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Boston Properties (NYSE:BXP)

Q4 2010 Earnings Call

January 26, 2011 10:00 am ET

Executives

Mortimer Zuckerman - Co-Founder, Chairman, Chief Executive Officer, Head of Office of the Chairman and Member of Significant Transactions Committee

Douglas Linde - President of Boston Properties Inc and Director of Boston Properties Inc

Arista Joyner - Investor Relations Manager

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

Raymond Ritchey - Executive Vice President, National Director of Acquisitions & Development and Member of Office of the Chairman

Analysts

Steven Benyik - Jefferies & Company, Inc.

Chris Caton

Michael Knott - Green Street Advisors

Sheila McGrath - KBW

James Feldman - UBS

John Eade - Argus Research Company

Suzanne Kim - Credit Suisse

Ross Nussbaum - UBS Investment Bank

Alexander David Goldfarb

Jay Habermann - Goldman Sachs

Jordan Sadler - KeyBanc Capital Markets Inc.

David Harris - Gleacher & Company, Inc.

Robert Stevenson - Macquarie Research

Erin Aslakson - Stifel Nicolaus

Operator

Good morning, and Welcome to Boston Properties Fourth Quarter Earnings Call. [Operator Instructions] At this time, I'd like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Arista Joyner

Good morning, and welcome to Boston Properties Fourth Quarter Earnings Conference Call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirement. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday's press release, and from time to time in the company's filings with the SEC. The company does not undertake any duty to update any forward-looking statement.

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

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

Douglas Linde

Good morning, everybody. We're going to change things up a little bit this quarter. Mort is going to I think do that cleanup for us but thanks for joining us.

When we spoke to you last quarter, our focus was on describing the investments and the thesis behind 510 Madison and the Hancock Tower and Bay Colony. Today, I'm going to focus my comments on the operating fundamentals in our markets, our leasing successes and our expectations for 2011 from an operating perspective.

But as a quick update, we close the Hancock Tower on the 29th of December. We have signed documents, and knock on wood, we expect to close Bay Colony in the next few days. And we did complete one other investment prior to year end, which was a swap of a $24 million cash payment in our 5% interest in the retail component at Wisconsin Place for the 33% interest in the office building, which is about 300,000 square feet that we already own. The project is located on top of the Friendship Heights Metro Stations, Chevy Chase. And if you want to talk about it, it's a really supply constrained market. This is one of them. It took more than a decade for New England development who was the original sponsor to get permits, and we joined them in 2004 and the building stabilized in 2009.

The purchase price equates to a valuation on an incremental basis of $525 per square foot for the office building and $25,000 per stall for the parking garage, which is a pretty diverse parking garage which gets income from the office tenants in our building, 325,000 square feet of retail space and 432 apartments, along with transient income from the neighborhood.

For 2011, NOI yield on incremental investment is about 6.3% and the contribution on a GAAP basis is about 6.8%. The property is unencumbered and it's 97% leased.

Over the last few weeks, the sell side analysts have all hosted conference calls by the major real estate service providers, detailing the macro views of the national office markets and overviews of submarkets and reviews of the current trends in 2010. Most of the markets, I'd say, had a focus on CBD. And this is sort of -- here is sort of my perspective on that, which is as a saying, I like about the man who had drowned crossing the stream with an average depth to six inches.

It's becoming harder and harder to act on broad generalizations or to expect that you can extrapolate market data to every submarket in every individual building. We are not seeing the rising tide lift of all boats. In fact, we think the bifurcation within individual sub is becoming even more pronounced, and I'm going to talk about this later.

Even in the depth submarkets, the individual characteristics of the location in the building, sponsorship, commitment to investing capital not just to make things look pretty but to really keep the building going, attention to building operations and focusing on what your customers really need today, all have to be put together to be successful.

For us, 2010 was a really, really strong year if you look at leasing activity. We finished the year with almost 6.5 million square feet of leases, 2.25 million square feet in the fourth quarter. Just to give you a perspective, this is 1.5 million square feet more than our previous high, which is back in 2007. The activity was dominated by Boston and Washington D.C., each was about 2.4 million square feet. The New York City portfolio followed the others simply because we didn't have vacancy or near-term expiration, so we couldn't lease space.

This quarter, we completed over 100 separate transactions compared to a quarterly average of about 75 during the first three quarters of the year. So things accelerated in the year. And our quarterly second-generation leasing stats are pretty much in line with what we've been foreshadowing about with a 15% mark-to-market. If you look at it on an annual basis interestingly, 2010 was actually up 11%. I think the one thing to note this quarter is that concessions were significantly lower, about $12.5 per square foot. So on a base of 1 million square feet of leasing that came into service this quarter, that's about $12.5 million. And if you amortize that over the average length of the lease of, let's say, 8%, the actual rental rate will be about $2.42 higher. So a net decline would be closer to 7% on a net-to-net basis.

The reason for decline this quarter is that we had a whole bunch of leasing that occur in the Reston submarket, where we had leases that were done in 2001 and 2002, which have their 2.5% or 3% escalators, and those rents just got ahead of where current market conditions are. So there was a natural road down when we re-leased that space.

The market rents we used for the mark-to-market, again, are based on long-term deals with market transaction costs. And I'm sort of give you some perspective on where we think the market rents are in our portfolio. In New York City, we think rents are in the high 60s or the low 90s with the exception of two Grand Central are in the low 50s, and at the General Motors building, where rents are about $100 per square foot and can go up to about $140. And if I can add, which I'm sure we'll talk about later, where rents range from the high 80s to base to over $130 per square foot at the top.

In the Boston CBD, rents are between the mid-40s and the mid-60s. In San Francisco, the high 30s and the mid-50s is at top of the better building. In D.C., on a net basis, CBD rents are in the mid-30s to the high 50s. In the suburban side, the Greater Waltham suburban market is mid-20s to the low 30s, Cambridge is in the high 30s to the low 50s, Reston Town Center is in the mid-30s to the low 40s. Suburban Maryland is in the low 30s and Rockville is in the low 50s in Chevy Chase, and Princeton rents are in the low 30s.

We added the Hancock Tower to our stats this quarter and the Hancock Tower has an embedded growth of about $7.5 a square foot. And I know Mike is going to talk about sort of the accounting implications of that. But when you combine the improvements that we saw over the year and New York City and in Waltham, in Cambridge and the Northern Virginia versus where we were at the beginning year where we had expiring lease, also, during the year that were a little bit on higher side, our actual overall portfolio rent right now is pretty much at market. So there really isn't on a growth spaces any mark-to-market down or up as we look at things right now.

Midtown Manhattan. Leasing activity ended 2010 with significantly more activity I think anyone predicted. Sublet spaces begun to disappear from the market. And the availability rate as we begin 2011 is probably under 12.5%, and about 3% of that is sublet space. We have seen a gradual improvement to the good buildings, and obviously, a much stronger rebound in rents than I think anyone expected at the Premiere Plaza district assets.

High-end tenants, hedge funds, opportunity funds, private equity firms and venture firms have seen a rebound in their business prospects. The changes that are occurring in the large financial institutions are clearly leading to the growth and formation boutiques smaller firms. And in addition, there were a significant number of big tenants in the market that look to lock-in current rents, and are still out there today, and certainly are looking for a large contiguous blocks in Midtown.

Overall transaction velocity still is a pretty good pace in New York City. As we've been previewing, our overall vacancy in our portfolio is about 3%, and we got back that 110,000 square feet at the base of two Grand Central this quarter. And to be frank, activity on that block has been slow.

We completed 20 new small deals this quarter, five leases totaling 44,000 square feet at 510 Madison, where we are achieving rents in excess of $110 a square foot in the upper portion of the building. Rents are up significantly from the beginning of 2010, but we only expect marginal growth during 2011 from where we are today.

Transaction costs have settled in the $60 to $65 a square foot range and three rents in the 10 months on average basis. Top yield in the market in 2010 was $175 a square foot at the top of Nine West 57 Street.

As large as Midtown is, there are actually pretty limited contiguous blocks of space available in the 2014 to 2015 timetable. I think that during one of these broker calls, a list was published with blocks of space over 200,000 square feet and blocks of space over 400,000 square feet. And I think there are seven blocks of over 700,000 square feet on a list. So I took a look at that list and talked to Andy and our guys in New York City.

And just so to give you a perspective, so of the seven blocks, there are deals pending on two of them, at Worldwide Plaza and at 120 Park Avenue. At 3 Columbus Circle is a subject to a fight between ownership and the new lender that would like to knock the building down and building Nordstrom's. The former New York Times building is being converted to a residential asset. 11 Times Square is actually made up of two blocks, neither of which is anywhere close to 400,000 square feet based upon where approx hours in the building. And that building is going to be leased in 2011 in smaller incomes if necessary. So it's going to be gone.

The sixth block in Nine West 57 St. for the last yields done is that there was $175 a square foot and the seventh block is at the East 42nd. So in sort of obviously gets to the question of what's going on at 250 West 55th St? Last year, when we were asked structure development. We said, we think we're going to be having legitimate conversations with tenants about pre-leasing at the end of 2010. That is, in fact, the case. Now whether we're going to be successful at attracting a tenant at a price that will lead to beginning and completing the building again, we'll see. But we are an active dialogue. And I'd say we're optimistic.

Washington D.C. has probably have the strongest job growth in the country for the past three years, but the overall availability, still over that time, went from about 7.8% to 10.8% in the district. Statistically speaking, if you look at the numbers, you see really had a great year with 3.8 million square feet of positive absorption, the second highest absorption in 10 years. But there's more to the story than that.

So 80% of that was leased by the U.S. government and its agencies, and the sort of money joke in the market is that the other 20% was leased to government contractors from outsourcing. The vast majority of the leasing was done in secondary locations in buildings that were built or redeveloped on a speculative basis and completed to '07 and '09.

GSA rents were in the high 30s to low 40s and flat for 10 to 15 years. I think the big surprise in the market during the year was when the SEC leased 900,000 square feet in the 1.4 million square foot vacant complex that was a former headquarters for the Department of Transportation, and that was pure growth. Scary thought.

Recently, the rumor is that the SEC got a little ahead of itself. And now, the OCC is taking 600,000 square feet of that space. I think the challenge that we think about when we think about Washington D.C. buildings is that if you're 25,000 square-foot tenant, you have about 140 unique choices in a reasonably good Class A buildings, obviously, not all Class A trophy. But the good news is that for the first time in the recent memory, the hangover of new speculum space in D.C. has ended. And this really bodes well for owners in 2015 and beyond, when by the way, we have a building that we could build.

In the short term, private sector leasing is going to be slow. And interestingly, there are really only two major uncovered law firm lease expirations between 2014. The great news of our portfolio is we're 99% leased. We have 258,000 square feet of expiring and uncovered rollover in '11 and '12, half of that is in Capital Gallery, which is a building where we have a waiting list of users. But we just don't really expect to see much in the way of an improvement in lease economics in 2011 in the district.

Last quarter, I described our transactions at 500 North Capitol and our ability to alter the redevelopment plan add a floor an attractive private-sector tenants. Well, guess what, we signed the lease for 15 years with 171,000 square-foot law firm. They've committed to 74% of the building.

At 2200 Penn, we're 82% leased on the office space and 70,000 square feet of retail space is 100% leased. Fairfax County in North Virginia is sort of my example of sort of how you have to think about markets in a very bifurcated and thoughtful way. So Fairfax County includes Titans and Reston Herndon and the toll road out to the Dallas airport. Overall availability in that market is about 18%. And the rest of Herman submarkets, which is where our focus is, Class A inventory of about 30 million square feet is a vacant 3% to 20%.

Reston Town Center is a market of about 5.5 million square feet, and it has a vacant of 13%. Our portfolio in Town Center is about 2.6 million square feet and we have a vacancy rate of under 3%.

We have 1.3 million square feet of 2011 and 2012 expirations. We completed only one renewal on that space in calendar year 2010, 80,000 square feet, yet we also completed 930,000 square feet of new deals with new tenants, 160,000 square feet at Discovery Square, 106,000 square feet at Overlook, 62,000 square feet at One Freedom Square, 70,000 square feet at Two Freedom Square and 530,000 square feet in the GSA Patriot Place.

It was actually positive absorption of about 1 million square feet in Fairfax County, but it was really driven by two large GSA requirements totaling 1.2 million square feet, ours being one of them.

What continues to be the most striking thing is that the rent differentiation even within the Town Center Market where things are better than everywhere else in the marketplace.

Two of our competitors still sit with over 200,000 square feet of current vacancy and are asking $29 to $31 a square foot while our portfolio ranges from 36 to 43. Again, you've got to be really careful when you think about how markets are doing.

In San Francisco, the overall availability rate in the CBD is still about 16%. Recently, there has been some growth in the markets spurred by some technology tenants, Google and Zing and Twitter, in areas of the city that went from Boston's lease perspective, we sort of we think about more like as Cambridge and the seaport of Boston not the core financial district.

We are seeing improved activity in Embarcadero Center was low. We completed 14 transactions this quarter compared to nine during the year on a quarterly basis. And we're pretty close on a multi-floor deal at the base of 4EC when starting to rent in the low 50s, again, pretty consistent with where I said market rents would be.

South of the city at the peninsula in the Silicon Valley, there is actually some pretty renewed optimism in this quarter about tenant growth. Facebook is in the process of purchasing 1 million square-foot campus that was a former headquarters to Sun Microsystems. Google is taking all of its sub off to market and has dozens of tenant improvement jobs under works. And in the last 60 days, Hewlett Packard and Dell and Motorola and Microsoft, obviously all brand-name corporate users, are all looking to expand in the Valley by more than 200,000 square feet a piece and are focusing primarily on the 3 million square feet of new space that was delivered in 2009, which still remains vacant.

Now this is a pretty big change. And I think the first positive widespread demand that we've seen in the last couple of years in the Silicon Valley and the Peninsula market.

Our single story Mountain View product continues to see a pretty good activity. And we completed another 53,000 square feet of transactions this quarter, bringing our total activity in ?10 to about 114,000 square feet.

When we spoke last, we talked a lot about the CBD of Boston and the transactions we were doing in our portfolio, particularly in and around the financial center. I think what is clear at this point is that there really is a dramatic difference between the conditions in the Back Bay and the conditions in the Financial District.

Current availability in the Back Bay is about 6%, compared to 17% in the Financial District. And there are a lot of holiday Financial District assets with strong financial backings, good sponsors with very significant vacancy, including 11 blocks of over 100,000 square feet.

Wellington has taken occupancy at Atlantic Wharf, they're in there. We've completed four other leases for 139,000 square feet in our Waterfront Building, including three full floors and one additional lease in the tower. And we have leased or negotiating leases on all of our retail space, totaling about 27,000 square feet. The project is now 79% leased.

In suburban Boston, we completed two large of 10 e-renewals. We finalized the 320,000 square-foot deal at 140 Kendrick Street starting in 2012 and a 220,000 square-foot leased with a tenant at Quorum way, which will start at the end of October.

In addition, we've completed a 140,000 square feet of leases in Cambridge and have recently signed an LOI with an existing tenant for another 60,000 square feet of expansion. Our current availability, including the 60,000 square feet, is about 9%. Excluding it, we're down to about 95% occupied.

We have one remaining build pursuit in Cambridge at 17 Cambridge Center. This building can be designed for office or lab tenants and we've actually received a number of inquiries from a number of tenants both lab and office technology that are considering expansion or relocation to Cambridge Center.

Now overall, again, the Cambridge still had billing rate of 16% and there are three other blocks of space, one of them which is ours of over 100,000 square feet. For us, 2010 was a year of organic expansion from a whole bunch of blue-chip technology in biotech companies. And our portfolio really has shifted in Cambridge, these larger expanding organizations away from some of the smarter stalls-ups which were sort of the traditional Cambridge tenant.

By next week, with the acquisition of Bay Colony, again, knock on wood, our largest exposure on Boston is going to be in the western suburbs. We have 700 square feet of availability, including Bay Colony.

Bay Colony is going to see a lot of capital and our preliminary plans are already attracting interest. We have two or three 80,000 to 70,000 square foot users who are actively at seeking proposals at Bay Colony, which would not have happened under the prior ownership in 2010.

Overall vacancy in Central 128 still a pretty high though, that's 21%, availability in the premier buildings, which is really where we're focused, is at 14% and rents are actually up 10% to 15% from this time last year.

Leasing activity in the Route 128 Central Market is substantially stronger than all of the other Boston markets. And we have about 140,000 square feet of leases in negotiation right now, covering five separate transactions of that 700,000 square feet of availability.

Before I turn the call over to Mike, I do want to say one thing about acquisitions and dispositions. We are clearly looking to deploy capital in 2011, but we are also going to be actively marketing some select assets.

We structured the purchase of the Hancock Tower as a reverse-like kind of exchange which gives us the flexibility to sell assets and retain capital. We are considering a sale of a significant interest in Carnegie Center right now and have identified other assets that may also be candidates for sale in 2011.

And with that, I'd turn it over to Mike

Michael LaBelle

Thanks, Doug. Good morning, everybody. As Doug said, the fourth quarter was very productive quarter for us. As you can see in our press release, we completed over 2 million square feet of leasing. We closed the acquisitions of the John Hancock Tower and our joint venture partners interest in the Wisconsin Place office building. And we completed a bond refinancing and other debt payoffs that both lowers our overall corporate borrowing cost and allows for a long-term extension of a significant amount of our near-term debt maturities.

First, I'd like to go through a little bit on the Hancock and the impact that it has on our balance sheet and our P&L since it will have a noticeable effect on both for an extended period.

Purchase price accounting requires us to mark-to-market the leases and debt associated with our acquisitions. The in-place leases that Doug indicated are currently below market, so we've added about $100 million to our other liabilities and $15 million to our other assets to account for this.

We will amortize the net of $85 million into income over the lives of the individual leases, resulting in non-cash income going forward.

The debt we assumed with the transaction was a total of $640 million at a 5.7% fixed rate that expires in January 2017, has an interest rate that is above market. So to account for that, we have added $23 million of fair value debt adjustment to the debt balance on our balance sheet, which will be taken in as a non-cash reduction of interest expense over the remaining six years of the loan.

Our bond offering, unsecured bond redemption and the repurchase of a portion of our exchangeable debt issue reduces our 2011 interest expense by $10 million and extends our debt maturity profile. We were able to take advantage of the Treasury market at one of its historic low points, and issue $850 million of 10.5 year senior bonds at an effective yield of 4.29%. We used the proceeds to redeem $700 million of our 6 1/4% senior bonds that mature in 2013 and repurchased $50 million of our 2 7/8% exchangeable notes that are callable in 2012. Our bond spreads have continued a strong rally and are now being quoted in the 130 to 140 basis point range and 35 basis points from our issuance.

During the same time period, the tenure Treasury rates have increased though, nearly 90 basis points. So our current borrowing cost in the bond market will be just under 5%. The convertible debt market is open with pricing for five- to seven-year terms in the 1% to 1.5% range at premiums of 20% to 25%.

And in the mortgage market, spreads have been slower to compress, although the trend is favorable. And we believe there's a capacity to push pricing due to the competition for high-quality loan opportunities. We see current credit spreads in the 165 to 190 basis point range for all-in, tenured debt coupons of roughly 5 1/4.

We just entered the market to refinance our $455 million mortgage loan on 601 Lexington Avenue. As we've mentioned before, the cash flow of this building has increased substantially since our acquisition in 2001. And we anticipate raising additional proceeds with a $700 million to $750 million new loan, which is still a sub-50% leverage position.

We only have a few other debt maturities in 2011, all of which are now joint venture portfolio. And we expect to refinance our $43 million mortgage on our Annapolis Junction Project with a new seven-year loan, and are working on extensions of our current loans that are on our Mountain View properties.

This quarter, we were successful in putting a good amount of cash to work. And our cash balance is down from $1.3 billion last quarter to $460 million at quarter end. In addition to using $290 million to acquire the Hancock Tower, we acquired and repaid the debt on Wisconsin Place, a $125 million cash use, extended the $75 million on our development pipeline and we repaid four other expiring mortgages, totaling $325 million.

This unencumbered 1330 Connecticut Avenue in Washington D.C., our South of Market and Democracy Tower buildings in Reston and three buildings in the suburban Boston. Our uncommitted cash balance after funding our remaining development expenditures and the closing of Bay Colony is about $150 million.

In addition, we anticipate generating free cash flow after funding all CapEx in the payment of our dividend of approximately $120 million in 2011. We expect to supplement our liquidity with the additional $250 million to $300 million of proceeds from our 601 Lexington Avenue refinancing and also have the availability under our $1 billion line of credit that is up for renewal in August.

Now I'd like to walk through the fourth quarter earnings results. Last night, we reported fourth quarter funds from operations of $0.64 per share and full year funds from operations of $3.90 per share. The most significant item impacting our earnings was the refinancing of our senior debt.

Our decision to make a long-term funding commitment in 2010 reduces our future interest expense but results in several one-time charges in the fourth quarter, totaling $81.6 million due to the premium paid on our debt repayments. We also incurred $1.7 million of higher-than-expected interest expense for the 24 days of bond interest between the closing of our new issuance and the redemption of our existing bonds. In aggregate, these one-time items totaled $83.3 million or $0.51 per share.

Excluding these items, our earnings would have exceeded our prior guidance by approximately $7 million. In the operating portfolio, we have a host of small variances, including early lease commencement, some higher percentage rent, better transient and parking revenue and improvement in our operating margins due to lower property expenses. In aggregate, our portfolio performance exceeded our plan by $3.4 million.

Our development and management services income was about $1.3 million higher than projected. In our JV portfolio, we generated $750,000 of income above our budget, nearly all of this was due to the continued strong sales from the Apple store at the General Motors building and our rental revenues in the portfolio were closely aligned with our projections.

Our hotel was in line with its budget. Our G&A costs came in just below the low end of our prior guidance at $79.6 million for the year versus our range of $80 million to $81 million. This was primarily due to higher capitalization of wages associated with our successful leasing program. And lastly, other than the charges from our refinancing I discussed earlier, our interest expense is generally in line with our budget.

As we look at our projections for 2011, we are raising our guidance from last quarter due to additional leasing momentum in both the portfolio and in our developments, the positive impact of the acquisition of Wisconsin Place, which was not budgeted and the reduction in interest expense associated with our corporate debt refinancing.

Picking up on the theme from Doug's comments, in New York City and Washington D.C. and Boston, our assets are seeing increased levels of leasing activity which is translating into slightly higher occupancy than we previously expected. Our projected same-store portfolio improvement relative to our last outlook is driven from recent leases completed in New York City and stronger absorption of assumptions of our vacant and rollover space in Boston.

For example, in Boston, we continue to see good activity in Cambridge, where we renewed two tenants totaling 140,000 square feet and have prospects for a portion of 165,000 of square feet of current vacancy. We also executed renewals in 75,000 square feet in the Boston suburbs that were not budgeted, and have upgraded our absorption projections resulting slightly higher occupancy projections for the Boston suburbs.

In New York city, we leased the floor vacancy in 601 Lexington Avenue that has the first quarter lease commitment. We now only have one floor of available space in the building. We also successfully back build our signage income at the base of the Time Square Tower.

In the same-store portfolio, we're projecting GAAP same-store NOI to decline by 1.5% to 2.5% from 2010, while cash same-store NOI is projected to increase by 5% to 6%. These figures represent 100 basis point improvement from our projections last quarter.

Our increases in cash NOI year-over-year is primarily due to the conversion of straight-line rent to cash rent associated with the full burn-off of the free rent on 450,000 square feet at the Prudential Tower, 400,000 square feet at 399 Park and 100,000 square feet at 601 Lex.

Overall, our same-store GAAP NOI year-to-year is still down, and the primary cause of the decline in occupancy and rent roll down in San Francisco. In our Zanker Road pricing in San Jose, Lockheed Martin vacated 260,000 square feet this month, and we do not expect a replacement tenant this year costing $4 million of lost revenue in 2011.

And at four Embarcadero Center, we have approximately 200,000 square feet of vacancy coming in the third and fourth quarters, with average rents in excess of $90 per square foot where we do not expect to see income until 2012 at the earliest.

In Washington, we will be commencing our redevelopment of the first building in Reston for the Defense Intelligence Agency this summer. The removal of this 260,000 square-foot building from service results in the loss of $4 million in '11. Also in Northern Virginia, we will see some downtime associated with the vacancy by Northrop Grumman and 220,000 square feet in Reston overlook next month.

In total, our 2011 rollover exposure is reasonable at around 7% of the portfolio. The mark-to-market on this 2.5 million square feet of space is negative of $1.31 per square foot, contributing to our same-store decline. If you exclude the 200,000 square feet expiring in Embarcadero Center, our 2011 mark-to-market is actually positive on the rest of our rollover at $2.15 per square foot.

We expect our average portfolio occupancy to dip slightly from its current 93% level and average 92% to 92.5% in 2011 due to the vacancies I noted earlier in San Francisco as well as the Bay Capital in Boston, who will vacate 207,000 square feet at the end of the third quarter. This space is already leased to NFS. However, at this point, we're not delivering the space until the beginning of 2012.

Straight-line rent in the same-store portfolio is projected to be $13 million to $17 million in 2011, down from over $80 million last year. Termination income, which we exclude from our same-store comparison, is projected at $4 million for the year, significantly less than the $13 million recognized in 2010.

And as Doug detailed in his discussion of our developments, we continue to make solid leasing progress. At Atlantic Wharf, Wellington moved into its space over the past two weeks and rent has not commenced on its 450,000 square-foot lease. The remaining tenants will take occupancy later in 2011, and we continue to have activity and are working on proposals for much of the remaining space.

We will deliver 2200 Pennsylvania Avenue late in the first quarter and expect rent commencements to be phased in throughout the year and into 2012 for the 70,000 square feet that is unleased. For the residential portions in both Atlantic Wharf and 2200 Pennsylvania Avenue, they will open this summer, but will be in a lease up for the remainder of the year and into 2012. We don't expect a significant contribution for the residential building until they stabilize in mid 2012.

As Doug said, the activity at 510 Madison has been great at rents that are exceeding our initial projections, and the velocity is on budget to meet our 24-month lease up.

In aggregate, we're increasing our projections for the NOI contribution from our developments to $48 million to $52 million for the full year due to the additional leasing resulting in earlier occupancy as well as higher rents of 510 Madison.

Straight-line rents are expected to total $35 million to $40 million and these projections include a full year contribution of Weston Corporate Center that delivered in mid 2010.

Consistent with the last quarter, we project the contribution of approximately $70 million in NOI from the John Hancock Tower and Bay Colony acquisitions in 2011, which includes straight-line rents of $13 million and FASB 141 rent of $8 million. The NOI impact of our acquisition of our partner's interest in Wisconsin Place is going to show up on our income statement as a reduction of minority interest, which is now known as non-controlling interest in property partnerships as this property has consolidated.

And as Doug mentioned, we expect a 6.8% unleveraged GAAP return on its investment, adding nearly $4 million to our NOI. Our hotel had a good year in 2010 with RevPAR up over 10% from 2009. We're completing a number of new capital improvements this year, including a restaurant renovation and some exterior work.

We're projecting a contribution of $8 million to $8.5 million in 2011, up 6% to 12% from 2010. We projected 2011 contributions FFO from our joint venture portfolio to be $130 million to $135 million, which includes FASB 141 income of $70 million. This represents only a minor increase from our prior-quarter projections.

I would say, we do have an opportunity here with our available space in two Grand Central Tower where we have 110,000 square-foot block in the low rise and four additional of the full floors, totaling 65,000 square feet in the high-rise to lease.

We're projecting our Development and Management Services income of $20 million to $25 million. This is a little higher than last quarter as we believe we will be successful in converting two short-term consulting projects we have in the multi-year development service agreements.

On the G&A side, our G&A is expected to be $80 million to $83 million for 2011. The core compensation components of G&A are projected to be up 3%. Also included is a $4 million charge to be taken in the first quarter related to the acceleration of the remaining cost of our 2008 outperformance plan, which we expect to write-off as the plan is not expected to be in the money.

As we noted in our press release, our compensation committee approved a new outperformance plan, the details of which can be found in our 8-K filing last week. The GAAP valuation of the plan is $7.4 million, which will be expensed through our G&A over five years.

Our net interest expense is projected to be $410 million to $420 million in 2011. This is a reduction from the last quarter of approximately $15 million due to the $10 million in savings associated with the reduction and the interest rate from our corporate debt refinancing. And in addition, our prior projections assumed the permanent financing of our $97 million construction loan on Wisconsin Place at market rates.

The repayment of this loan at the end of 2010 results in $5 million of net interest savings for 2011. Our interest expense projections includes $30 million to $35 million of capitalized interest for the year.

After considering all of these projections, we are increasing our 2011 guidance range by 20% to 25% per share and are now projecting funds from operation of $4.45 to $4.60 per share. For the first quarter, we project funds from operation of $1.06 to $1.08 per share. Our first quarter results are typically lower due to the seasonality of our hotel, which is projected to be down $0.02 a share from the fourth quarter.

We will lose some occupancy in the portfolio with a couple of large leases rolling out that I mentioned earlier, and we expect to book the entire $4 million charge associated with our expiring outperformance plus about $0.10 of higher seasonal G&A costs in the first quarter, frontloading our G&A expense.

As an aside, we've taken $20 million of expense for our original outperformance plan over the past three years with no actual payout as the plan will expire without any value. As I have mentioned in the outset, we have a strong quarter and completed several transactions that should enhance our earnings in the future. These include the long-term interest savings from locking in low interest rates in our debt portfolio and the benefits from our acquisitions, each of which have embedded cash flow growth over the near to medium term.

2011 is a transitional year for our development pipeline as each property will be in the lease-up stage and will not deliver on their full potential until 2012 or 2013. The pipeline represents $1.04 billion of invested capital, which upon stabilization should generate a blended cash return of over 7%.

I'd like to turn the call over to Mort now. Mort?

Mortimer Zuckerman

Yes, good morning. I'll just cover some of the broader perspective of our -- Still, I think an overall sense at least in my own judgment, a weak recovery at best somewhere between 0% and 2% I would say is the range that I would put it in terms of GDP growth. I realize this is below a lot of other estimates. But given the weaknesses in the housing market, the weaknesses in employment or unemployment, the problems that states have and the problems that we're going to have in other aspects of our macroeconomic picture, I still take the more conservative view.

Having said that, what is remarkable, of course, is that American business world has done a remarkable job in terms of adapting to a much weaker economy than I suppose many of them expected. And they've done this in the form of reducing costs, so they're profitability, I think, has improved dramatically over the last couple of years. And particularly, the financial sector has improved dramatically given the support that the financial world got from the TARP money and the Federal Reserve.

And I suspect that if anything, this is just going to get stronger because of the basic pressures or trends in that industry. So Boston Properties, since it concentrates: A, in supply constrained markets; and B, in the upper end of those markets, I think is going to have a very good experience in terms of at leasing.

And the question will be: How do we continue to grow the company? We do it through acquisitions and we do it through developments. We're working on a variety of different projects in New York, in Washington. We've really done some very good acquisitions in the general Boston market.

And I think as was indicated, perhaps our weakest market is in the San Francisco area. Cambridge is very strong, Boston is very strong and we expect to continue that these markets will be supportive of the kind of growth that you've heard about.

This is a time, it's an unpredictable time, it is unprecedented, and therefore, unpredictable. But I do think that we are in a position as a company to continue to make acquisitions both of existing buildings and of development sites, and we intended to do that. We're going to, again, remain consistent with our sort of whole experience and our whole business strategy because as I have said and as I'm sure you've heard from all of my colleagues many times, everybody does well in good times but in bad times or difficult times, it is the high-quality buildings that do relatively the best, and this is exactly what we have experienced.

And in a lot of the buildings that we have where we've had big vacancies, we've been able to backfill them because tenants want to move into those buildings. And we expect this is going to continue and it will take a slightly different form in the sense that I think some of our rents will be in a position to go up in these buildings as we go forward through next year and this year.

So on balance, I think we have to be reasonably confident about the next several years, modestly optimistic about the next several years in terms of our own business even if we're less optimistic than most about the macroeconomy. If the economy does proved to be stronger than what we expect, then frankly, we think we'll do even better than we are estimating.

But still in my judgment a great deal of unease in the American business world about where this economy is going. So I think people will move slowly into a stronger expansionist phase of their activity. But right now, I think it's very hard to see any major uptick in the employment. It is very easy to see another, we've got five months now of declining home prices, which is a very, very important factor.

And in my judgment, the most important strategic risk to the economy because of home equity, which is the difference between price of the home and the mortgage is the largest asset on the balance sheet of the average American family. And if that continues to go down, then we have a real concern. And I think in general, if there is such an anxiety over what's been happening at the home prices. Because even if the people who have a home that don't sell or don't contemplate selling or what have you, they feel the loss of wealth. There's been $9 trillion loss of home equity. So far according to zillow.com, which is one of the most, if not the most reliable firm that follows all the statistics in the residential market, that's a staggering number. And it's been going down since they came back with that number.

So I just don't know what the consequences of that will be because I have never experienced that in my own business career, and I don't think we have ever had that kind of a situation. And we don't know what its consequences are.

If you look at the affordability though, this is one illustration, if you look at the affordability of housing, you take the median income and you figure out what at lower prices and lower interest rates, what percentage of income would have to go to supporting a home? It's below 15%, but the conventional number is 25%. Yet, housing sales virtually at record lows. And I think the reason for that is that people are apprehensive: A, about their jobs; and B, mostly they fear that home prices are going to continue to go down.

The whole epic of the residential market, that all saw that home prices never go down year after year. This has been said and was true of everything since the end of World War II, but well it's certainly hasn't been true last year. And in my judgment, it will not be true this year and may not be true next year. And that has really caused a lot of people to hold back.

And what means, for one of the key industries, in every turnaround from a recession into a growth, I mean housing has always led that turnaround. I don't see that happening this year and maybe not next year. So that's one of the things that makes us feel a little bit cautious.

But we're in a strong position. We are in a strong patients financially. We've had a very good, relatively good run through this difficult time. We really have been able to take advantage of the market in terms of both acquisitions and in the development sites. We've done well at our leasing. So in a sense I think we're going to be optimistic, although as a cliché‚ goes, cautiously optimistic in terms of what we're going to be able to do.

And as you've heard from Doug and Mike, we really are in a very, very solid position to continue growing the earnings of the company over the next several years. So we're in the markets we are in. We have our eyes and ears open. We're looking for additional acquisitions. We're looking indeed to see if we can expand to other markets or at least one other market where we can continue to grow and build an operating platform so we have the basis for a long-term growth. But we look for unique market, so this is not something that's going to be easy to find, it’s going to take some time if we are able to do it. But at least we feel we are in a position to do that.

So that's sort of where I am and where we are on these matters. And I think we're looking forward to enter into next year as being a solid year for Boston Properties. Thank you all very much.

Michael LaBelle

Okay, operator. We can start the dialogue with our investors.

Question-and-Answer Session

Operator

[Operator Instructions] Your first call is from Jordan Sadler. [KeyBanc Capital Markets.]

Jordan Sadler - KeyBanc Capital Markets Inc.

Just curious on 250 West 55th for a second. I know it's not necessarily factored into guidance at this point, although you do seem optimistic. Mike, could you tell us what would happen to 2011 FFO if we were to restart 250 West 55th on a pro forma basis, January 1 of this year?

Michael LaBelle

The immediate impact would be starting to capitalize interest on the amounts that we have in the building. So we have about $450 million of cost that are in the building right now, and our average debt cost is about 5.5%. So $25 million would be for a full year. If we started on January 1, obviously, we haven't started it. But that's what the effect would be, immediate.

Jordan Sadler - KeyBanc Capital Markets Inc.

And then separately, Doug, you spoke about selling assets maybe in the context of your comments about the bifurcation of assets in markets. Can you maybe give us a bit of a profile of assets you would like to sell? What they would look like maybe markets?

Douglas Linde

Well, I talked to Carnegie Center and we're recapitalizing to sell a significant portion or a full on the entire Carnegie Center asset base depending upon what that pricing looks like. We'd like to try and retain management and development because we still control the land for another seven-plus years, and that will all of play out. The other assets are obviously scattered amongst our other regions. And I would sort of characterize them as more suburban in nature. Although, there are a couple of CBD assets that we looked at where we think that the opportunity for extensive growth is less spectacular. And then some of the other places we might be able to deploy capital. And the asset size is in the sort of $100 million plus or minus individual asset a piece, and we'll sort of see how it goes based upon what opportunities we have to deploy capital because we're not interested simply in selling assets and reducing the size of the portfolio and reducing our overall ability to retain capital.

Jordan Sadler - KeyBanc Capital Markets Inc.

Is it safe to say, I mean most of your assets are stabilized. I know there are some around the edges. Is it safe to say that they would be stabilized assets?

Douglas Linde

Yes, they would be stabilize assets.

Jordan Sadler - KeyBanc Capital Markets Inc.

And then, in terms of deploying, do you favor development over acquisitions today broadly?

Douglas Linde

We favor higher returns on a risk-adjusted basis than lower returns. If we can put to work our development sites and sites that we are at least pursuing with tenants that would give us a more than a significant amount of pre-leasing, I think that would certainly be in today's marketplace, given where we are looking to acquire assets a very productive use of capital. That being said, there are some terrific assets that are going to come to market. It's going to be competitive from a pricing perspective. We may choose to form partnerships with other capital sources to reduce our overall investment and use our operating platform to some degree of leverage. But we are so -- we don't feel we're capital constrained, Jordan, we are opportunity constrained and we would prefer higher return asset if we could find them. But we're realistic about what's going to be available in 2011.

Mortimer Zuckerman

The other thing is, if I may add here, we have consistently taken a longer term view in terms of how we measure the returns. We're not looking to have a negative of short-term returns, don't get me wrong. But when you look at various buildings, you can see very often the opportunity for longer-term returns. I'm going to just mention again the General Motors building where we have two huge tenants their leases come due in the number of years. Those leases go way, way back and they are way, way below the market. So that is a part of the strength that we have. We can take a slightly longer-term view in these things because we do believe that there will be in terms of the kind of growth that this company would like to have over the longer term that these will make a major contribution to that. So that I think, from our point of view, really gives us a modest comparative or competitive advantage as we go forward in the way of acquisition.

Operator

Your next call is from Ross Nussbaum [Barclays Capital].

Ross Nussbaum - UBS Investment Bank

I want to talk a little bit about Washington D.C.. Doug, your comments with expect to slow private sector leasing, and no real improvement leasing economics. And I'm trying to balance that against the prices that have been paid for D.C. office buildings and the uptick in interest rates, and how do those all come together in your mind? Do you think Washington has gotten overheated from an asset pricing perspective?

Douglas Linde

Well I said two things, right? The first thing I said was that in the short term, we think there's going to be little impetus for a growth in private sector leasing. I also said that looking out 2014, 2015, there are no buildings that are going to be on the docket from a private-sector perspective. And believe it or not, there are still tenants in Washington D.C. of a couple hundred thousand square feet or more who are going to be looking to expand at some point in the future. And the average building site in Washington D.C. is under 400,000 square feet. And the natural course of things in that city is that when larger firms are looking at their lease expirations after 15 or 20 years, the natural governor for them is new building construction. Without that sort of sitting out there, I think you would argue that the medium-term opportunity for rental rate depreciation in Washington D.C. is one that you can have some confidence in. And so, I do think that the size of the asset in Washington D.C., the amount of capital that is looking to deploy into core real estate assets has certainly not shown an ability to find "great value" in D.C. relative to serve other markets. But I don't think it's necessarily overpriced. I just think it's more of a long-term play in Washington D.C. than in a short-term play. Ray, do you want to add anything to that?

Raymond Ritchey

Well, I would just say that the market is a little bit skewed and the fact that there was a major user sale on Connecticut Avenue that broke all records. And that was a one-off deal that was kind of an off-market type of transaction. And I also kind of always be in Washington is like a club that you had to pay the initiation fee to get in. And we have seen a lot of international buyers come into the marketplace that are really stretched to get a D.C. asset in their portfolio. There's not a lot of products on the marketplace that kind of drives demand. There's two or three really attractive assets that hit the market recently that are going to be very, very competitive in terms of pricing. But again, to Doug's point, the long-term trend is still very, very positive. And there's a couple that we are taking a hard look at just to establish or re-establish or reinforce our identity as the number one iconic office building owner in Washington D.C.

Ross Nussbaum - UBS Investment Bank

Did you hear anything at the State of the Union last night that made you feel better or worse about the State Affairs in the world?

Mortimer Zuckerman

Well, I mean I think it was a more constructive speech. The President, I think, was reaching out to the Republicans and sort of dealing with a lot of the contentious points that separate the Republicans and the Democrats in a constructive way. So by and large, I thought it was a constructive speech. He spoke I thought with some more energy and authority than he has in the past. Nevertheless, I do think that the issues that we are facing, particularly the fiscal issues got very, very little time and attention. And I think that's going to be a huge issue going forward, and we have to be very careful. I mean they are threading a very, very thin line. If their estimates are anywhere close to mine, and I know on some levels, they are. When they see the weakness in the housing market and the unemployment market, the weakness in state and local governments and what that could mean for the municipal bond market and what that could mean for the United States. They've got to be very, very careful because the last thing in the world they want politically is a double-dip. So I don't think they're going to do much about the fiscal side because they just feel they need it, not just for next year but for the year afterwards. And by and large, this is as somebody put it, it's like going to a psychiatrist for an hour, in which you talk about yourself and all of the good things that you're going to do and the people you have problems with. But the psychiatrist never ask you the question. How you are going to do this? How are you going to get the other side to work with you? Those questions are just by definition going to have to be worked out. The one good thing that I have to say, and I think we will take credit for this, is that he brought in this guy, Bill Daley as his Chief of Staff. Now the reason why we take credit for it was he was on our Board for half a dozen or so years, and I'm sure that's the major training that he's had because that's the way we tell the story. But he's a terrific man and he's a grown-up. And I think he'll be very effective in working with the Congress and working with the business community and working with the financial world. And boy, do they need somebody like that. So I think that, depending on what influence he has, I think that's a very, very good sign and we will just have to see. The thing that worries me is I don't think they can do anything about the housing industry. I'm not sure they can do very much about unemployment. I don't think they can do very much about the problems of state and local governments whose, if you look at Illinois where they just increased I think the sales tax from 3% to 5%. That's going to take away any of the stimulus that were originally going to come out of that tax deal. If you look at gasoline prices, I mean if you look at retail sales, if you think about gasoline prices and food prices, which are necessities, the retail sales are still quite weak. But gasoline prices have gone up enough to take $60 billion plus out of the consumer's pocket book. So I just don't see yet where the energy is. I don't think they do -- whatever they have to say publicly because they have to be optimistic, probably. And I think they're very worried about that because they know that ultimately, the state of the economy and not the state of the Union speeches is what's going to determine how they're going to do politically. And like every other administration, they're totally focused on the re-election in two years. So we'll just have to see how it plays out. I mean I don't envy them because, as we say, nobody's ever been in this kind of macroeconomic situation. And we have a hugely higher unemployment than the 9.4% or the 9.8%. The 9.4% came about more because of people left the labor force and because people got jobs. And if you take what is called I think, the U6, which is household unemployment, which measures people who look for a job in six months rather than in just four weeks, which is the headline number. I mean you're talking about an unemployment rate that's about 17%, and you add to that the number of people who have left the labor force completely, roughly 19% unemployment. We've never been through anything like that. So nobody knows exactly how this is going to play out and neither do they. And they don't know quite how to deal with it. So he has to be quite optimistic quite reasonably. He have to be constructive, which I thought he was with the Republicans for the first time. He gave an energetic speech. So from a political point of view, I think he did as well as we could expect. But everything is going to be determined on the basis of how the economy performs. And frankly, I think more or less, it's out of their hands.

Operator

Your next call comes from Suzanne Kim [Crédit Suisse].

Suzanne Kim - Credit Suisse

I just want to get some more clarification on the underlying assumptions in your guidance numbers. What kind of leasing assumptions are you assuming for some of the lease of assets in your portfolio? And then second of all, I didn't catch what sort of leasing pre-hurdles do you need before 250 West 55th starts up again?

Mortimer Zuckerman

I'll answer your second question first because it's easier, it depends. It depends on the size of the tenant, the location of the tenant and the credit of the tenant. So we don't have any sharp rule. If a tenant that was 350,000 square feet who wanted the base of the building and that was AAA credit came along and was going to sign a 20-year lease, we will clearly get started. I can sort of give you that sort of a floor. With regards to our other leasing assumptions, I can't answer the question. Our leasing assumptions are done on a property-by-property basis. We gave you a sense of sort of what our same-store growth is going to be and that it was an improvement in occupancy, which obviously would suggest that we believe that we're going to do better than we told you three months ago. But it's on a marginal basis. And we said it's about 100 basis points increased in our same-store run rate.

Michael LaBelle

I think that occupancy is about 50 basis points above the where we thought it was going to do when we talked last quarter. So I think if you're thinking about total leasing volume, it's somewhere between 2/4 and 3/4 and 3 million square feet of leasing. That will do. And we're seeing in leases that we're doing in New York City. We're seeing it in Cambridge and in suburban Boston, which I think is part of the place we're going to see the most kind of increase in occupancy. And I think that we're going to be successful in getting some positive absorption in San Francisco and some of the vacant seats we have now. I don't think we're going to be a little replace the 200,000 square feet that we have rolling because it is not rolling until the end of the year, but that's roughly where it's coming from. And we're also seeing some improvement in our operating expenses, honestly. We've signed in and fixed some energy rates that we have in the company that reduced our energy costs from where we had projected it before. And we were pretty aggressive about what or conservative I guess about what our real estate tax projections are going to be. Because as Mort said, the environment in the state and municipal governments especially you would think that they would be pretty aggressive about having rate increases and assessment increases. And we now have some figures for the first half of the year, which are a little bit less than where we had projected originally. So that's a little bit of the same-store improvement as well.

Suzanne Kim - Credit Suisse

What about 510 Madison? I guess, I was wondering why 510 Madison like you're and how the closing of Bay Colony impacts your guidance numbers, those two particular assets.

Douglas Linde

I think it's an impossible question to answer in the specific. What we said was, we have a 24-month leased of projection for 510 Madison. And one of the reasons that we increased our guidance this quarter was because the rents were going to be higher. I'm not going to tell you how many percent to the contribution that was because I just don't have the numbers in front of me. Bay Colony, we have a very conservative view on the lease up. We think we're going to significantly exceed that. When those leases are signed and when rent commencement occurs is very much dependent upon the form of that lease. And since we don't own it yet, we're just sort of reticent to make any predictions. But we're optimistic that we're going to be more successful than I think we would have thought over a year ago.

Michael LaBelle

And the other thing, Suzanne, if you take a look at our third quarter earnings release, our press release, we have attached to that the returns that we expect and some of the operating information that we expect from both Bay Colony and from John Hancock segregated out. So there hasn't been a change from that per se, other than we haven't closed Bay Colony yet. And that would have -- those numbers would have been for a full year because we assume we're going to close it at the end of the year. And we're going to close it as Doug said, hopefully, next week. So we're going to have 11 months worth of that.

Operator

Your next call is from Jamie Feldman [BofA Merrill Lynch].

James Feldman - UBS

Ray, if we can turn back view in D.C. for a follow-up question, can you give a sense of different budget cuts that we have seen so far? How do you think they're going to impact the different submarkets?

Raymond Ritchey

Well, Jamie, I think the defense cut backs you're talking about is going to be much more on the hardware and the deployment towards kind of a global battlefield. What we're seeing, and Mort have implied on this at the editorial he said a weeks ago, it's really about the cyber projection that the Defense Department is focusing on right now. And the investment that is being made at Fort Meade and the investment is being made at Fort Belvoir and similarly at the new NGA campus down in Springfield, all of those investments by the federal government and the Defense Department, I think bodes very, very well for those specific markets. And we are nicely positioned in those two submarkets. I think a broader general concern about defense may have some short-term effect on some of the defense contractors. But those specific locations where we have established our beachheads I think are going to be really well-positioned for continued focus on those aspect of the defense budget. If we're own further a field and we're focusing on areas that are more generic in the defense expenditures, I think we'd be concerned. But I think our portfolio is really well-positioned. And candidly seen this coming, that's one of the reason that we went so hard to secure the DIA to backfill that 540,000 square feet on Reston. That's a 20-year government lease. And not only did that income secured, but that specific user, the defense intelligence I think has a great curtails and we've already got tremendous interest in one things that's striving the demand for space in Reston is the desire for the private sector defense contractors to be in close proximity to that user. So in terms of our position Fort Meade, for Belvoir, Springfield and the DIA, I think we're about as well-positioned as we can be here in Washington to write out any short-term hits and take advantage of the focus on cyber security as opposed to hardware.

James Feldman - UBS

Do you get a sense of even cyber security that there is going to be cutbacks and just ways to rationalize spending?

Raymond Ritchey

We really don't see that. And in fact, we're looking at -- we're debating internally starting building some Springfield and perhaps a new one up at Fort Meade. And in anticipation, I mean what we're seeing from both our private and public sector contacts in the Defense Intelligence Agency is that stand by, that there is still going to be need for office space, well positioned to service these needs. And we do not have that type of levels of concern that others may be having. I mean look at Reston, we just leased an addition to the 0.5 million square feet. We leased the DIA. We probably done something close to 400,000 to 500,000 square feet of defense-related deals, all long-term tenure deals in the last six months out of Reston. So we're feeling pretty strong in it. Our position is well-fortified.

James Feldman - UBS

And then Mort, you had mentioned you're looking for one other market. Is it still London that you had mentioned on the last call?

Douglas Linde

This is Doug. I don't think Mort mentioned London on the last call.

Mortimer Zuckerman

I did not mention London in the last call. The only thing I said about London was that because of the language and because of legal system, because of culture. They were attractive features to the city compared to other cities in Europe. But no, we're not looking in Europe, frankly, and we're going to stay in North America. And we are looking to see if there's another market that would intrigue us. We are in a position to grow the company, I believe. And we always end up starting with one or two buildings in the market and then gradually build that over time, and that's sort of our plan. So we're just looking around at this stage of the game. And I don't want to suggest that we're going to go under one market or another because I can’t tell you after the last call when somebody or other thought that we were referring to London. We got calls from just about everybody in the real estate business in London. So I don't want to create any false sort of anticipations. But we are in a position to grow the company, both within the markets we are already in. And we're looking for other markets that would be consistent with the kind of business strategy that we've had for 40-odd years. So they're not easy to come by, and we haven't found one to date that we would be prepared to go into. I'll just tell you a little story once. The Mayor of Chicago Daily called us, called me. And said, why don't you come to Chicago? He said, "I hear, you have a very good real estate company." because his brother, Bill, now the Chief of Staff, was on our Board. I said, "Well, I have a problem with Chicago". And he said, "What is it?" I said, "The city is too well-managed." He said, "What do you mean by that?" I said, "Well, we, like cities when you go into a city and demand goes up, we would like rents to go up. In your case, supply goes up because your manage the city so well you make sure that sites are available." We don't like that. So peculiar, shall we say, criteria, for the kind of business that we're in. And there are not too many cities that fit it, but we're just going to continue looking.

Operator

Your next call is from Sheila McGrath [Keefe Bruyette & Woods].

Sheila McGrath - KBW

Just more on acquisitions. I just wondered if you could give us some color on your acquisition teams pipeline? Is it bigger than it was six months ago? And if you have expectations for that, for more product to come on over the next six to 12 months?

Michael LaBelle

Well, since we closed $1.5 billion of transactions in the last quarter, I would say that it's hard to suggest that the pipeline that we have today is larger than that. We are aware of and following and making inquiries and studiously searching for ways to make acquisitions in all of our markets there. We look at chunky assets, the larger CBD-oriented opportunities. We haven't baked any of that into our guidance for 2011. We're optimistic that we'll get some more stuff down in 2011. But I'm not going to put a number out there or make any suggestions as to what the timing of that would be.

Sheila McGrath - KBW

And just quickly on 510 Madison Avenue, you did have some lease activity there already. I just wondered if you could comment how that compared thus far to your expectations or underwriting?

Michael LaBelle

We were considerably above probably, I'd say it's literally $15 to $20 a foot above what our original underwriting was. We had a very conservative underwriting deliberately but it's gone and is going very, very well. And we think we're going to have a very -- we estimated that we would fill up the building in a couple of years. If I had to give you an honest guess now, I think we'll exceed that time period that is we'll do it in less time, and we'll do it at higher rents. The building has been extremely well-received. It is an extraordinarily building that was to his credit is designed by and built by Harry Macklowe. And it's an outstanding design, it's in the Plaza District, as you know, which is very to very difficult to come by. And we think we're going to do a very well with it. And as I said, we'll do it and we'll lease it up in less time and at higher rates than we anticipated.

Sheila McGrath - KBW

Just wondering what you're thoughts are on the dividend given your improving outlook?

Michael LaBelle

If you look at it in the short term, I think we're comfortable with our dividend as it relates to our taxable income. Obviously, as we move forward into the future, our taxable income continues to increase. We’re going to have to look harder at our dividend.

Operator

Your next call is from John Eade [Argus Research Company].

John Eade - Argus Research Company

Looking at your land bank, are there any other developments that could move up to the front burners soon? You have a lot of land in Reston and you seemed reasonably positive on that market. Could you add an additional project there this year?

Michael LaBelle

No, I think that the Reston market is not to a point where you have a replacement cost rents. As I said, there still is a pretty significant availability. I think the chances for us to do a build to suit or a partially leased building are most high around the Fort Meade and Fort Belvoir in and around Washington D.C. at 250 West 55th Street in Manhattan and at 17 Cambridge Center in Cambridge, Massachusetts. Those, I'd say are the four places where you're mostly likely to see something.

John Eade - Argus Research Company

And on the cash balance has declined pretty significantly as you put capital to work. Are you comfortable with where it is today? I don't know if having $1 billion of cash was helpful in terms of being able to close quickly on acquisitions. Given the opportunities that you see, are you comfortable with the level of cash you're running at today?

Michael LaBelle

We're comfortable with our expectation of where our cash position will be during the year. That's not to say that it's not better to have more cash than less cash to a point. As you know, I think we talked about it. There are some capital raising opportunities for us both on the sales side as well as the financing side. And there are joint venture opportunities. We have our ATM. There's the equity market. I mean there's a lot of ways to raise capital if we think the opportunity is such that we can deploy that capital in an appropriate rate of return.

John Eade - Argus Research Company

And just lastly, can you talk a little bit about the acquisition landscape? And specifically are you seeing any more competition from private equity yet?

Mortimer Zuckerman

There has been a huge transformation of that market, as I'm sure all of you know and all of you have read about. A lot of money is coming back into the commercial office building market because there is a sense that American business is doing relatively well in the economy compared to a lot of other options like hotels and/or residences. So yes, I think there has been a big change. I mean I'll put it this way, we have been offered on one of our buildings in New York, for example, purchaser offered to buy that at a 4% cap rate. Now those are very, very, very competitive cap rates. I mean we haven't seen those cap rates since the bubble of a couple years ago. Yet, there's that kind of money that is looking into it because they see a lot of the longer-term values in Commercial Real Estate. And I think, it's made the competitive landscape just that much more difficult. But because we have the capacity to add an operating platform to an acquisition I think we have still the ability to put together additional transactions.

Operator

Our next call is from Michael Knott [Green Street Advisors].

Michael Knott - Green Street Advisors

Mort, was up 4% cap rate now? Or are you talking about back in the bubble days?

Mortimer Zuckerman

No, this was offered to us within the last 30 days.

Michael Knott - Green Street Advisors

Interesting. And then I guess the property...

Mortimer Zuckerman

The way I would put it.

Michael Knott - Green Street Advisors

I guess a question for Mike or Doug, can you help you understand the thinking behind the debt swap in paying that the big premium on redeeming the debt that you did?

Douglas Linde

We really look at it on a long-term basis. We didn't necessarily look at on just an NTD basis for those isolated transactions. And we looked at the ability to lock-in for 10.5 years, 4.2% money, which we thought which is incredibly attractive and will be great capital for us to have for 10.5 years. We obviously looked at the maturities coming up in 13 months. And about 20 months, let's say, we're going to have to deal with these maturities in the near term. There is a premium to them, and maybe that premium does go down as you get closer to the maturity of that debt. But we were really struck what we saw in the Treasury market where it was. And said, you know, if the Treasury market continues to go lower or it stays flat, maybe we'll be able to do something again and take advantage of this again. But we really don't want to lose this opportunity, to put that kind of capital on our balance sheet for a long term.

Michael LaBelle

And Michael, the most simplistic analysis that we did was we said, if we did nothing today, at what rate would we have to issue at and when those loans mature at their perspective dates in order to be indifferent. And the rates were in or about 5 1/4% to 5% and our view was we're probably better off issuing today at 4.22% than taking our chances that in 2012 or 2013, we can issue a 5%.

Michael Knott - Green Street Advisors

K

And then a question for Mort. Mort, obviously, there are a lot of demands on your time outside of Boston Properties. How should we think about your role as CEO and how long you are interested in holding that role as opposed to just Chairman?

Mortimer Zuckerman

Well, I mean by whatever the title is, as you may know, I did not have the CEO title for many, many, many years. If this is still my prime interest and my prime occupation, the fact that I do other things frankly, the ways it makes enhances. If I may say so, the opportunities and the role I have at Boston Properties. But this is the principle focus of my attention and will remain the principal focus of my attention. And whatever I have to do here, I do. Everything else that I do is secondary to this, and in addition to this. And this is the one that has the first priority and the one that sets the agenda for whatever else I may do.

Operator

Your next call comes from John Guinee [Stifel, Nicolaus & Company].

Erin Aslakson - Stifel Nicolaus

It's Erin Aslakson, in for John Guinee. It essentially relates to Cambridge and the recent news that Vertex might be moving to St. Pierre, Joe Fallons project in 2013. I don't know if you had discussions with Vertex? Or if you have a landbank ability large enough to complete the development for Vertex site requirement. But could you talk about that move? And what effect that has on Cambridge and what outlook you have for Cambridge? Why a Vertex has moved to south Boston?

Douglas Linde

Sure. To answer the simple question first, we can build 170,000 to 200,000 square-foot building depending upon whether it's lab or it's office in Cambridge. And we have no other availability between now and call it, 2017, '16, '17. So we never talk to, we never were approached by and never attempted to talk to Vertex about Cambridge Center. Vertex is a company that have grew up in some rather antiquated facilities in Cambridge. And over time, has sort of organically moved from building to building. And so they're sporadically located in lots of single store in a couple of mid-rise buildings in and around the East Cambridge submarket. And I think that their desire to consolidate was one that comes when companies mature. And the choices that they had were twofold. They could stay put or go to a new development because there is no obvious existing campus in Cambridge for them to go. I think they probably had a choice to look real hard outside the Alexandria has got under development and they also probably looked at what is referred to as Northpoint, which is about Cambridge opportunities. And then they looked at the I guess the City of Boston is now referred to as the Innovation District or the Seaport. Again, I don't know what the economic opportunity was that is being offered by Joe Fallon and his partners relative to what Alexandria and others were offering. But I assume that economically, it was more advantageous for them to move to the City of Boston from Cambridge. I think it doesn't really impact the market for high-quality lab space or new lab space. I think there's a very big difference between second-generation on lab space and primary lab space in terms of how it's being built, how it's being used, what the infrastructure looks like. There have been some examples of some older lab building that really have a challenging time of leasing up, but they have leased up in the Cambridge marketplace. And the good news is that the owner of the Vertex building said a couple of years, assuming Vertex gets their FDA approval and they have a drug to sell and it's able to be financed to at least talk to tenants about what the opportunities might be within their portfolio.

Michael LaBelle

One additional comment would be, one of the interesting stories about Cambridge right now is the fact that the activity on new delivery of products has really been on the last sectors. On the office side, the last building brought to market really is our eight Cambridge Center, which is now going out of decade. So the office sector is particularly real-estate decision really haven't will have no impact on.

Mortimer Zuckerman

This is Mort. We look forward to talking to you again after our next quarter and we appreciate your interest.

Douglas Linde

Wait, Mort, We still have a couple of people that we have to get to.

Operator

Your next call comes from Chris Caton [Morgan Stanley].

Chris Caton

I wanted to follow-up on talking about entering new markets. I think I heard that it would be more incremental in nature rather than a larger portfolio. Can you talk a bit about your thinking around that?

Douglas Linde

I don't want you to read too much until what was said. I think that to paraphrase what Mort said is that, we'd like to grow, if there is an opportunity to find a market that meets the supply restrictions that we found exist in the markets we're in, where we think there are opportunities to see strong demand growth over time, that would be an opportunity we would like to explore. We continue to look at a lot of different markets and we continue to look -- based on those marks because conditions change, right? I mean nothing is static in this world. And in a perfect world, we'd like to establish an operating platform and whatever market that might be if we were to find one. If we can't do that and we can do it on an incremental basis, that would be okay too if we thought we could eventually get to a platform size that would be similar to what we have in the markets that we're in today. But I don't want you to read into this that you're going to see an announcement that three weeks from now that we are suddenly going to in a new market and that we're going to buy a building and market x, y and z and with an expectation to grow. It's a long-term consistent view that you will hear about in 2011, in 2012, in 2014 and we're going to continue to look because we don't want to preclude ourselves in doing things in other places if we think that opportunity is there.

Chris Caton

You talked about releasing spreads and how in the segment in San Francisco, which is down and the rest of portfolio, which is flatter up. How much of that it already kind of agreed to and how much of that is kind of speculative?

Michael LaBelle

In terms of its spreads? The way we do our spreads is that we look at our existing in-place rent and we look at where we think we could lease that space on a day-to-day basis. An aside from San Francisco, on average, we are at or above market in terms of where we think we could lease the space relative to where our current in-place rents are. When you push the San Francisco stuff into that, it's basically flat.

Mortimer Zuckerman

And I would just add that none of it is really agreed to. None of it is signed or anything like that, this is exposure. If we have an expiration that we've already signed a lease for, then we don't consider that exposure.

Operator

Your next call comes from Jay Habermann [Goldman Sachs & Company].

Jay Habermann - Goldman Sachs

On West 55th Street, Doug, could you talk a bit about where potential tenants are most focused on in timing? And perhaps how far apart you might be focused today on pricing?

Michael LaBelle

I'll focus on the timing because that's an easier question for me to answer. It's going to take a couple years to deliver the building and it's going to take us six to nine months to martial to get there. So we're talking about basically 2014 delivery of space. We probably could push it up a little bit but not a lot. With regards to timing, I told you were I thought the market rents were in the city. We recognize that the Westside is weaker than the Plaza district. We recognize that 8th Avenue is different than 6th Avenue. But we also recognize that new construction and the efficiencies of a new building would come at a premium to potentially existing rents in those same places. So we're looking for a fair rent based upon the product that we have and the current environment and where we think rents will be in 2014.

Jay Habermann - Goldman Sachs

Any thoughts on debt paydown either the exchangeable notes further paydown to the 2012 or even looking out to 2013, the senior notes? Any thoughts there? Just given your all in costs of around 5% today?

Michael LaBelle

We haven't, obviously that's not any of our guidance. So we think about it on a consistent basis. I would say it's not on the front of our mind at this moment. But with our 2012 exchangeables, we're going to create a strategic for that. And in the next few weeks to months, clearly that one is coming up in February of 2012. And we'll continue to evaluate where rates are and we're they're going, given, as you heard Mort say, we're a little bit less bullish on the overall economy. So is there a possibilities that treasuries could dip down a little bit? Maybe there is this possibilities. And if we see that where we potentially take advantage of a moment like that? I think that's possible. That's pretty much where we stand now.

Operator

Your next call is from Rob Stevenson [Macquarie Research].

Robert Stevenson - Macquarie Research

Doug when you have conversations these days with your bigger, legal tenants, what's the outlook for them needing additional space over the next three to five years?

Douglas Linde

I'll characterize it in two segments. So for all of the tenants that did something between 2008 and 2010, I actually think, in many cases, they are feeling a little bit pressed for what their current space looks like. And if there are firm that is considering either doing partner acquisitions or they are looking to maybe sort of, how should we say, wraps it back the amount of partner time that is being spent on clients and looking to use a little bit more operating leverage, I think they're feeling that they're feeling that there may be a need for more space on incremental basis. For anybody who has not yet hit that sort of 2008 to 2010 leasing timeframe, and it is working with their existing platform, they probably have 10% to 15% more space than they need. The way they utilize their space is dramatically different than it was when that lease was signed. The number of file uses they have. The number of conference they need. The number of support staff they have and cubicle stations to permanent offices. The size of those offices. All of that has changed. And there has been compressions of the ability to get into less space more efficiently. And all of those tenants in our expectation, unless they're doing a merger, are going to be looking for a less space than they currently have.

Raymond Ritchey

I think that it is a good thing. This is Ray Ritchey. That what we're seeing with almost all of these firms is if they're taking 20% to 30% less space, they are much more willing and much more open to pay more to upgrade their space go to their building. It's clearly a plays to our strength. And that was one of the key things with the McDermotte deal in D.C. Here is they came out of 220, they took 170 with us, and viewed it as a real value play and a chance to upgrade. So the lack of the growth or the consolidation on the space on the law firm side actually plays to our strengths in many occasions.

Robert Stevenson - Macquarie Research

And then for Mike, just quickly of the, I'll call it, $0.22 of increased guidance for '11, how much of that is the stronger leasing versus the interest and any of the leased stuff on Hancock, et cetera?

Michael LaBelle

I would say that we've brought our same-store up about 100 basis points. I would target that in a per share number of somewhere around $0.06 and a $1 number of somewhere around $10 million, is what that means. And again, portion of it is coming from expenses and a portion of it is coming from faster absorption of space and 50 basis points of occupancy.

Operator

Your next call is from Alexander Goldfarb [Sandler O'Neill & Partners].

Alexander David Goldfarb

Just a question for Mort, if he's still on the line. Just want to get a sense of here in New York what your view is for the success that Chroma may have in reforming Albany and sort of hopefully starting to write the state's financial position? I guess Mort has left. Then Mike, on a 601 Lex, as you're thinking about CMBS versus portfolio lenders, can you just give a sense of who is more competitive and also what they're doing in terms of terms if someone's trying to sell additional products maybe the CMBS guys are trying to sell additional products to make their bids more competitive? If you could just give some color?

Douglas Linde

I think it's interesting because everybody in the CMBS market feels like the origination of CMBS is going to be up four to five fold from 2010. And we probably have half a dozen or more investment bankers in here on a consistent basis touting their origination platform and expansion of their origination platform in anticipation of an increase. So they are very, very excited and interested in doing something. One of the big questions though is how comfortable are they going to be in putting something on their balance sheet for a period of time that it will take to bundle it into a securitization. Now the good thing for a large transaction like 601 Lex is that the size of the securitizations are getting much bigger. So a securitization that was maybe $1 billion or $1.5 billion in 2010 is expected to be $3 billion to $3.5 billion in 2011, which enables an asset like this to fit in well and maybe not have to broken up into two pieces. If it has to be broken up into two pieces, then you view it with one institution, they have to hold it longer. So their aggressiveness on pricing I think is going to be affected by their comfort with the CMBS market. They clearly want to do more business and generate those fees and are being aggressive about marketing. We haven't gotten feedback yet on exactly what their pricing is go to be, however, so we will see. We do know that in the whole lender market, which could be the banks, the foreign banks, the pension funds and the life insurance companies that we think that they will be very aggressive. We think that you'll have to put a club together, but that is something that we have done before and we're prepared to do so. And they are clearly looking at assets of this ilk and asset of this size to upgrade their portfolio and do a long-term financing at these types of leverage points.

Alexander David Goldfarb

But as far as their competitiveness, the sweet spot that the portfolio lenders are offering you as far rate term LTV, is it sort of similar to the CMBS guys, or is it each a little bit different? And then for you guys, you would be looking at your maturity schedules to see where you are more comfortable having that role?

Douglas Linde

Well, I think that from a pricing perspective, if you look at 2010, the whole home loan lenders were more competitive than CMBS. CMBS won some deals because they would give a little bit more leverage. We're not necessarily going to be looking for that leverage. However, I will say that I think the CMBS market is going to get more aggressive. And I think they're going to have to. And if they get more and more comfort with CMBS spreads and where they are and where they are moving because we've seen them all come in, their pricing is going to come down. From a terms and conditions perspective, both of those parties will do long-term financings, some of the foreign banks would rather do seven years rather than 10 years. We're going to look at all of those factors. We're going to want to do a longer-term financing based on where interest rates are today. So it could be a seven year, could be 10 year, probably not longer than that. And I guess amortization maybe that advantage on CMBS side a little bit. I think CMBS is more willing to do interest only. And most of your life insurance company lenders and pension fund lenders are saying we'll do a few years of interest only and then we want some amortization on the backend.

Operator

Your next call is from Steve Benyik [Jefferies & Company].

Steven Benyik - Jefferies & Company, Inc.

Just a question on Wells Fargo and what you think drove their decision to go to 120 Park, which seems like somewhat of a lower price point and then just to add that with a coupled with the prospects for back selling some of the space at Grand Central Tower. What you guys are seeing there?

Michael LaBelle

Well, I think you answered your question. That's a lower price point. And I think Wells Fargo has suspected that were happy to be in Midtown Manhattan. They weren't prepared to or aren't prepared, and I don't know if they got a deal yet at 120 Park. I heard that other tenants are looking at it as well. So that being at the Seagrams building with a couple hundred thousand square feet wasn't in their sort of view of what the future held for their business. And we're looking for a value opportunity, and I think they waited a little too long in terms of finding a host of value opportunities because I think a number of them are already gone on Park Avenue in particular. And so they were forced to move a little bit south and potentially, a little bit further to the east or the west if they're going to do what they said they were going to do on a consolidation. With regards to our space at Grand Central Tower, we have these smaller floors at the base of the building and we just gutted them, the U.S., UN requirement that was in there before. It was a challenge to use of the space. So we're starting sort of from scratch on those space with a pretty substantial work letter and literally a white box there for people to look at. And we're confident we're going to find tenants. People who are looking for 18,000 or 20,000 square feet of space at the bottom of the building are fewer than people who are looking for 16,000 square feet of space or 15,000 square feet of space at the top of the building. And so you know it's going to be a price and a value proposition for somebody. It's not going to be a major financial institution because it's not a big enough block.

Steven Benyik - Jefferies & Company, Inc.

Do you think that the financial institutions, otherwise besides Wells Fargo, might also follow a similar line of thinking going forward? Or is this more of a one-off decision related to them?

Michael LaBelle

I think it's very dependent on the image and the view that the institutions take how to use space and where they are putting in what they're putting in that space. I mean there's always been an ability to find cheap space if you wanted to go to secondary locations in Manhattan on a relative basis. And to date, there are a few of the financial institutions have done that. I don't think the location that Wells is choosing is a secondary location. It's not Park Avenue and 53rd Street, which is where the Seagrams building is. And I can't speak for they think about it. Nomura is looking at a very large block of space on the west side, right? Again, it's a sort of off-location in terms of being on Fifth Avenue. But I'm not aware of very many 900,000 square feet block of space in Midtown Manhattan. So that's sort of where they find themselves. We believe that we will find financial institutions or legal firms or a financial firms who will really like the efficiency and the competitive nature of their total occupancy at 250 West 55th Street and we'll be able to generate a good return on that project. I can't tell you when it's going to be. So we're optimistic that there will be financial services users who are looking for a high-quality space in core Midtown market locations.

Operator

Final call comes from the line of David Harris [Gleacher & Company].

David Harris - Gleacher & Company, Inc.

Mort ? Doug I should say on TIs, did I heard you correctly that said fourth quarter was low but there's a reasonable run rate looking forward into 2011?

Michael LaBelle

No, I didn't say it was a reasonable run rate. I just said it was low. I think we've traditionally, as David said, we think our tenant improvement package including leasing commissions is generally in the $30 to $35 of square-foot range and we were obviously significantly lower than that in the fourth quarter.

Chris Caton

Was that a function of the actually nature of the leases that you were reviewing?

Michael LaBelle

As I suggested, we did a lot more as is deals, a lot more renewals in terms of what hits us during the quarter and those are naturally lower on the TI side. The leasing commission is pretty consistent amongst the renewal because you pay what you pay. But the tenant piece of it was significantly lower.

David Harris - Gleacher & Company, Inc.

And so what I should look at is perhaps the prior quarters is a reasonable run rate for as we look into the future with some perhaps diminution over time as the market improves?

Michael LaBelle

Yes, I think that as a fair characterization. I think that if you're looking at 2012, I don't think you're going to see much of a diminution.

David Harris - Gleacher & Company, Inc.

And Mort is gone, I don't even have a building in London to sell him.

Michael LaBelle

Oh well.

Operator

This concludes today's Boston Properties Conference Call. Thank you again for attending. Have a great day.

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