Boston Properties' (BXP) CEO Owen Thomas on Q4 2015 Results - Earnings Call Transcript

| About: Boston Properties, (BXP)

Call Start: 10:00

Call End: 11:35

Boston Properties, Inc. (NYSE:BXP)

Q4 2015 Earnings Conference Call

February 04, 2016 10:00 am ET

Executives

Arista Joyner - Investor Relations Manager

Owen Thomas - Chief Executive Officer, Director

Doug Linde - President, Director

Mike LaBelle - Senior Vice President, Chief Financial Officer, Treasurer

Ray Ritchey - Executive Vice President, Head, Washington, D.C., National Director, Acquisitions and Development

John Powers - Senior Vice President, Regional Manager, New York Office

Bob Pester - Senior Vice President, Regional Manager, San Francisco Office

Bryan Koop - Senior Vice President, Regional Manager, Boston Office

Analysts

Jamie Feldman - Bank of America

Emmanuel Korchman - Citi

Vincent Chao - Deutsche Bank

Jed Reagan - Green Street Advisors

Alexander Goldfarb - Sandler O’Neill

Ross Nussbaum - UBS

Steve Sakwa - Evercore ISI

Brad Burke - Goldman Sachs

Blaine Heck - Wells Fargo

John Guinee - Stifel

John Kim - BMO Capital Market

Rich Anderson - Mizuho Securities

Tom Catherwood - Cowen & Company

Craig Mailman - KeyBanc

Operator

Good morning, and welcome to the Boston Properties' Fourth Quarter Earnings Call. This call is being recorded. All audience lines are currently in a listen-only mode.

Our speakers will address your questions at the end of the presentation during the question-and-answer session.

At this time, I would like to turn the conference over to 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 Forms 8-K. In the supplemental package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures 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 Wednesday's press release and from time-to-time in the Company's filings with the SEC.

The Company does not undertake a duty to update any forward-looking statements.

Having said that, I would like to welcome Owen Thomas, Chief Executive Officer, Doug Linde, President, and Mike LaBelle, Chief Financial Officer.

During the question-and-answer portion of our call, Ray Ritchey, Senior Executive Vice President and our regional management teams will be available to address any questions.

I would now like to turn the call over to Owen Thomas for his formal remarks.

Owen Thomas

Thank you, Arista. Good morning, everyone. Our focus today in addition to the quarter and market conditions will be review of 2015 and our outlook for 2016.

On current results, we produced another solid quarter with FFO per share a penny above consensus and a penny above our guidance after adjusting for the defeasance transaction.

Based on recent leasing accomplishments, as well as a significant lease termination we just completed for $45 million, we have also increase the mid-point of our full year 2016 FFO per share guidance by $0.26. We leased 1.4 million square feet in the fourth quarter and 5.2 million square feet for all of 2015 and our portfolio occupancy is now 91.4%.

Moving to the operating environment, the U.S. economy continues to grow, albeit at modest level, with full year 2016 GDP growth expected to be 2% to 2.5%. There was a modest slowdown in the fourth quarter of 2015 as GDP rose only 0.7%. The job's picture remains healthy with 292,000 jobs created in December, 2.7 million jobs created in all of 2015, 2.5% wage growth for the last year and 5% unemployment, albeit with lower workforce participation rates.

Economic growth continues to be uneven, with energy-related industrial sectors in recession. Our markets that are driven by technology and life sciences are continuing to exhibit tightening leasing conditions. Office markets nationally are also firming. The data indicates that absorption was 17 million square feet for the fourth quarter and 46 million square feet for all of 2015.

Vacancy ended the year at 13.8%, down 20 basis points for the fourth quarter and 50 basis points for the year. Asking rents rose 4.7%, with Boston and San Francisco experiencing the highest increases.

Construction levels actually dropped in the fourth to 2% of existing stock, but are up 9% from a year ago. Financial markets have become very volatile in 2016, driven largely by concerns that weaker economic growth outside the U.S. and falling oil prices will have a negative impact on the U.S. economy.

Most economic data indicates a continued slowdown in the Chinese economy. The domestic equity market in China is down over 20% year-to-date and fears of additional currency devaluation are pervasive. China has funded an estimated 600 billion of currency reserves over the last six months supporting the Renminbi to its current trading levels.

Local regulators appear to be taking additional steps to stem capital flows out of China. Oil prices have also dropped nearly 50% from high as last year to approximately $33 a barrel. This has caused disruption in the industrial component of the U.S. economy and widening credit spreads for high-yield names, particularly related to the energy sector.

We are also monitoring with interest investment activity from oil-based sovereign wealth funds as several Middle Eastern funds have reportedly been redeeming more liquid offshore investments in 2015. Lastly, despite the Federal Reserve raising short-term rates 25 basis points in December, the 10-year U.S. Treasury has dropped below 1.9%, given all the global economic uncertainty mentioned.

What does all this mean for real estate investment activity and valuations? Our instincts are that investment activity from some oil-based sovereign wealth funds should slow, due to the decreasing inflows and capital needs at home and that flows from China will recede, due to increasing capital control.

However, there continue to be numerous large-scale office deals completed in gateway markets at attractive pricing. Recent examples include AXA selling 787 Seventh Avenue to CalPERS and 1285 Sixth Avenue to RXR and Blackstone selling four assets in Westwood to Douglas Emmett as well as 500 Boylston Street and 222 Berkeley in Boston to Oxford and J.P. Morgan. All these deals were large and completed with North American led investors with cap rate in the mid-4% range or lower.

Our read is capital values for high-quality assets are holding up notwithstanding in some cases fewer bidders and a somewhat of a geographic rotation of investor appetite. Further as a tailwind, long-term interest rates are low and dropping while cap rate spreads to treasuries are above long-term averages and rising.

Investment yields and cash flow stability from high-quality real estate assets will continue to be an attractive investment alternative to fixed-income.

Our capital strategy remains largely unchanged, in that we are investing more in new developments versus acquisitions, which will be funded partially by additional dispositions. On acquisitions, we continue to actively review new investments, but do not anticipate significant investments in stabilized building given continued robust pricing. We are however seeing a pickup in value-added and development opportunities in our core markets.

Moving to dispositions, in the fourth quarter we completed the sale of Innovation Place in San Jose for $207 million, including a gain of $79 million and a land parcels sale in Maryland for $13 million. Our total dispositions for 2015 were $584 million on an our share basis, which led to a special dividend of a $1.25 per share, which brings our total special dividends paid since 2005 to over $21 per share.

For 2016, we expect to continue to sell non-core assets and asset where we are able to achieve extraordinary pricing, but likely at levels below 2015. Our balance sheet is strong, we have already raised the cash to fund our significant capital needs and we see upside in many of our core assets through rollups and redevelopment.

We recently sold 7 Kendall Center to MIT for $105 million, based on the pre-agreed option associated with MIT's tenancy in the building. We also placed under contract for sale our Reston Eastgate site to a corporate user, who will retain us to build a corporate facility for their use, further enhancing the Reston area.

Though difficult to estimate precisely at this time, we would expect 200 million to 250 million of total asset sales in 2016.

Moving to developments, our activities remain robust. In the fourth quarter, we placed in service from our development pipeline 535 Mission Street and 690 Folsom Street in San Francisco, the point in Waltham and Annapolis Junction 8 in Annapolis, Maryland. In the aggregate, these projects cost $254 million, and with the exception of Annapolis Junction, which is currently not leased we delivered 98% occupied and unleveraged cash yield of 7.8%, which is above our target.

Also in the fourth quarter, we added to our active development pipeline, The Hub on Causeway at North Station, which is the podium phase of our North Station development in Boston, where we have signed anchor deals for 60% of the 200,000 square foot retail component and are negotiating 85,000 square feet of additional retail and office leases.

North Station is a very significant mixed-use development being built adjacent to one of Boston's busiest transit stations and the TD Garden. This project is a 50% partnership with Delaware North and will provide us with significant long-term profit opportunities.

At year-end, our development pipeline consisted of 11 projects, representing 4.6 million square feet and $2.6 billion in project cost.

Our budgeted NOI yield for these projects is in excess of 7%. The commercial component of the pipeline is 58% pre-leased. We have all the cash, $1.5 billion required to complete the development of the portfolio, which should add materially to our Company's growth over the next four years.

Looking ahead in 2016 on developments, we have numerous entitled projects and new starts will be highly dependent on preleasing activity. More specifically, we secured 940,000 square feet in additional entitlements from the City of Cambridge for Kendall Center and are in discussions with several tenants for preleasing a 360,000 square foot office building.

For Springfield Metro Center in Northern Virginia, we are pursuing at 600,000 square foot requirement from the TSA. Again, predicated on substantial preleasing, other potential projects for this year are 20 CityPoint in Waltham, Mass, and Block 5 Office in Reston. All these projects aggregate 1.5 million square feet.

Lastly, we continue to devote time and resources to refurbishing our existing high-quality asset base. At Citibank vacates 399 Park Avenue in late 2017, we will be completing upgrades to the façade entrance roof, decks and outdoor spaces.

A redevelopment of the office and retail space and the low-rise at 601 Lexington Avenue is also planned. We are also updating lobbies and common space at 1330 Connecticut Avenue and Metropolitan Square in Washington D.C. to accommodate existing tenant renewals and attract new tenants.

In summary, we are very enthusiastic about our prospects for success and ability to create shareholder value in 2016 and beyond. We have a very clear plan to improve and lease our existing assets as well as add new buildings through development to our portfolio, all of which we expect to result in attractive FFO growth over the coming years.

We have selected non-core asset for sale to ensure continued portfolio refreshment. We have significant entitled and un-entitled land holdings that we will continue to push through the design and permitting process and add selectively to our development pipeline in future years.

Our balance sheet is strong with net debt to EBITDA below six times and with much of our upcoming debt maturities having now been either refinanced or hedged. This strong capital position will also allow us to pursue an act on investment opportunities that may present themselves in the coming quarters, due to increasingly turbulent financial market conditions.

Now over to Doug for a further review of our market.

Doug Linde

Thanks, Owen. Good morning, everybody. It seems like every day, we seem to jump on this roller coaster of global volatility in the financial markets, but I do want to step back and just sort of take a little bit of a perspective here, so about eight months ago, when we were in the NAREIT conference, I think almost every meeting we had was dominated by questions focused on signs of weakness in the tech markets, the lack of public IPOs, questionable valuations of unicorns, whether there was a looming shadow vacancy in our biotech markets due to potential slowing from venture capital sources and then all this was sort of going to be precipitating a market corrections,

I think honestly that these are the same questions that we were asked in November at NAREIT and they are the same questions that are on everyone's mind today. They continue to be top of mind, so just take their perspective as I give my comments.

You are going to a recall that the we have been characterizing the bay area real estate market is really one of as I would refer to healthy, where the activity is really pretty similar to what was in 2013, which was a really good year, but clearly off the spike that we saw in 2014, and I think the pace of activity that we are getting today is pretty similar to the same activity that we have been seeing in the back of 2015 and it is pretty constant.

I just sort of want to supply some facts to back that up, so in the Northern Peninsula in the Valley, in the last quarter or so, Apple has expanded by another 1 million square feet, Google has leased over 500,000 square feet and they have entered into additional building purchase agreements.

Palo Alto Networks has expanded by 300,000 square feet. Facebook has taken on 200,000 square feet. As Owen said, we were the beneficiary of Broadcom's desire to expand and they purchased our 574,000 square feet at Innovation Center and have filed permits for the next phase of development, which is up to 537,000 square feet.

Then, on top of all that, there have been another 12 fields in the Valley for over 1.3 million square feet with block of space over 50,000 square feet. We in January, signed 88,000 square feet of renewals and expansions in our single-storey Mountain View assets. That is R&D property over $48 triple net rents.

If you go to the city, leasing activity in the city finished off 2015 clearly off of the 2014 level high, when Salesforce and Twitter and Dropbox, all combined for over 1.4 million square feet just those three tenants, but again was at the exact same level as we were in 2013.

Tech demand continues to average around 50% of the volume in the city and there has been a pretty consistent volume appeals.

Now recently, there has been continued attention to sublet space. Well, the Dropbox sublet, which was planned at China Basin. It was all absorbed by Stripe in lift. [ph] There are some of Twitter availability that was described in the mid-market area and it's all under lease negotiation. In fact, there is over 850,000 square feet of tech leasing that is expected to get done in the first quarter and it is almost entirely expansion led by Airbnb, which is taking an additional 150,000 square feet from the former Dolby building.

The largest block of sublet space that was in our portfolio was a five-floor block in EC 3 coming back from the Morgan Lewis being emerging that occurred a few years ago we please four of those five floors.

Now, there is some speculative construction in the city, 181 Fremont and 350 Bush and the exchange are all under construction and they are added about 1.4 million square feet of space and Park Tower at Transbay is supposedly going to be started with another 750,000 square feet, but again the overall vacancy rate in the City of San Francisco is under 6% and people continue to talk about the Prop M and issues there, but the point is that after the FAR deposit in October, the bank was at about 1.75 million square feet, but if the first in mission project 598 Brannan Street get approved, the bank will be empty. No additional supply availability.

At Embarcadero Center, we completed another 220,000 square feet of office leasing during the quarter. Four floors totaled 162,000 square feet and new tenants moving into Embarcadero made up 145,000 square feet of that.

During the third quarter, you may recall and I am going to refer to this a few times, we described our "revenue bridge" to get to the end of 2017, and I think one of the sell-side analysts on our last call sort of asked, well, so how much of that is in the bag?

While in Embarcadero Center, the larger deals that we completed last quarter about 95,000 square feet are going to add about 2.4 million square feet to that 2017 revenue versus '15. The new floor deals that we did this quarter; 145,000 square feet are going to add 4.4 million square feet.

We have another four more floors close to being completed and other 89,000 square feet, those floors are going to add 5.1 million square feet for a total of $12 million of incremental growth from Embarcadero Center

The market-to-market on these transactions is between 40% and 70% on a gross basis and none of those transactions are in our same-store statistics for the quarter. In fact, there is only about 28,000 square feet of CBD deals in the San Francisco region in that store data in our supplemental.

Traditional [ph] demand continues to be very strong and Embarcadero Center and across the city. As 535 Mission, we are now 99% leased, so this is the last time you are going to be hearing about that project for quite some time. We completed 51,000 square feet of leases, average gross rents of about $80 a square foot.

The building should be fully contributing by the third quarter '16 cash return 7.8%, 150 basis points greater than our pro forma.

I had hoped to announce that we had signed leases for an additional five floors at Salesforce Tower, 108,000 square feet bringing us to 821,000 square feet of leasing of that 1.4 million square foot building or 59%. Well, two of the leases are back for two of those floors, but the Lord, but the remainder is yet to come in and we expect to see it hopefully by this Friday, so we are going to have 180,000 square feet of leasing done.

We are adding venture capital and management consulting clients as industry is being represented in the building. We still have active, single and multi-floor discussions going on with asset managers and hedge funds and more VCs, law firms, consulting firms, real estate brokerage firms and other non-tech service firms that encompass another 300,000-plus square foot of space.

Activity continues to be really strong at Salesforce Tower, and most of these requirements are leased expiration-driven occupancy, tenants that are recognizing the value and excitement about the Salesforce Tower and wanting to be there. Again, in summary, activity across the California portfolio, our bay area portfolio, continues to be very strong.

Let us over to Manhattan, Midtown. Again, not much has changed on our activity and expectations for the Midtown market. Our tone has been pretty consistent for the last 24 months, somewhat subdued. When we made the strategic decision to get in front of our many pending leased expiration, due to the large block future availabilities to supply in the market, in our view to providing early relief in the form of taking back some space in small increments would be the best interest of both, us and our customers.

Well, during this quarter, we completed another 11 deals, 120,000 square feet. 8 of them had starting rents above $90 a square foot and six were above $100 a square foot. Comparable to last quarter where we did 12 deal 10 deals over $90 a square foot and 7 over $100 a square foot.

Now it is clear that during periods of high stocking credit market volatility, many things do in fact distract the high-end users. While some of the active tenants are probably elongating their decision-making process, they continue to look for space and sublet space in Midtown is at an eight-year low.

In 2014, there were 570,000 square feet of leases done with starting rents between $90 and $99 a square foot, in 2015, there was more than 1.2 million. For deals over $100 a square foot, there was over 1 million square feet in 2015. The reason I talk about this is because the bulk of our availability and rollover in our portfolio in the next few years occurs in spaces that command rents in excess of $90 or $100 a square foot.

Now, transaction size continues to be small, with the preponderance of the activity under 20,000 square feet for non-renewals, which is the reason we have again strategically decided to cut up the remaining floors that we have at 250 West 55th Street and we have leases out for all of our remaining pre-built suites and we have signed half lower [ph] deals on the two of the three available floors that we have.

We have signed leases now for 242,000 square feet with incremental gross revenues of $18 million that will be contributing in 2017, another component of our bridge. We signed a termination agreement last night with a tenant of these 85,000 square feet in a combination of one high-rise floor, the second floor and a portion of the ground-level space at 250 West 55th Street.

While working with the tenant on the transaction that would allow them to minimize their future obligations while recognizing both, the cost and the time associated with finding replacement tenants. The party's agreed to a one-time payment at a transfer of the responsibility of re-tenanting the building to Boston Properties. That space was never built out and we never provided TIs.

Switching over to 399, as Owen said, we have unveiled our plans for the upgrade, including the addition of outdoor terraces and are "Oasis in the Sky" as we position the building to reel at 640,000 square feet of 2017 expirations. Those are late 17 expirations.

We are in lease negotiations now on 200,000 square feet of that space and we completed our first four-floor deal in the mid-rise, where we are pricing the space with starting rents around $115 a square foot. There are a number of medium-sized financial institutions with 2018 and 2019 expirations that really value the more affordable low-rise large block space we have those 100,000 square foot floors and 65,000 square foot floors, but with connectivity to our slightly more expensive space in the mid-rise.

Going down to Washington D.C. Two-thirds of our activity this quarter in the Washington area was in Northern Virginia, where we completed 128,000 square feet of leases with GSA renewal at VA 95 project and also some GSA contract dependent expansion at our Kingstowne project. Then we also did 10 small transactions in Reston Town Center.

In January, we completed a 60,000 square-foot renewal at the Town Center, with starting rent of over $54 a square foot. Again, if you compare that to the total, where rents are an average $33 to $35 a square foot, the premium from Reston continues to show. Reston is 97% leased.

Our Signature residential project is under construction and we are in lease negotiations for 80% of the 25,000 square feet of retail that is associated with our project and if our leasing team follows the typical pattern, given the lack of blocks of space and the continued demand in Reston, we should have a lead tenant for the 275,000 square-foot Signature office development sometime in 2016.

In the CBD of D.C., we completed our second office lease of 601 Mass Ave and we have pretty good activity on the remaining 47,000 square feet.

Our largest availability is going to be at Metropolitan Square, where we have 120,000 square foot tenant expiring at the end of the first quarter. We are in active discussions on more than 110,000 square feet of that upcoming availability.

Our view is that the overall market conditions in D.C. really have not changed much. On the margin, there is probably a little bit more GSA-related leasing that is anticipated for 2016, but it is probably going to have some economic limits that will push it a little bit further out of the CBD [ph].

The district continues to be very competitive. The majority of our Boston activity during the quarter was in suburban walk in suburban Waltham, Lexington. The Waltham Metro West market, a "suburban market", continues to get stronger, driven by organic expansion.

This quarter, we did 16 leases in our suburban portfolio for 413,000 square feet and we have another 200,000 hundred active negotiation.

Rents have increased 25% over last 18 months. Delivery of the Waltham developments is on target, August for 10 CityPoint, October for 1265 Main, both projects come into service 100% leased. In January, the City of Boston learned that General Electric had chosen to move its corporate headquarters to the City. It is expected to bring about 800 jobs, but that is really not what the issue is.

What it really speaks to, to the overall economic ecosystem of the area. This region continues to be a magnet for both, the life science industry, established technology companies as well as startup tech and maker organizations. This has led to continual improvement in business growth in the greater Boston area.

The East Cambridge office and lab market is probably the largest beneficiary of growth and that has the best economics of any market that we are in. With 6.5 million square feet of office space and just under 8 million square feet of lab space, direct vacancies under 4%.

Office rents continue to achieve new peaks with the most recent transactions being completed on office space at over $55 triple net with annual increases.

Tenant improvement allowances have been reduced and are now below 60 bucks a square foot. As Owen mentioned, we finished out the year with an up-zoning of our Kendall Square development that is going to allow for the eventual development of 540,000 square feet of commercial office and 400,000 square feet of residential, including 80,000 of for sale.

We are having substantive conversations right now with a number of existing tenants that are searching for growth and looking for that office space. The other news for our Cambridge portfolio is the recent decision of Microsoft to relocate a group - at 255 Main Street to the suburbs over the next 24 months. This is likely going to mean that we will have an opportunity to lease 125,000 square feet of space that was not going to be expiring April 2021.

With the multisite RFP expected to be issued in may and the zoning application still in process we would expect more Cambridge tenants with near-term space needs to be likely exploring suburban Waltham and Lexington in the Boston CBD, because there is simply no place to go in the city of Cambridge right now.

The Boston CBD continues to be a good market as supply has been absorbed over the last few years, so there is some speculative development in the Seaport of those modest size building. Again, GE has not landed on where its new home is going to be and it could take existing inventory or go to a new develop.

At 120 St. James, where we have 170,000 square feet of availability, there are now a number of tenants reviewing their options of the building and they range from 32,000 square feet, a single floor up to the entire 170,000 the block.

At 200 Clarendon, we are in lease negotiations with tenants that were still - another floor in high-rise and leave us with 90,000 square feet on floors 45, 46 and 47. High end demand in Boston has typically been for users under 30,000 square feet and we expect to lease space in smaller increments.

We have completed our multi-tenant transaction in 100 Federal Street, where Putnam has signed lease for 250,000 square feet. Wellington has executed a long-term renewal and relocation on 156,000 square feet it is currently using and BMA has been able to realize some space and rent savings by reducing its footprint by 137,000 square.

All of the available space at 100 Federal Street has now been spoken for. Again, as you think about our bridge, the 2017, these transactions at 100 Federal Street contribute approximately $6 million of incremental revenue.

Last fall, we outlined $80 million of incremental revenue from our existing portfolio that we hope to have in place by the end of '17. Given all the transactions I described, we now have commitments for approximately 36 million of that $80 million.

With that, I will turn the call over to Mike.

Mike LaBelle

Great. Thanks, Doug. Good morning. I am going to start out with a few comments on what we are seeing in the debt markets. As you know, we defeased our $640 million mortgage loan on 200 Clarendon Street in December. That resulted in $0.13 per share charge for our fourth quarter earnings. To replenish our cash, we closed on $1 billion 10-year bond deal at an all-in yield of 3.77%.

The excess funds will be used to repay our $211 million mortgage on Fountain Square. That is open for prepayment at par in April as well as fund our future development costs. We have reduced the cash interest rate by 200 basis points with this bond deal versus the expiring loans and the annual cash interest savings will be $11.5 million even though we borrowed an additional $150 million of proceeds.

On a GAAP basis, the interest rate reduction is 75 basis points as both of the refinanced loans were above market at acquisitions, so they have a non-cash fair value interest component that is amortized into and reduces GAAP interest expense.

Clearly the market volatility that Owen described is having an impact on the credit markets. It is driving credit spreads wider, particularly as you move out the risk spectrum. The bond market continues to operate efficiently though and high-quality issuers like ourselves have access, albeit at spread that are 20 basis points to 30 basis point wider than the 155 basis point spread that we issued in early January.

Though there are frequently days, when the global volatility does [ph] necessity patients. With the rallying the 10-year to below 2%, all-in borrowing costs really have not moved much for us.

The mortgage markets have been a little more fickle with CMBS spreads widening more significantly, especially in the conduit world and for single asset deals that are in secondary markets are not fully stabilized.

For high quality stabilized properties and strong locations, the markets remain active with both, life companies and CMBS issuers actively putting out mortgage money with 50% to 60% leverage loans pricing in a 4% area for 10 years.

The banks are also increasingly active in financing five to seven-year term loan on a floating rate basis at competitive spreads. Although we see some volatility, good quality assets like ours continue to be able to secure attractively priced long-term financing. With the most active buyers for our asset class, looking to employ lower leverage, the financing markets remain favorable.

I also want to note that over the past three years, our asset sales strategy and the delivery of development properties at superior yields has translated into a reduction in our leverage position. As our new delivery stabilize, we expect these ratios will continue to improve and create additional investment capacity on our balance sheet.

I just wanted quickly touch on our earnings for the quarter. We reported funds from operation of a $1.28 per share after adjusting for the defeasance charge. We came in a penny ahead of the mid-point of our guidance range, which was related to better performance in the portfolio.

Operating expenses came in better than budgeted while our revenues were pretty tightly aligned with our expectations. For 2016, we are increasing our NOI projections from our in-service portfolio. As Doug detailed, we continue to see good leasing activity, particularly in San Francisco and in Boston.

In Boston, we closed the Putnam lease, and although will not impact earnings until 2017, the transaction included a relocation in long-term extension with Wellington, with future rent bumps that will be straight line in the 2016.

We are also seeing increased activity in our vacancy, both in the high-rise space at 200 Clarendon Street and at the Prudential Tower, where we could see additional income commence later this year.

At Embarcadero Center in San Francisco, we continue to be successful, in completing a number of lease renewals with significant rental rate increases and have activity on our availability. As these renewals are signed, our GAAP income reflects the straight line impact of the rental rate increases though the cash impact will not occur until the future renewal date which in most cases later in 2016 or 2017.

As Doug mentioned, we terminated an 85,000 square-foot lease at 250 West 55th Street and received a significant termination payment $45 million. Also at 601 Lexington Avenue, we are finalizing a termination with a tenant in the high-rise, which will enable Citibank to relocate out of the low-rise office building, so it can be vacated for repositioning.

Overall, we expect our 2016 termination income to be approximately $47.5 million dollars higher than our guidance last quarter. These lease terminations will result in lower future rental income until such time as we find replacement tenants.

The lost income is projected to be approximately $11 million in 2016. Given his lumpy nature, our practice is to exclude termination income from our same property NOI guidance, but it does have an impact. The leasing success that we are executing exceeded our expectations and would have improved our GAAP same-store NOI growth projection by about 50 basis points.

However, the lost rental income related to our decision to enter into lease terminations has more than offset this growth. The net impact on our same-store property NOI projection is a decrease of approximately 25 basis points from our guidance last quarter.

The income from terminations also impacts our cash same property NOI though we still project growth of 1% to 3% over 2015. As a reminder, our same property growth is weighed down by rollover at 767 Fifth Avenue and 601 Lexington Avenue. Both of these are consolidated joint venture properties. The growth in our share the same property NOI is approximately 100 basis points higher for both, GAAP and cash.

We project our non-cash straight line rental income to be $35 million to $50 million in 2016, which is higher than our projection last quarter. The completion of our bond deal takes care of a $1 billion of our near-term debt maturities. We now have $2.9 billion of consolidated debt expiring over the next two years of which $2.3 billion represents our share. These loans carry a cash interest rate of 5.9% and a GAAP interest rate of 4.4%.

We have hedged the 10-year swap rate on $1 billion of the expected refinancing. The only material financing activity in our 2016 projections is the refinancing of our $350 million mortgage loan on Embarcadero Center 4, in the fourth quarter. This loan has a cash interest rate of 6.1% and a GAAP interest rate of 7%, so our interest expense run rate should be lower at the end of the year.

Overall, we project our 2016 full-year interest expense to be $400 million to $450 million, which is net of capitalized interest of $40 million to $50 million. The impact of these changes results in our increasing our guidance range for 2016 funds from operation to $5.78 to $5.93 per share. This is an increase of $0.26 per share at the mid-point, which consists of $0.21 per share from the net impact of tenant terminations and $0.05 per share from better projected performance in our same property portfolio.

That completes our formal remarks. Operator, if you could turn the call over to questions that would be great. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Jamie Feldman from Bank of America.

Jamie Feldman

Thank you. Good morning. Doug thanks for the color on where you stand getting to the $80 million of same-store NOI recovery. Can you just talk about the largest chunks left to go and your thoughts on timing of those leases?

Doug Linde

This is called, no good deeds goes unpunished, right?

Jamie Feldman

Exactly.

Doug Linde

I think that there are the three largest components that are likely to be talked about over the next few quarters are at the 200 Clarendon Street, and 120 St. James, which is the building in Boston.

The additional lease up at the Prudential Center, which is about 90,000 square feet of space and the changes that we are going to be going through at 757 General Motor's building, which are both the retail space at the base and the two floors that we are getting back in July. That is where the bulk of that is coming from.

I think the prognosis is positive and we are working forward on transactions and all stuff, but I mean, it maybe a quarter or maybe three quarters before we announce those transactions are completed.

Jamie Feldman

Okay. Thank you. You commented on some of the higher end tenants, particularly in New York City, maybe taking longer to make decisions given stock market volatility. Can you just provide more color on exactly what you are seeing and whether things are getting delayed?

Doug Linde

As I said, I think, the overall tenure of the market, and I am going to let John Powers comment, is that things have just taken a little bit longer, but the activity remains the same. As an example, when I look at our portfolio of tenants looking at the space where the General Motor's building on the 34th and 35th floors, we got three or four tenants that are actively interested in pieces of those floors.

I think that there are days when they are as more focused on looking at their screens than they are looking at office space, so I think it is just elongates decision-making process. John, you want to make any additional comment?

John Powers

I guess, what I would add is that we finished last year with a very good leasing year, very good leasing velocity year I am talking about Manhattan overall. It was down 6% from 2014, but then again it was 6% higher than the last five years.

During the year, we had issues in August and September as Owen and Doug said and we had spread widening as Mike talked about and that never moved into the leasing market.

It might have won a few deals slowing things down a little, so right now we have the same kind of activity in the financial markets and people are looking at it, but a lot of large tenants are planning for significant period of time and are not continuing with what they do.

Some of the smaller tenants in the smaller deals, I think, look more closely at the screens than the large organizations do.

Jamie Feldman

Okay. Great. Thank you.

Operator

Your next question is from the line of Emmanuel Korchman with Citi.

Emmanuel Korchman

Hey, guys. Good morning. Maybe Mike or Doug, if we think about the $80 million of NOI uplift that we all keep talking about, how much of that is going to actually impact 2017 numbers? How much of that is you are thinking about that $80 million as sort of a run rate going into 2018?

Doug Linde

I wish I could give you an honest answer, because the timing is what really is going to drive that. I can tell you that, much of it will start to bleed in, in latter part of '16 and much of it will bleed in over '17, so there is no question that by the end of '17 we will have all of it in our estimation right now.

I can't tell you if it is 50% in the first quarter of '17 or 80% in the first quarter of '17, a lot of it is just going to be depending upon the physical characteristic of the space and when we can start recognizing revenue.

Emmanuel Korchman

But it's fair to assume that some majority portion will be a '17 impact and then there will be bleed over or and there will be bleed over that impacts '18, specifically?

Doug Linde

Yes. I think, the fact is that a lot of it is going to be coming in very bulky manner in 2017, not all on January 1, 2017, but over each quarter. By the fourth quarter it will all be there, but again a significant piece of it is going to be in [ph]

Emmanuel Korchman

Great. Then just thinking about San Francisco for a second, how much of the showings of the demand at Salesforce is overlapping with either current or prospective tenants at Embarcadero?

Doug Linde

That was I think a question that we had last quarter as well. It is an interesting question, so existing incumbent tenants at Embarcadero Center, we have one tenant that we are talking to at Embarcadero Center that is likely to leave and move to sales force.

There are some tenets are looking at both, Embarcadero Center and Salesforce that are not tenants on our portfolio right now.

Emmanuel Korchman

Thank you very much.

Operator

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

Vincent Chao

Good morning, everyone. I just want to go back to your comments earlier on investment markets feeling like there is going to be a little bit of a pullback from the oil-based economies in China, which makes some sense, but you also mentioned other geographies picking up.

I guess, on net, do you think those are geographies will be able to offset the lost in-flows from those other two segments, and curious if that is more based on your expectations or have you started to see that unfolding in the markets already?

Owen Thomas

Yes. I think that we have seen it unfolding in the markets over the last couple of quarters. I cited $3 billion-plus $4 billion-plus deals in high quality office space, high quality office deals and gateway markets that went to North American-lead investment group, so either U.S. pension funds, other U.S. investors or Canadian investors.

I think that there is a bit of a geographic rotation, but thus far certainly U.S. investors, Canadian investors, we are increasingly seeing Japanese investors in the marketplace, investors from Asia, outside of China, there are other groups that are in the marketplace and so far have led to a lack of reduction in pricing at least today.

Vincent Chao

Okay. Then just on the flipside of that you also mentioned seeing more opportunities in the value-add side of things and I was just curious if you could provide some more color on exactly what is driving that? Are there more projects coming to market, are the traditional buyers pulling back, a combination of those and have cap rates moved significantly in that space?

Owen Thomas

On the value add, I think we have mentioned for many quarters prior to this and also in this quarter, we are focusing on new investments where we can use our real estate talent, so that I would either new development or redevelopment of existing assets. I do think right now we have a fairly robust pipeline of things that we are looking at in both of those categories and most of our core markets.

These are areas where many of the sovereign wealth funds and offshore investors - you know it is not 100% the case, but they are less active and you that is helpful to us.

Vincent Chao

Okay. Thank you.

Operator

Your next question is from the line of Jed Reagan with Green Street Advisors.

Jed Reagan

Good morning, guys. There were some concerns put out there last week that New York City job and rent growth is likely to soften this year. Then non-core assets values in the city might be re-priced lower. Are you expecting those kinds of changes yourselves and do you think this could affect some other markets in your portfolio?

Owen Thomas

Jed, before I let John respond more specifically about his views, the Company's perspective has been that we have been seeing modest amount of rental rate growth over the last few years, because as we have characterized the market it is a healthy market, not an accelerating market.

I think our perspective has been very constant over the last three or four of these calls about issues associated with the growth of rental rates and economics in the city largely due to the amount of supply that is in the market from either relocations to the new building, on the Far West side or Downtown and the retrenchment that occurred in 2013 and 2014, those yield actually starting to get completed.

As an example time place moved who finally down World Financial Center and their building on Fifth Avenue is now vacant and available to lease and they are doing a repositioning on it.

Everyone knew that the building was going to be there, but it is now in the market, so there are a number of those types of macro supply issues that we have been watching and following.

Again, while we made our decisions and had tempered our views on what would be going on in Manhattan in calendar year 2016 and 2017, and John I do not know if you want to add anything to that?

John Powers

Let me just add to my previous comment, I said last August and September, the financial markets had a drop off and there were concerns and we have that now. It did not move to the leasing market last time. We do not know whether move the leasing [ph] markets this time. It hasn't yet, but obviously if the financial markets continue to have problems and the economy has problems than that will affect everyone.

On the New York side, we do not see any change over the last few months in the leasing. I would say the only change that is really noteworthy and Doug has mentioned the supply for a number of times is the deal with the news did not get done at two, so that is a 2.8 million square foot building that is now getting built Downtown, so on the supply side we understand that that is way out, but we do look way out - let us say over the next three or four years.

Certainly that is supply side. We do not need another 2 million square foot building on Sixth Avenue to come in the market in terms of the supply, so are we just moving along in New York, no big change yet, but obviously we are concerned like everyone is with the financial markets and what is happening globally and if that is going to have a real impact on leasing market in the coming months.

Jed Reagan

Okay. Thanks for those comments. Then just as far as the kind of non-core value-add type of assets, are you expecting a re-pricing downward on those types of buildings in the city or elsewhere?

Owen Thomas

I do not think we necessarily anticipate that. It certainly could happen. I do think that market is stronger for core assets and gateway city than it is as you go out the risk spectrum in real estate investment, but we are not necessarily expecting a re-pricing of those assets.

Doug Linde

We are certainly not getting any re-trading on deals that we are working on in New York.

Jed Reagan

Okay. Thank you. Then you mentioned the 200 million to 250 million of planned asset sales for 2016, just curious if the recent downdraft in share prices make you want to sell more aggressively than your are currently planning potentially or just how you are thinking about that?

Owen Thomas

Our asset sales are driven by selling non-core assets, which we do every year. Innovation Place was probably the most recent example of that. Then from time-to-time, we have opportunistically sold assets where we achieved what we thought was extraordinary pricing.

This year I mentioned an early prediction of asset sales mix in the $200 million to $250 million range. As I mention also, we have already done seven Kendall Center, which is a little over 100 million, so we are not changing our disposition plan for this year based on current market conditions. We basing it on desire to continue to sell non-core assets.

Jed Reagan

Okay. Thanks for the color guys.

Operator

Your next question is from the line of Alexander Goldfarb with Sandler O’Neill.

Alexander Goldfarb

Good morning. Just following up that, Owen, on the disposition side, last cycle you guys sold some rather large CBD office buildings and this time it sounds like that is not in the cards, so just curious is that simply because the CBD towers that that you own now have better growth profiles than the ones you sold last time or is it a fact that as submarkets have been built up, you see less opportunity to get back into the submarkets where you want to be?

Owen Thomas

Alex, we have sold a lot of very significant portfolio of assets this cycle. 2014 was the largest year of assets selling at Boston Properties. Our total sales for this cycle, I think, are in excess of $3 billion.

Remember, the joint venture we did with the Norges on four assets over two years, another significant asset that we sold, also, the large reason why we have made the very significant special dividends that I described and also the reason that our current gearing is below 6, so we feel like we have done very significant selling this cycle.

Alexander Goldfarb

I guess, Owen, from the perspective that last time you sold outright stakes. This time it has been a bit more on the JV, so I did not know if that had an impact in sort of how you see the reinvestment opportunity. That is where the question was going.

Owen Thomas

No. I think that we did sell 100% of several assets in the portfolio. I agree they were not as large as the joint venture transaction that we did. I think the JVs were a function of the fact that the marketplace was very aggressive for the joint venture structure, which was attractive to us. Second, the assets that we have in joint venture, we do believe in and we, in many cases, are improving and growing the cash flows, so the combination of both.

Alexander Goldfarb

Okay. Then on California, Doug, I appreciate the comments on the tech leasing environment out there. It sounds like things are pretty good, but just from the from our standpoint, as we read news headlines - well, you spoke about Twitter, but Yahoo having issues or various tech tenants having issues.

On the demand side, on the user side, is it basically as though the market, this is just normal tech volatility and this is always part of the cycle or what would be the red flags that would indicate that some of these tech issues headlines are more so than just normal, expected volatility in business models?

Doug Linde

You are asking, what is the canary in the coal mine, right? I think that that it is a really difficult question to answer with a specific fact that we will look and say okay now the market is going to go turn.

I think that in the last four or five years, the City of San Francisco has reshaped itself so dramatically in terms of the tenant demand that the diversity of companies and the strength of those companies is so different that I think that it will be much more difficult to sort of look at look at any one particular industry or any one particular company and say okay things have really changed.

I mean clearly a overall GDP reduction and a series of layoffs from major technology companies would be the thing that I think would make it a clear-cut type of a demarcation, but again we just do not see that. I mean, we see these large tech companies that have got pretty strong balance sheet and pretty global reaches now being able to weather the storm in a pretty significant manner and with business strategies that have a very long-term focus associated with them, so there is no question that there are going to be failures in certain tech industries. All of the mobile payment companies are not going to survive.

I mean, you know they are in all likelihood a couple of unicorns that are not going to make it just from a valuation and from a capital perspective, but we have spent a tremendous amount of time looking at the demand from the sort of startup community versus the "traditional" now and more fundamentally sound technology companies. On a relative basis, the City of San Francisco was in a really good place.

Bob, I do not know if you have any other comment you want to make.

Bob Pester

No. I think you covered it.

Alexander Goldfarb

Okay. Thank you, Doug.

Operator

Your next question is from the line of Ross Nussbaum with UBS.

Ross Nussbaum

Hey, guys. Good morning. Can you touch on each of your four major markets. Do you think market rents actually go up this year and can vacancies sort of hold where they are or do you see any risk of market rents flattening, going down, vacancy going up, maybe put some context around that. It sounds like you are pretty bullish around your opening comments, but I was just curious how that translates into what you really see at the market rent vacancy level?

Owen Thomas

Yes. I guess, so I would characterize the way we feel that we are cautiously optimistic that rents will marginally improve across our markets. Meaning that in markets like San Francisco, we believe, we will continue to see modest increases in rents. I do not think we are going to see spikes in the suburban Boston in the CBD of Boston we are going to see good growth in rents, not spikes.

In Midtown, Manhattan we think we are going to see pretty flat marginal growth in rents a 2%, depending upon the quality of the space and the location of the space. In a market like Reston, I think, we can push rents 2% or 3%, maybe up to 5%, depending upon the space in the city of Washington D.C. It is going to be a pretty flat year. We think it is a good market not a spiking market.

Ross Nussbaum

Okay. Helpful. Then specifically, if I look at 250 West 55th, and I look at the lease termination, can you help us understand, if there was almost 20 years left on the lease, why did not you say to the tenant, I think we all know who it is, but why did not you say to the tenant, look, you signed a contract, pay us the rent and go sublease it. Why was not that an option?

Owen Thomas

I think, I am going to give you the glimpse of quick and dirty [ph] answer and John can choose to add some color if he would like. I think that is the approach that we took and I think we got to a point where we felt that the economics of the payments that the tenant was making us more than justified the risk that we would be taking, we letting the space at a valuation that would provide us with a significant enhancement on a total NPV basis.

Ross Nussbaum

Our math is, you got about five years give or take worth of rent. Is that about sort of the specific lease it in the next five years - is that about right?

Owen Thomas

I am not going to speak specifically to what the tenant is paying us, because I just do not think that is appropriate, but the way we looked at it, it was - we had not yet given the tenant any money to build out their space, so that is sort of helps money and we believe that we will be able to reel at the space in short order at market transactions and that we will come out significantly ahead versus what the payment that the tenant made us.

Ross Nussbaum

I appreciate it. Thanks, guys.

Operator

Your next question is from the line of Steve Sakwa with Evercore ISI.

Steve Sakwa

Thanks. I guess, a couple of quick questions. Doug, I guess on the 250, I just want to kind of circle back. Before this termination, the building was kind of what percent leased are committed and just what kind of discussions maybe have you had behind the scenes with existing tenants about possible expansion needs in the building?

Doug Linde

I think prior to this we were 92% leased and we have leases outstanding for another floor, so another 3% or 4%, so we are basically 94%, 95%. I would expect that the space that we are getting back, remember, I said there is some space on the ground floor that is retail.

Then there is space on the second floor and then there is one high-rise tower floor that we will in all likelihood lease the high-rise tower floor to tenants outside of the buildings similar to the way we have been leasing up the 33rd, the 34th, 35th floor, so they are going to be 5,000 square feet to 12,000 square feet to maybe fourth floor and I do not believe that anybody in the building will take the second floor and the retail will come from retailers who are obviously looking to place their inflation on 8th Avenue.

Steve Sakwa

Okay. Thanks. I guess, going to Salesforce Tower, I mean it sounds likes you are making a little bit of progress here, had some leasing done and it sounds like you have got other things in the pipeline.

Just help us kind of map out over the next couple of quarters kind of what goals you have, kind of where you want to be maybe by the middle of the year, end of the year as you kind of turn the corner in the '17. What does sort of the leasing progression look like as we now get into the strike zone of delivery?

Doug Linde

Yes. Again, just in the context, the building it is going to be available for tenants other than Salesforce in the latter half of 2017 and into early 2018. I would expect that we now have done another five floors, knock on wood, that we will get the last signature page. I mean, leases are literally out for signature in the next couple of days, so our expectation is there is another 200,000 square feet to 300,000 square feet of leasing that we hope to get done during calendar year 2016, obviously, for rent commencement in late '17 or early '18. I think that would be or that is our sort of base case goal. Bob, you can comment and you will probably tell me you are going to have the whole thing leased before the end of the year, but I would moderate that…

Bob Pester

I would just to add that, just this past week we had an inquiry for 200,000 feet to 500,000 feet from a very well known tenant in the marketplace. This week we also had three senior real estate heads from Wells Fargo, Google, Intel, all come for a presentation on the building, which was better attended than we expected. I mean, clearly people are looking at this building and I remain very optimistic that we are going to lease that quickly.

Steve Sakwa

Okay. I guess last question maybe for Doug Linde and/or Owen, as you just think about some of the development projects that you talked about our future developments. I realize you guys generally have a relatively high hurdle for preleasing, but just what are the discussions like on some of those. If you have to handicap, how much you think you start this year maybe without naming specific projects. What do you think that looks like?

Owen Thomas

Yes. Well, Steve, as you said, we do have a high bar for new development. We have, we talked about our target yields and we also like to see significant pre-leasing. I went through some of the projects in my remarks. The most significant ones are the TSA requirement at Springfield, which I do not think we are prepared necessarily to handicapped certainly pursuing it.

Ray, comment on Reston and what the prospect looks like for the Signature site that we are working in Reston right now.

Bryan, I do not know if you want to spend a minute on CityPoint to talk about what prospects are for that, so Ray can I turn over to you?

Ray Ritchey

Sure, Owen. Thanks. Where Reston sits today effectively 100% leased, and no due supply coming online either from us or from the competition, we feel exceedingly strong about. This may come as a shocker, but we are pushing those back.

We think that the floor sizes, the building size and the internal demand we have within the market to clearly justify it, but we are in discussions with about three or four major existing tenants of ours who have expressed interest in anywhere between 80,000 square feet to 150,000 square feet.

Owen Thomas

Bryan, you want to spend a minute on 20 CityPoint?

Bryan Koop

Yes. The quite a story about the strength of the Boston market is the Waltham market in general. If you look at it, our competitive set is like 5% in terms of vacancy and it is probably two, three points down from the previous year, so we got a good supply side look at the marketplace.

On the demand side, Doug mentioned it earlier, we have got good life science activity many companies looking from migration out of Cambridge into this immediate suburb. Then also in the [ph] cyber or cloud tech segment of the marketplace, good growth and Doug mentioned the strength of the larger companies and the concern about it what we are seeing again it is in a quiet way these mid-size companies 50,000 feet growing to 70,000 square feet to 100,000 square feet with strong financial statements and strong product, so we are really encouraged about what has taken place.

Last note on is just that there is a strong appeal for product that has the amenities that have been lacking in the marketplace those being the restaurants and that is what has been so attractive to clients about CityPoint.

Steve Sakwa

Then, Bryan, lastly the last one which you had mentioned is the Kendall Center, the new office project the Kendall Center?

Bryan Koop

Yes. A lot of ways, it is quite new to market, because we just got the approvals on it, so it is very recent in terms of its news and the opportunity. Again, just to reiterate, you and Doug had mentioned the strength and the number of people who we are talking to is significant in this market - Kendall remains very…

Doug Linde

Steve, to summarize, so the projects I think if you keep an eye on our Kendall Centers, Springfield Metro, 20 CityPoint and the Signature site - we are all working hard on getting pre-leasing, so we start this projects.

Steve Sakwa

Okay. Thanks a lot.

Operator

Your next question comes from the line of Brad Burke from Goldman Sachs.

Brad Burke

Hi. Good morning, guys. Just a follow-up to the last question, taking everything that you just said in summarizing it, should we think about the negative macro headlines that we are seeing over the past few months have having had any impact on how you are thinking about the pace, the magnitude of total new development starts over the course of 2016?

Owen Thomas

I think, we are generally conservative in our approach to new development. We talked about our yield targets being 7%-plus for office. We have a pre-letting requirement, which we also think helps mitigate risk in development. I would also point out that our development pipeline is not static. We just announced the delivery of several projects of our pipeline. That is going to continue.

Even if we add a few projects this year, it is likely our development pipeline may actually go down during the year. Yes. We are paying attention. The macro headlines do matter, but at the same time if we have a project that we think pencils too an attractive yield to shareholder and we have risk mitigation through pre-leasing we are going to launch it.

Brad Burke

Okay. Then, just an update on how you are thinking about the appropriate amount of liquidity and appropriate amount of leverage in the current environment and whether that has shifted it all over the past few months.

Owen Thomas

Brad, I think that we have acted to bolster our liquidity additionally with the bond deal we just did. We have looked at our future debt maturities and we did that the defeasance, so we are kind of taking some of those maturities off the table now.

We have got all the capital raised to fund out our development pipeline, so we have a very, very liquid balance sheet and are in strong position. From a leverage perspective, on net debt to EBITDA basis, we are somewhere in the high 5s, so that is down pretty significantly over the last four, five years.

We expect to continue as I mentioned in my comments, as our development pipeline will be coming online and we have already raised the money to do that and those developments we are expected to generate strong yields, so I think that our capacity to do additional thing is just going to grow, so we think we are a very, very well-positioned from both, the liquidity perspective and leverage perspective right now.

Brad Burke

Okay. Thank you.

Operator

Your next question is from the line of Blaine Heck with Wells Fargo.

Blaine Heck

Thanks. Back on the topic of 250 West 55th, I think some of the space on the second floor is pretty unique, so how are you guys thinking about releasing that? Will it need to go a specific type of users, what do you think you will have demand that will be pretty broad based?

Owen Thomas

…you want to take that?

Doug Linde

Sure. It is very unique space. It is almost the side core at that lower second level with the four floor plate being close to 50,000 feet and the ceiling heights make it and large windows make it very unique space.

We have the flexibility to use the second floor in creative ways. We could clearly use it for access into the lobby and use it for office space, but we could also access it from 8th Avenue from some of the retail space and use it for different type of use, studios or other, so we will be look at all of that.

Blaine Heck

Okay. That is helpful.

Doug Linde

The Tower floor is we get a lot of velocity up there and we already have that offer on one floor.

Blaine Heck

Okay. Great. Then in the past you have talked about some good prospects for a permanent solution on the old FAO space. Is there any update on that?

Owen Thomas

Yes. I will give you the macro view. The macro view is, we are in conversations with a number of tenants and we are optimistic that our perceived view of the value and the critical nature of that space for someone's brand will melt together and we are optimistic we are going to have a deal done sometime in 2016 for someone to use this space in 2017.

Blaine Heck

Okay. Great. Thanks.

Operator

Your next question is from the line of John Guinee with Stifel.

John Guinee

Great. Thank you. Few questions here, first, Ray Ritchey…

Ray Ritchey

Hi, John.

John Guinee

…general dynamics of Washington Business Journal article a couple of weeks ago, moving into - you are doing a build-to-suit for them on Sunset Hills Road. I think, it is in Reston, there was also an article that Northrop Grumman is spending $300 million to buy versus lease space in the Baltimore, Washington area.

Do you have any sense as with defense contractors out there, whether there is a tendency to lease versus own and control their own space? Then you have got to do this without talking your book. What do you think are the better submarkets in D.C. as the defense contractors, cyber security-driven get back into the market and lease space?

Ray Ritchey

That is right. That is a long question. I will give my best to be as brief as possible. First of all, I cannot comment on the specifics of the tenant coming or the purchaser coming to Reston. There is a little bit movement towards owning this space.

As you know the accounting change taking place in '18, will have an impact on many corporations or how they book their occupancy cost, but I still think that the defense contractor want to have given the uncertainty of long-term government contracts, they still want to stay relatively short in the lease terms, so they are not held out either long-term lease obligations or the lack of liquidity by owning real estate, so I think the - isolated is an example, John, but I do not see a general trend.

Relative to the market for cyber command, obviously, we are optimistic that the Fort Meade will continue to pump out both, contracts and then resulting jobs to those corridor, still is very strong with the presence of major Intel activities out there overall in CIA, so we like our positions in both of those markets.

I will say that there Rosslyn-Ballston corridor is relatively soft and I think that is more about the fact that now Tysons with the silver line has opened up another market that those defense contractors go to with better access and lower occupancy cost, so that still face the challenges, but we were put our money in the Dallas corridor and the Fort Meade market.

John Guinee

Okay. Great. Then, Doug, this is a question on lease economics and value creation versus just simply no value creation and being on a hamster wheel. What we have seen happen in over the last four or five years has been an interesting situation, where you have seen rental rates go up, but you have also seen CapEx and re-leasing costs remain high, essentially financing corporate America. Clearly, if you get a mark-to-market of zero cash, 5 GAAP, and $50 in TI, that being the math there is value destruction. What you need in terms of rollups in order to justify the CapEx you are putting into these buildings to say to your shareholders, we have got value creation here?

Doug Linde

Well, you are just making one sort of subtle argument that there is no real value to the cash flow from a building one the lease has been signed that is different than the amortization of the transaction costs into that building and I guess I would argue that, in many cases the expectation associated with what these buildings will do in the future is an important component to how they are being valued, so while on a short-term basis it may be true that in a particular building where a lease is rolling at a "flat mark-to-market" and you are putting transaction cost in on a net effective basis it is obviously slightly dilutive.

If there is a perception, and in many of these markets there is a perception, which is based upon reality that rental rates will grow over time. There is significant value that is likely embedded in that cash flow from that particular lease on a forward basis, so that is how you have to think about it.

Now, there are in fact cases where we do not have a view that there is going to be rental rate growth of any significant. As Owen suggested that those are buildings where we are sort of saying, you know, leasing these things up and selling these buildings might be the best course of valor here, so we have done a number of those sort of modest prunings over the years, where in fact we have agreed with you that there really is not a lot of value to be attributed to doing additionally leasing of these assets.

John Guinee

Okay. Wonderful. Then, Mike LaBelle, I realize taxable income does not line up with EPS exactly, but your dividend run rate is about $0.65 a share or $2.60 a year. In 2014, your earnings per share was $3.72, and when you take your $2.60 standard dividend and your $1.25 special it came out to $3.85, which is pretty close to your earnings per share for '14.

The 2015 earnings per share guidance is about $2.75 at the mid-point. What that tell us about - I am sorry misspoke, I meant 2015 and now 2016. Your 2016 earnings per share guidance is about $2.75 at the mid-point. What does that tell us about future dividend policies?

Mike LaBelle

That is a good question. I think that as our development comes online. If we slowdown our assets sale as Owen had mentioned that is going to grow our taxable income. As our taxable income grows we will want to keep up with our traditional dividend policy of dividend out 100% of our taxable income so you would expect that our dividends would grow. Whether that occurs in 2016 or not, I cannot tell you right now.

What I can say is that at this point, we have not made any change to our dividend policy for this year. Obviously, in prior years, we have sold the tremendous amount of assets and we have delivered I think it is $8 a share and special dividend in last few years, so we have lost income from those assets that we have sold. We replaced it with development and we have elected to keep our dividend in our regular dividend line, because we have been able to base upon our taxable income, but we have got a sizable development pipeline that is going to be adding to our income in the next few years, so depending on what happen on assets sales, I would expect our taxable income is going to go up.

John Guinee

Great. Thank you very much.

Owen Thomas

Okay.

Operator

Your next question is from the line of John Kim with BMO Capital Market.

John Kim

Thank you. I was wondering if you could share any surprises or other takeaways from your bond offering last month, perhaps if there was a widening disparity of investor appetite between A-minus and lower credits or any investor concerns on the office fundamentals.

Owen Thomas

Look, I think that our bond offering went very well. I would say it was better than we expected given the volatility that we were seeing in the market. We wanted to try to do something either in December or January, so we have been looking at the market for a while and it has been pretty volatile throughout and the demand for our deal was over four times what we expected to raise, so we were able to tighten during the process and get to a level that we thought was a really a good level and there has been other companies that are highly rated companies, including a company yesterday not in the REIT space that has been very, very successful.

I think as you go down the risk spectrum into lower investment grade and non-investment grade, the widening and credit spreads in the last 30 day has been more significant than the 20 basis points to 30 basis point that I mentioned for companies like ourselves.

Doug Linde

I just want to comment. Mike has done a terrific job managing down our balance sheet and putting us in what I consider to be an enviable position relevant to both, our liquidity and our assets to capital and has done a really good job of working with the bond investors to educate them on the principal foundations of how our business runs, so we know we did our deal and I think we have traded 5 basis points to 7 basis points wide in a period where the market is traded 30 basis points wide.

I think the reason that we were successful as we were is because the company is in a really good stead with the bondholders and I think it is very satisfying and it give us a lot of comfort that going forward into 2016 and 2017, as Mike spoke earlier, we do have additional maturities that we are going to be in a pretty good place to access either the unsecured or the secured markets at whatever the market pricing is but at the tightest levels possible.

John Kim

Due to fixed-income investors have a similar amount of concerns on the tech slowdown and New York fundamentals or are they less concerned about the future?

Doug Linde

I think they think about it in a significant way, but ultimately then they look at both, the covenant structure of our rebounds and they look at the overall leverage ratio of our company and how we performed over the past decade as being an unsecure issuer and they get very comfortable with the way we have managed our book of business.

John Kim

Okay. Then Doug, on your answer to Ross's question earlier on market rental growth, can you clarify if that was for asking rents or effective rents that you are seeing?

Doug Linde

I am talking about grows base rent.

John Kim

So with vacancy tightening in the some markets, do you see TIs decreasing?

Doug Linde

I think the TIs have come down in some places and I think the TIs have basically stabilized in other, so as an example. I still think in San Francisco, if you doing a 10-year or a 15 years lease with a tenant that is going to be rebuilding space there are likely looking for a $70-plus a square foot. By the way, the $70 a square foot is probably getting 60% of the way to what their cost are and it might have been getting them five years ago, because this was a part of construction as well as changes to the energy cost and other cost that are acquiring them - that they would not have had to do, which is just simply increase the overall cost of occupancy. I think from the tenants' perspective interestingly they actually see a diminution and the transaction costs in many of these deals we are sort of looking it as a flat.

John Kim

Got it. Okay, thank you.

Operator

Your next question is from the line of Rich Anderson from Mizuho Securities.

Rich Anderson

Yes. I will just ask one question, try to keep it short. Doug, you mentioned early expiry early on and the comments about taking back incremental small increments of space in New York and trying to get in front of some of the supply pressures.

Do you have a visibility into that pipeline? In other words, what amount of the space in New York do you think tenants have signaled interest to either shrink or exit their space at some point in the future?

Doug Linde

I am going to let John answer that question. Interestingly, I think, we have had a presentation that we have done for a number of groups that where we have gone out and shown people what is ultimately anticipated coming onto the market over the next few years. I think all of that is sort of built into it.

John why do not you sort of describe the results?

John Powers

Well, right now I can say we do not have any discussion with any of our tenants about shrinking. That has probably synced as I can put it, we have done over the last couple of years, as you know a number of law firm deals. Some of those law firms have taken the same amount of space, because they are growing, but they are more efficient in the space that they have and other of those law firms have dropped significantly. Sometimes by 15% or 20%, but right now we do not see any tenants that are in the portfolio that we are talking to or for that matter tenants that are looking at that from outside that are shrinking.

Rich Anderson

What is the motivation to be taking this proactive step?

John Powers

Well, different tenants have different motivations. We are talking to someone at 399 for a very large block of space that is in three or four locations and they want to consolidate. That is an important motivation.

We are talking to some tenants in the building that have bought other companies that want to expand and want to consolidate everyone into 399. It is always a specific business issue for the tenants that you are dealing what are the prospects that you are dealing with.

Doug Linde

Rich, let me just speak a little bit more clear. Our decision to redo Weil Gotshal, Kirkland & Ellis, Reed Smith, and lock [ph] was a decision where we said okay there are a number of new buildings that are being built across the city and there are a number of buildings that are going to be vacated across the city when the tenants that are in them are moving to buildings that are currently vacant and our tenants are a likely candidate for all of those future availabilities as we think we have the ability to help them get into more efficient space, take some space back in calendar year 2015 or 2016 or 2017, in a very modest way that can be both, accretive to them in terms of being able to reduce their footprint prior their expiration in 2019 or 2020 and give us an opportunity to lease space at rents that are better than what those current tenants are paying.

It was the recognition that they were a number of competitive availabilities that our tenants were going to be looking at over the next few years and taking advantage of our attributes in terms of timing and ability to do things with them earlier that led us to go in those direction and that space is available today, so we feel really good about all those decisions.

Rich Anderson

Okay. Good enough. Thank you.

Operator

Your next question is from the line of Tom Catherwood from Cowen & Company.

Tom Catherwood

Yes. Good morning. A quick question on D.C. Obviously the 9% leasing spreads this quarter were the highest since 2011, but Doug, building off your comments, saying you expect rents to be flattish in 2016. Do you think the driver of those kind of moderating to no growth rents, is more slower demand, or is it an impact of kind of increased supply in the market?

Doug Linde

Ray, do you want to take that?

Ray Ritchey

Yes. Let me take a shot. One of the things we look at is, not only the new construction that is new development taking place, but we are seeing in D.C. a repositioning of older assets, moving them from C-minus to A-minus and that level of supply is probably at an all-time high. That is why we are so aggressive - talking to our tenants.

We just renewed Steptoe was 17 expiration, we are talking to Akin with the 2020 expiration, we are trying to get our larger existing - locked up, because they are targets of those new buildings coming online.

Unlike the other three markets that we are in, D.C. is very much a lease expiration-driven market. We do not have Salesforce coming and take 70,000 square feet as Bob enjoys in San Francisco, so our strategy is to get out with our existing tenants, lock them up and then aggressively go after other people's tenants to backfill our new development.

To summarize, it is much more about the increasing supply, moderating any future growth in demand.

Tom Catherwood

Got it. I appreciate that. Then one quick up in Cambridge, obviously, the up-zoning of Kendall Square is a big deal. Do you have an estimate of the per square foot value of that additional FAR that you guys received?

Doug Linde

I would not want to halfheartedly give you an answer. I will just say as follows, that we have the ability in some places to build structure on top of parking areas and in other times there may be a requirement to remove a particular existing assets and add density to it, so the mathematics associated with what the value is are really difficult to sort of described with a number.

I will tell you that we believe that we will be able to achieve rents in excess of that mid-to-high 60s on a triple-net basis in current market conditions and over time we think those rents are going to go up, because there is such a lack of supply in that area, so we believe we will be able to profitably figure out how to use that density.

Tom Catherwood

Okay. Fair enough. Thank you.

Operator

Your final question comes from the line of Craig Mailman from KeyBanc.

Craig Mailman

Hey, guys. I will try to keep it quick. On the Salesforce, net-net, the 300,000 square feet you guys are working on with 2017 expirations, do you think that that would indicate an expansion space versus what those guys have in place or a contraction?

Doug Linde

I think in most cases these are financial services companies that are looking for a modest amount of incremental expansion as they move forward. There are none of them are looking to reduce their...

Craig Mailman

Okay. Then the 200 to 500 that you guys are just got the inquiry on, is that someone that is new to the market in expansion space or more of a forward expiration that they are looking to consolidate into your building with?

Doug Linde

It is an existing tenant in the marketplace that continues to expand.

Craig Mailman

Okay. Then just last one. Owen, you touched on earlier that you guys are looking at more value-add and development opportunities just more on the development side. Kind of how far out are you guys looking in terms of opportunities for this cycle or next cycle, which markets, perhaps outside the Volpe site would you guys be interested in adding additional sites for?

Owen Thomas

Yes. It is opportunity-driven. We are actively looking at new investment opportunities in all of our market. We have on balance sheet today actually a very significant pipeline of both entitled and un-entitled land that we are going to continue to push through the entitlement and permitting process.

New projects at this stage it depends. I mean, they could be for a future cycle. I suppose if for prospect exist for the cycle, probably less likely.

Craig Mailman

All right, great. Thanks, guys.

Owen Thomas

I just want to add a couple of things just to that last question. We have interestingly a shadow, shadow pipeline that we have talked about before. As an example, in Reston, Virginia when light rail comes, we are going to get an up-zoning in density and Peter; you can describe what how much of that we are going to be getting there on land that we own in our existing footprint.

In Boston, we are in the midst of beginning our Back Bay Train Station, up-zoning entitlements for up to 1.75 million square feet of space, so there are projects like that that are more long range. They are not 2017 starts. They are probably 2018 or 2019 or 2020 starts that are physically in the Company's - on balance sheet right now and we just need to protect them.

Then we have buildings like Fourth and Harrison, where again we are in the permitting process for up to 900,000 square feet and likely it will probably be a little bit less than that, but when Central SoMa eventually gets permitted and we are in a position to start a building it is another market, where we are looking for things.

We have talked about Dock72, where we will hopefully be under construction in the next few weeks with the first building, where we have the potential to do another million square feet. Again, there is a really good embedded inventory of places in the Company that we can add inventory over time.

I think that completes all the questions. Hopefully, we have been able to demonstrate to you all the progress we have made on our plans. Thank you very much for your attention this morning.

Operator

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

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