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Executives

Arista Joyner - Investor Relations Manager

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

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

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

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

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

Analysts

Jeffrey Spector - BofA Merrill Lynch, Research Division

James C. Feldman - BofA Merrill Lynch, Research Division

Unknown Analyst

Ross T. Nussbaum - UBS Investment Bank, Research Division

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Joshua Attie - Citigroup Inc, Research Division

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

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

Robert Stevenson - Macquarie Research

Chris Caton - Morgan Stanley, Research Division

Steve Sakwa - ISI Group Inc., Research Division

Boston Properties (BXP) Q4 2011 Earnings Call February 1, 2012 10:00 AM ET

Operator

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

Arista Joyner

Good morning, and welcome to Boston Properties' fourth quarter earnings call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements.

If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that those expectations will be attained.

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

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

Mortimer B. Zuckerman

Good morning all. Thank you for joining us for this discussion about the company and the environment in which it works. I'm going to spend most of my comments just sort of describing the general macroeconomic environment.

It is still a time, it seems to me, when we have to be very cautious about where the economy is going in general. The unemployment numbers are very weak, the housing prices continue to go down, consumer sales are still weak, inventory buildup is primarily accounting for a good part of the growth that we've had. We face the risk of a situation in which, while there isn't that much in the way of additional layoffs, still that there are some, there's very little hiring going on across the country.

Nevertheless, within this context, the basic business strategy of Boston Properties still seems to be working out fairly well for the following reasons: Number one, we are in unique markets and the markets that have by and large done relatively well in this weak economy, and those markets are cities. And cities, which have certain characteristics including the level of employment that requires, shall we say, a knowledge base for their flourishing and, indeed, survival. And that is true of the cities that we are in: Cambridge and Boston and New York and Washington and its suburbs and San Francisco. San Francisco was the last city to sort of really get its gear in forward. But in the last year, 1.5 years, particularly as the social media boom spread throughout that community, we have seen a dramatic turnaround in the performance of that city and in the performance of our real estate in that city and in its surrounding areas.

But in the other cities, we have continued through this entire period to do relatively well. I'm not saying that it is the kind of exuberant experience that we had for many, many years, but still, the basic strategy that the company followed from day 1, which was to be in certain markets that really had the best chance to continue to flourish even in difficult times and to be in those buildings within those markets that would be the ones that would attract tenants. Not that our rents haven't gone down somewhat, but we own, by and large, the kind of buildings that when those companies that are doing well look for a new place of occupancy, they look to our buildings. And so our basic occupancy has held up remarkably well throughout this period, and our basic strategy, it seems to me, continues to hold up remarkably well.

So the question in this sense is, are these cities going to continue to do well, and in particular, what is the national macroeconomy going to have to say about how well these cities are going to do. We think these cities are going to continue to do reasonably well. But isn't to say that we think, and I certainly don't think, that this economy is going to continue to do very well. It has not been doing well now for quite a few years, and we have been bearish about this economy, as many of you will remember over the years that we've been talking about it, for quite a few years. We're talking 4 or even 5 years. And I do think that this is going to go on for a year or 2, or maybe even more. My own view, it's going to take a minimum of 2 years and probably between 3 to 5 years for us to work through the overhang of debt that now suppresses the economy. It is also going to take us some time to see if after the next election, we can develop national policies that offer a much better chance to restimulate our economy on a macro level than the ones we have had to date. And this is something, no matter who comes into office, they're going to have to really think about it and see whether or not they can fashion such policies and get them passed into legislation.

At this stage of the game, it really -- when you think that you're in the middle of the kind of political campaign that we have witnessed, it's hard to believe that anybody is going to come out of this campaign with the kind of authority, political authority and moral credibility to move the Congress and to have a Congress that's going to be very responsive to whomever the President is. But we're just going to have to wait and see on that. In any event, I do think that the economy is sort of getting somewhat better and not really getting worse. There is a chance that it will get worse because at some point, everybody is going to get exhausted with the fumes of optimism and really begin to think very differently about the economy. For the moment, that's a little bit away in terms of seeing it because the economy is growing, albeit at a very slow pace. But in our markets, as I say, we find ourselves really dealing by and large with reasonably good markets, not great markets, but reasonably good markets. This shows up both in terms of the level of occupancy and in terms of the rents that we are obtaining. And the real question is, we do have a unique advantage at this stage of the game, which is the cost of capital. The cost of long-term capital for a company like Boston Properties has dropped dramatically. We have never seen anything like that, not in the, I'm embarrassed to say, 50 years that I've been in this business. We've just never seen anything like the kind of rates that we're now able to realize, and this is going to give us an advantage on several grounds. One is we still can do a lot of leasing, in a sense, at somewhat lower rates. But if our financing costs have dropped significantly as they have, our margins will be maintained in one form or another, even sometimes greater than they were before. So that is one thing that will help us mitigate the current condition of the economy which while, as I said, it is not going down, it is still relatively weak in terms of the fiscal and monetary policies that we've had, trying to give it the kind of stimulus so that the economy would begin to self-generate itself at a higher level of growth of GDP. Anyway, that hasn't happened yet, but we think we're reasonably well positioned to continue to grow, to continue to find assets that we can acquire and develop, and to continue in a sense as we turn over the space in some of our buildings, these are buildings that are the highest quality within the markets they are in. They are, as we say, A buildings in A locations. Their replacement cost continues to go up every year and so it mitigates again the downward pressure on the space that we have, and we have kept a fairly high vacancy in virtually every market we are in.

So that's as much of a summary that seems to me, I should give you at this point. My colleagues will fill you in with a lot of the other aspects of our company's operations, and particularly in the last quarter.

Thank you all very much.

Douglas T. Linde

Thanks, Mort. Good morning, everybody, and thanks for joining us. Happy new year to those of you who I haven't personally seen or talked to.

We finished 2011 with a total return to shareholders of 18%. We completed about 5 million square feet of leases. We delivered $932 million of developments, which we expect to have all stabilized by the third quarter, with a yield of about 7.4%. And we have another $1.8 billion of active developments, which are going to be delivered between 2014 and 2012. Those include 2 recent developments, which are the Reston Residential and 17 Cambridge Center, which I believe are in the supplemental as of this quarter.

In addition, as our operating earnings improved, we increased our dividend in the fourth quarter by 10% to an annual rate of $2.20. So it was a really, really good year for Boston Properties.

As Mort described, our corporate strategy of selecting on select markets, submarkets and buildings with unique and differentiated demand characteristics and limits on new supply, and we support that with a terrific operating platform with an amazing group of associates, has really allowed us to be very successful in spite of I think what Mort would describe as an unpredictable macroeconomic environment.

So last quarter, we talked about our baseline earnings for 2012, and Mike's going to update that. But I thought I would keep my remarks this quarter contained to the operating fundamentals in our markets and those expectations for 2012. So that's really where I'm going to focus my time.

In 2011, it was the second time we surpassed 5 million square feet of annual leasing. It was about 1.3 million square feet in the fourth quarter, which was a pretty consistent pace through the year. We had about 85 transactions with an average of 90 over the first 3 quarters. So again, very consistent. Our second-generation rents were really in line with our previous guidance, and that includes the downsize associated with San Francisco. If you strip San Francisco out of our numbers, our mark-to-market second generation was actually up 8.5%. And remember, you're going to see the same trend throughout 2012 in California as we roll over the leases in EC 4, many of which we've already actually commenced the leases -- the leases have been done on.

Our in place rent at Embarcadero Center 4, which most of the rollover is from, was $63 a square foot as of December 31 of 2010. And it's now -- at the end of this year, it was $54 per square foot. So you get a sense of the roll down that we witnessed.

As we look forward, our portfolio mark-to-market today is about $1.53. I'm sure everyone noted that our concessions this quarter were significantly higher than traditionally, actually about $30 per square foot, above our run rate in 2011, which actually was probably $10 to $15 lower than what we traditionally have seen. And it was really due to about 1.2 million square feet of new long-term leases versus the renewals that we traditionally do during the quarter. The average length of our leases expanded from 102 months -- to 102 months from 72 months for the prior 3 quarters.

As Mort said, the job growth of the United States today is clearly focused on businesses that are oriented on new ideas, be they in the technology or life sciences or the medical device industries. And if you look at venture capital as sort of a leading indicator, it was up over 20% in 2011 versus 2010. And surprise, surprise, the Silicon Valley, New England and the New York Metropolitan areas were the top 3 areas for venture investing, with more than 60% of the deal flow. And if you look at the industry focus, it was software, biotech, medical devices, energy and social media.

So I guess it's not surprising that the Silicon Valley and the San Francisco CBD showed the most significant improvement in real estate fundamentals in 2011. There was 8.6 million square feet of office and R&D absorption in '11 to the fourth quarter, although the pace did in fact slow as we moved into 2012. After this very active year, there still are, in the Silicon Valley, 20 active requirements over 100,000 square feet.

For our portfolio, we leased another 90,000 square feet, bringing our total leasing to 355,000 square feet down the valley. And rents rose dramatically.

In May, we did a 50,000 square-foot lease in Mountain View Research, $15 triple net. Two weeks ago, we signed a 25,000 square-foot deal on the same park, $27 triple net.

Office rents in Mountain View have moved from $27 a square foot triple net in early 2011 to in excess of $42 triple net today. We purchased a building in November, which is described in our press release. The rents that are in place there are about $33 a square foot. It was purchased at a projected 2012 GAAP yield of 7.5% and a cash yield of 6.3%. There is specular development underway once again down the valley in Sunnyvale and Santa Clara, and the momentum does in fact show that it's pushing forward, coming to the North Peninsula, which is where our Gateway projects are. We have 4 floors of space that we got back at the end of the year. We've re-leased one of them already and are in negotiations on the second. Rents in south San Francisco are at about $20 per square foot, triple net. Again, very different than what we saw in Mountain View and Palo Alto. But to just give you a perspective that it's not great everywhere, across the highway from our Gateway project is a 320,000 square-foot, brand-new building completed 3 years ago, it's yet to sign its first lease.

Our view is that rents are going to continue to rise in 2012, dramatically in the South, not so quickly in the North, but they will be rising as we look forward.

Growing demand from the technology sector has also been a very significant factor in the net absorption of about 2 million square feet in the city of San Francisco. Class A vacancy has dropped over 400 basis points, which is a dramatic number, in 2011 to somewhere around 10.5%. There's been a lot of focus on the desirability of the non-core office space in some markets like the multimedia gulfs [ph] and the China Basin market for these technology companies, but those same tech companies are also interested in traditional highrise office space.

In the last 60 days, Medivation, which is a biotech company investing [ph] in the journal today about prostate cancer drugs, leased the 34th and the 35th floors in 5 25 [ph] market, so that's 55,000 square feet. Linkedin took 3 floors in One Montgomery Tower, that was a space that was formerly occupied by Charles Schwab, and SalesForce has leased 400,000 square feet at 50 Fremont and they did it on a long-term basis for over 17 years. And the space they took back filled [ph] the space that Pillsbury Winthrop is leaving to move into our building at Embarcadero Center 4, and space that Ernst & Young once occupied before they moved to 555 Mission.

These are all traditional office towers. Embarcadero Center, we did 300,000 square feet of leasing, 6 full are multi-floor deals, including a full floor to a cloud computing company, bringing our total year-to-year leasing to 615,000 square feet.

Our asking rents at EC are in the low 40s on the small or non-used spaces, in the ECs 1, 2 and 3, to over $7 a square foot at the top of EC floor. Rents are about 15% higher than they were last time this year.

Activity in Cambridge is what's leading the Boston region, as Mort suggested. There's over 1 million square feet of new construction, which is 100% committed to biotech and life science companies. One office building at Technology Square is actually being converted to a lab space. It's actually reducing the overall inventory in Cambridge and putting more pressure on office rents. We are in discussions with tenants for almost all of our availability at Cambridge Center. And asking rents are up 10% to 15% from 2011 to over $50 a square foot. The surge of larger technology and biotech companies for space in Cambridge is continuing, and there are new entrants for the market everyday. As an example, Amazon.com, who doesn't have a presence in the Boston market, is now looking for 30,000 to 40,000 square feet in Cambridge as we speak.

Across the river in the Back Bay, which is where we sit, there's really limited short-term availability, but it's not preventing us from doing leasing on a forward basis.

At the Hancock Tower, we are in discussions with tenants, many of whom are subtenants of Manulife, on long-term extensions and expansions beginning in '13, '14 and '15. We've actually completed 100,000 square-foot of forward leases and we're in negotiations with tenants that occupy an additional 164,000 square feet on 6 floors. These transactions aren't going to impact our numbers until the original leases expire in '13 or '14, but we are creating strong, and I promise you, very strong contractual revenue growth. Rents in our Back Bay properties range from the low 40s to over $70 a square foot at the top of the Hancock tower. We completed one additional floor at the base of our Atlantic Wharf tower. This last quarter, where rents are in the low 50s, when you think about our Back Bay portfolio, keep an eye on 2014 and 2015 because that's when most of our major lease expirations occur. But we are actively working today, as I said, on new or replacement tenants for that space.

We continue to see evidence of modest growth from small and mid-sized Boston financial tenants as a number of the Hancock deals involve expansion. But at the same time, there are large traditional users in the city that are becoming more efficient in their space utilization and that's leading the contractions.

As an example, one major Boston financial institution, which occupies about 1.1 million square feet, including space at the Hancock Tower and other buildings in the Back Bay, is expected to either renew or relocate into only 800,000 square feet without any job reductions. This type of a factor is really impacting the net absorption of the city, so there really hasn't been much in the way of marginal improvement in the overall demand characteristic on a vacancy perspective. And we continue to have lots of space at the base of buildings that the city is dealing with.

The suburban market had pretty good activity in 2011, but again, absorption was tempered through sublet availabilities brought about by corporate mergers and acquisitions. We completed half a dozen leases over 25,000 square feet that involved either relocation or expansion for tenants looking for more space in 2012. But companies like IBM and Oracle continue to purchase local tech companies and they consolidated operations. And while Biogen's decision to move into our building in Cambridge from Weston was a great opportunity for us, as a new development, it hasn't helped the overall dynamics of the 128 [Route 128] market. We're about 90 days away from completing the first phase of our Bay Colony repositioning and we finally completed a lease with a new technology company, 40,000 square feet, and they're already looking for new additional space.

During the fourth quarter, we completed almost 200,000 square feet of leasing and we have pretty good visibility on leases for a similar amount of activity during the first quarter of 2012.

Availability is still in the mid teens, however, which means that in our view, rents are maybe [ph] pretty flat year-to-year after a pretty significant growth in 2011. Rents were up about 15% last year.

In D.C., the impacts of the deficit negotiations and the spending reductions and the President election are going to mute any significant improvement in overall market conditions. In the district, we really don't see the government expanding in 2012.

The GSA procurement process has become more prolonged, and it's interesting, as we witnessed for many years in our other properties, our lease expiration really isn't an issue for the GSA. They simply continue to pay at their old rent and they let the leases expire. They don't really have any motivation to do anything.

Over the last few quarters, additional large blocks of space have come on to the market due to law firm consolidation, and that's increased the choices for tenants. So in the short term, we think private sector leasing is going to continue to be slow and there really isn't much in the way of large law firm lease expirations before 2014 that are going to drive much in the way of large leasing in the city. However, the good news for us, again, is that our portfolio is 97% leased. We have 160,000 square feet of expiring in uncovered 2012 exposure. So while we may not see much in the way of lease economic improvements, we also don't think that we're going to be impacted over the short or the medium-term. Market rents for the best space are in the high 40s and may touch $50 on a triple net basis. But the bulk of the leasing in the city that we see happening in 2012 is going to really be in the high 30s to about mid-40s triple net, with little expectation from much in the way of change. Just to give you a perspective, the GSA perspective cap for large leases for 2012 is $49 gross, which really limits the activity from the GSA to the older buildings in secondary locations. Operating expenses, bottom line, are somewhere between $17 and $20 a square foot for those buildings, so you're talking somewhere in the high 20s, low 30s for where those rents are going to be on a triple net basis.

Government contractors are also delaying their leasing decisions. We're completing short term extensions because contracts just are -- they're very much in the air. There's going to be a $500 billion to $1 trillion of defense spending reductions that are going to kick in over the next 10 years and it's clearly going to have an impact on the overall region.

If you look at the Dallas Corridor, depending on how you slice it, availability is in excess of 20%. Yet when you look at our portfolio in Reston, vacancy is 1% and we have completed over 300,000 square feet of additional leases in Reston in the fourth quarter, including 190,000 square-foot lease with Bechtel that absorbed 100% of the availability that we had in our Reston Overlook project.

During the year, we leased 600,000 square feet in Reston with virtually no renewals. Many of you attended our investor conference and you saw our presentation materials on Reston Town Center. We have created a unique environment for users of office space in Northern Virginia and our users have appreciated the value proposition, and that's translated into significant rental rate premiums over the market. In the midst of a really, really weak Northern Virginia market, there is still demand for premium product. So space in the town center is being leased in the mid to high 40s on a gross basis depending upon concession packages, where space outside the core are leasing in the high 30s and space outside the town center is being leased in the high 20s to the low 30s with significant concessions.

Our one large exposure in Reston is a 182,000 square-foot building, which is adjacent to the new DIA headquarters, the first building of which is going to be delivered in February. We're aware of interest from another agency that can -- is very interested in the infrastructure that's in that building. It's a 7 year-old BRAC compliant building, but the timing of the solicitation is being impacted by the budgetary issues that I talked about a few minutes ago, so we'll see when that lease ultimately gets allowed to be -- to move forward, but we're optimistic that it's going to come to that building.

One area that the government continues to fund is the area of cyber security, and the nucleus of that is up at Fort Meade. We are quickly finishing our second building at Annapolis Junction, just outside that base, and we have very strong leasing activity for that product.

As we discussed last quarter, the limited activity in our New York City operating portfolio stems from a lack of availability. We're somewhere between 97% and 90% leased. And our decision last quarter was to start doing prebuilds in 510 Madison. I would note that we did do one 50,000 square-foot expansion at 125 West 55th Street, but our prebuild suites are close to being done. So again, we have 7 of those at 510 Madison, 5 at 601 Lex [Lexington Avenue], 4 at 599 Lex and 2 at 540 Madison. Tenant interest on those spaces is good, but again, the deal size is going to be smaller than our typical deals and tenants want to see the finished product. We have leases in negotiation on 3 suites that are done at 599 and 2 suites at 510, where construction should be completed in the next couple of weeks. In addition, we actually picked up 2 additional floors of space at 510 Madison where we're working on leases right now.

Our big exposure in 2012 is going to be at 399 Park, where we're going to have availability beginning in the third quarter. That space is being priced at around $90 a square foot, and we've just started to market that space to full floor and multi-floor users. And I'm not going to be surprised if we don't decide to do some breaking up there and do some prebuilds as well. We don't expect to have rent commitments for that space until sometime in 2013.

At the upper end of the market, just to give you a perspective of why we're doing what we're doing, in 2008, there were 105 leases signed at over $100 [ph] a square foot. That dropped to 19 in 2009 and 2010, and it moved up to 44 in 2011. The average high end yield was under 20,000 square feet, which really reinforces our strategy of delivering small prebuilt places to attract those types of tenants. We also do sense that the changes that are occurring at the large financial institutions are starting to lead to the growth and formation of lots of new boutique firms, smaller firms, which we think are going to be excellent candidates for this type of space.

Today, when you look at 100,000 square foot blocks of space in Midtown and you compare it to last year, there's significantly fewer number. And it's interesting because there's a sort of a barbel-ing of them. There's an abundance of lower space options in older buildings east of Lexington Avenue, where rents are in the 60s or below, and then there's a group of blocks that are above $90 a square foot. Well, the lower levels of 250 West 55th Street is being priced in the mid-80s, and we believe it is an excellent alternative in the market. We continue to have discussions with larger tenants with lease expirations in 2014 and 2015 for the space at 250 West 55th. Users do feel less pressure to make decisions and transactions are taking a longer time to complete, but they are occurring. So that's my summary of the current operating environment. I'll let Mike talk about earnings, and then we will open things up for questions.

Michael E. LaBelle

Great. Thanks, Doug. Good morning, everybody. Before I jump into our earnings for the quarter, I want to mention what we completed in the capital markets.

In early November, we issued $850 million of senior unsecured bonds for a 7-year term at a yield of 3.85%. The 7-year term fit nicely into our maturity schedule and the deal represents the lowest coupon we have ever issued in the bond market. This capital is dilutive to our earnings in the short term until we repay other debt maturities.

Last quarter, we bought back $50 million of our 2012 exchangeable notes. We paid off $50 million of mortgage on our Reservoir Place project in suburban Boston, then we extinguished our Atlantic Wharf construction loan.

For the rest of 2012, we have about $810 million of debt expiring, with higher GAAP interest rates than the new bonds.

As we stated in our press release, we'll be redeeming the remaining $576 million of our exchangeable notes in February that have a GAAP rate of 5.63% and a cash coupon of 2 7/8. We also expect to repay $144 million mortgage on Bay Colony with a 6.53% interest rate and a $65 million loan on One Freedom Square that has a 7.75% interest rate.

Also, as we noted in our press release, despite substantial efforts to work out a resolution for our Montvale Center property, we expect to transfer the property during the first quarter to the lender, a servicer for a CMBS trust, extinguishing a $25 million loan that is accruing interest at 9.9%. The property's annual FFO is negative $1.2 million and the transfer will result in a gain of approximately $18 million. This is reflected in our first quarter and full-year 2012 net income guidance but is excluded from FFO.

Upon completion of all of this refinancing, our annual interest expense will have been reduced by approximately $15.6 million or $0.09 per share. In addition, we will still retain just over $1 billion of cash on our balance sheet, which is sufficient to fund all remaining cost for our development pipeline, as well as provide capital for new investment opportunities.

The health of the capital markets has improved over the last 2 months and particularly since the first of the year as positive domestic economic data and high levels of investor liquidity are resulting in a more bullish sentiment from credit investors. Our outstanding 10-year bonds are trading at spreads in the 170s and we can likely issue new 10-year paper today under 4%.

In the past 4 weeks alone, our bonds have traded in by 40 basis points. This compares to the 10-year mortgage market where we see the life insurance companies looking for minimum coupons in the low- to mid-4% range for large loans. The CMBS market has wider credit spreads and is not currently competitive for loans on properties like ours, where the life companies aggressively compete.

We're also seeing continued demand in the bank market, primarily for 5 years or shorter terms with attractive floating interest rates on term or construction facilities. This quarter, we closed 2 construction loans, aggregating $126 million, with LIBOR spreads in the high 100 and a nonrecourse 3-year term loan for one of our valued properties in the mid 200s.

Now I want to turn to our earnings results. We announced fourth quarter funds from operations of $1.21 per share. This is $0.02 per share above the midpoint of our guidance, and it would've been $0.04 per share above the midpoint if not for the dilution from our bond offering that was not included in our guidance.

For the full year 2011, we reported funds from operations of $4.84 per share. If you exclude the loss from extinguishment of debt we incurred in 2010, we improved our FFO year-over-year by $0.44 per share or 10%.

For the quarter, our portfolio generated approximately $5.5 million more than our projections, including $2.5 million of higher rental revenues. Much of the rental revenue came from outperformance in San Francisco, where we signed 340,000 square feet of leases, several of which commenced rental income in the quarter, and we also generated $500,000 of unbudgeted income from a little over 1 month of ownership of 2440 West El Camino Real, our acquisition in Mountain View.

Other areas where the portfolio performed better than our expectations include parking revenue that was $500,000 above budget, and net operating expenses, which came in $1.3 million under budget.

In addition, we generated $1.2 million of termination income that we had not budgeted. The 2 largest terminations related to a 30,000 square foot deal at 230 CityPoint in suburban Boston and 25,000 square feet at One Freedom Square in Reston. In both of these instances, we took back space from a vacating tenant prior to their lease expiration and immediately released the space to an expanding tenant in our portfolio.

Our development and management services income came in $1.3 million above our budget, with virtually all coming from higher-than-normal service in overtime HVAC income from our Boston and New York City regions, and we also generated a sizable leasing commission with the completion of a 50,000 square-foot expansion by a tenant in our 125 West 55th Street joint venture property in New York City.

The contribution from our joint venture portfolio was about $1 million better-than-expected. The majority came from higher than anticipated percentage rent received from the Apple Store at the GM building as their sales have outperformed their budget. And similar to the wholly-owned portfolio, we also experienced better-than-expected service fee income in the JV portfolio.

Our hotel continued to show strong improvement with a 7% increase in RevPAR from 2010. For the quarter, it performed slightly above our projections.

Offsetting the performance of the portfolio is the dilution associated with our $850 million bond deal we closed in early November. We had not projected this financing to occur until mid-February of 2012, and it added $4.3 million to our interest expense for the quarter. Our capitalized interest came in better than we expected so in total, our interest expense was approximately $3.8 million higher than we anticipated.

We incurred $1.5 million of unbudgeted losses from early extinguishment of debt as well. This related to the acceleration of amortization of finance charges for our Reservoir Place mortgage and our Atlanta Wharf construction loan that we extinguished. In addition, we repurchased $50 million of our exchangeable notes at close to par that also contributed to the charge.

As we discussed last quarter, we closed on the sale of Two Grand Central Tower in New York City for $401 million in late October. We booked a gain on the sale of $46.6 million, which shows up in our income from unconsolidated joint ventures. We back this out when we calculate our FFO as we exclude all gains on sale from our funds from operations.

Our FAD for the quarter was lower than typical due to the unusually high second-generation leasing cost that Doug discussed, and the fact that 60% of our recurring capital expenditures occurred in the fourth quarter. Our FAD was still more than sufficient to cover our increased dividend with a payout ratio of 88%. And our FAD for the full year 2011 provided strong coverage of our dividend with a payout ratio of 62%.

Before I go into our 2012 projections, I just want to remind you of our discussion last quarter on the transition period that a portion of the portfolio will experience in 2012 and its impact on our earnings projections. This includes $25 million of lost income from the downtime associated with redeveloping Patriots Park in Reston, the downtime and roll down of our now expired space at 4 Embarcadero Center and Gateway Center of $12 million, and the 145,000 square feet being vacated midyear by Lumber Hale [ph] at the top of 399 Park Avenue where we project downtime to cost $6 million in 2012.

As we anticipated, our occupancy ended the quarter at just over 91%, with a reasonable 2012 rollover that we have of 2.4 million square feet, which is 6% of the portfolio. We expect to gain occupancy during the year in average between 91% and 93%.

Our same-store projections reflect the portfolio transition. We project our same-store NOI to be down 1% to 2% on a cash basis, and down 1.5% to 3% on a GAAP business. This is improved from our view last quarter. We have executed a number of leases at Embarcadero Center in San Francisco, as well as a major lease with Bechtel and an expansion by another tenant in Reston, giving us better visibility on the absorption of some of our available space.

Our acquisition of 2440 West El Camino Real in Mountain View will contribute to our earnings with a projected NOI of $5.4 million in 2012.

Our development projects are showing consistent leasing progress in line with our projections. We signed additional leases at Atlantic Wharf and are now 93% leased, while at 2200 Pennsylvania Avenue, we're 94% leased, demonstrating the strong success of both of these projects.

The residential components of these developments are also leasing well with The Lofts at Atlantic Wharf at 91% leased and the Residences on the Avenue at 78% leased, each at rents that are among the highest attained in their markets.

At 510 Madison Avenue, we executed only one lease in the quarter and are 42% leased. But as Doug noted, we're in lease negotiations with multiple tenants for both full floors and for some of our smaller prebuilt suites. So activity is good.

In the first quarter of 2012, we will deliver the first building at Patriots Park, which is 100% leased to the Defense Intelligence Agency, and later in the year, our 120,000 square-foot Annapolis Junction joint venture development, where we're seeing increased activity. For 2012, we expect these developments to contribute $65 million to $70 million of GAAP NOI, which is in line with our expectations from last quarter.

We expect that our straight-line rents for the consolidated portfolio, including our developments, will total $67 million to $72 million for 2012. This is higher than last quarter, reflecting quicker absorption of space, primarily in San Francisco and in Reston Town Center, combined with our Mountain View acquisition. We're projecting our hotel to contribute $8.5 million to $9.5 million of NOI to 2012, which is approximately 9% above 2011. We recently opened a new restaurant in the hotel and are also in the process of completing significant common area upgrades in the plaza areas of Cambridge Center, both of which we expect will positively impact the hotel performance.

Due to seasonality, the hotel is projected to run at breakeven NOI in the first quarter.

Our joint venture portfolio is improving on a cash basis as we roll leases to market rents. And we anticipate a same-store cash NOI growth of 5% to 7% in 2012.

This quarter's leasing statistics demonstrate that our second-generation leasing in New York City was up 16% on a net basis, part of which was from the transaction in the GM building.

On a GAAP basis, the roll off of $16 million of noncash fair value rental income resulted in our joint venture FFO contribution declining year-over-year. In 2012, we're projecting FFO contribution from this portfolio of $122 million to $127 million, which includes $54 million of fair value lease revenue and $7 million to 12 million of straight-line rents.

Our 2012 projection for development and management services income is $25 million to $30 million and is unchanged from last quarter.

For our G&A expenses, we project between $83 million and $85 million for 2012. We announced the second of a series of annual outperformance plans in our press release. The plan was disclosed in our proxy statement last year and is included in our G&A guidance.

Our interest expense will be higher than our previous projections in the first quarter of 2012 due to our November bond offering. We're earning only nominal interest income on this cash while we wait to redeem our exchangeable notes in February and prepay $210 million of mortgage debt at the end of the first quarter, which are the first dates that these loans are open for prepayment without penalty. Upon completing these payoffs, our interest expense will be lower for the remainder of 2012.

For the full year, we expect our net interest expense to be $390 million to $395 million, capitalized interest for the year is projected at $40 million to $45 million and in the first quarter, our net interest expense is projected at $101 million to $103 million.

So if you combine all of these assumptions, it resulted in our projection for 2012 funds from operations of $4.65 to $4.78 per share. The increase in our guidance from last quarter is the result of the contribution of our acquisition in Mountain View, quicker than projected absorption of a portion of our rent available space, a modest increase in the contribution of our joint ventures, offset by higher interest expense from our bond offering. We have assumed no new acquisitions or other new investment activity in our projections.

For the first quarter, we project funds from operations of $1.12 to $1.14 per share. The first quarter is projected to be down from the fourth quarter of 2011 due to the seasonality of our hotel, as well as a decline in our portfolio NOI from our fourth quarter rollover, the removal from service of the second building at Patriots Park and $2 million of noncash fair value lease revenue burn off in our joint ventures.

Mortimer B. Zuckerman

Thanks very much. This is Mort Zuckerman again. I'm going to have to excuse myself. I have to attend a funeral service for the former mayor of Boston, and I hope I'll be able to catch up with you on the next call. Thanks very much.

Douglas T. Linde

Okay. Operator, you can open up the queue again. So I apologize that Mort can't be here for the Q&A. But the former mayor of Boston passed away on Friday and the funeral starts at 11:00, and the good news is in terms of Mort's attendance here, is that the funeral is literally down the street so he was able to stay as long as he could. But we will endeavor to answer all of the questions that you ask of us. Hopefully, you won't be asking me political questions because I'm going to refrain from answering those. Go ahead, operator.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jeff Spector.

Jeffrey Spector - BofA Merrill Lynch, Research Division

I guess the first question, we did not -- and I'm here with Jaime, we did not hear any details on your acquisition from the quarter on 2440 West El Camino Real. Could you just discuss that acquisition please?

Douglas T. Linde

Sure. So I did -- I think I did mention that. It's 7.5% on GAAP yield and a 6.3% cash yield. The building is fully leased. I also said that the market rents were $33.25 in a market where rents currently are about $42 a square foot. So I didn't -- I don't think I -- I want to make sure that you did hear that. It's a good solid Mountain View building. We view Mountain View Palo Alto as the premier area for office ownership in the Silicon Valley. This is a multi-tenanted building that is likely to have users of between 5,000 and 100,000 square feet, no real lease rollover until 2014 and beyond. It's just at an excellent intersection, it's pretty close to Caltrain. It's got retail and high-end housing around it, and we just -- we thought it was a -- it allowed us a good entry point into a market that we feel pretty good about the long-term prospects of.

Jeffrey Spector - BofA Merrill Lynch, Research Division

And Doug, did you say how you sourced the deal?

Douglas T. Linde

The deal was out in the brokerage realm. I would say we had a pretty unique way of acquiring it. We -- from the time that we entered our contract period in terms of negotiating a PNF to closing with 7 days.

Jeffrey Spector - BofA Merrill Lynch, Research Division

Okay. And then I just have one more question before I pass it on to Jamie. I think in the introductory comments, Mort was talking about some of the -- that you're in reasonably good markets. I guess, of the markets you're in, which 1 or 2 are you most concerned about?

Douglas T. Linde

Well, this is one of those trick questions, right? So you're asking me to tell you what I like least. But I like everything. So I'll just start that way. I would say in the short term, I'm glad I don't have a lot of availability in Washington D.C. and I'm glad they don't have commodity product in Washington D.C. Because I think that, that's probably in our portfolio, where the weakest amount of demand will come from. I think after that, everybody has, I think, recognized that the financial services sector in New York City is not in a mode of growth at the moment. And so it is putting some degree of pressure on the question of where our tenants are going to be coming from. We again are fortunate to have a unique product availability and we are marketing it towards what we think is a relatively attractive demand generator in the form of smaller financial institutions, a.k.a. hedge funds and money managers and small law firms and small business services companies that are not larger users of premium space. But clearly at 2012, I think, as I've said in my comments, it's going to be a pretty flat year in Midtown Manhattan and likely in other parts of Manhattan given what's going on in the financial services side.

James C. Feldman - BofA Merrill Lynch, Research Division

And then if I could -- this is Jamie. If I could just ask a quick question for Mike. Based on your higher guidance and the higher CapEx spend in the fourth quarter, what's your outlook for AFFO for 2012?

Michael E. LaBelle

Well, if you look at -- let me just kind of go through the pieces a little bit. The -- our projection for occupancy is 91% to 93%, so we expect it to improve through the year. Our rollover is about 2.5 million square feet, so I mean we expect that we're going to do somewhere between 3 million to 3.5 million square feet of leasing next year. So if you look at transaction costs on average, I would expect that it would cost us $120 million to $140 million. If you assume kind of $35 to $40 per square foot, which I think is what we kind of traditionally or typically average, which just actually lines up pretty well with what Doug mentioned where he felt that our average was as well. The CapEx side, we've got -- I would expect our recurring CapEx to be $30 million to $35 million. Now we do have what we call nonrecurring CapEx, which is the money that we're spending at Bay Colony and money that we're going to be spending at the Hancock Tower, primarily on the garage that is adjacent to the Hancock Tower. And we expect that we're going to spend somewhere between $20 million and $22 million on those 2 projects next year. But those were kind of underwritten in our acquisition, that's why we separate them. The straight-line noncash rent I mentioned was $67 million to $72 million, and $60 million to $65 million in the JV portfolio. And then offsetting that, we have noncash interest expense and noncash compensation that is somewhere between $50 million and $60 million and some noncash ground rent. So you kind of add up all those adjustments and you get somewhere between $210 million to $240 million off of our FFO, somewhere in that range, would be where we would call our FAD.

Operator

Your next question comes from the line of Jordan Fent [ph].

Unknown Analyst

I just wanted to follow up on New York. Doug, you obviously went through sort of the market commentary a little bit, I was trying to keep up. But I'm just kind of curious, I know you said big blocks are down year-over-year, but what are your expectations sort of given what's going on in the financial services sector and what seems to be happening with the rest of tenant demand, meaning some going downtown, some going to Hudson Square? What's sort of your expectation for market rents now? And I know you had discussed in the past couple of quarters that you saw a little bit of a slowing, but I'm just curious what you've seen in the last 90 days.

Douglas T. Linde

What we've seen in the last 90 days has really been a continuation of what we saw through the larger portion of the year, starting in July when things, I think, started to slow down from a velocity perspective, which is the high-end deals in the premier buildings are still achieving in excess of $100 per square foot. And there is -- as I think I tried to illustrate, the demand isn't anywhere where it once was call it back in 2007, 2008, but it increased significantly since -- from where it was in 2010 and 2009. That being said, there are not a lot of high-paying big block users currently in the market today. So as we think about what our pricing is for 250 West 55th Street, we priced it accordingly. We priced it in the 80s because we think that's the price point for new constructions that is very attractive to the tenants who are interested in continuing to locate in Midtown Manhattan and are not interested in being in a secondary location or secondary building, prewar or east of Lexington Avenue. So we think that's a pretty good pricing point and it's really a question of lease expirations. There's not a lot of incremental growth from large institutions. I've been talking for 2 years about what's been going on in the law firm economy with the reduction in the overall footprint of the legal industry firm-by-firm, but they're all -- there happens to be consolidation that's also going on, which is increasing the size of certain firms and other firms are just no longer doing very well. So we continue to have a tenant in the market list, the tenant list as we call it, that's not insignificant for blocks of space in excess of 100,000 square feet at 255 West 55th Street. It's just these tenants are taking their time making decisions, but they do have lease expirations, and so they're going to act. It's just a question of how quickly they act. So that's where we think rents are. I think that they're trying to get $100 a square foot on a block of space, a big block of space on Park Avenue in the first or second quarter of 2012, given where the economy is and where financial services employment is. It's not going to be an easy thing to do, when quite frankly, we're not pricing big blocks of space that way. That's why, in fact, we're going into the prebuilt market to get some velocity in and be able to achieve what we think are a fair rent for the type of product and location we have.

Unknown Analyst

Do you think net effect of market rents are up, flat or down in New York from here by the end of the year?

Douglas T. Linde

I think they're flat.

Unknown Analyst

Okay. Separately, on the investment market, can you talk a little bit about maybe opportunities you're seeing? Has the pipeline started to build a little bit? Obviously, you got this deal done in Mountain View, which looks like an opportunity. Anything else behind it you could speak to?

Douglas T. Linde

Sure. So we had a -- I obviously, purposely spent my comment on operations, but any operating platform issues, I expected the question. I would say where we are today versus where we are 3 or 6 months ago, the pipeline is more significant largely because there's a lot more better product that we are looking at today than what we were looking at in the second and the third quarters of 2011. We knew there were some better stuff that was going to hit the market, it has hit the market. Some of it is off market or transactions where there were a relatively few bidders or people being talked to about the acquisitions and there are others that are going to be these fully auctioned, broker-type solicitations that some of the properties are the ones that we might be interested in. So -- and I would articulate that by saying they are in all of the markets we're in. So there is stuff in the CBD of San Francisco, there is stuff in the CBD of Boston, there is stuff in Washington D.C. and then there is stuff in New York City that we are looking at on a pretty continual basis today. And we continue to explore other places, and we are endeavoring to put ourselves in a position where the pricing makes sense and the opportunity is there. We have the capital and the opportunity to close in a very efficient manner and use that as a quiver in our -- an arrow in the quiver.

Operator

We have a question from the line of Ross Nussbaum.

Ross T. Nussbaum - UBS Investment Bank, Research Division

I'm here with Dave Hilmo [ph]. I want to follow up on Jordan's question and specifically about the investment market, Doug. Do you think that following what the Fed said last week, do you think that there's any probability here that the market takes the bait, if you will, and drives cap rates lower in response to a view that interest rates may be anchored here for a couple of years?

Douglas T. Linde

I think that the overall interest rate environment is clearly impacting people's perspectives on what their return expectations are. I would endeavor to say that it is highly unlikely that a high-quality premier office building is going to be trading at anything above a 7-ish type of an IRR on a long-term basis, assuming a moderate view on where rental rate growth might be. If you want to pretend that there are going to be spikes or that there's going to be significant inflation in rates at some point in time, you can drive those numbers much higher. But my sense is -- and that has clearly been affected by interest rates and the view that people are saying, look, I can -- and you see it. People can borrow money on a 5-year basis if they choose to at somewhere between 3.25% and 3.5%. And you can get a very satisfactory yield on a private basis for that, and there's a lot of capital that's prepared to step into that particular type of a transaction and sort of hold on for what the long-term might be in terms of interest rates. There's also, I think, clearly this sense that there is no yield available in very many types of investments, and it is clearly driving people to real estate asset, particularly the types of buildings that we own and the type of buildings that we would like to own, which is impacting pricing again. I can't tell you if I think the overall cap rate is going to be going down much more than it already is, because if you look at the deals that have been done in the better markets, if you have available space in those buildings, people are bidding those assets at below 5% going in cash on cash return. If the buildings are stable and there is not much in the way of lease expiration, the sort of going in returns in our estimation are somewhere in the mid 5 to the low 6s. And depending upon where those market rents are, that may -- the lower the market rents are versus what's in place, the better the yield is going to be and vice versa. So I have a sense of where that sort of where things are. And the fuel that the Fed has put on the fire in terms of saying that they think where interest rates are going to be lower for a longer period of time, I think, is just adding to people's appetite.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Are you targeting 7% unlevered IRRs or do you expect to be doing better than that?

Douglas T. Linde

I think that our expectation on a long-term basis is higher than that. We are looking for assets where we might be able to do something that is sort of not "underwritten in the asset" from a cash flow perspective because of our portfolio and because of our experience, where we can share in [ph] buildings and do things that you have to sort of take a little bit of leap and faith in that will get us to returns that are significantly higher than 7%. But if you said to me, what is sort of our typical pricing view of where buildings are, if we're assuming very little in the way of rental rate growth and very little in the way of appreciation, that's where the numbers are. I think that we have other ways of sort of skinning the cat in terms of our underwriting and where we can create value in the assets that allow us to convince ourselves with some degree of accuracy that we can do better than that.

Operator

Your next question comes from the line of Jay Habermann.

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Doug, you mentioned a firm downsizing in the Back Bay, I think, by roughly 30%, but obviously, keeping jobs about the same. Can you give us some sense of what sort of activity? You mentioned some of the forward leasing you're doing and the strong rent growth. Can you give us some sense of perhaps that growth that you're seeing in rents there?

Douglas T. Linde

Well, it's -- the growth in rents is really because of the product that we have, Jay. So as an example, the average rent in, at the Hancock Tower on the highrise floors is in the mid-50s, and we're going to end up doing deals in the high-60s to low 70s. That's where the renewals are going to get end up being done in our prediction, so that's pretty strong embedded growth. The growth from a tenant demand perspective is coming from those smaller financial institutions. So there's an asset management company, for example, at the Hancock Tower that's currently in 45,000 square feet and is looking for 90,000 square feet. There's another one that's in 30,000 square feet that's looking for another 15,000 square feet. It's those types of -- that's where the sort of the incremental growth is on the demand side.

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

And on average, what sort of terms are you seeing for those transactions?

Douglas T. Linde

We're doing -- lease length terms or market terms?

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Lease length terms.

Douglas T. Linde

So it's generally, the leases that we're doing there are forward 7 to 8 years after 2013 to 2015.

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Okay. And just switching gears...

Bryan J. Koop

Jay, this is Bryan. The other thing that's been the benefit of Back Bay is, of course, in the supply side. If you take that look from year-to-date last year where the vacancy, direct vacancy for the cult of pure class that we focus on, 30-some buildings, it's dropped from 7% to 3%. So that's been a big benefit as well.

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. And then on Silicon Valley, Doug, you mentioned some risk of supply. I guess how quickly could you see this ramp up?

Douglas T. Linde

So there is new construction as we speak. There's probably 1 million square feet block of buildings that are on the docket. So there's probably, I'd say, half of that is pure spec and half of that has got tenant commitment. And the buildings that are going up are generally 3 to 6 stories, suburban office buildings that probably have a total development period of between 12 and 15 months.

Jonathan Habermann - Goldman Sachs Group Inc., Research Division

Okay. And then lastly, just on 399 Park, can you get -- you mentioned the rent of $90 a foot. What's your expectation there and I guess which floors as well in 2013?

Douglas T. Linde

There's 140,000 square foot of block. It's in the mid to highrise of the building in the 20s, I believe. And we're hoping that we're going to be able to achieve rents in or around $90 a square foot in the 90s depending upon the size of the block and the amount of capital we put in. If we're doing prebuilts, I think we'll try and get more. And if we're doing multi-floor deals with traditional concession package, which today is probably 9 to 12 months of free rent and $60 a square foot for a 10-year to 15-year commitment, we'll be in the low 90s. That's my expectation.

Operator

Your next question comes from the line of Michael Bilerman.

Joshua Attie - Citigroup Inc, Research Division

It's Josh Attie with Michael. Doug, you gave some really good color on rents for large blocks of space in New York. Can you also talk about the lease economics at some of the smaller prebuilt spaces, including 510 Madison, maybe how has that changed, if at all, relative to your initial underwriting and also relative to the first half of 2011?

Douglas T. Linde

Well, it's -- I'm going to bait myself. Our initial underwriting, we are underwriting rents at the top of building in the high 90s, low $100 a square foot, and at the base of the building, in the high 70s to low 80s. And we are asking for 125 plus or minus at the top of the building. And we are achieving rents that are in the low 90s at the base of the building on both our prebuilt suite as well as our "floor -- made by floor" deals, where we're providing a tenant allowance. And I think those are very consistent with what we were pricing to the space at last year in the second, third and fourth quarters.

Joshua Attie - Citigroup Inc, Research Division

That's helpful. And can you also give us an update on the 601 Mass redevelopment? I know you have some time before NPR moves out, but were you in the process of finding a tenant for that project?

Douglas T. Linde

Mr. Ritchey?

Raymond A. Ritchey

Well, NPR doesn't move out until the first quarter of 2013, but construction's going on very well and we have got 3 different proposals out, 2 major law firms and another entity for anywhere between half the building to about 3 quarters of the space. One would be occupancy immediately upon completion in '15, the others go around end of '16. But when you look around D.C., while the existing portfolio may be on the soft side, the availability of sites to build first class buildings is very limited, and we feel really great about the 601 Mass site.

Operator

Your next question comes from the line of John Guinee.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

A few very quick questions. First up, Doug, on the prebuilts with startup companies, do you get any personal guarantees on that or is it just kind of essentially a month-to-month? Second, I think you're $450 million of exchangeable notes due in mid '13 are now in the money. Will you change the accounting on that? Third, you've gone from very little in terms of ground leases to about $5 million a quarter in ground lease expenses, can you give a little more color on that situation, which building, if you look at that, is implicit leverage? And then last, if Ray can comment on the Springfield, Virginia submarket.

Michael E. LaBelle

This is Mike. I'll try to cover most of those except for probably Springfield. On the prebuilt deals with smaller companies, they're not necessarily startup companies, obviously. But with all of our leases anywhere where we're making any kind of investment, we're getting security deposits. And those security deposits for companies that don't have strong balance sheets are generally somewhere between 6 months and 12 months of rent. I would say when you're doing a prebuilt space, when you know what is going into the space and you feel confident that on a second-generation basis, that it's going to be releasable with minimal additional improvements, and we have not seen this because we did a bunch of prebuilts at Times Square Tower that have rolled over, and we brought new tenants in those spaces and it's costing us $10 or $15 a square foot to get those new tenants in. We may -- the security might be a little bit less and maybe towards the 6 months, because again, they're not doing any kind of specialized improvement. We don't typically see personal guarantees, but certainly, security deposits. On the exchangeable notes, we do have additional share count that leaks into our equity side every quarter, and you will see that in the last few quarters whenever the stock goes above that strike price, which in the high 90s.

Douglas T. Linde

$99.

Michael E. LaBelle

Yes, $99. So you will see that go in. So when we quote our diluted FFO per share, it includes the additional shares for the quarter based upon where our stock price is in that period. And then the ground leases, we actually started cleaning up the ground leases, I think, 2 quarters ago, and it's all about 2200 Penn and the Avenue in D.C., where we -- that building is on a ground lease with George Washington University. That ground lease has steps to it, so there's a big noncash portion to it. So those buildings are pretty close to stabilization now. So the amount of quarterly ground lease payment that you're seeing this quarter on our highlights page, which I think is $7 million, is pretty -- should be stable going forward. And then you will see on our FAD page that we back up the noncash piece. So that noncash piece over the 65-year term of this ground lease will change. But that's how we handle the ground leases. And we don't really have any other meaningful ground leases in the portfolio. This is really the only large one. Ray, do you want to comment on Springfield?

Raymond A. Ritchey

Sure. John, as you probably know, NGA is now fully in place and operational. In fact, I went for a tour last week at that facility and it's an extraordinary facility. The one thing that is poorly evident when you go there is the lack of parking. And while the defense contractors are on the sidelines just in terms of trying to take down space in response to demands coming out of the NGA, the contractors may be forced out of the headquarters just because they ran out of parking. So while we're not starting, we're having discussions with some contractors and with NGA about future requirements. But clearly, we're not going to go on speculations unless we feel a little bit comfortable about the market. One surprise about Springfield is the fact that there has been a greater supply potential there that we originally anticipated because people are converting old 1950s suburban residential projects into office space and knocking down old hotels and going vertical and office. So there is some supply there. Well actually, one interesting thing about Springfield, for those of you who are familiar with the Washington area, is the FBI is being considered the new law [ph] Pennsylvania Avenue's headquarters, and they're working to identify a government on site that can support up to 2.2 million square feet. Well, that is one of the winning candidates at the GSA warehouse that really is adjacent to our buildings down in Springfield and was the one motivation we did when we bought the site about 7 to 8 years ago. So Springfield in general is flat, nothing really specifically a new site, but we still have long-term optimism about the success of the development.

Operator

Your next question comes from the line of Alex Goldfarb.

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

Just going back to the New York market for a minute. Doug, it sounds like on 250 West 55th, did you guys reduce the asking rents that you're -- for that property? And where I'm coming from is there's clearly been a sort of pause on new leases or leases for the new developments that are scattered around the city. I'm just trying to get a sense for what jump starts that market. Is it purely landlords cutting rent or is it offering increased leasing concessions to compensate tenants who would have to pay the cost of first generation space? Just...

Douglas T. Linde

I would -- let me try to answer that question delicately. The rents that I've been discussing have been to the base of the building. We have -- I don't think you would -- you could say we've reduced our rents. I think our expectations for the building was that we were going to be in the low 80s at the base of the building and in excess of $100, hopefully, at the top of the building, which is pretty consistent with where we've been for the last 12 months. Has the concession offering increased? We aren't close enough with a deal that I want to describe that we're -- we have put on the table more or less concessions. I think that the overall concession package is if you're signing a 15- or 20-year lease, you're getting 12 months of free rent and you're getting a tenant improvement allowance of somewhere between $65 and $70 a square foot depending upon sort of what's defined as the base building. The -- I think that the opportunity for new construction in these large platform-type opportunities that the folks have on the far west side are going to have to follow what we are doing in -- see, I could give you West 55th Street because I think they're going to need a larger tenant commitment to get those buildings going, and I think that the overall pricing/value equation is going to have to be more expensive from the tenant's perspective to go into one of those buildings and want to be in what we are offering at 250 West 55th Street. So I'm not sure you can sort of use the 2 sites and opportunities as sort of a, as a good sort of catalyst. We're talking about how we're thinking about it versus how other people are thinking about it. Overall, our view is that there are not a lot of large, large users in the market today that are looking for 400,000 or 500,000 or 600,000 square feet. And I believe that's sort of the type of dialogue that at least others have talked about in terms of what it would take to get one of those other developments going.

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

But just even on the existing, it sounds like for a tenant to either renew in their existing space or move to another existing building, the rent differential and the fit-out differential is meaningful enough where people are happy to pay the $80 or $90 on maybe an existing asset, but not the $100-plus moving to a new one. And just sort of wondering, does it just take an improved economy or is it something else that can help fill up, whether it's at 510 Madison or 250 or even some of the other existing developments?

Douglas T. Linde

I don't think it's going to take an improved economy to do the leasing that we're doing at 510 Madison. I think we have a unique product and we have a unique product offering, and our market target from a demand perspective is strong enough that we feel very comfortable with our ability to lease space under traditional market conditions as I've described today and in previous calls. With regards to the base of 250 West 55th Street, as I've said, we're pricing our block sort of in the middle of the stuff that's available in Midtown on the east side and what I would deem to be sort of the high-quality expensive blocks like 9 West 57th [ph] Street, where I think they're asking $125 or $175 a square foot for the big block of space there. It's totally different market decision in terms of a tenant who's looking at that versus looking at our building. We are -- the efficiencies associated with what we are building at 250 West 55th Street and the ability to use that space in a manner that is cost-effective for -- particularly for law firms and other smaller financial institutions, I think is very, very attractive. And I believe that the value that we are offering to tenants is something that is enticing them to spend a lot of time and a lot of energy thinking about how that building might fit into their own overall operating profile from a profit and loss perspective. And so we're getting good activity on that. And we're confident that we're going to be filling the building up at our current pricing, but I don't think we're going to be offering the same type of transactions at the top of the building. But the market for the top of the building is a different market than the market for the base of the building in terms of what we -- our expectation is for the types of users that are going to be up there.

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

Okay. And just second question is, if you think about the next generation of the $100 rent payers for New York, you guys do not -- you don't own anything in Midtown South. It's not been a market that you've traditionally been focused on. But clearly, there have been a lot of tenants flocking to that area, especially in media and tech. How do you -- do you have to own something in that submarket to cultivate relations with those tenants or is it just simply through the broker networks? You actually don't need to own assets in that market.

Douglas T. Linde

I don't think you have to own buildings to have good relationships with tenants. I mean we have relationships with lots of high-tech tenants, the more mature high-tech tenants in either Cambridge or in San Francisco or in Reston or in Chevy Chase that allow us to have good dialogue with the tenants that understand what they're looking for. I think that the most interesting question to ask yourself is whether or not there's going to be a migration of the more mature tech tenants as they grow into more traditional higher-quality office buildings because the product that is located south of 20th Street is a unique product, but it is not the type of product where a 300,000 or 400,000 or 500,000 square foot tenant can be. It's where a 20,000 or a 30,000 or 40,00 square foot tenant can be. And as we are witnessing in San Francisco, there's a limited amount of better quality space or brick and beam cool space that these types of tenants can go into, and over time, the more mature ones migrate to the traditional office buildings. And if the building has the right image and it's marketed appropriately and is positioned appropriately, it can be a very attractive place for a tenant that's not a traditional financial services firm to create the image that it wants to create and the cool factor they need to attract employees over a long term. So we'll see what happens with Midtown South in terms of sort of how the supply and the growth of those tenants sort of move. If for the next 4 or 5 years the growth in that market is based upon new venture capital startup companies that are 5,000 to 10,000 square feet and they're going to grow at 2,000 or 3,000 square feet per year and they don't -- none of them sort of take off, I don't think that they're going to migrate to Midtown. I don't think they're going to migrate downtown to the new inventory there. But if some of those companies really explode and become larger mature companies, I think that's the question. It will be, where will they go then? And there are -- they have opportunities in both places.

Operator

Your next question comes from the line of Rob Stevenson.

Robert Stevenson - Macquarie Research

Doug, can you just talk a little bit about, given your comments on the various markets, which projects on your 9-million-and-change of owned and optioned land might make sense to start the next 12 months?

Douglas T. Linde

I don't think that there is an expectation that we're going to start anything on spec in the next 12 months other than if we are successful at leasing up this 120,000 square-foot building outside of Fort Meade. And if the leasing activity really is as strong as we think it might be, the building could be filled by the end of 2012, and we would start another building if that were the case. So I think that will be the one place where we would consider a speculative building. Other than that, it's going to be based upon finding a tenant to be a lead or a significant occupant in one of our assets. And I can't tell you where that might occur, but there are conversations that are going on in Waltham and there were conversations that have gone on in some of our product in the Washington D.C. area. But there's no sort of specific site that I can point to and say, that's the one that's going to go next.

Robert Stevenson - Macquarie Research

Okay. And then your land bank has been sort of relatively stable for a while now. I mean, how aggressive are you guys these days on pursuing land for future development given those comments?

Douglas T. Linde

We are aggressive about looking at sites, so as an example, if we could find another couple of sites in Cambridge, Massachusetts, I think we would be aggressive about taking a land position there. We are looking for additional sites in Midtown Manhattan and other parts of that city. Obviously, just simply buying land and hoping that the market is going to improve over the next 10 years is not a terribly ideal structure. So if in effect, you can option land or you can put yourself in a position where you can control a parcel, that sort of would be more attractive to us. There are a number of sites in Mountain View that our San Francisco team is in discussions with that might be long-term development opportunities or redevelopment opportunities, and we're in [ph]. And the folks in Washington D.C. continue to figure out where the next area of opportunity from a new development growth perspective is going to be, and these are not traditional sites that you sort of look at and say, oh, well there's a parking lot and we're going to put a building up there. It's how do you reposition a building or how do you take a building down, or is there a particular public action committee or a lobbyist or entity that owns a particular piece of property that might be prepared to move and have a higher-density product put on, on that current piece of ground. I mean, there are -- we are constantly engaged in those types of conversation.

Robert Stevenson - Macquarie Research

Okay. And then one quick for Mike. After -- you've got $1.8 billion of cash on the balance sheet and you talked about the debt, the $800 million or so of debt that you're going to take out in this year. I mean, what's the sort of optimal cash balance for you guys to be running at on a go-forward basis given the financing needs for the current development pipeline, as well as any being able to fund acquisitions on the spot?

Michael E. LaBelle

Well, I mean, I think that we're comfortable with where we are today. Our development pipeline has a little under $800 million to spend, but it's going to take 3 years to spend it. So after we refinance our 2012s, we'll be just over $1 billion. And we got probably $300 million to spend in 2012 on our development approximately. So we should have a pretty decent cash balance throughout the year, and we're constantly looking at what the opportunities are in the acquisition side. So with that, we have the liquidity to be able to act quickly on any type of acquisition. And given our line of credit that has $750 million and our cash balances, we have more than sufficient liquidity today to be able to act on anything that we could imagine on the acquisition side. So do we have too much liquidity? I don't think you could ever say you have too much liquidity. But we're certainly comfortable with where we are, and if we had a little bit less than this, I think we would still be comfortable with that level of liquidity.

Robert Stevenson - Macquarie Research

Okay. So currently, you're comfortable with whatever the dilution winds up being on running at that sort of cash balance, given the inability to invest that in any meaningful manner. I mean from a cash management standpoint at 10 basis points, so whatever you're getting.

Michael E. LaBelle

We are because we think that we are going to have the opportunities to put that money to work. In the relative near term, if you look at the last couple of years and our success in making acquisitions in 2010 and 2011, it's been pretty strong. And I think we will continue to look at our cost of funds and our opportunities because as rates continue to be low and borrowing costs continue to be low, if we are successful in spending some of this capital or we feel our opportunities are stronger, there's certainly the possibly that we would raise capital at these rates, on a long-term basis, again to, as Mort said, take advantage of that. So that when we do find these opportunities, which we believe we will, the margin will be that much better on those opportunities.

Operator

Your next question comes from the line of Chris Caton.

Chris Caton - Morgan Stanley, Research Division

Just wanted to follow up on a comment you had on the investment environment. I think you said that last year, you expected better opportunities in 2012. I wonder, was there anything specific you are watching in terms of a catalyst that would drive asset sales?

Douglas T. Linde

If you're talking about a macro trend, the answer is no. If you're talking about discussions that we've been having with various owners of pieces of our property and institutions that we expected would likely sooner rather than later do something with their assets, I think that those conversations led us to believe that the sooner was coming in 2012 and probably was not going to be delayed further than that in terms of their own expectations. And today, that's what we have seen occurred.

Chris Caton - Morgan Stanley, Research Division

Yes, just I meant thematically. Is it funds on [ph] setting or debt maturities, is there anything thematic that you are watching?

Douglas T. Linde

I think most of the entities that are doing this are doing it for different reasons. Most of the funds that own assets will still have 3 to 4 years of debt extensions to go. But quite frankly, they're looking at the interest rate environment today and saying, geez, 2014 is interesting, but expectation that 2014 interest rates going up are probably better managed with period of time between now and then. So the value that we think we might be gaining from that interest rate environment is heightened today versus what it might be if we sort of hold on. I also think that a lot of owners of assets are becoming less enamored with this prospect of growth in the cash flows from their assets over the next couple of years, particularly if they're not on the ground and they don't have an operating team that can actually do something creative about improving the cash flow characteristics of those buildings. So they look at the underlying interest rate environment and they look at their own opportunity set to increase cash flows and say, aside from the fact that we're borrowing money at a very low rate or however it may be and we're getting a good yield on a relative basis from a spread investing, if we have to exit, now's probably not a bad time to exit.

Chris Caton - Morgan Stanley, Research Division

And I have a quick one for Ray, just on 601 Mass Ave [ph]. The added availability, as Doug noted in the market, is that affecting rate negotiations or discussions that you're having on a forward basis?

Raymond A. Ritchey

Well, one of the great things about having a building situation is we don't have to lease the building. In other words, we'll do deals that make sense to start it. There are a couple of large blocks, especially in the Metro center area. The Howrey space coming back, the relocation of McDermott Will & Emery by us over to Capitol Hill, the spec space at City Center [ph], all of that has responded to the market. The fact we haven't put a shovel on the ground means that we can only do what we do -- we're at liberty to do a deal that will make sense to us. So we don't have to respond to the market and build something that doesn't make any sense.

Chris Caton - Morgan Stanley, Research Division

I guess, and then asked in a different way, timing-wise, have these added availabilities kind of delayed your expectations?

Raymond A. Ritchey

No, actually. The availabilities that are just identified now are currently in the market. We're not going to deliver this building well into '15. And if you look -- and we talked about this at the investor conference, we have a huge bubble of law firm expirations coming in '15, '16 and '17. And we think 601 is ideally positioned to knock off one of those major law firms in that timeframe. Virtually, every major law firm is going through a restacking and a downsizing, which is very hard to do in place. And as we demonstrated here at 2200 Penn, even though we may be charging higher rents, if we can get them in a space that is 30% or 40% more efficient than their current facility, we can be very, very competitive even at rental rates that are higher than existing buildings.

Operator

Your next question comes from the line of Caitlin Burrows [ph].

Unknown Analyst

My first question was already answered, but I'm also wondering, why did you increase your 2012 guidance? Was it because of greater acquisitions, better operations or something else?

Douglas T. Linde

No, it was -- we did have an acquisition, which was not in our guidance before, so that was -- that added about $5.4 [ph] million. And as I mentioned, both in our joint venture portfolio, which we're seeing some modest improvement, and in our core portfolio, where we've had signed leases and lease starts going quicker than we have previously anticipated, it is driving the leasing that we did anticipate to happen in 2012, just starting to be renting sooner than we had anticipated. So it was really those 3 things, and then you offset that by the interest expense, which is only the first couple of months of the year, which is higher, and then it gets to a pretty stable run rate.

Operator

Your final question comes from the line of Steve Sakwa.

Steve Sakwa - ISI Group Inc., Research Division

Just, Doug, I had one question on dispositions. You guys marketed the Princeton portfolio maybe 6 months ago or 9 months ago, it didn't happen. I guess, given the continued low interest rate environment, the improving employment outlook, I'm just wondering, is your sense that there is an increased appetite for suburban assets? And is there something you guys would look to take the market in 2012?

Douglas T. Linde

I think there's an expectation that there's going to be an increased appetite for suburban markets. Remember that one of the big issues that we had with Princeton when we sold it, and I think we were pretty forthright about this, was that there's an enormous gain associated with that, and we're really not looking to create an opportunity to have to reduce the liquidity of the company through huge onetime dividend payments at the end of the year at this moment in time. So to the extent that, again, we're acquisitive and there are some 1031 reverses [ph] that we could do, I think that we would consider looking at some of our suburban assets. In fact, we are -- we've identified 2 or 3 buildings that are currently on the market in suburban Boston that are sort of maxed up with the purchase of the Mountain View assets. So that, in sort of the vein of your question. With regards to Princeton, we really want to get a higher level of occupancy and a better set of cash flows going before we think seriously about the disposition there again. Because our view is that there is an opportunity to dramatically improve the occupancy at Carnegie Center. Right now, it's running in the low 80s and we should be able to get it into the high-80s, mid-90s over the next year or so. And that would clearly improve our desirability of selling that building, those assets if we got there.

Steve Sakwa - ISI Group Inc., Research Division

Do you see enough demand drivers in Princeton to actually get that done in the next 12 months?

Douglas T. Linde

It's all a question of the pharmaceutical and the biotech companies because they are the ones that are, I think, that -- they are the ones who could give you the big prop. There are 2 or 3 large deals that we've done last year. There's pretty good activity in terms of market demand, a lot of it is musical chairs with incremental growth. We are optimistic that we're going to see improvements over the next year or so in the Princeton portfolio, and our team down there is very motivated to get the occupancy up.

Operator

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

Douglas T. Linde

Thank you all for your patience, and we think to all the questions that were answered, I hope we were able to provide you with some insight. We will be talking to you, many of you in Florida in a couple of weeks, and again, we'll see you at the next NAREIT event in June, as well as our conference call in April. Thanks.

Operator

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

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