Boston Properties' (BXP) CEO Owen Thomas on Q2 2014 Results - Earnings Call Transcript

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Boston Properties (NYSE:BXP)

Q2 2014 Earnings Call

July 30, 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

Douglas T. Linde - Director and President

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

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

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

Bryan J. Koop - Senior Vice President and Regional Manager of Boston Office

Analysts

Michael Bilerman - Citigroup Inc, Research Division

Jed Reagan - Green Street Advisors, Inc., Research Division

Jeffrey Spector - BofA Merrill Lynch, Research Division

James C. Feldman - BofA Merrill Lynch, Research Division

John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division

Bradley K. Burke - Goldman Sachs Group Inc., Research Division

Vance H. Edelson - Morgan Stanley, Research Division

Ross T. Nussbaum - UBS Investment Bank, Research Division

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

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Emmanuel Korchman - Citigroup Inc, Research Division

Operator

Good morning, and welcome to the Boston Properties Second 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' second 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 the Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday's press release and, from time to time, in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements. Having said that, I'd like to welcome Mort Zuckerman, 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 for his formal remarks.

Mortimer B. Zuckerman

Good morning, everybody. We are, as everybody else is in this wonderful economy of ours, basically operating in a fairly weak economy and a fairly low rate of growth and, particularly, in a fairly weak increase in employment where a large part of the employment comes from part-time work rather than from full-time work.

Having said that, though, the markets that we are in, as you've all known, and we've sort of underscored over and over again, frankly are, if I could put it in popular terms, the top 1% of the markets in New York, Boston, Washington and San Francisco. They're the best markets, we believe, of any major cities in the United States. And it shows up in the activities that we are enjoying and working with. In particular, in each one of these markets, we have a range of products and those products, frankly, are meeting with a pretty good response from the marketplace to the extent that there is demand, and in each of these markets, there is demand. It's not a overwhelming demand, but it's a solid demand. The strongest markets are, for example, in San Francisco where they have the location there of the online world. It's probably the headquarters or the leading city for the online world, and they're growing at rates that we have not seen ever in any particular market. But Washington, New York and, indeed, Boston are still -- and Cambridge are still additional markets. In Washington, we, of course, also have a very, very substantial activity in Reston, Virginia. So we have a diversification even within these markets.

Nevertheless, the one advantage that we are, frankly, able to exploit, take advantage of, is the interest rate environment which, as you all know, is almost at record lows over an extended period of time. It's certainly been the longest period of low interest rates that we've had since the end of World War II, and this gives us the chance to finance our activities and finance the company and to be able to refinance our activities when necessary.

So in that sense, the environment for the company is actually pretty good in these markets, pretty good in the financial markets and in the markets that we are in, in the buildings that we are doing, where we are sort of in the upper end of the office market. There are still a lot of activity in there, so we're all feeling pretty good about it. We're kind of a little wary of the progress we've made over the past quarter, the past year. And with the progress that we foresee for the next period of time, as I say, particularly in San Francisco, which will be covered here, it's just been an opportunity for us to do what we do and have done, which is to find good sites, to build good buildings, to lease them well, to manage them well and to hold onto a good number of our clients on a longer-term basis. And to have built up credibility in the marketplace, that does make it easier for us to do all of what I've just described, both in terms of acquisition of sites, of building the buildings, when we're getting the tenants or financing the building.

So we're in a fairly comfortable place here, I don't want to overstate it, but I also don't want to understate it. With that, if I may, I'll just end my comments and turn it over to Owen.

Owen D. Thomas

Thank you, Mort. Good morning, everyone. As usual, I'll touch briefly on the operating environment, and our overall performance for the second quarter and then provide an update on our capital strategy and execution.

Mort covered some details on the environment. I would just reiterate that we believe the U.S. economy continues to experience somewhat sluggish growth characteristics and the economic indicators are mixed. As all of you know, GDP growth in the first quarter was revised down to negative 2.9%. Although the second quarter GDP numbers have came out this morning at 4%, which was certainly above consensus forecast, full year GDP growth is estimated to be 3%, and I think that will probably now be raised as well.

And the payroll numbers in June, at least on their face, were more favorable, and published unemployment's dropping -- has dropped to about 6.1%. Importantly, the impact of this sluggish and uneven growth on our business has not changed substantially from what we reported to you over the last few quarters. Those markets, such as San Francisco, Cambridge and segments of New York City, which are driven by tenants and technology and other creative sectors, are experiencing very favorable growth characteristics in terms of rent increases and net absorption.

However, likewise, those markets that are more reliant on traditional tenants, such as government, financials and law firms, are exhibiting lower levels of activity and growth. For us, those markets would be downtown Washington, D.C. and, to some extent Midtown Manhattan.

Now moving to results for the second quarter for us. We performed well and made considerable progress in the execution of our business. FFO for the second quarter was $1.35 per share, which is $0.02 per share above consensus forecast. There are several recurring and nonrecurring items in the quarterly result, which Mike will cover in his remarks later in the call. Also in the quarter, we completed 88 leases, representing 2.1 million square feet, with the San Francisco and Boston regions being the largest contributors to that result.

The 714,000 square foot lease with Salesforce.com is obviously also a large contributor to our leasing results. Our in-service properties in the aggregate are 93% leased, up 60 basis points from 92.4% leased at the end of the first quarter.

And lastly, we also made significant progress executing our development pipeline and our asset monetization plan, which leads to my next topic, which is turning to capital strategy. As Mort referenced, interest rates continue to decline over the last quarter. The 10-year U.S. Treasury has dropped roughly 0.5% or 50 basis points to below 2.5% since year-end. But despite the continued commitment by the Federal Reserve to taper its quantitative leasing program, investor enthusiasm for real estate, particularly in our core markets, remains high. Our capital strategy remains consistent with what we've been communicating to you over the last several quarters. And that is, given pricing levels for assets in our core markets, we continue to find acquisitions challenging. However, we do continue to evaluate new investment opportunities in all our markets for both existing buildings and new development. Currently, we have the acquisition of a single building under a Letter of Intent in Washington, D.C., for under $100 million and are evaluating several additional properties and development sites where we believe Boston Properties has the unique ability to add value and, therefore, compete.

Given low interest rates and attractive pricing for our existing assets, we continue to actively monetize selected assets in our portfolio. We've made significant progress in our disposition activities in the second quarter, having closed 1 deal and placed 4 additional sales under contract, representing $437 million in gross sales proceeds.

Yesterday, we closed the disposition of a portion of our Mountain View single-story product. We received an unsolicited offer and are selling a group of buildings comprising 198,000 square feet for $92 million.

Sale price represents the 5.6% cap rate and $464 per square foot, and we purchased the properties for $290 a square foot. The buildings were initially purchased in 2008, pre-crash, and the sale generated a 23% unleveraged total return to shareholders.

The portfolio is being sold to a user, who is evaluating the acquisition development plan.

Next, we also have under contract for sale, Patriots Park, which is a 705,000 square foot suburban office complex located in Reston, Virginia.

The sale price of $321 million represents a 5.2% cap rate and $455 a square foot, which we think is particularly attractive given the buildings are in a suburban location, outside of Reston's urban core and are leased to the GSA for 20 years with flat rent. This asset was purchased 16 years ago in 1998 and the sale generated 11.5% unleveraged total return to shareholders.

We also have under contract 2 land parcels, settling $24 million in gross sales proceeds. As you know, we also attempted to sell The Avenue, a 335-unit Class A apartment building we built near Washington Circle and downtown Washington, D.C. We have been under contract and engaged with a single buyer for several months. At the present time, the buyer is unable to perform, which has lead us to take the property off the market.

And then, lastly, with respect to asset monetization, we continue to target at least $1 billion in sales this year and are evaluating the possibility of additional asset joint ventures similar to the transaction we completed with Times Square Tower last year.

Lastly, on capital strategy, we will continue to emphasize development for our new investment activities, given the opportunity we see to recycle capital from the sale of our older buildings into new projects with higher returns.

We made significant progress in the second quarter advancing the execution of our development. Our active development pipeline now consist of 12 projects representing 4.8 million square feet with a total projected cost of $3.6 billion, up from $2.5 billion at year-end.

We have added to the active pipeline this year the vertical portion of the Salesforce Tower in San Francisco, 888 Boylston Street in Boston's Back Bay, 10 CityPoint and a related retail building in Waltham, Mass. and several other smaller developments.

We continue to be in the pre-development stage on another set of projects with strong potential in all our markets.

In the aggregate, our share of these projects represents an additional future pipeline of over $1.2 billion in gross development cost.

Let me now turn the discussion over to Doug for a more detailed review of our markets and performance.

Douglas T. Linde

Thanks, Owen. Good morning, everybody. I'm going to start just with one brief comment on asset sales because I think it's important to reiterate. So last year, we sold about $1 billion of assets. And I would say, we had some pretty robust discussions about the near-term dilutive impact on our earnings and the accretive impact on our NAV of those decisions. And from the notes that I saw this morning, I think there's clearly attention in our earnings, in our short-term FFO numbers per share and the value that we are creating through the asset sale monetization perspective.

As we move forward with these additional sales, I just want to reiterate why we're doing what we're doing. So we believe that targeted sales today provide a greater asset level of value creation opportunity in holding the asset, collecting the cash flow and then timing and executing on evaluation at a later date, which again is subject to both risk [indiscernible] of interest rate as well as future sales valuation. It's an opportune time to create asset level value. That's what we're doing, even though it's going to come with some short-term earnings dilution. And we obviously have a timing issue because most of our new investment opportunities, as Owen just described, involve development not immediate property acquisitions. So we will find ourselves, in all likelihood, with an inability to quickly redeploy that cash and, therefore, we create another special dividend opportunity. But that's really the rationale that we're using for what we're doing on a global basis.

So let me talk a little bit about the markets now. It was an extraordinary 3 months in San Francisco. Year-to-date, there have been over 6.5 million square feet of leasing compared to about 9 million for all of 2013, which was a banner year. And it's been driven by large blocks from technology tenants that have really been forced to transition from what I would refer to as sort of a just-in-time real estate mentality to a long-term planning and decision-making mode of operation.

The top 10 tech deals totaled 1.2 million square feet in 2010. The top 10 deals to date this year totaled 3.2 million square feet. So clearly, the tickets are much, much larger. A few weeks ago, Google joined LinkedIn as a Valley headquarters firm that's made the decision to expand in the city with its lease at One Market place and a purchase of 188 Embarcadero Center, 2 traditional downtown financial office buildings.

Yelp, Splunk, Uber and, of course, Salesforce all made major expansion commitments during the quarter. We saw the law firm, Perkins Coie, who's a tenant in some subleased space at Embarcadero Center commit to Foundry III and with Google's lease at One Market, I think the stereotyping of where tenants want to locate becomes more and more difficult to predict, and the lines between what I refer to as tech buildings in tech locations and the traditional financial district assets really has begun to blend in a much more significant way.

Activity at 535 Mission continues to be robust. We anticipate completion of the building in the fourth quarter, and we will have physical occupancy before the end of the year. We have leased another 2 floors, we're at 100,000 square feet, and we have active proposals with 3 additional multi-floor tenants, all with 2015 occupancy, way above our expectations. We didn't have any additional leasing to report at Salesforce Tower, but I think the 700,000 square feet we do with Salesforce was a pretty good start. Construction is progressing. Our marketing center overlooking the site is now open and we're making lots of presentations.

The competing new construction pipeline has speculatively been fully committed, with the exception of the 420,000 square feet at 181 Fremont, which again is a small floor place building, 13,000 square feet of floor. And now the activity has switched to landfill in the next wave of development. The purchase of Salesforce Tower's land 1.5 years ago was $140 in FAR foot. The current bidding on the 2 entitled Mission Bay sites, so these are entitled sites, sold by Salesforce, bidding sold by Salesforce, are rumored to be in excess of $250 per rentable space. We are now focused on a number of next cycle developments with the increase in land prices, new construction costs are probably pushing towards $900 a square foot. And the one important factor that everyone now is going to start to consider and is being written about in all the periodicals and, I'm sure, it's being talked about on all the calls for people who have California interest, particularly in San Francisco, is that, lo and behold, the voter 875,000 square foot prop and limit on new commercial office development is suddenly going to be a governor on additional supply. While there's a deep prospective pipeline of additional projects that have been conceived, once the prop and allocation bank is depleted, which everyone, I think, projects will happen within the next 12 or so months, future approvals are going to be severely limited. So depending upon growth in demand, this may create a scarcity premium in the market for office rents.

Activity in Embarcadero Center is pretty restrained because we're at 95% occupancy. We completed 10 more deals this quarter totaling about 73,000 square feet. We continue to market the 3 great floors on EC4. And while we're in discussions with a few tenants, probably doesn't have a 2014 revenue impact. I think the sweet spot in the market right now for all transactions, Financial Center buildings, South of Market buildings is really in with a starting rent between $70 and $75 gross.

But with the lack of inventory, landlords, including us, are really seeking to try and push rents. And we're asking in excess of $80 a square foot for our best space. We'll see if we get it. Incoming tenants have adjusted to the market given the inability of them to have to spend money and move if they make a capital decision to relocate.

So we're feeling good about the prospects for -- in rental rate increases [indiscernible] California South of Market, California North of Market, California Financial District buildings over the next couple of quarters.

Net rents in Embarcadero Center in the second quarter generate some statistics for the supplemental show a 24% increase on leases that commence during the quarter, which is in line with what we've been talking about, which is basically a 15% to 25% markup over the next number of quarters and years.

Shifting to D.C. Our investment capital continues to be focused on new development. Construction at 601 Mass Ave is on schedule. We'll be delivering that building for -- to Arnold & Porter in October of 2015. We are moving forward with the design and permitting of 501 K Street in the district, as well as a 276,000 square foot office retail building and 2 additional residential buildings, with about 25,000 square feet of space, in the urban core of Reston. The earliest construction commencement for the Reston development, probably the third quarter of '15, and the K Street building is really going to be tenant-[indiscernible].

Now the greater D.C. market is probably the softest in our portfolio. Although as Mort said, Reston Town Center, which makes up 40% of our D.C. NOI, is outperforming the rest of the region in a big way.

When you think about our markets, Boston and San Francisco and New York City really have a more diversified tenant demand, while D.C. continues to roll [ph] in the legal industry and government and federal contractors the bulk of its activity. The sequestration and the budget deals from last year are actually still being felt in the contracting community and the GSA through both the nonrenewal of expiring contracts and the densification mandated by the GSA. And if you read the various market reports that are coming out from the brokers, I think it's pretty consistent with this.

We completed about 75,000 square feet of early renewals in Reston and about 75,000 square feet of leasing in D.C., but our critical D.C. activity right now, particularly in the CBD, is focused on retaining 3 major law firms that currently occupy about 800,000 square feet of space in our CBD portfolio, with 2017 to 2019 lease expirations. Now 70% of this portfolio was in JVs on a square foot and weighted basis. We've actually signed a Letter of Intent with the largest of these 3 tenants, and we believe we have an excellent chance of retaining the others. In total, they're going to be reducing their footprint by about 100,000 square feet or 13%. The good news is that the current in-service rents for the 3 leases is about $61 of square foot growth and we expect that the future rents are going to be 10% to 15% higher, each with their traditional D.C. 2% to 3% annual escalations built in.

Now in each case, the tenants are going to be rebuilding their space and we're going to be providing swing space at reduced economics until the build-out's complete. So as we mentioned in our previous call, these transactions will result in some transitional downtime that's going to impact our 2015 and 2016 revenues from these spaces.

In Reston, where we have no direct vacancy, no real inventory, there are a few tenants within the portfolio that for various reasons have put some sublet space on the market. So our leasing associates are spending most of their time replying to inquiries on how we can accommodate new tenants with direct or sub-deals on these spaces. We're actually in the midst of a 40,000 square foot take-back lease termination to accommodate a growing tenant in Reston Town Center today.

Turning to New York. There are a lot of large transactions announced in New York City during the last quarter, with Time and Bonnie downtown, Stony in Midtown South, and Neuberger Berman at 6th Avenue and Blackstone's renewal at 345 Park. But I think the takeaway is that Blackstone was the only expansion. There's been considerable velocity, but the overall availability coupled with the activity, which is still driven by lease expirations has really not resulted in any real changes in lease economics in Midtown, with a possible exception of the very small high end market where availability is much more limited. At 510 Madison, we did 4 more leases, including 2 floor deals at over $120 a square foot. And we're now over 91% leased with 1 floor and 3 of other prebuilt suites available.

We haven't increased our asking rents, but negotiating room has narrowed dramatically. Through the end of the second quarter, the level of leasing for space above $90 a square foot, which we referred to as the premium market in Midtown, is 40% higher than it was in 2013 at this time, with a dramatic pickup in the number of new leases versus renewals, which is a big change. Our primary focus in New York, like D.C., is on our tenant expirations between 2016 and beyond. We're actively involved with 6 law firms, leasing over 1.8 million square feet, on their possible renewals. While 2 of these firms are looking at possible expansion, the most are going to be looking for some kind of an occupancy reduction over the next 4 to 5 years.

So we have 2 transactions that are sort of in the documentation stage right now, and they encompass about 350,000 square feet. And the result is going to be a net giveback of about 40,000 square feet in 2015. The space we're taking back again is going to be used as non-revenue producing swing space for about 12 months as the tenants rebuild.

But on a combined basis, these first 2 renewals are going to result in a 15% roll-down on a cash basis and a 2% roll-down on a GAAP basis in '15. Now we actually expect these other transactions will all result in positive cash and GAAP roll-ups and that, in the aggregate, the total portfolio of 1.8 million square feet will see a significant positive mark-to-market as we get to the other 3 transactions.

At 250 West 55th Street, we completed 131,000 square feet of leasing, including the lease with Al Jazeera. So at 750,000 square feet, we're now 77% leased. We have only 4 prebuilt suites remaining. So in addition to focusing on the 1- and 2-floor prospects, we fully expect to break some more floors and continue our prebuilt program in the high rise. At Carnegie Center in the New York suburban market, we continue to gain both occupancy and extended leases. During the quarter, we executed 4 more leases for 75,000 square feet and we've got about 300,000 square feet of expansions and new demand under discussion.

We expect to be under construction with our new development for NRG towards the end of the third quarter.

Turning to Boston. Overall, the Boston office market continues to improve, our development activities are continuing to advance and we have included 3 new projects in our development section of our supplemental, which I'll give you a little bit of color on. At the Prudential Center, we signed lease with Natixis for 130,000 square feet and they have the right to go up to 150,000 square feet at the base of 888 Boylston Street, so that's floors 4 through 8 or 9. This is our new 365,000 square foot office development, which is on top of 60,000 square feet of new retail, which will be integral to The Shops at the Prudential Center. In addition, we're planning a complete renovation of our quick serve food operation and potentially a 17,000 square foot second story addition to the portion of the Boylston Arcade. These 2 retail projects will have a cost of somewhere between $30 million and $40 million, and that's not included in our construction of progress just yet, probably comes on into the program next quarter.

We have begun the temporary closing of a portion of the retail, which will eventually impact about 22,000 square feet in our food court and reduce our overall revenue in '14 and '15 before we reopen with an additional 17,000 square feet. Now current inline rents at the Prudential retail are in excess of $150 a square foot.

At the Hancock Tower, we're 5 months away from the expiration of our State Street lease, which is going to result in 2 blocks of availability at the building. We'll have a 170,000 square foot block at the base, which we're rebranding as 120 St. James, where we are creating a second lobby and entrance dedicated to the low rise and designed to attract technology and other creative tenants with its larger floors and floor-to-ceiling glass. Now the tight conditions in Cambridge and the influx of startups in the Boston area have really led to a rising new demand for office space from a nontraditional user in Boston.

Wayfair, which is an online home shopping retailer, has expanded at Copley Place. Sonus has relocated from Cambridge to the Financial District. Autodesk is moving from the suburbs to the Seaport. World Winter, which is the parent company of the Game Show Network and Rapid7, which is a security company, have expanded and moved to 100 Summer Street. The Cambridge Innovation Center, note the name, opened a second location in downtown Boston and WeWork has now 2 sites with over 100,000 square feet and is looking for additional locations. Lots of untraditional demand in the Boston market at this point.

The other major block of the Hancock is at the top of the tower, 145,000 square feet, which we will get back once we move in E&Y down into 4 of the State Street floors in the lower third of the building. And that's going to occur in the middle of 2015. So a little bit of extended downtime. While we have a big pickup in vacancy, the average in-place rent for those 2 blocks is about $40 gross and our expected starting rent is over $60 gross. This quarter, we leased 140,000 square feet of Hancock Tower at an average starting rent of over $65 gross. The suburban market in Boston continues to be very active, led by expansion of the life sciences and the tech businesses. Large blocks of space have disappeared, forcing larger tenants to consider new construction.

Rents in Waltham continue to rise, an average to mid-'40s for new construction. We completed just over 100,000 square feet of leases in Waltham and Lexington this quarter. And in addition, we signed a lease with Wolverine, parent company for a number of shoe brands, for 155,000 square feet at 10 CityPoint, which will kick off our 230,000 square-foot office building and 16,000 square feet of retail space. And just down the Street, we're starting a 16,000 square-foot stand-alone retail building with a future of residential/hotel pad site. We've signed 2 full service restaurant leases, totaling about 13,000 square feet, and while it's a small investment, it enhances the amenity base for CityPoint, where we have 516,000 square feet of existing office space; 1.2 million square feet of additional office density, including 10 and 20; as well as 1.3 million square feet of other space at this interchange. In total, our new developments added this quarter are about $425 million, not just the Boston stuff, and are anticipated to yield in excess of 8% on a cash NOI basis.

In Cambridge, where we're 100% leased, we anticipate making our formal permanent submittal over the next few months for our new residential building, which we hope to start in the first half of '15. In addition to the residential development, we're working in concert with the Cambridge Redevelopment Authority in the city of Cambridge on a 600,000 square-foot office and 400,000 square-foot residential density increase at our Cambridge Center project. In the meantime, there are 3 major tenants looking for blocks in excess of 150,000 square feet of office and lab space in Kendall Square as we speak. Office rents, as exemplified by our recent early renewals, are in the mid 60s to low 70s on a gross basis, which is an increase of over 50% since 2012.

To sum up, it's been one of the busiest summers we can remember, and we are really encouraged by both the level of activity we're seeing across the portfolio and the development opportunities that sit before us. And with that, I'll turn the call over to Mike.

Michael E. LaBelle

Thanks, Doug. Good morning. I'm going to start with a quick recap of our performance for the second quarter. Our portfolio had a strong quarter. Same-store NOI was up 3.5% on a GAAP basis and 8.1% on a cash basis from last year. We have been projecting growth in our same-store, and it's primarily related to occupancy increases in suburban Boston and Princeton and at 510 and 540 Madison Avenue in New York City, as well as strong rent rollups on expiring leases in Cambridge and in San Francisco. We also have free rent burning off from prior period leasing that is driving some of the cash rent growth, particularly at the Hancock Tower, at 510 Madison Avenue, 399 Park Avenue and Patriots Park.

For the quarter, we reported funds from operation of $1.35 per share, that was $0.02 per share above the midpoint of our guidance range. Our rental revenues were in line with our expectations, and we experienced about $4 million of lower than projected operating expenses. The majority of the expense savings were in repair and maintenance items, and we expect to incur most of them in the second half of 2014. So the savings will not entirely flow into the full year.

We generated $1.5 million of better than projected development and management services income with stronger service income in our New York City building portfolio, and we brought online development fees associated with our 2 new joint ventures where we started construction at Annapolis Junction 8, and we have commenced permitting and design work at 501 K Street.

We also had a little bit lower than expected G&A expenses due to higher capitalized wages associated with this quarter's leasing productivity and higher development activities.

The combination of these items resulted in about $6 million or $0.04 per share of outperformance. However, it was offset by $0.02 per share of nonrecurring items, including disposition transaction costs and an adjustment to our noncontrolling interest in property partnerships of $2.4 million. Next quarter, the run rate of our noncontrolling interest in property partnerships is expected to return to about $19 million per quarter.

As we look at the rest of 2014, we don't expect much change to our prior projections. Since the majority of our current leasing activity involves transactions with revenue impact in 2015 and beyond, the most significant change for the remainder of this year will come from our asset sales activity.

As Owen mentioned, we're selling some of our flex buildings in Mountain View, our long-term government-leased Patriots Park portfolio in Reston and 2 land parcels. These assets are unencumbered and currently contribute annual FFO of $23 million or $0.13 per share. We anticipate closing these within the next 60 days, and the projected impact to 2014 is the loss of approximately $8 million of FFO or $0.05 per share.

The in-service portfolio continues to perform with solid same-store NOI growth coming from positive mark-to-market on expiring leases and occupancy improvement. Our occupancy improved this quarter to 93%. However, due to the anticipated lease expirations, our occupancy is expected to tick down in the second half, an average between 92.5% and 93%, for the rest of the year, which is slightly better than our prior guidance.

And just a few details, we expect to lose occupancy at The Prudential Center with Arnold Communications, who's vacating 180,000 square feet, which will be backfilled by Blue Cross Blue Shield, but not until April of 2015. We're also getting the 26th floor back at the GM Building at the end of this month, and we're losing about 100,000 square feet of occupancy in our VA 95 R&D Park in Springfield, Virginia. These known moveouts totaled 75 basis points of loss occupancy and are partially offset by anticipated positive absorption elsewhere in the portfolio.

On a same-store basis, we project our GAAP NOI to improve from 2013 by 2% to 2.5%, an increase of 25 basis points at the low end from our last quarter's guidance. On a cash basis, we expect moderation from the second quarter results due to the aforementioned lease expirations, but we're still projecting strong same-store cash NOI growth of 5% to 6% from 2013.

Our noncash straight-line and fair value lease revenue is projected to be $93 million to $99 million for the year, up slightly in connection with our -- in conjunction with our GAAP NOI guidance increase.

We continue to enhance our development pipeline both in terms of adding new projects and leasing up our existing projects. This quarter, we added 5 new developments. They totaled 840,000 square feet and $425 million of total investment. In addition to 280,000 square feet of preleasing in these 5 new developments, this quarter, we also leased 95,000 square feet of space in our other office developments, which are now 70% leased in the aggregate.

Our Avant residential project in Reston had a strong quarter. It absorbed 95 units and is now 55% leased.

Nearly all of the office leasing in our developments is for lease commencement in 2015, so the projected 2014 contribution for our developments is really unchanged from last quarter.

We project an incremental contribution to 2014 full year FFO from these projects of $28 million to $30 million. The FFO contribution from our unconsolidated joint ventures is projected to be $29 million to $32 million for the year. We generated stronger than expected development and management services income this quarter; and for the full year, we're now projecting $22 million to $25 million, an increase of $3 million at the midpoint. And for our G&A, our projections are unchanged and we anticipate 2014 expense of $100 million to $104 million.

We project our capitalized interest to be higher than last quarter -- in last quarter's guidance due to the commencement of new developments that were not included in our prior guidance. This will lower our 2014 interest expense, and we now project 2014 full year net interest expense of $444 million to $448 million, an improvement of about $2 million from last quarter.

For the remainder of 2014, our quarterly interest expense run rate is actually going to increase due to the cessation of capitalized interest for 250 West 55th Street and 680 Folsom Street by the end of the third quarter. Included in our second quarter results is $8.5 million of capitalized interest from these 2 properties.

In summary, we are modifying our 2014 guidance range for funds from operation to $5.24 to $5.29 per share. Adjusting for the $0.05 per share of loss FFO from our asset sales, this equates to a $0.03 per share increase in the midpoint of our guidance from last quarter. The increasing guidance is from a combination of better than projected same property NOI, higher development and management services income, and lower interest expense. For the third quarter, we project funds from operation of $1.36 to $1.38 per share.

I want to spend a minute on our outlook for 2015 because there are a couple of things Doug mentioned that are important as you consider 2015. The first item is the dilution related to our disposition activity. As I mentioned, our dispositions have a current annual aggregate FFO contribution of $0.13 per share. We lose a portion in 2014, so you can expect the reduction in FFO year-over-year to be approximately $0.09 per share.

The second item is interest expense. Assuming we simply refinance the $550 million of 5.5% yield in unsecured debt we have expiring next year, at current market rates, our interest expense should decline. However, the projected reduction in cash interest expense is expected to be fully offset by a decrease in our capitalized interest because our 2015 development spend does not ramp up fast enough to make up for the development cost that we delivered in 2014. In total, we expect our net interest expense to be relatively static year-to-year.

The third item is the impact of transition in the portfolio that will have a short-term impact on our 2015 occupancy and our same-store performance. As Doug detailed, in Boston, we expect to lose 315,000 square feet of occupancy at the Hancock Tower and we're taking a portion of the high-value Prudential retail shops out of service in 2015.

In addition, we have another 100,000 square feet of vacancies coming at the Prudential Tower and 100 Federal Street. While this space is currently below market and upon releasing should result in higher income, we expect downtime during 2015. We also expect to complete early renewals with several large law firms over the next 12 months, which could result in 200,000 square feet of either vacancy or non-income-producing swing space for a period of time. Again, this is all highly marketable space, but we anticipate some income interruption in 2015.

In general, we anticipate that we could experience an average same-store occupancy decline of 50 to 100 basis points next year, which would hamper our same-store revenue growth. On the positive side, the contribution of our development deliveries is projected to drive 2015 FFO growth. Even though, 250 West 55th Street will not be fully stabilized in 2015, as some of the leases will not commence until later in the year, we project revenue recognition from an average of 75% of the building versus 25% in 2014. 680 Folsom is now 98% leased with 440,000 square feet of leases that commenced this quarter and the remaining 70,000 square feet commencing at the beginning of the fourth quarter. 2015 will be a fully stabilized year for the project. We will also start to see a contribution from 535 Mission Street with our first tenant taking occupancy at the end of 2014. And last, The Avant project in Reston is projected to complete its lease-up by the end of 2014 and be fully stabilized in 2015.

I also would like to cover the impact that our disposition program may have on our dividend. The sale of the 2 office assets demonstrate the significant value that we're able to create through the development, repositioning and releasing process. The projected gain is $140 million on an aggregate value of $413 million, which results in an unleveraged IRR in excess of 14%. If we're unable to defer the gains through future investments, we could have a special dividend of approximately $0.80 per share later this year. And to the extent we sell additional assets, that special dividend could be larger. We're not currently projecting any changes in our regular quarterly dividend.

The only other item I'd like to mention is that we're planning on holding our next Investor conference this fall. With Boston having many of our new developments that we've just announced, as well as exciting future pipeline deals, we will be having it in Boston on September 22 and 23. You can all expect additional information from Arista on this shortly, and we certainly look forward to seeing everyone. That completes our formal remarks. I'd appreciate if the operator would open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first call comes from Michael Bilerman.

Michael Bilerman - Citigroup Inc, Research Division

Owen, I think in your opening comments, you talked a little bit about pursuing some additional development sites and some acquisitions. You talked about $100 million in D.C. I was wondering if you can elaborate a little bit on the development opportunities and sort of where -- what markets they're in. Are they more mixed-use space than just pure office development, and sort of give us a little bit of sense of size?

Owen D. Thomas

Michael, the answer to your question is varied. We're looking for new development and acquisition opportunities in all of our markets. We're not focused on any one particular market. I would say, the -- in San Francisco, we pursued multiple sites. I would say the acquisition activity that we have in San Francisco has been much more focused on development as opposed to existing product. In Washington, I mentioned, the smaller acquisition that we're working on. In terms of developments, we've talked about 501 K Street, which -- where we have a joint venture on a site and we're seeking an anchor tenant to construct that building. We also have developments that we are considering related to the Reston Town Center. In New York, we are looking at acquisitions and development opportunities. And in Boston, I'd say, we are probably a little more focused on executing the robust pipeline that we're working on as opposed to identifying any new projects that we haven't announced. It's a little bit all over the place.

Douglas T. Linde

I mean, Michael, just to sort of reiterate what we said in past calls, so in Boston, we have the North Station development, which is in excess of 1.8 million square feet, of which we're -- we presumably will be a 50% partner with Delaware North, and that's a 2015 start, which is not in our numbers anywhere. There's been some reports about the conversations we're having regarding the -- what's referred to the 100 Clarence Street garage, which is a site that, in all likelihood, could support some additional development, and we're working diligently with Mass Department of Transportation on figuring out a way to untap a couple of those sites, and those are in excess of 600,000 or 700,000 square feet apiece. We've got another building at 10 and 20 CityPoint, which we could build and then there's another close to 350,000 square feet of permitting that we're going to be getting accomplished in August for another building associated with the site that we're selling. And then, as I said, we have the Cambridge development. So that's a pretty big pipeline in Boston. In Washington, D.C., as Owen said, 501 K Street is a development that we are drawing right now, and Ray and his team are making active leasing proposals, and we're optimistic that someone is going to step up and take a very significant portion of that and allow us to get started some time in '15 or 16. In Reston, we have the 2 major developments in the urban core, which is 275,000 square-foot of building, which I described, as well as the signature site, which is another 500-plus thousand square feet of residential, which given our success at The Avant, we're very encouraged by. And then we have the Gateway site, which is another 2-plus million square feet of incremental development on top of the 500,000 square feet that we currently have at what's referred to as Reston Corporate Center, our 250,000 square feet of Reston Corporate Center. So there's a lot of potential development right there. In New York City, John Powers, as we would say, is up to bat with a lot of pitches coming at him. And there are a few that we're moving forward with -- in an expedition -- expedited basis. We're not prepared to talk about where they are or what they are, but they're not insignificant in terms of size, hundreds of millions of dollars. And then, in San Francisco, in addition to the Salesforce Tower and 535 Mission and 690 Folsom Street, Bob is in active discussions with a number of landowners about what I would refer to as next cycle developments, which are developments that will be predicated on 2 things happening. One, the central SoMa business district plan being passed by the city's planning authorities, and then the way the city has to go about it allocating its development resources with regards to the prop M allocation, assuming, as everyone expects, that we're going to get into the situation where there's going to be a limit. So those are the sort of the short-term things that we're looking at, which I think is billions of dollars of development in its total capacity.

Michael Bilerman - Citigroup Inc, Research Division

Right. And it sounds like certainly over the next 18 months, that clearly well over $1 billion could be added to the pipeline.

Douglas T. Linde

Those are your words, but I'm not going to disagree with you.

Operator

Your next question comes from Jed Reagan from Green Street Advisors.

Jed Reagan - Green Street Advisors, Inc., Research Division

On the Trulia lease commitment of 535 and then maybe just in general, if you can expand on the types of tenants that are expressing interest in Transbay and 535 these days, and maybe what kind of timing you might expect for reaching 90% leased at those 2 projects.

Douglas T. Linde

So, Jed, could you please repeat your question again because you got cut off at the beginning of it so I didn't hear the earliest part of it.

Jed Reagan - Green Street Advisors, Inc., Research Division

The first part of it was just whether the Zillow/Trulia merger might have any impact on Trulia lease commitment there at 535?

Douglas T. Linde

Sure. Trulia was the first lease we signed. And during their process of being acquired or merging, depending upon your perspective, with Zillow, they approved and signed a lease extension. And they're building up this space, as we speak -- expansion, excuse me. So our strong inclination is that, as Dave said, they're going to be running 2 brands. And Zillow has a relatively small office in San Francisco and that they will fully be occupying the space that they've taken at 535. With regards to the other demand at 535 Mission and the Transbay Tower, which by the way we don't call it anymore, it's called the Salesforce Tower, which is the way we should be referring to it. We are seeing what I would refer to as a number of the traditional legal financial services oriented lease expiration driven requirements -- the major banks and law firms. And then we are making presentations and having conversations with a lot of the -- what I refer to as the technology or the new economy companies that Mort was describing, that are growing exponentially in San Francisco. As I described, they're very chunky and they're very large, and everyone is looking forward from a planning perspective because they all see the day when there's not much in the of way of blocks of space available, and Transbay Tower happens to be the one place where, right now, there is a block of space that is available for occupancy. With regards to the -- when we get to 95%, if all the leases that we are in discussions with at 535 actually were to happen, we would be basically 95% before the end of the year. I can't tell you whether or not all those leases are going to occur, but we have active proposals out that encompass more than 100% of the available square footage, which is 207,000 square feet.

Michael E. LaBelle

Although we may be able to sign those leases, they wouldn't commence the rent until mid to later '15 at best.

Jed Reagan - Green Street Advisors, Inc., Research Division

And Salesforce Tower, you feel like you might be able to reel in another bigger tenant this year?

Douglas T. Linde

We are optimistic about the market. We are -- we feel that Salesforce Tower is an incredibly exciting project. And we are in no sort of rush to lease the next space, but if a tenant comes along that is looking for a block of space and is prepared to have an economic discussion with us, we are prepared to do another lease.

Jed Reagan - Green Street Advisors, Inc., Research Division

Okay, great. And just to follow up, some of your competitors have talked about the flattening of the Manhattan office market and sort of a general shift to the south and west on the island. And just curious if you can talk about the extent to which year you're feeling that in your portfolio. And then does it sort of change how you're thinking about your longer-term footprint in Manhattan?

Douglas T. Linde

John Powers, do you want to take that one?

John Francis Powers

Well, there is certainly a lot of activity in Midtown South. That's the hottest market in Manhattan and that relates very much to Owen's opening comment about the increase in tech in the more steady-state and some decline in the law firm with steady-state and are unchanging in the financial service industry. The high-end law firms, or high-end financial firms are still very strong in Midtown. And we see a very good market here in Midtown. We don't see the positive growth or the spillover to downtown is getting because it's price advantaged.

Operator

And your next question comes from Jeff Spector of Bank of America.

Jeffrey Spector - BofA Merrill Lynch, Research Division

I'm here with Jamie Feldman, too. Our first question, I guess, is on the development pipeline. And can you just talk to us a little bit about the size you're comfortable with versus the risks of development?

Douglas T. Linde

Sure. We've had this conversation, I think from time to time during our history, and I'll start with the following, which is we are opportunity constrained not capital constrained. We are a $30 billion enterprise right now. And at any one time, having a series of projects that are in different stages of development from conception to leasing to coming and going into service of a $1 billion or $2 billion is not something that we are at all uncomfortable with. We've described the issues associated with development in the past, regarding the issues with permitting, the issues with construction and the issues with leasing, and we feel like we are really good at managing all of those issues. And that on the leasing side, the issues associated with new development and the issues associated with lease expiration driven vacancy are not too dissimilar. And often times, the advantage is associated with new construction and the changes in the way people are using space and the attractive nature of being able to move into a new environment relative to -- in the example that we're dealing with right now, having to rebuild over a 12- to 18-month period of time and having to swing through it actually create an incentive and an advantage to development. So it puts us in a position where we feel even more comfortable taking the leasing risk on certain developments, particularly when we have a major commitment for a portion of it, a.k.a. 888 Boylston Street than we necessarily have with the risks associated with our "availability in our portfolio."

Michael E. LaBelle

The other thing to recall, Jeff, is that these developments cycle through. So for example, we have a $3.5 billion pipeline today, but $1.7 billion of it is delivering in the next 6 months or is delivered effectively. And by the way, those are primarily leased, 77% leased to 250. You're basically 100% leased to 680, which is the 2 biggest ones that are delivering. So again, when you think about percentage of overall company size, we don't anticipate it increasing to a level that will be significantly more than what it is now as a percentage of company at any one time.

Jeffrey Spector - BofA Merrill Lynch, Research Division

Okay, that's helpful. And then, just wanted to focus, I guess, on law firms. I mean, one of the -- obviously, one of the tenants that has been downsizing. We appreciate your comments on next year. With M&A picking up this year, I guess, we were hoping to maybe hear that some of the discussions have changed a bit more recently. Is that -- I guess, that's not the case. The law firms you're speaking with, they're still talking about downsizing space in the coming years. Nothing has really changed there.

Douglas T. Linde

Well, Jeff, there are 2 things that are going on, okay. So the first is that any law firm, and I don't care whether they're in the M&A business or the patent and trade business or the litigation business, that has an installation that was built 15 or 20 years ago, by definition, is looking at the way they're utilizing that space very differently. And we talked about this before, law libraries and the way conference rooms are used and the more uniform nature associated with the way offices are built out and the lack of secretarial or administrative report stations[ph] -- that in itself is creating a reduction in the total overhead of occupied space necessary for a law firm. Then, there are, in fact, mergers and acquisitions going on within law firms. I mean, so some of those firms are growing. And then, there are business unit differentiations. So, as an example, firms that have -- maybe had a significant bankruptcy practice, probably are in more of a downsizing mode than those firms that are in the patent and trade and for a biotechnology complex, right? So as I said, we actually have, in New York City, of the 6 firms that we're talking to, 2 of them were actually looking to maintain the same amount of space and that's after rebuilding it. So that would imply some growth for a few of them. And then, we have others depending upon their business practices and how much space they have that are going in other direction. So I think that, any law firm that has an installation that's probably pre-2007 is -- can find efficiency. And we're still -- I refer to the sort of the sixth or seventh inning of the continuum in the law firm world of tenants moving through their footprints and getting to sort of what I would refer to as the right size environment.

Jeffrey Spector - BofA Merrill Lynch, Research Division

Okay. I appreciate those thoughts. And Jamie just has one quick question.

James C. Feldman - BofA Merrill Lynch, Research Division

Yes, just a quick follow-up, if you guys don't mind. Michael, are able to quantify the FFO impact of the transitional leases in 2015?

Michael E. LaBelle

We're not going to give guidance for '15 today. I think the challenge that we have is that I described that 500,000 or 700,000 square feet of space, which is over 100 basis points of our space that is going to be going through transition. So with that kind of occupancy loss, we do continue to have roll-ups, particularly in San Francisco, where we hope we will see positive absorption. In New York City, there is opportunity to grow occupancy. Then we'll have roll-ups in Boston. So if those may offset each other, we'll see, but it's some headwind to having real kind of same-store growth in 2015.

Operator

Your next question is from John Guinee.

John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division

Three quick questions. First, on your law firm deals, I guess, Doug, can you give us just a basic number in terms of price dollars per square foot for releasing costs, TI, leasing commission, base building upgrades, how that tends to be split between BXP and the tenant? And is there any security obtained in this day and age for those kind of capital commitments? And then maybe this is also yours, Doug, but if I look back at your land inventory, about 9 million square feet of developable square feet and then another 2 million of options, do you have sort of near-term plans to either develop or monetize those? And then the third question would be for our friend, Ray Ritchey, if he can talk about what's happening in the DC market excluding the CBD and excluding Reston Town Center with the opening of the Silver Line.

Douglas T. Linde

Okay. So let me see if I can do this succinctly. With regard to leasing costs associated with major law firms in cities like Washington and New York, where it's most germane for our purposes, a new transaction, okay so it's kind of moving into a new installation. It's probably getting in Washington, D.C., a tenant improvement allowances of up between $100 and $110 a square foot, and in New York City, it's somewhere between $65 and $80 a square foot. In New York, we believe that the cost of a new installation is somewhere in excess of $200 a square foot when you factor in furniture cabling and everything else, and in D.C., it's probably somewhere in the neighborhood of $175 a square foot. So that is the sort of costs. These deals are all different in terms of what's actually going on, and traditionally, in New York City, there's free rent associated with the move for the build-out time, so to the extent that a tenant is in place and they're not getting free rent, there's a transition of those economics to either rent or into additional TIs, and similarly in Washington, D.C. And then depending upon the age of the building, there may or may not be base building improvements that are required. So as an example, a building like 599, we are undertaking a lobby renovation because we think it's the right thing to do for the building, independent of the lease expiration. And the building work that's being done on elevators, for example, is sort of outside of a change to the tenant improvement, so that's not part of those costs. And that's obviously amortized over the entire value of the building over a much longer period of time. And then there are cases -- in cases where a building -- in one of the buildings we're looking in Washington, D.C., we may do a major gut rehab and change the entire HVAC system because we think that the building has gone past its useful life and we think it's the right thing to do both for the tenant and for the building, and those costs would all be on our side of the equation. So that's sort of -- that's the first question.

Raymond A. Ritchey

I would also add, Doug, of the commissions that are forthcoming on these transactions, well, the biggest change is we're seeing the law firms participate greatly in the commission. So the commission could be $25 to $35 a square foot, but the law firms are going to harvest back between $15 and $20 of that, so that helps offset some of the costs associated with the build-out through the law firms' participation of the commissions.

Douglas T. Linde

So with regards to our land inventory, John, I think we are working through 2 things. One is, there are certain sites that we are aggressively developing, a.k.a. things like 888 Boylston Street. And then there are others sites that we are aggressively trying to sell. So as an example, we have a land inventory in Rockville, Maryland associated with our Tower Oaks project, and we are looking to actually have an agreement with a non-office building owner to convert that land and permit that land into a different use, stick-built or multifamily or single-purpose, single-family homes, and we would be selling some of that land in manners like that. Again, we're selling a parcel out at the Broad Run project. We're selling a parcel of land that we have in Waltham because we're getting a terrific price and it's improving the environment around it. So over time, I'd say, we are working through that, and then a lot of that land, we hope to develop ourselves.

Raymond A. Ritchey

And your third question, John, regarding the DC market, were you're asking specifically about the Silver Line or just the market in general?

John W. Guinee - Stifel, Nicolaus & Company, Incorporated, Research Division

Essentially, if you look at the core urban markets, Crystal City, Rosslyn-Ballston corridor, Tysons, with the Silver Line, Southwest, they seem to be surprisingly anemic, unless you can tell me otherwise.

Raymond A. Ritchey

No, I would fully support that position. The vacancy in Crystal City and in Rosslyn is approaching 30%. And the recently announced CEB deal was a little bit of a head fake in that while they're going to take down half of the new JBG building, or about 350,000 square feet, the space they're leaving behind equal to the amount of space they're taking. And thus, JBG is going to add 300,000 square feet to the market. So this will push the availability vacancy rate in excess of 30% in Rosslyn. And then in Crystal City, Pentagon City, you have the TSA out with a major procurement that may continue to show some continued erosion in that market itself. So while the Silver Line, I think, is going to be great long-term, and specifically for us in Reston Town Center, is going to create that development opportunity that Doug mentioned earlier, that $2.5 million to $3 million feet, certainly, in the short term, the Silver Line has done very little to impact or improve the market conditions in the RB corridor or in Tysons Corner.

Operator

Your next question comes from Brad Burke of Goldman Sachs.

Bradley K. Burke - Goldman Sachs Group Inc., Research Division

I was hoping that you could touch more on what you're thinking on a potential for new JVs. First, are those included in the $1 billion of asset sales that you're think about for this year, or is that in addition to the $1 billion? And then, you said that they're likely to take the form of what you already did in Times Square. So should we be thinking about these mostly focused on New York office?

Owen D. Thomas

Yes. It's Owen. So to answer your question, what we said about dispositions for this year is that we felt that they would be in excess of $1 billion, and we'll continue with that guidance. I referenced the Times Square joint venture that we did last year as an example of something that we might consider for this year. And to go back to the merits of that, we were able to -- we feel monetized a portion of an asset at a terrific pricing. We retained the leasing and the management of the building, and we also retained the upside that was in the interest of that we owned. And then lastly, no, I wouldn't say that we would consider joint ventures only in New York. We might consider our own assets outside of New York as well.

Bradley K. Burke - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. And then just on the decision pool, The Avenue off the market. I realized that you can have issues with any given buyer, but what's the thought process on completely pulling it off the market versus just trying to line up a different buyer?

Raymond A. Ritchey

Well, I think -- this is the Ray. We're considering the overall position of The Avenue book, the office building and the apartment building. And while -- let's put it this way. Our discussion with the current buyer has ceased. And we're evaluating where we go forward either with the buyer that has been considering the properties for the last 2 or 3 months, whether we take it back to the market or we continue to own it for the long haul. I mean, listen, it is a phenomenal asset that continues to perform in the best location in Washington D.C., and this was not a -- this was clearly trying to take advantage of industry environment and the interest from a capital markets for trophy-level properties like The Avenue. And certainly, nothing has happened that has distinguished that or altered our approach towards in our viewpoint of that asset.

Operator

The next question comes from Vance Edelson of Morgan Stanley.

Vance H. Edelson - Morgan Stanley, Research Division

Following up on an earlier question. Outside of West 55th there's no other New York development currently underway. And you mentioned you're looking at other opportunities, but given that New York is one of your largest markets, the fact that it's clearly at present not one of your larger development markets, is that just a matter of timing? Could it one day be one of your top development markets? Or do you think you just have better long-term opportunities in other cities? And related to that, is expanding into another district in New York City -- I think you touched on that a little bit earlier, but is that a realistic near-term possibility?

Douglas T. Linde

As a public company, we've developed $3 million square-foot towers in Midtown Manhattan, and we think we've been highly successful at creating value to that process. We have a new Regional Manager in the form of John Powers, who has I think both a desire and an expectation to dramatically ramp up our activities in New York City, commensurate with the opportunities that he can find. And there is a significant desire to extend and expand our New York City outreach in terms of development as well as other types of transactions. And we've discussed in the past that we would consider doing residential, not unlike what we're doing in Washington and we're doing in Boston, at this point on a new development perspective as well. And again, as we said earlier in the call, we're opportunity-starved, not capital-starved. And so, we're focused on trying to grow that.

Vance H. Edelson - Morgan Stanley, Research Division

Okay. Good to hear. And then, shifting gears, could you discuss retail strength in Boston and the inclusion of retail in your projects like 888 Boylston, how integral is retail to the overall appeal of the project? And then longer term, do you see the non-office mix for BXP -- you just mentioned residential, but do you see the non-office mix with resi and retail moving any higher than it is currently?

Douglas T. Linde

So, I'll break this into suburban and urban, okay? So from an urban perspective, having the right cachet associated with any of the buildings that we have in the form of what I would refer to as amenity-driven retail is pretty important. But when you're in the city, you also happen to be in a network where there are a lot of alternatives, right? So there are restaurants and dry cleaners and drug stores and hard goods and soft goods sellers of other things that are around that. The Prudential Center in itself is very different because it is effectively a regional mall in an urban location. And it's one of the highest producing productivity malls that we're aware of. I mean, it's over $1,000 a square foot, and it sells per square foot. An it's got both soft goods as well as restaurant and ancillary products and hard goods like -- Microsoft has a store here. Well, as we think about new developments across all of our markets, we are exceedingly aware that the old idea of having a suburban office park with a cafeteria in it is not the ideal mix for a tenant and a group of tenants that want to go into a location like that. So where we can, we're amenitizing and providing as much in the way of additional services to our customers, our tenants as we possibly can. And in the case of, for example, what we're doing in CityPoint, creating restaurants that have a full-service menu, where you can both get breakfast, lunch and dinner and have a cocktail after 6:00 at night or whatever time you want to have your cocktail, is a pretty big draw for those tenants that are looking for an environment where they're trying to recruit and retain the best employees. And relative to going to a suburban office building that it really doesn't have that availability, it is a strong advantage and something we are acutely trying to bring to as many of our properties as we possibly can. And if you think about the cluster that we have, we talked about trying to create these clusters of great place, great space. And so it's a pretty strong focus of what we are trying to do, but we are not trying to become a major retail owner of space in an absentee perspective aside from how we're dealing with our office buildings.

Bryan J. Koop

Some additional discussion on the retail. This is Bryan Koop. At The Prudential Center, as Doug mentioned, we're performing already at over $1,000 a square foot. We're very fortunate that we have a considerable role coming up. We have an opportunity to take -- we're performing at $1,000 a square foot. And that's what many performers and they're at $400, $500 a square foot. There's going to be opportunity to bring new, exciting retailers to produce at higher levels. And then when we look at 888, it's a really great, perfect combination of being able to support that building, but also enhance, call it, with greater destinations on Boylston Street for the rest of The Prudential Center. So we're really optimistic about the next few years of retail at The Prudential Center.

Operator

Your next question comes from Ross Nussbaum of UBS.

Ross T. Nussbaum - UBS Investment Bank, Research Division

I'm just curious. A number of your peers have been quite active on the Manhattan street retail scene. And I don't want to say you guys have been noticeably or notably absent because you do obviously have some street retail in a couple of buildings, but you haven't done any one-off deals. Could you just give us your perspective on that niche of the market and how you're thinking about it going forward?

Douglas T. Linde

This is a not terribly well-informed answer, but I'll give you my perspective, and others may have a different one, which is we have not focused on buying individual condominium interest in high-value potential long-term lease rollover Manhattan, Fifth Avenue, Madison Avenue, Broadway, and Times Square retail as a strategy, because we're focusing on trying to put dollars to work in the office residential business in bigger volumes than that. It doesn't mean that we don't think there's an opportunity to create value there. I mean, as you said, we have, in excess of $60 million of revenue, and most of it is NOI. It's just that the 767 Fifth Avenue, that's the General Motors Building, and we have a 100,000 square feet of space there, so we have a pretty significant, relatively speaking, volume of that. And we are working really hard right now figuring out ways to significantly enhance the assets that we have on the 53rd and Lexington and Park corridor, a.k.a. 601, the Citibank -- the former Citibank building, as well as 399, to really create value and significantly increase the revenue potential of the street-level retail in those buildings. So it's not that we're not thinking about it. It's just we've not been focused on going out and buying a sort of one-off and creating a business like that.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Okay. And the second question I had was on Reston Town Center, and specifically given the pricing that you achieved on Patriots Park, and what I consider Reston Town Center to be, which is kind of an oasis in the middle of a suburban D.C. office desert, is that an asset you've ever considered selling or JV-ing and focusing your efforts in D.C. sort of in a more high-rise urban footprint?

Raymond A. Ritchey

I'll answer that one. This is Ray Ritchey. And by the way, I'm in the Boston office today. I mean, it's just magic. It's just wonderful to be up here with these people. I can say that from our perspective in Washington that the Reston asset is a core asset not only today, but the future of that specific region is very much sized to the continuous success of Reston Town Center. And that while we are an oasis in a desert, we are a very large oasis and dominate the market. And we see even in times of softness in the surrounding markets, our ability to continue to outperform, and this is before the metro comes. And any future supply that will have a similar type of amenity base, and thus attracts them to the tenant, we control. So this is the market that we dominate today and we'll dominate in the future. And others in this table may have a different opinion, but they'll get a stronger argument against the Washington contingent, if that's in fact the case.

Douglas T. Linde

I'd just put it in a slightly less personal context, which is that we believe that there continues to be an opportunity for strong growth in the Reston market. And that's both for the appreciation of the cash flows in the existing assets, we reinvest in those assets and make them better -- a.k.a. from what we're looking at doing, for example, with the retail in Fountain Square. And then we have -- as I suggested, we've got 750,000 square feet of immediate development, and we have another 2 million to 3 million square feet of longer-term development until we look at what we can create and what we can grow, invest in. And I guess, to the extent that at some point, we felt there was no growth left in it, we feel differently. But right now, our crystal ball tells us that this cluster in this particular location has a really strong long-term growth prospect, and that it's the kind of place we should be investing on money and see strong increases in our cash flow over a long time period.

Raymond A. Ritchey

Also, the past part disposition was a long-term 20-year lease. So real upsize for a long period of time at a very attractive capital environment. So that was more -- but the sale was more opportunistic and not indicative of the company's commitment to Reston.

Operator

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

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

Two questions here. First, maybe it's for John. But as you guys look at New York, just given the way land pricing has gone, are you still able to sort of find deals where you can outright own the land? Or are you increasingly looking at ground lease situations? And, by extension, are you also having to look at situations where it's either a combination with residential or hotel to make the numbers work? Just sort of curious just with the bid from condos, curious if straight-up office deals, fee simple ownership, still if you can make them [ph] and sell.

Douglas T. Linde

John, do you want -- he addressed the question to you, so

John Francis Powers

It's a very difficult market. There's a lot of money-shaking deals here, and it's very difficult. So my approach is not to focus on the books that I get but to try to be innovative and proactive in the market and look for other type of opportunities. And I think we're making some inroads, but nothing that we can announce here.

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

Okay. But do you think that we'll see either ground lease situations or mixed-use situation, as you announced, future New York or borough deals?

John Francis Powers

I would say, we're open to all of that.

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

Okay. And then for Ray, if you can just give some color on the D.C. acquisition. Maybe I missed it in the MD&A. But is this a redevelopment play? Is this a major lease expiration, where the reason you're buying it is because you're comfortable you've got a tenant to back that. So just sort of curious, some color on the D.C. acquisition.

Douglas T. Linde

This is Doug. We don't feel comfortable talking about what the D.C. acquisition is at this point because it's an off-market letter of intent that we're approaching, and obviously it's a transaction that Ray has found that we think there's great long-term value creation opportunities on, but it's not appropriate to talk any more about it at this point.

Operator

And your next question comes from Jordan Sadler of KeyBanc Capital.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

I just wanted to take the other side of Ross' question, if I could. I'm just curious about in terms of D.C., you've got this oasis in Reston that seems to have this natural barriers to entry. Whereas, in the district, there don't seem to be huge barriers to entry like we see in some of the other cities that you're focused and even in Reston with construction continuing in some big potential sites. What are the thoughts surrounding sort of paring that portion of the D.C. exposure and maybe concentrating more in Reston?

Douglas T. Linde

So let me just give you some historical context about what we've done in D.C. because I think it's important in answering the question. So the vast majority of our holdings in D.C. were done through development, ground-up development, where we have found either sites or landowners who had sites, and we've done joint ventures with those parties in order to be in the value creation business on a long-term basis. There have been 1 or 2 acquisitions that have been done in what I would refer to as transitional times when the capital markets were struggling and we had the availability of funds to buy buildings at very, very attractive valuations, where we felt we could reposition those assets, or honestly, wait until the leases rolled and just mark-to-market over a period of time. And that continues to be where we are focused in Washington, D.C. Interestingly, we have actually done a significant amount of pruning in D.C. over the time that we've been a public company as well. We sold 1301 New York Avenue last year. We've sold -- we're in joint venture with a significant number of our properties, so we sold the joint venture interest in Metropolitan Square when we did our 901 New York Avenue deal. We sold one of our major assets in the Southwest of the city 10 or 11 years ago.

Raymond A. Ritchey

The Marketing Center.

Douglas T. Linde

The Marketing Center [ph], which is in the suburb. So we continue to be thoughtful about the long-term opportunities to create value in D.C., as well as what the appropriate exit point is for particular assets.

Raymond A. Ritchey

I mean, we're underway right now, Jordan, as you know, with 601 Mass. That's a site that we controlled 5 years ago with a lease back from NPR, built their new headquarters. The project is 85% lease-free activity, doesn't deliver for another 15 months. the cash on cash return, that's going to be mid 8 unlevered when it's delivered. So while Washington continues to be challenged, at risk of sounding self-serving here, we have continued to outperform the market not only in Reston, but also downtown. And we're planning a really good defense on the 3 major renewals we have. We're very, very optimistic about our own chances of success of keeping all 3. So while Washington has had a little bit of dip in the last 2 or 3 years, and relative to barriers to entry, that pesky height limit keeps those buildings at 11 or 12 stories. So for us to deliver a $1 million square foot tower that you see in the other 3 markets, it takes $4 billion or $5 billion to meet that level of supply. So we're still bullish on D.C. and specifically very bullish on Boston Properties' position in that market.

Operator

And your last question comes from Michael Bilerman of Citi.

Emmanuel Korchman - Citigroup Inc, Research Division

It's actually Manny here with Michael. Just thinking about -- you mentioned 2015 cash NOI growth. I was wondering what the spread between the cash and the GAAP may be given the burn-off of free rents and other things.

Michael E. LaBelle

There still is a GAAP, so we still do have free rent burning off in some of the same-store from some of the leasing that we've done. I don't want to describe right now what the amount of that GAAP is, but there still is some more in there. I do -- I would expect the same-store portfolio, the noncash rent to be lower in '15 than it was in '14, although we will have noncash rents in our development portfolio that actually will probably be higher than in '14. But if you just look at the same-store, it would be lower.

Operator

And at this time, I would like to turn the call back to management for any additional remarks.

Owen D. Thomas

Okay. It's Owen Thomas. Let me just summarize by saying hopefully we've been able to demonstrate to you how busy we are at the current time given all the projects and activities going on. We feel we had a strong second quarter operationally. And we made significant progress executing the long-term strategy that we've been articulating to you. Thank you for your time and attention.

Douglas T. Linde

Thank you, guys.

Operator

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

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