a square foot per month to the economic impact is not terribly significant.

Leasing activity is picking up in the Valley, but again remember there is a lot of availability, there’s just that overhang that is in the market. It’s probably 15 million square feet of Class A space, a lot of it which was developed and delivered in 2009 that is remaining vacant. So, it’s going to be challenging for a while but we are seeing again additional demand. Google and Intel have both announced hiring objectives and we are seeing expansion from some of our smaller start up tenants that occupy our Mountain View Research Park.

Overall, our mark-to-market as you probably would expect remains negative. It’s actually improved slightly, about 5% from last quarter, down to $1.65 from $1.74 and remember that the rents we are providing are starting rents so there’s always an increase during the term but those aren’t reflected in the mark-to-market. We actually have raised our rents modestly in New York City over the past few months in concert with what we’re talking about in terms of the demand there and it’s literally largely due to the fact that we just don’t have any meaningful inventory.

In New York City, our gross rents ranged from the high 60s to the high 80s with the exception of 2 Grand Central where they start a little bit lower, in the low 50s and at the General Motors Building where rents start in the low 90s now and probably reach over $140 a square foot. The rents in the rest of our market really remain pretty stable. In 2010 the average expiring office rent is about $42.75, it’s about 9% higher than the overall market and in ’11 it’s $49.14, about 14% higher. Again, we’ve talked about this in the past, we have a lot of rollover of very high rents in the [inaudible] that are impacting our 2011 numbers.

The highlights in our press release this quarter were clearly dominated by capital raising activity. While it’s certainly possible that interest rates and credit spreads may continue to tighten, we’ve looked at the absolute level of borrowing costs and the potential dilution that comes from holding large capital balances and made the judgment that it was an appropriate time to borrow. We have opportunistically repaid or purchased a portion of our near term maturities and we might continue to consider these activities as well.

But, as we look forward we believe the environment to create value through acquisitions is improving. In the last 60 days the transactional opportunities have clearly started to accelerate. We’ve seen broadly marketed fee interest in some CBD office buildings in San Francisco, 303 2nd Avenue and 333 Market and in New York City with 600 Lex, 340 Madison and 125 Park and potentially controlling debt positions that are actively being marketed at One Federal Street in Boston and 885 3rd Avenue in New York City.

The point is that the financial institutions that hold controlling debt in many instances are recovering. Debt and equity capital is very available and the various participants in these over leveraged real estate assets and portfolios are beginning to push for resolutions. The participants in the capital stack are getting more realistic about the current level of lease economics, tenant demand and the significant capital necessary to operate office properties. At the same time, potential buyers are getting more aggressive about expectations for a recovery, there is a meeting of the mind that is starting to come through.

In some cases, we are actually seeing things slowly but surely making their way down the capital stacks through the various tranches with each successive participant passing on the opportunity to invest additional capital. In other cases borrowers are seeking to make interest payments, pushing assets in to special servicing and in other situations lenders are simply saying, “We’re done. We’re moving on. Let’s just throw this out as a discounted debt sale.” In the more complicated transactions, the one constant, and this is important for us is that the potential deterioration in the value of the assets over time continues.

Without capital tenants are making decisions to move on or in the best case being offered a discounted rental agreement in exchange for foregoing those capital improvements. Any capital expenditures on the base building side, other than emergency repairs are being deferred. Tenant brokers are advising clients of the issues surrounding the ownership of these assets which is affecting demand so the tenants and the buildings which have challenged capital situations are in fact feeling the impact of that environment.

During the last cycle of appreciation, investors were able to make money through cap rate compression and rapidly rising rental rate expectations. We believe we are in an era in the office building business where investors are going to have to operate, not trade assets. Identifying the opportunities and challenges inherent in the individual assets and developing the right plan to position them in the marketplace including making speculative capital investments and then executing is going to be challenging and it’s going to be management intensive.

While the plethora of capital available today may reduce the potential returns we can earn, we are optimistic that Boston Properties is going to be able to use its operational and its financial strength to create a lot of value for our shareholders as we move forward. With that, I’m going t turn it over to Mike to talk about the results for the quarter.

Michael E. LaBella

I want to start by giving a quick update of the capital markets. As you can see from our press release we had a productive couple of months in the debt markets. We successful closed three major secured financings on our joint venture properties including a $207 million loan at 125 W 55th, $180 million loan at 2 Grand Central Tower and $175 million loan on Metropolitan Square. As we look back on how we expected these financings to go earlier this year, it’s clear how far the secured markets have progressed.

Last summer we anticipated that these loans would have been sized at only 75% of what we ultimately achieved and at rates between 7% and 8%. Today, we were able to place reasonable leverage with secured financings at debt yields of 10% to 11% and pricing on new 10 year loans in the high 5% range. The life insurance companies and banks are offering very aggressive pricing for high quality buildings and in addition the CMBS originators are in the market offering slightly higher leverage and pricing although we haven’t seen evidence that they have actually originated a material amount of new loans yet.

We have covered the majority of our 2010 debt maturities and expect to pay off a couple of smaller loans due later this year at maturity. One in Cambridge in a portfolio within Carnegie Center in Princeton which combined totals $80 million. We’re also preparing to enter the market to refinance our Market Square North joint venture mortgage that matures in December and are still evaluating our low floating rate bank loans on our Reston development and on Annapolis Junction, each of which has an extension option.

Our billion line of credit expires in August and we anticipate exercising a one year extension moving its maturity to August of 2011. We’re also looking at our medium term debt maturities and to date we’ve repurchased approximately $150 million of our exchangeable debt that is redeemable in 2012 at slight discounts to par.

As Mort mentioned, we accessed the unsecured bond market this month with the successful $700 million debt issuance for 10.5 years at an effective yield of 5.64%. As you will see in our guidance, this capital in addition to the cash we raised last October will be dilutive to our earnings in the short term until it is deployed. We believe taking advantage of the current low interest rate environment and positioning our balance sheet with a long term low cost debt capital will benefit us over the next couple of years.

Last week we announced the institution of an aftermarket equity program of $400 million. Given our cash position of nearly $1.8 billion today, we have no immediate plan to use this program. However, it could be a useful tool to raise moderate amounts of equity in a price efficient manner down the road.

Now, I want to talk about our first quarter earnings performance. We announced first quarter funds from operation of $1.07 per share. This exceeded our guidance by $0.04 per share or approximately $6.5 million at our guidance midpoint and would have been even greater if not for the impact of a $2.2 million, $0.015 per share charge associated with our debt buyback activity. The performance of our portfolio beat our expectations by approximately $3.5 million, about $1.5 million of this was on the expense side as we continue to aggressive purse expense savings.

Portfolio revenue was modestly higher due to stronger percentage rent from 2009 sales at the Prudential Center and a variety of leasing successes throughout the portfolio plus some holdover rent from a vacating tenant in Boston. Our hotel continues to earn market share with occupancy up 8.5% compared to the same period last year and exceeded its budget by $400,000. Unfortunately room rates remain stagnant at recession period levels so RevPAR is not improving significantly.

Our joint venture properties outperformed by about $1.4 million, the result of expense savings, higher work order income and approximately $800,000 of unbudgeted termination income. The termination fees primarily related to two tenants, one in the GM building and one at 540 Madison where in both cases we have re leased the space. We generated fee income of approximately $2 million in excess of our budget, the largest piece coming from our joint venture portfolio where we completed an early renewal of 175,000 square foot tenant at the base of 125 W 55th Street and earned a significant leasing commission.

We also generated 400,000 in cost savings at our 20 F Street development job in Washington DC and the remaining outperformance is from work order income and incentive management fees in New York City. We had interest expense savings of $1.3 million in the quarter, this is due to the combination of lower than projected LIBOR rates on our floating rate debt, our use of cash in lieu of funding our construction loans at Atlantic Wharf and Wisconsin Place and the impact of the smaller principle balance outstanding on our exchangeable notes given our debt buybacks.

Offsetting a portion of the positive performance is a $2.2 million non-cash charge associated with the buyback of $53 million of our exchangeable debt during the quarter. At inception the debt was bifurcated in to a debt and equity component pursuant to GAAP based upon market conditions at issuance. Upon early retirement, GAAP requires us to allocate the purchase price based on current market conditions and given the relative near term maturity and an exchange price of $142 per share, the security is deemed to have no equity value today so we’ve allocated the purchase price solely to the debt component with the debt on our books at below its par value at roughly $0.95, we ended up taking a non-cash GAAP loss.

Just a couple of other items I want to cover for the quarter. At our 250 W 55th Street site we completed all of the remaining work for the suspension of development and this quarter we expensed $350,000 of suspension costs. We anticipate future expenses for taxes, insurance and securities at this site of approximately $2 million a year. In addition, and as we disclosed in our press release, we settled a lease termination obligation related to the project for $12.8 million. We have previously recorded an obligation of $20 million so this resulted in a $7.2 million positive adjustment this quarter. This was included in our prior guidance and is not a variance.

Also, you will see our G&A is higher than in prior quarters due to the onetime acceleration of vesting of the long term compensation for [Ed Linde]. This cost was also budgeted in our prior guidance and going forward the run rate will be lower as I will discuss in a minute. I do want to go through our FAD for the quarter because it has been significantly impacted by the strengthen of our leasing activity. This quarter we have over two million square feet of leases commencing, more than double our normal activity and due to the location and length of the lease terms, our transaction costs are higher than typical.

The cost per lease year of $4.27 per square foot, is actually lower than our 2009 average so the lease term length is really the driver. Some key examples include the 480,000 square foot lease with Ropes & Gray at the Prudential Tower. This is a 20 year lease for virtually all of the space that had been leased to Gillette since the building was built thus requiring an relatively high TI work letter. Also, we have over 400,000 square feet of leases in New York City including two leases totaling 210,000 square feet at 601 Lex and a 15 year 175,000 square foot lease at 125 W 55th. With tenant improvement costs running $40 to $60 per square foot and leasing commissions for 10 to 15 year leases of $35 to $45 per square foot in New York City, these deals meaningful impact our reported lease transaction costs for the quarter.

If you strip these four deals out of the statistics, the average transaction costs for the remaining 1.1 million square feet of leasing was only $25.75 per square foot, more in line with our historical average. Our straight line rent also affects our FAD and is higher than normal due to many of the same leases plus the other new leasing that we did in the third and fourth quarter of 2009 at 399 Park. As we’ve mentioned before, the Ropes & Gray lease has a 12 month free rent period to complete the build out of the space and is going to impact our straight line rent for all of 2010. The free rent on the other deals starts to burn off in the second half of the year.

Turning to our projections for 2010, the biggest change to our previously provided guidance will be the near term dilution associated with our bond offering this month. The interest cost of this debt net of anticipated interest earnings is projected to be approximately $0.16 per share in 2010. We’re not assuming any new acquisitions in our projections for the year so this cash is assumed to remain dilutive for the full year.

In the same store portfolio, we anticipate flat to moderate decline in year-over-year GAAP NOI with the negative mark-to-market that Doug discussed. We’ve had some terrific leasing successes in the past six months and our occupancy climbed nominally this quarter. Though much of that leasing was projected and we continue to anticipate occupancy for the rest of the year averaging in the 92% area.

In New York City in particular we have increased occupancy by nearly 100 basis points this quarter. At quarter end we had just over 300,000 square feet of vacancy and another 350,000 square feet of space expiring later this year. We expect positive absorption for the remainder of the year in 601 Lex and at 399 Park Avenue where as Doug mentioned, we have recently signed an additional lease bringing to near full occupancy.

However, in our joint venture portfolio we have the GSA rolling out of 80,000 square feet at 2 Grand Central Tower which will mute our absorption for the region. In Washington we expect occupancy to remain relatively stable this year as nearly all of our million square feet of 2010 expires are projected to renew. In San Francisco Embarcadero Center has about 300,000 square feet of current vacancy and 140,000 square feet of leases expiring this year. As Doug mentioned, San Francisco has showed an uptick in activity but overall leasing velocity remains slow and competition is tough. We’re projecting our occupancy at Embarcadero Center to remain in the 90% area throughout the year.

In our suburban portfolio the only significant new exposure we have is Zanker Road Business Park in San Jose where we signed an extension with the existing tenant for 270,000 square feet this quarter but have an additional 270,000 square feet expiring on December 31, 2010. This space is leased in the mid teens per square foot so its impact on the bottom line is less and it has no affect on 2010.

Our largest leasing exposure is in Boston with 900,000 square feet of vacancy and nearly 600,000 square feet of leases expiring this year. This 1.5 million square feet is comprised of 200,000 square feet at the Prudential Center, 275,000 square feet in Cambridge and just over one million square feet in the suburbs. We are seeing a pickup in activity in both the suburban and Cambridge markets as Doug detailed and much of our space is very high quality.

However, excluding our fully leased new development in Weston that comes on line midyear, we still expect to lose between 250 and 350 basis points of occupancy in 2010. With this backdrop, we expect our 2010 GAAP same store NOI to be approximately 100 basis points above our prior estimates at flat to down 1% from 2009 and -3% to -4% on a cash basis. Again, our cash NOI is impacted by the free rent associated with the Ropes & Grays lease and the new leases in New York City.

Taking a look at our quarter-over-quarter projections for the remainder of 2010, the first quarter NOI after adjusting for one million of non-recurring items is a good run rate for the remainder of the year with growth of zero to 1%. We’ve excluded termination income from our same store comparison as in 2009 we had an unusually large $17.5 million of termination income. We’re projecting $3.2 million in termination income for the rest of the year and that includes $1.2 million of fees already received in the second quarter from a small retail tenant in New York City where we have already got another tenant committed for the space.

We’re projecting straight line rents of $75 to $80 million for the full year. This is up from last quarter due to the new leases signed in New York. Additionally, we signed an amendment of a lease with 180,000 square foot government related tenant in Reston Virginia that triggered a restoration payment provision in the lease increasing our straight line rent by $3.5 million per year through the lease expiration in May 2012. This is part of the 700,000 square foot three building complex that Doug mentioned where we expect the tenant to vacate in 2012.

We will deliver our Weston Corporate Center this summer. The project is 100% leased to Biogen for its corporate headquarters and we expect it to have roughly a 10% unleveraged GAAP NOI return. We should also benefit from the full year impact of our 2009 development deliveries which are virtually fully leased. This includes our 120,000 square foot Princeton University build to suit, our Democracy Tower project in Reston Town Center which is 100% leased and our Wisconsin Place Building in Chevy Chase Maryland, now 96% leased with the signing of another 16,000 square feet this month. In total our development is projected to add an incremental $18 to $20 million to our 2010 NOI.

We expect the contributions to FFO from joint ventures to be slightly better than our guidance last quarter at $135 to $140 million in 2010. It’s important to note that our first quarter results contain over $4 million of non-cash FASB 141 income that has now burned off. Our hotel has exceeded its budget the last couple of quarters due to occupancy improvements but we continue to be conservative regarding the prospects for any near term meaningful turnaround. We’re projecting the hotel’s contribution to FFO to be approximately $6 to $6.5 million in 2010.

Development and services fee income is expected to be $25 to $30 million up from last quarter due to the out performance in the first quarter and we have no change in our G&A projections for 2010 and expect the full year G&A to be approximately $81 to $83 million. Our net interest expense projections is impacted by the interest expense from our bond offering this month net of interest earned on our increased cash balances.

Offsetting this is the reduced interest expense owning to our bond buyback activity. In the first and second quarters we repurchased approximately $150 million of debt that was incurring a GAAP interest expense of 5.6%. We now expect net interest expense of between $380 and $390 million for 2010 an increase of approximately $25 million from last quarter. This number includes the non-cash charges of $2.2 million and $4.7 million in the first and second quarters related to our buy back activity. Our projections do not assume any additional debt repurchases in 2010.

Combining all of these assumptions results in a revised 2010 guidance range for our funds from operations of $4.06 to $4.16 per share. Our recent capital markets activities have a short term dilutive impact on our earnings guidance. Stripping our all of the projected net interest expense changes from our new debt offering and the repurchases, we’re actually increasing our range by about $0.13 per share at the low end reflecting the improvement in our operating portfolio projections.

For the second quarter we are projecting funds from operation of $0.97 to $0.99 per share. As I mentioned our second quarter guidance includes a $0.03 per share or $4.7 million non-cash charge on our debt repurchases, a partial quarter of interest expense associated with our recent bond offering and lower contribution from our joint ventures with the burn off of non-cash FASB 141 [inaudible].

Overall, our portfolio continues to perform well in the current environment. Our occupancy is stable and as evidenced by the 1.8 million square feet of leases we signed in the quarter, our portfolio is attracting its share of the available tenant demand. The success of our development program continues to be a difference maker enabling us to demonstrate modestly positive portfolio NOI growth year-over-year despite the difficult fundamentals in the leasing markets.

In early 2011 we expect to deliver both our Atlantic Wharf and 2200 Pennsylvania Avenue developments representing nearly $1 billion of invested capital. Our balance sheet is in terrific shape with $1.8 billion of cash and we’re poised to make smart investments. Until we invest however, our cash will be dilutive and its currently costing us roughly $0.60 per share annually. We believe the short term cost of holding this capital is well worth the benefits it can deliver over the longer term.

That completes our formal remarks so operator you may open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Bilerman – Citigroup.

Michael Bilerman – Citigroup

Either Doug or Mort, just in terms of putting capital to work it sounds like you have a little more confidence of using some of the $3 billion of excess capacity over the next 12 to 18 months. I’m just wondering if you’re able to contrast I guess your positioning and your competitiveness in terms of transactions given your comments of there’s a plethora of capital available in the marketplace, a lot of people chasing assets. But, also what it sounds like is you believe in a more slower type of recovery and so maybe it’s hard to stretch on deals if you’re not forecasting in a faster rise. I’m just wondering how you sort of put everything together given your confidence to put out the money.

Mortimer B. Zuckerman

Let me just tie together two things that I said, one of them is that we do foresee a slower sort of economic recovery than many but again, as we have said many times you have to [inaudible] the markets. The upper end of the market, the higher quality space we believe will do a lot better. I mean, just look in New York, there’s no space available in our buildings and as we now go in to further renewals or whatever limited space we have left, we’re continuing to step up the rents.

Now, this will reflect itself even more strongly I believe when there is a stronger economic recovery. So I think in terms of making acquisitions we are still comfortable with taking a longer term view and we do believe that three, four, five years out we’re going to be very happy that we had the cash today to buy the kind of high quality assets or invest in the type of high quality assets that has been our basic strategic space since we started the business.

We’re really as always frankly, really looking to a longer term perspective in the types of investments or developments that we will undertake and we still think that those kinds of developments will do well. It may not do extremely well in the shorter term but in the medium term and the longer term we think they’ll do very well. So, that’s still our basic sort of analytic structure as we look at investments and whether they be acquisitions or developments.

We do think that yes, there is capital but as Doug pointed out there’s a combination that is needed. It’s not just capital, it’s also operational ability and here is where we think we have a competitive advantage in terms of understanding what we can and what we cannot do. So, we obviously are at this point modestly bullish. I don’t want to over state anything until we can actually announcement some things. But, I do think we are modestly bullish about what we can do with the additional capital.

Again, we’re not trying to pretend that this is going to have a huge uptick from day one although we will have the uptick in the sense of the alternative investment of capital. We’re clearly going to do better than what we’re currently able to invest the capital in so we’ll have that short term benefit. But, in terms of the longer term investment on the assets that we either buy or begin to develop, we think that will work out very well for us.

Michael Bilerman – Citigroup

You look at the recent deals, you talked about the activity, the buildings in San Francisco, the buildings that have closed in New York, the Tishman, the Carr portfolio in DC, where were you in those processes relative to final pricing?

Douglas T. Linde

I don’t want to disparage other people’s transactions. Obviously, the pricing that we had was lower than the pricing where the deals ultimately priced. We’ve underwritten everyone of those deals pretty hard and in certain cases we’ve just looked at ourselves in the mirror and said, “Does it really make sense to stretch on this deal given what we believe the other opportunities are that will present themselves and what our return expectations?” To date, we just haven’t been prepared to do it.

Michael Bilerman – Citigroup

My second question just on 250 W 55th, you talk about the activity that’s happening in New York and certainly the larger tenants in terms of space requirements in New York, where are those discussions today about – I realize it just got wound down this quarter but are there discussions at this point of potentially restarting that? And, at what level of commitments would you need and how far will rents need to move to be able to start that project?

Michael E. LaBella

We are having discussion with potential tenants for that space. As I mentioned, or as Doug mentioned, as we both have observed, we really are virtually leased up in all of our other space so yes we are looking at this building and yes we are talking seriously with at least one tenant, maybe with two. Let me just put it this way, I don’t want to be specific about the amount of space that we’re talking about but we believe it’s not just a function of how much space, it’s where in the building the tenants would take the space and I think if we decided to go ahead it would be with the understanding that we would be comfortable with the leasing prospects and the return prospects in the overall transaction.

Operator

Your next question comes from John Guinee – Stifel Nicolaus & Company.

John Guinee – Stifel Nicolaus & Company

Doug, I thought you said something very interesting regarding Lockheed Martin and the NGA contract. Can you elaborate a little bit on that as it pertains to your overall thinking about the GSA demand and the defense contractor industry in Northern Virginia? Maybe Ray’s on the call and he can talk about it also.

Douglas T. Linde

I’ll let the guy on the ground start.

Raymond A. Ritchey

Well first of all as you know John, the NGA campus is relocating to Springfield. As many times is the case they’re a little bit behind schedule and have to extend the leases to maintain occupancy in our core buildings out there and we were the core beneficiary of a very nice hold over. However, they are looking to relocate down to Springfield. That will free upwards of 700,000 square feet and Reston and we are already in an intensely competitive process right now to try and secure another defense contracting government agency to backfill the 520,000 square feet which is the core of the campus.

We think that is extremely important besides the obvious of replacing the income. We also are restoring another major demand generator to that Dulles corridor. So we’re going after it aggressively, we’re very optimistic of success but obviously there’s no guarantees. If they take the 520,000 the remaining 180,000 which is a brand new fully compatible building relative to defense and intelligent standards, will be available for either additional government leasing or private sector camp followers wishing to be right next to that agency.

But, more importantly, we’ve also taken a very aggressive position down in Springfield where the NGA is going. We have, as you may remember, secured a campus of upwards of one million square feet atop the Springfield metro. Not only does it have metro but hard rail access down to Quantico. It’s got direct access to the pentagon via public transportation and is the closest owned major office campus to the new NGA facility.

In addition to that we have our [VI95] Park which we’ve owned for nearly 30 years where we have upwards of 800,000 square feet of very competitive space that is literally within walking distance of the NGA campus. So we think while we’re facing a short term challenge to backfill the NGA campus in Reston that our barter strategy is really fully formed and in place to be very response to this changing situation.

John Guinee – Stifel Nicolaus & Company

The second question Doug, I don’t know if you have anything to add, is can you walk through the capital stack at 885 3rd and how that’s being marketed?

Douglas T. Linde

I don’t want to go through because of confidentiality agreements and the such that are out there. Big picture there is a ground lease and then there is a first mortgage and then there is some additional debt on top of that. A portion of that capital stack is currently being marketed for sale.

John Guinee – Stifel Nicolaus & Company

Do you know who the ground lessor is?

Douglas T. Linde

I do but again, I just don’t feel comfortable talking about a confidentiality agreement that has bound me.

Operator

Your next question comes from Steve Sakwa – ISI Group.

Steve Sakwa – ISI Group

First question I guess if for Mort, I realize that all of this financial regulation discussion is very much up in the air but as you kind of peel the onion back here on things like the vocal rule and other things that House and Senate are trying to pass, how do you think about the impact on the financial services industry, prof trading, hedge funds and its impact on New York?

Mortimer B. Zuckerman

Well, we all at this point can’t be totally sure about how it’s going to come out and it’s been held up by two different votes in the Senate because all 41 Republicans are basically saying that the democratic proposals are not going to pass muster as far as they’re concerned. I do think it’s going to have some effect in terms of the kind of leverage in particular that has been available for a number of these funds, particularly for the library large hedge funds. I don’t really think it’s going to effect – if this doesn’t get in to a very nasty political fight, what has been going on and I’ve been very critical of this publically on television and in writing, it is an attempt really to demigod the financial industry as far as I am concerned and make it look as if it is the financial world that is responsible for the great recession that we are in. That is just unfair.

The financial world is responding primarily to the collapse of the housing market and what that meant for the securitization market. There were some excesses in terms of lending without question and maybe in terms of investing but it was fundamentally these programs that were initiated I might add, by the Congress in mandating Fannie Mae and Freddy Mac and the FHA to really do a lot of things that I think they would regret and frankly a lot of banks made a lot of credit card lines available that have been cut back dramatically.

So we are in a transition period in that regard. I expect again in the short run it’s going to have some affect. But, I’ll say this about New York and I said it after 9/11 and I said it many times before, the great strength of New York is that it has the most talented people of world of finance working here. I don’t mean this to disparage anybody in any other city but if you want to take it not just pound for pound but just in terms of both quantity and quality, this is a city that attracts talent because it nourishes talent, welcomes talent, celebrates talent and rewards talent and that’s the key to the future of these businesses.

You can get the most talented people in so many different industries. I mean I was just at a conference that involved 50 or 60 CEOs from major Chinese businesses. This is their first destination and it’s not just finance, it’s finance related businesses and other businesses so I do think that frankly whatever the short term bump may be, and it will be something, I don’t know how serious it will be but it will be something, I do think that New York’s major assets really are vested in the people that these kinds of firms can hire when they have their offices there in New York.

Of all the markets we are in I have to say I think we have seen how well New York City has performed and I think it’s going to continue to perform very, very well over the intermediate term and certainly over the long term. As I said, the one thing that is remarkable at New York at this stage of the game is there is virtually no new construction going on with any kind of available space. This has been typical of the kind of roller coaster issues of supply and demand but it’s also typical of a market that is really constrained in terms of the availability of sites. So, I find myself feeling quite bullish about New York and I do think that New York therefore will frankly do as well as any other market over any kind of reasonable length of time in the real estate business.

Steve Sakwa – ISI Group

Mort, your comment about supply just leads in to question two, I guess there’s been discussion or rumors that you guys are interested in maybe participating in the Freedom Tower or One World Trade in sort of a Port Authority recap for investment. Can you just talk about your interest downtown? I guess historically that has just not been a market that you have shown much interest in. I’m just wondering if the papers have it wrong?

Mortimer B. Zuckerman

Let me explain. There have been no decisions made about that but I will tell you this, we have a unique structure, this is $3 trillion development. At this stage of the game nobody – it is going to be the dominate building downtown both for the city but particularly for international tenants. We will have a very, very limited investment that will be less than 5% of that total cost, less than 4% of that total cost in fact and it will be in a preferred position.

Frankly, there are some projects you do not just to maximize the financial return but also to establish another layer of the creditability of this firm. We will be very happy to do that transaction under the circumstances that we have proposed to the various public authorities. It is not an accident that four of the major firms in this city entered in to that competition. I can understand why they’re doing it and I can certainly understand why we are doing. Again, because of confidentiality I really can’t talk too much about it but I think we will all be very comfortable all of the different elements that go in to being involved in a transaction like that.

What I don’t want you to come away with is a feeling that we’re treating this as a normal development, we are not and nobody can. It is a project of an incredible cost and will be an incredible icon for the city of New York. But, the vast, vast bulk of all of the funding and financing is going to be put up by the public authorities.

Douglas T. Linde

I think Steve and Mort may have said trillion and I think he meant billion.

Mortimer B. Zuckerman

Did I say trillion?

Douglas T. Linde

Mortimer B. Zuckerman

Oh my goodness. $3 billion still seems like a trillion to me.

Douglas T. Linde

But, the fact of the matter is that we do have a operational expertise that we can bring to the table here to really hopefully help the port authority manage its way through what’s going to be a very complicated and long road to successful completion of that building and the marketing of that building. And, to the extent that we can do it in a way where our capital is thoughtfully invested we will do that. We have an organization that can bring something to bear that would be a good thing for both the city and for us.

Steve Sakwa – ISI Group

Doug do you just have any sense of the timing? I realize these things are really unpredictable but where do you kind of get the sense you are in the process?

Douglas T. Linde

Well I guess we’re in round three of God knows how many. Hopefully it’s just four rounds. We continue to cooperatively engage with the representative of the Port Authority in answering their questions and providing them with additional information. We hope they’re going to make a decision sooner rather than later.

Operator

Your next question comes from Chris Caton – Morgan Stanley.

Chris Caton – Morgan Stanley

I was hoping you could give me a little more color on kind of some of the forward-looking leasing activity? What are tenants thinking in terms of downsizing or expanding at this point in the economy now that we’re kind of three months forward in say the recovery I suppose? Second is, what type of options are the tenants looking for in terms of expansion or contraction and how does that in any way kind of encumber vacant space in the portfolio?

Douglas T. Linde

I’m going to try to answer this very succinctly and I apologize if it doesn’t give you a full answer but if I answered it fully I would be talking for the next 25 minutes. Big picture, professional services firms went through a downsizing in people and they are now going through sort of a rationalization realignment of their new premises on a going forward basis. Most of them are going to be getting smaller marginally, 10%, 15%.

Technology companies and corporate America in our portfolio in our cities we think are on the margin going to stay where they are from an overall platform perspective but not grow as quickly as they were growing in 2006, 2007, 2008 even. From an overall concession perspective, the tenants that are in the market today are looking to try and achieve savings in rents that they’re currently paying, lock in as long a term cost basis as the possibly can and for the most part are really not looking for much in the way of options that are driving those transactions as opposed to in 2007 expansion space and getting must take or option space in three and five and seven years were predominately the drivers of many transactions.

Now, it’s if we can reduce our rent and we can lock in on that number for a long period of time we’ll figure out how we’re going to grow if we grow later on. That’s sort of how I would answer the question.

Operator

Your next question comes from Ross Nussbaum – UBS Securities.

Ross Nussbaum – UBS Securities

On yesterday’s SL Green’s call Marc Holiday was talking about how he’s underwriting 25% rent growth in Manhattan over the next three years and I know that there are some brokers out there that perspective buyers are underwriting as much as 50% rent growth in Manhattan over five years. I’m curious what our take on those numbers are and how you’re approaching the underwriting of assets not just in New York but in all of your major markets in terms of the rent growth?

Mortimer B. Zuckerman

I would say that is the reason we have been outbid on each of these three properties that Doug referred to. I don’t think we are looking to that kind of increase. I think we will see increases I just don’t think they’re going to be in the next three years at the level of that kind of double digit level. We think they’ll be double digits perhaps but not nearly at the 25% level. I think what he is talking about is the fact that we do see the financial world is frankly picking up steam in a lot of different ways and associated people who service the financial world will be doing the same.

Also of course, there is very little vacancy I believe not just in our buildings but in all of the first class or A or A- buildings. I think this is the rational for what they are seeing. We are frankly more cautious and more conservative in our estimates and I think that is what explains why people have out bid us on a number of these properties and frankly, I hope they’re right.

Ross Nussbaum – UBS Securities

What changes the dynamic in terms of your ability to put upwards of $3 billion of equity to work in the next year or two if there are others that are continuously underwriting stronger rent growth?

Mortimer B. Zuckerman

Well, we are in a competitive market and we are still going to maintain whatever our sort of standards are for how we invest the funds. Bear in mind we have not just a financial ability but we have an operational ability that we think will make a difference and in particular we have the opportunity to do some major developments where we think we will do very well and there are unique situations that might come up that provide us with those opportunities and we are working on some of them and we’re comfortable with that sort of mix of opportuinities.

We have performed well, if I may say so in good markets and in bad markets for now over four decades and we think we will continue to be able to do that and you will have the opportunity to review what we do and I think we will be able to produce as we have in the past. It’s hard for me to just sort of speak in more than generalities because there are things going on that we just simply aren’t in a position to talk about until they’re finalized. As we hope they come in to clear site you will understand the rationale for what we are saying.

Douglas T. Linde

The other thing Russ is that all space is not the same even if it’s in the same market and it’s in two buildings next to each other. I guess one of the postulates that we make is that some of these buildings are going to languish and other buildings are going to perform in a much stronger capacity and knowing which of those buildings to put your money in to is probably more important than necessarily picking the market.

So those are decisions that we have to make on an asset-by-asset basis. But, big picture the tenant demand in various markets is changing as time goes on and buildings that might have been suitable for certain types of institutions at certain times over the last 20 years may not be the same on a going forward basis and we have to think about those issues when we’re making our investments.

Operator

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

Jordan Sadler – KeyBanc Capital Markets

It sounds like I hear you are optimistic despite the ongoing sovereign debt crisis across the pond. Maybe in that context, what’s your current view of long term interest rates in the US and how is this factoring to the view of cap rates or values as you guys are going through your underwriting?

Mortimer B. Zuckerman

Let me just deal with the first reference, I must say this situation in Greece is really critical for Europe in a sense because it leeches in to the banking system since the European bank holds so much of the Greek sovereign debt. You want to talk about a too big to fail situation, in a way they are too big to fail, too small as a country and too big as debtor to fail.

I do think sooner or later they’re going to work something out that is a standoff between Germany and the countries it represents and the Greek government which of course doesn’t want to introduce the kind of tax increases or cost of government reductions in various government programs. They’ve got to work something out and they both know it and they’re playing chicken at this stage of the game and I just hope nobody plays that game for that one step too late and I doubt if they will because it is just impossible to let this whole thing to go under. It would be terrible for Greece and terrible for Europe and they both know it.

But, it would have international consequences, there’s no doubt about that. I think it’s a scary situation. As far as we concerned here in this country I really do not think that we are going to – let me put it this way, I don’t think there are any inflationary pressures in this economy and there will not be inflationary pressures of anything significant for several years to come. Therefore, I think the feds have no choice but to be very careful about what they do with interest rates.

Nobody quite knows what’s going to happen going forward. I mean we’ve been, and I am happy to say we were much more pessimistic than most people several years ago and acted on it and we are still if not pessimistic cautious and the reason for that is fairly simple. We are in an unprecedented situation and it being unprecedented, it is unpredictable. Everybody can make different judgments about how it’s going to go, we’ve taken a more cautious view of it and I’m frankly very happy that we did.

I will also tell you that I think we have done better than one would have thought even given how serious the recession was. But, I will remind you that the Queen of England when this whole thing exploded addressed a group of economists gathered by the Economist Magazine and famously said to them, “How come none of you saw this was coming?” Well, the reason why most of them did not was it is unprecedented and therefore unpredictable and as we work through it, it is still unpredictable.

There are still a lot of problems. There could be another serious drop in housing prices. State and local governments are under terrible, terrible pressures financial and fiscal pressures and there’s going to be a continuing erosion of employment in that sector. There is I think a large drop in investment spending, capital spending overall though in some sectors it is beginning to show some form of life. You could go through a whole list of things where you could say they could go in either direction.

I am worried about the fact that a lot of companies have realized that they can operate quite successfully with fewer employees and to my great dismay, with less advertising. This is something that is going to come back but it is going to come back quite slowly. I do think though that we are on a positive trend now. I do think it’s not just that we avoided thanks frankly to Ben Bernanke, rather than to the government’s stimulus program although that helped, we avoided a major financial crisis.

I think we’re pretty much beyond that concern although there are still a lot of issues that still have to be resolved that is going to keep the financial world in a fairly cautious posture. But, having said that I still think we are now on a positive uptrend. I may not be as bullish as others but I still think it’s positive and frankly, I’m open so I do think interest rates are going to stay fairly low for quite a period of time. They are certainly going to be low by historical standards. They may be up a little bit from where they are now but I still think those are very, very attractive financial markets for people like us who are borrowers.

I think the more difficult thing is in this kind of economy is as we estimate it is are we going to be able to find the kind of investments that make this kid of funding appropriate. We think we will have a competitive advantage, not an overwhelming one but a good enough so that we’ll be able to do fairly well with it given the level of interest rates that we think we are looking at and looking forward to.

Operator

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

Jamie Feldman – Bank of America Merrill Lynch

Mike, I was hoping you could give a little more color on the CMBS market and kind of what you’re seeing and how fast things have changed and maybe your outlook from here?

Michael E. LaBella

I guess I’ve been surprised at how fast things have changed to be honest with you. We are certainly being marketed by multiple different banks who have started up programs. The debt yields that they have been talking about have moved pretty quickly. Now, I would say the debt yields in the overall market have moved pretty quickly as well and I think they believe that they’re competitive advantage seems to be that they’ll provide 75% leverage where the traditional whole loan lenders are still kind of holding on to a little bit lower leverage than that.

They’re trying to get a little bit more rate. They’re out there marketing these programs. I think one of the institutions has made some loans. Another institution that we spoke with said they had a significant number of applications that they had signed but they hadn’t made any loans yet but, all of them are all out there marketing clearly. Where size was a constraint before, I would say size is less of a constraint now. Six months ago when we first started talking about the CMBS market coming back it was they’ll do $50 to $75 million loans really looking for a lot of diversity.

Now, they’re asking us if they can bid on our Market Square North financing that we’re coming out with for example. They seem to be willing to size loans that are in $150, $200 , $250 million maybe even higher. So I think it’s improved pretty significantly from that point.

Jamie Feldman – Bank of America Merrill Lynch

Then I’m sorry if I missed it but did you give a cap ex assumption for the year? Based on the $90 million in the first quarter I’m just curious what the thought is to get the rest of the leasing done this year?

Michael E. LaBella

Well, from a leasing perspective based upon where we think our occupancy is going to be we think we are going to lease about two million square feet give or take for the rest of the year. A lot of that is renewals as we talked about and I mentioned the DC market where we have almost a million square feet of renewals coming. I think that our transaction costs associated with that two million square feet of leasing is going to be significantly less than our transaction costs were in the first quarter.

So, I would expect to be more in line with kind of what our typical is which is $25 to $30 a foot on that space for TI costs. Then, for kind of traditional cap ex and maintenance cap ex, we also had a pretty low first quarter where we only I think had $1 million or so of cap ex. That was really related to two things, one we came off some pretty big jobs last year like the 601 Lex lobby and we haven’t really started some of the 2010 jobs yet and we still expect somewhere between $25 and $30 million of that type of cap ex for the year.

Operator

Your next question comes from Jay Habermann – Goldman Sachs.

Jay Habermann – Goldman Sachs

Just touching on development for a second, the Atlantic Wharf in Boston and 2200 Penn in DC, it sounds like you’re close with the DC project and that could be close to fully leased in the near term. I’m just wondering when you look sort of in the near term at the acquisition market, it’s obviously very competitive, does your appetite seek to increase here for development now that you could have 1.1 billion of projects that are close to fully leased.

Douglas T. Linde

I think the answer is if it makes economic sense the answer is absolutely yes. Economic sense means rental rates get to a point where they justify new construction and starting with a project where you have to buy land from somebody and then build a building the question is whether or not those lines will cross sooner rather than later. If you said predict where you would start a building which might have some speculative leasing associated with it, there are clearly three places where that could happen in my mind. New York City is obviously one of them.

The second would be the District of Columbia, not in 2010 or 2011 but in 2013 or 2014 because there is literally nothing of quality being built right now and as buildings in DC are limited by their size, as tenants have to grow and look overall at their footprints out three or four years, they’re going to run out of options to have big continuous blocks of space so I think there’s an opportunity potentially there and we happen to have this building which we purchased from NPR which is a development site that we’re going to start drawing probably sometime later this year or next year so that we’re in a position to accommodate those tenants.

Then, there’s an interesting phenomena going on in some of our suburban markets and particularly Boston where there are tenants who are looking at the available inventory and are saying, “The stuff that is out there is not the stuff that we really want and we may be willing to pay a premium to go in to a new building that is constructed with more of an amenity base, a better floor plan, a better window line, with better materials that may have a more energy efficient sustainable quality to it.”

Those are sort of I would say the three areas where I would say there is a chance for a building to be built other than the built to suit in a Princeton or northern Virginia when the GSA or some corporate user comes along and says, “We want a building for ourselves.”

Jay Habermann – Goldman Sachs

Just touching on acquisition now, I know some of your competitors have been putting together some funds but are you talking to joint venture partners or potential partners as you seek to make these acquisitions just given your more conservative underwriting of rent growth and perhaps cautious views on the economy?

Douglas T. Linde

I would say that there isn’t a week that goes by that we don’t get in a room with some institution and/or foreign investor who is interested in doing an acquisition or a group of acquisitions with us. At that moment we have really not seen eye-to-eye on either pricing, or cost of capital, or opportunities. But, it’s certainly something we would consider. Obviously, when you have the kind of capital that we have sitting on our balance sheet, you’re a little less apt to be if you find a great deal putting that deal in to a joint venture with the amount of cash we have sitting on our books.

Jay Habermann – Goldman Sachs

Just lastly for Ray, with the rollover in DC for the next few years, I know rents are in the low 40s, can you give us a sense there if you have any concerns that you expect the law firms to pull back or is it really just the expansion you talked about the Treasury and government agencies that continue to expand?

Raymond A. Ritchey

Well, I think the tightness in the space market, especially the Class A, I mean Doug made a reference to the normal market in the Ballpark District and clearly those are challenged markets but the CVD is still very tight. We do have some rollovers, some relocations and where we are really competing on space is space that is being vacated by tenants moving to new space. As Doug mentioned, we’re 65% pre leased at 2200 Penn and really strong activity on the balance and believe it or not we’re starting to get some inquiries about the NPR site just because there are so limited a field for new development sites that the larger tenants are looking ’13, ’14, ’15 and out.

We’re optimistic about DC. We’re still seeing rents in the – when you say mid 40s, we’re looking mid 40s triple net and plus at 2200 Penn, we just did a renewal at 401 9th Street which was $50 triple net. It was just a terrific renewal there too.

Operator

Your next question comes from Alexander Goldfarb – Sandler O’Neill.

Alexander Goldfarb – Sandler O’Neill

Just going to the transaction market, I think historically you guys have said you’re not apt to invest in debt, you’d rather own title. Just given how some of these portfolios seem to get worked out and not come to market, is it your view that maybe it’s better to start preemptively trying to buy parts of the capital stack to try and encourage the process along or is it just better to wait until the assets come to market and the books start going around to then get involved?

Douglas T. Linde

I think what we said in the past is we’ve never looked at being a lender as a sort of business model. We are realistic about the fact that much of the projects that are going to be available are projects where the debt capital is really in control from a financial perspective of the ownership. So where it makes sense to be participating with the debt market executions as opposed to waiting for a book to come out, we’re aggressively looking at those opportunities. I would not be surprised to think we would actually take advantage of those types of transactions more opportunistically than we would with simple a fee interest.

In many cases we would like to partner with the ownership or that lender because I think we would prefer not to get in to a year and a half litigation bankruptcy battle but if we thought that the control position was firm enough I think we would be very aggressive about purchasing a piece of debt.

Operator

Your next question comes from Michael Knott – Green Street Advisors, Inc.

Michael Knott – Green Street Advisors, Inc.

You mentioned the legal lack of demand or contraction over the next couple of years, what do you think picks up that slack or is that maybe the reason why you’re a little less optimistic than some others?

Douglas T. Linde

I guess I think that once the law firms have sort of reestablished their new base they will start to grow again. I just think we’re in that readjustment phase. I don’t believe that a national law firm that has reduced it’s headcount by 7% to 10% and has reduced it’s footprint by 10% to 15% is never going to grow again I just think you have to sort of reestablish the base before that occurs. Clearly, transactional activity has started to pick up but it’s nowhere near what the pace was in 2006 or 2007.

I think as that occurs you will start to see law firms hiring again. It’s an interesting predicament that the law firms are in right now because their profits per partner are actually higher probably in 2009 than they were in 2008 in many cases because the partners are working harder and the partners have a higher billable rate. The question will be at what point will they start to recognize that they are foregoing business by not having a staff and an organization that is available to take in more work as opposed to simply asking a higher rate.

Operator

Your next question comes from Mitch Germaine – JMP Securities.

Mitch Germaine – JMP Securities

Doug, any thoughts on possibly pursing some asset sales?

Douglas T. Linde

I think that it’s certainly in the back burner. There are some assets that we have considered over time not strategically core to our company. I think that if we started feeling even better about our opportunity to deploy capital we would think more seriously about those types of situations but I would say it’s not a strong focus right now.

Operator

Your next question comes from George Auerbach – ISI Group.

George Auerbach – ISI Group

Mike, can you quantify for us the progression of straight line rent and FAS 141 income as the year goes on in to the first part of 2010? I know you mentioned that the FAS ticks down $4 million in Q2 but where would you expect the run rate to start in 2011?

Michael E. LaBella

We really haven’t provided any guidance at all for 2011 to be honest with you. We really don’t want to get in to that at this moment. On the 1414 side it is going to drop down after the first quarter by the $4 to $5 million and then I think it stays pretty steady for the rest of the year. On the straight line side the second quarter is going to be high as well. Then the last two quarters will drop because some of the New York City leasing that we did in the third and fourth quarter and in the first quarter of this year will start to burn off. The only big thing that will still be out there will be the Ropes lease that goes all year.

George Auerbach – ISI Group

Is it fair to say that the New York City leasing and the Ropes lease will be sort of fully burned off by the first quarter?

Michael E. LaBella

By the first quarter of 2011?

George Auerbach – ISI Group

Yes.

Michael E. LaBella

Yes, that’s fair to say.

Douglas T. Linde

Thanks for joining us this quarter. We will see many of you in Chicago at NAREIT and others we’ll talk to you on the phone and get you again in the middle of the summer.

Operator

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

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Source: Boston Properties, Inc. Q1 2010 Earnings Call Transcript
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