Boston Properties, Inc. (NYSE:BXP) CEO Owen Thomas on Q1 2016 Results - Earnings Call Transcript

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Boston Properties, Inc. (NYSE:BXP)

Q1 2016 Earnings Conference Call

April 27, 2016 10:00 AM ET

Executives

Arista Joyner – Investor Relations Manager

Owen Thomas – Chief Executive Officer

Doug Linde – President

Mike LaBelle – Chief Financial Officer

Ray Ritchey – Executive Vice President of Acquisitions

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

Bob Pester – Senior Vice President and Regional Manager of San Francisco Office

Peter Johnston – Senior Vice President, Regional Manager, Washington DC

Analysts

Emmanuel Korchman – Citi

John Kim – BMO Capital

Jamie Feldman – Bank of America Merrill Lynch

Jed Reagan – Green Street Advisors

Blaine Heck – Wells Fargo

Alex Goldfarb – Sandler O'Neill & Partners

Tom Lesnick – Capital One

Erin Aslakson – Stifel

Vincent Chao – Deutsche Bank

Steve Sakwa – Evercore ISI

Craig Mailman – KeyBanc Capital Markets

Operator

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

At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although, 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 material differently from those expressed or implied by forward-looking statements were detailed in Tuesday’s press release and from time to time, in the company’s filings with the SEC. The company does not undertake a duty to update any forward-looking statements.

Having said that, I’d like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchey, our 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

Thanks Arista, good morning, everyone. This morning I’ll cover our quarterly results, the macro market conditions that we see, as well as our current capital strategy and investment activity. On current results, we produced another strong quarter with FFO per share $0.05 above consensus, primarily due to improved operating performance. We've also increased the midpoint of our full year 2016 FFO per share guidance by $0.05, released 1.5 million square feet in the first quarter above historical averages, and our portfolio occupancy is now 91%, down 40 basis points from year end due primarily to the Genentech vacancy of 186,000 square feet at 601 Gateway in South San Francisco.

We had solid rent rollup in our leasing activity with rental rate on leases that commenced in the first quarter up to 16% on a gross basis and 26% on a net basis compared to prior lease. The leasing results in San Francisco, New York and Boston all exhibited strong growth over the quarter. Our U.S. economic growth continues to be positive, though we certainly see a hands of slowdown, fourth quarter GDP growth is now reported at 1.5%, which is down 2% from the third quarter last year, and estimates for this quarter are below 1%, however our most forecasters for this year are still predicting growth in excess of 2.5% albeit after downward revision.

The job's picture remains fairly healthy with 215,000 jobs created in March and the unemployment rate are steady at 5%, labor participation statistics are unchanged. We also see office market nationally continuing to improve, net absorption was 5.9 million square feet in the first quarter, vacancy rate remained essentially unchanged at 13.9%, asking rents rose 4.7% over the last year, construction levels also rose 6% over the last year, but remain at 2% of total stock, slightly above long-term averages for the U.S. office market. We continue to see the strongest space demand in locations driven by technology, life sciences and other innovative industries, notwithstanding all the financial disruptions in the last nine months.

Moving to the financial markets, they’ve improved materially from their lows in mid-February. S&P 500 is up over 14%, credit spreads have narrowed, oil prices are up over 50%, near-term interest rate increases also look less likely with the U.S. Federal Reserve highlighting concerns about sluggish growth, and other central banks around the world, most recently, the European Central Bank signaling an accommodative posture, 10 year U.S. treasury is hovering around 1.9% is traded below 2% since January. Credit spreads have narrowed, though less so for riskier credit.

Now moving to real estate, on private real estate – private markets real estate valuation, prices remained strong for prime assets in Gateway markets. And we’ve seen plenty of evidence of this over the first quarter and seen a number of transactions in our core markets that were offered and priced in 2016, examples of this include; in Boston 101 Seaport that’s a new 440,000 square foot office building located in the Seaport District, a 100% leased to PWC on a long-term basis, sold for $1,029 a square foot and a 4% initial cap rate to a German fund. In Washington DC, 733 10th Street, a fully leased 170,000 square foot office building sold for about a 4.7% initial cap rate, 1,065 square foot, I believe only the third building to trade above 1,000 per square foot in the district, the buyer was a Middle Eastern fund manager.

In New York, there are two significant sales reported to be pending to non-U.S. investors. A significant partial interest in 10 Hudson Yards, a new 1.8 million square foot office tower selling for a low 4s, initial cap rate is nearly $1,200 a square foot and 550 Madison Avenue, an 850,000 square foot office building that was being vacated for residential conversion is trading for approximately $1,800 a square foot.

And lastly in San Francisco, 140 New Montgomery, a 300,000 square foot older, but fully renovated Class A office building in the SoMa district leased at current market rents sold to a U.S. investor for approximately 4.8 cap rate and over $960 a foot, a record price per square foot in San Francisco.

As with the fixed income market, our perception is pricing for risker assets, whether in non-core locations and/or acquiring lease-up for renovation has softened to a degree in 2016. Long-term interest rates are low and cap rate spreads, the treasuries are above long-term averages, both of which provide strong support to real estate valuations. As I’ve mentioned before, the relatively high investment yields and cash flow stability provided by high quality real estate assets will continue to be an attractive investment alternative to fixed income.

Now moving to our capital strategy, it remains unchanged and that we're investing more in new developments and redevelopments than in stabilized acquisitions and these investments will be funded partially by select asset dispositions in the balance with debt financing. On acquisitions, we continue to actively review and are seeing an increase, for the reasons I mentioned earlier in value-add and development opportunities in our core markets. This past quarter, we purchased 218,000 square foot office building on Peterson Way in Santa Clara, California for $78 million. The asset is in infilled location with increasing density, it’s 100% leased to a single tenant through 2021.

During the remaining lease term, we plan to entitle the property for approximately of 630,000 square foot office campus. So the way to think about pricing is we’re paying $123 a square foot for un-entitled land, while receiving a 4.6% cash yield, as we entitle and prelease a new upsize office complex. We are also working on several additional acquisitions of sites and value-add office buildings.

On dispositions, in the first quarter as previously discussed, we completed the sale of 7 Kendall Center to MIT for $105 million. We continue to pursue select sales of non-core assets and maintain our estimate of 2016 asset sales of $200 million to $250 million.

Moving to development, we remain very active, primarily in the execution of our predevelopment pipeline. In terms of forecasting potential starts for the balance of 2016, it will remain highly dependent on securing preleasing for entitled sites. The potential starts for 2016 include Springfield Metro Center where we're pursuing a requirement with the TSA, Reston Block 5 located in the Reston Town Center and 20 CityPoint, the mirror building to 10 CityPoint being developed in Waltham, these three projects aggregate 1.1 million square feet. We've been very active in this past quarter, advancing our predevelopment pipeline for projects that would start beyond 2016.

Several important updates are as follows; as mentioned last quarter, in Cambridge at year-end 2015, 940,000 square feet of additional entitlements were made available for our Kendall Center development. We are in advanced discussions with multiple office users to fully prelease the 540,000 square foot office component of the entitlements. The balance of the project will be high-rise residential. The project is complex, involving replacing two smaller existing buildings on the site and will likely commence in 2017. Given we are not acquiring additional land, this project is another great example of the embedded development value in many of our existing assets.

You’ve probably read about our initial submission to the City of Boston for the development of additional sites at the Back Bay Station. We are already managing the concourse level of Back Bay Station as part of our agreement with the Massachusetts Department of Transportation. The project is in an early phase and could ultimately represent 1.3 million square feet of office retail and residential space located adjacent to a major Boston transit hub. The project is obviously subject to local approvals and public review and would not commence prior to late 2017.

You have also probably read that we've been designated by the MTA as developer for their site located at 343 Madison Avenue, between 44th and 45th Streets in New York. The site is the western half of a full city block between Madison and Vanderbilt Avenues, and offers direct access to Grand Central Station and the new Long Island Railroad station at Grand Central Terminal. We will acquire a 99 year ground lease and build up to a 900,000 square foot office tower, subject to a number of local approvals and ULURP. The development of this property is likely several years out, but we’ve commenced our predevelopment work.

As discussed, we are also conducting a significant upgrade of portions of our portfolio. These redevelopment projects that we're executing include 399 Park, the low rise building at 601 Lex in New York, 1330 Connecticut Avenue, Metropolitan Square, and the Prudential Center retail.

At the end of the first quarter, our development pipeline consisted of 11 new projects and one redevelopment, representing 4.6 million square feet and $2.6 billion in projected cost. Our budgeted NOI for these projects remains in excess of 7% and the commercial component of the pipeline is 61% pre-leased. We have all the cash, $1.4 billion, required to complete the development of the portfolio, which should add materially to our Company’s growth over the next four years.

Moving for a moment to comment on governance, we recently announced in our proxy that Mort Zuckerman will retire as Chairman of the Board and become Chairman Emeritus of Boston Properties. Ivan Seidenberg will also retire from our Board and Joel Klein will become our lead Independent Director. We were also very pleased to be able to recruit Karen Dykstra and Bruce Duncan as Independent Directors of our Board.

So, in conclusion, we remain very enthusiastic about our prospects for success and ability to create shareholder value for the balance of 2016 and in future years. We have a very clear plan that we’ll 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 assets for sale to ensure continued portfolio refreshment. We have significant entitled and unentitled land holding 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 a net debt to EBITDA ratio below six times and with a substantial portion of our upcoming debt maturities having now been either refinanced or hedge. This strong capital position will also allow us to pursue and act on investment opportunities that may present themselves in coming quarters.

Now let me turn it over to Doug for further review our markets.

Doug Linde

Thanks Owen, good morning everybody. The market color that I am going to give this morning is pretty consistent with our last few calls, albeit there are few subtle changes, but I want to just sort of level status-quo what I’ve said previously and I’ll do that real quickly. So what we’ve said before is that San Francisco has slowed from the pace that it was going at in 2014 and 2015, the Silicon Valley continues to be very active and actually has been expanding, New York is a good market, but it’s been impacted by growing supply and there has been some impact of the financial service market volatility on small tenant demand, the Washington DC is a challenged market and there is not much evidence of improvement, so the Reston area continues to be pretty active and there is a little bit of growth there, and Boston suburban and Cambridge are seeing increasing demand, while the CBD is a healthy market, but it’s really been more driven by lease expirations and intermittent technology migration. So that sort of levels what I’ve said previously.

Let me start now with the Silicon Valley and given that Peterson Way was just purchased, give you some sense of the thesis around this state and our views of the Valley. So having sold innovation place last quarter, our portfolio unfortunately is pretty small down there. It’s really comprise of our 5,700 square feet of Mountain View single storey product where we actually completed another 8,900 square foot of leases this quarter with average starting rents of $50 triple net, which is more than double the expiring rents on that space. And then we have our standalone office building down in Mountain View, which is only 141,000 square foot and we have our land redevelopment parcel on North First in San Jose, that’s the totality of our portfolio down there.

The difficultly we’ve been having over the last four-five years is finding high quality buildings or sites with an acceptable basis/return ratio. And the Peterson Way site offers an opportunity for us to deliver products in 2023 at a cost basis of under $700 of square foot and that assumes cost escalation on the cost side of the equation in terms of our building materials, labor, et cetera, and an initial return in excess of 7% at rents that are less than 10% above market rents today.

So we have a market where there was 29 million square feet of gross leasing and user activity in 2015, the market size is about 240 million square feet, so it’s a market we definitely want to be a part of and there was 11 million square feet of absorption in 2015. In the first quarter there were another eight leases over 100,000 square feet each, including 275,000 square feet from Google and another 200,000 square feet from Apple, and those are clearly the two dominant users of space and they’ve had a dramatic influence on the market, but there are lots of other companies down there like Facebook, NVIDIA, Broadcom and VMware and Palo Alto Networks, that are really leaders in their perspective fields, and these are growing companies and what they are looking for is new modern efficient product to house their growth. So this is what we are going to hopefully build and this is the demand that we are going to satisfy.

Jumping over to the city, as we discussed in our call in January, leasing velocity in the San Francisco CBD has moderated from the levels we saw in 2014 and early 2015, and so that’s been a continuation into the beginning of 2016.

I think the big difference between the market then i.e. in 2014 and 2015 and today is really the lack of large growth requirements, and by that I mean big tenants over 300,000 square feet. So at the moment, there is no 300,000 square foot greater requirement that we are tracking in the market. In 2013, 2014 and 2015, you had unprecedented large growth from Google, and Dropbox, and Salesforce.com, and Uber, and Stripe, and Slack, and LinkedIn, and they’re just not there today. However, there continues to be lots of active tech demand. And in the first quarter, Airbnb and Twilio and Quantcast and Stripe all took down blocks over 100,000 square feet each, and just in April Lyft, and FitBit and Uber have combined leased over 500,000 square feet and much of that actually was from the sublet markets. So technology is still a vibrant part of the market, it’s still expanding, it’s not quite in the same manner that it was in 2014 and 2015. And interestingly, technology users now make up 31% of all of the space leased in the City of San Francisco.

The second change in the CBD market in San Francisco has been the velocity from startups. If you look at the venture investing statistics, the seed in early stage investing is down about 22% quarter-to-quarter from prior year and first time investing is down 31%. And if you look at the city‘s sublet statistics, the overall level is very low at about 1.4 million square feet, but there are significant amount of full floor availability between 12,000 and 15,000 square feet across the South Financial and the SoMa areas. This is the product that’s most attractive to the startup community.

Keep in mind that most sublet has limited term, so it’s not competing with the lease expiration-driven requirement from traditional tenants, which is where we are working at Embarcadero Center. So at EC, we completed another 128,000 square feet of leasing during the quarter, full floor tenants totaled 90,000 square feet of that 128,000, and net tenants coming into Embarcadero Center totaled 85,000 square feet of that 128,000. The mark-to-market on these larger transactions is between 40% and 70% on a gross basis, very consistent with what we’ve been seeing for the last couple of quarters and is obviously a dramatic mark up in our same store statistics this quarter.

The pipeline of leases that we have going in negotiation today at EC continues to be robust, a 150,000 square feet of additional leases in negotiation, 66,000 square feet of that is either new tenants or expansions. We also have active discussions with new tenants for an additional four vacant floors totaling 100,000 square feet. So with very, very busier Embarcadero Center, I would say however that relevant to the end of 2015 when activity was described as its strongest it is ever been in the history of our ownership, the pace of new tours has moderated a little bit.

We’ve signed additional leases for floor to Salesforce Tower, a 180,000 square feet which is in our statistics today, so our occupancy is 59% and the next wave lease proposals are progressing and include some single floor users, as well as large tenants between two and four floors. All of the discussions involve pending late 2017 and 2018 lease expirations. The steel in the core are rising into the San Francisco skylines, and we hope to have our first tenants and occupancy in late 2017 or early 2018.

Now based on conversations we’ve had with shareholders and analysts recently, I think it’s fair to say that there has been a prevalence of concern about the next market I'm going to talk about which is Midtown Manhattan. Now our perspective has been pretty consistent since 2014, when we recognized there was going to be a supply issue from both new construction and the impending relocations that would impact lease economics. There continues to be good, not great leasing activity across the city and there are still tenant expansions across diverse industry group, including examples of financial services companies within our portfolio that are expanding today. Some of the more recent transactions in the marketplace from an expansion perspective have included Facebook and CBS Broadcasting, Vox Media, Google, PricewaterhouseCoopers, Shroders, and Chubb.

In January, we talked about the fact that the public capital market volatility was impacting the decision making from small financial firms. And the first quarter was certainly a rollercoaster for the debt and the equity markets. These conditions impact velocity at the high end, which is predominantly a small financial services firm demand pool. Across the market in the first quarter, there were five relocation transactions written at starting rent over $100 of square foot and that includes the Citadel lease at 425 Park. So if you remove the Citadel transaction, the average lease was 10,000 square feet, so four leases 10,000 square feet on average. There was clearly a change in the market in the first quarter.

During the quarter, we completed 14 deals for about 173,000 square feet, over 100,000 square feet of our demand had starting rents over a $100 of square foot. They were all renewals and explore expansions. While we continue to see a constant and steady volume of leasings between $80 and $120 of square foot, the velocity above $125 of square foot have slowed. We’ve been successful leasing small unit across the portfolio for a number of years and we are going to take a very similar approach for the two General Motors floors we get back on July 1st, subdividing them for smaller customers as required.

Our discussions regarding the entire FAO block continue to be very, very active, given the magnitude of the commitment by the perspective tenants, this will take some time, but we hope to have a firm signed lease later this year. Last quarter, we announced our lease termination transaction at 250, West 55th Street, and while we have not signed a lease on any of that place in the last 90 days, we have significant conversations underway for the entire second floor and a number of food operators have presented proposals for the ground floor space. So the activity on that take back is stronger than we anticipated.

At 399 Park, we are in lease negotiations with two existing tenants that would expand and commit to about 175,000 square feet of the city space rolling over in 2017, a 125,000 square feet of that demand represents expansions by these tenants. And we’ve had some questions about the rollup and roll down of the office space that city is going to be leading in 2017, and our expectation is that it’s going to be pretty moderate with very slight rollup. So as an example, we completed a four floor extension on one of the floors that is in question and the rollup was about 3.75% on a gross basis, i.e. pretty flat. This quarter, our New York City portfolio, CBD portfolio had a rollup of over 35% on a gross basis, so clearly 399 is one of the more moderate pieces of that.

Mike made some significant enhancements to our supplement package this quarter and he is going to discuss those, but the one I want to point out is the delineation of our share of the portfolio NOI by market. In the case of our Washington DC region, it illustrates what we’ve been saying for some time which is that our Washington DC, CBD portfolio is 9.5% of the company’s NOI.

We’ve seen a number of comments suggesting that the DC office market has turned the corner. Our view is that there has been no demonstrable change in the leasing environment. Most of the DC law firms have completed their new installations, between 2016 and 2019, we are tracking only one law firm expiration over a 100,000 square feet. The good news is that there is likely to get little impact on any downsizing under market, the bad news is that they’re selectively being generated from this sector. The GSA continues to be a very – take a very measure approach to their renewals, it is now hunkering into what we refer to as election inertia, which contributes to pushing our decisions.

In spite of the challenging environment, we did complete a 117,000 square foot lease at WeWork at Met Square this quarter, as well as get another 17,000 square feet of the uncommitted space at 601 Mass Avenue leased. This quarter we also completed a 60,000 square foot renewal in Reston Town Center, starting rents in the mid-50s and five smaller transactions totaling 17,000 square feet. Reston continues to be 97% leased.

One green shoot in the Washington DC and Northern Virginia marketplace comes from a group of midsize technology tenants that are slowly expanding. We have a few of the tenants in our Reston portfolio, some direct and actually some subtenants and they are prime candidates for that next building in Town Center that Owen mentioned.

The Boston region continues to be a magnet for life science industry and established tech companies, as well as for startup technology and maker organizations, this has led to a continual improvement and leasing momentum in the greater Boston market this quarter. Leasing velocity in the Waltham/Lexington submarket in particular has accelerated during the last few months, as a result of this type of demand and much of it is organic expansion.

When we purchased Bay Colony in 2011, it was about 50,000 square feet of technology tenant and no life science companies in the park. Today, we have over 500,000 square feet of these users and almost every one of them is in an expansion mode. This quarter, we completed another 179,000 square feet in our suburban portfolio and we have responded to more than 500,000 square feet of additional proposals over the last months. Virtually every pharma company has put down a base in the Cambridge market and coupled with a growth of the biotech industry and a tech tighten that are there, we have a market where the availability rate is under 5%. We are in active lease discussions as Owen described on 100% of our recently permitted commercial density, which will likely involve terminating some leases and potentially taking down some existing buildings in order to accommodate the new growth. We expect to make our site specific applications this year with a potential construction commencement in early 2017. And again, as Owen said, as part of this new development, we will also build additional residential high rise product.

The Boston CBD continues to be a very steady market and supply has been absorbed over the last few years, though there is some specular development going on in the seaport area. While we do have a few technology tenants expanding into the overall market, much of the demand is still leased expiration driven. General Electric is going to be moving into a combination of new construction and rehab buildings currently owned by P&G and not utilizing existing inventory.

This quarter, we completed over 520,000 square feet of leasing and that includes the work that we did in 100 Federal Street, which is about 400,000 square feet of that. We also did 28,000 square feet at the top of 200 Clarendon and 50,000 square feet at the Prudential Center. Activity at 120 St. James where we have 170,000 square feet of availability has picked up dramatically, and although we haven’t signed any leases, we have a number of tenants reviewing their auctions at the building and they range from between 32,000 square feet which will be partial floor to the entire 170,000 square foot block. All of those tenants would have occupancy in late 2017 or early 2018.

Last quarter we provided a score card for our revenue bridge. We continue to make progress and with additional transaction this quarter, leasing at Embarcadero Center, the Prudential Tower, 200 Clarendon and 250 West 55th, we’ve accomplished about $48 million of that $80 million bridge.

And with I’ll turn the floor over to Mike.

Mike LaBelle

Thanks Doug. Good morning everybody. As Doug mentioned we made some changes to our supplemental financial report this quarter that I’d like to go over. The purpose was really to more clearly reflect the characteristics and performance of our share of the portfolio, given the sizable impact of the consolidated joint ventures that we have put in place in the last couple of years.

In addition to delineating the geographic and tenant diversification in this manner, we’ve included supplemental information in our same property NOI performance pages to include both the consolidated portfolio performance that we’ve historically provided, as well as the performance of our share of the portfolio. You will also note that we’ve folded our R&D segment into our office segment this quarter due to the immaterial size of the R&D portfolio, especially after the sale of 415 Main Street in Cambridge during the first quarter.

Lastly, as Owen mentioned, we’re embarking on several significant repositioning projects within the portfolio, which we consider non-recurring in nature. In our capital expenditure disclosure and the supplemental, we’re now segregating the capital spend for these projects which have a total budget of approximately $165 million to be spent over the next few years.

Now turning to our results for the quarter, as you can see from our press release, we reported first quarter funds from operations of $1.63 per share, which is $0.03 per share, about $5 million higher than the midpoint of our guidance range. The performance of our portfolio drove approximately $4 million of this outperformance with about half of it coming from faster than projected leasing activity. We continue to successfully execute early renewals at Embarcadero Center and in our Mountain View properties at a significant rent roll up that are streamlined into our revenues upon lease signing. We also incurred earlier than projected occupancy from new leasing and smaller pieces across the portfolio. Approximately $2 million of the improvement resulted from lower than projected operating expenses that stemmed from warmer than normal weather conditions in the Northeast, which reduced our utilities expense a little bit, as well as the deferral of repair and maintenance expenses that we project will be incurred later this year.

On development and management services fee income, we were approximately $1 million ahead of our projections, the majority relates to higher than anticipated service income generated in the portfolio. We also signed an agreement to act as development manager for the tenant that acquired our former Innovation Place project in North San Jose, and we will earn a multiyear development fee for worth that commenced this quarter.

Our first quarter same property performance was solid, with the combined portfolio cash NOI up 5.6% and GAAP NOI up 1.5% from the first quarter last year. As I mentioned, the company's share of NOI growth differs from the combined results and if you pull out the non-controlling interest share, our share of the portfolio performance is even better. This quarter our share of cash NOI growth was 7% and GAAP NOI growth was 2.8% in 2015, which is the new level of detail we provided on Page 41 of the supplemental under the heading adjusted combined.

As we look out to the remainder of 2016, we project our same property growth to moderate through the year. Our same property cash NOI growth will be impacted by free rent that was in place in the first quarter of 2015, but burned off during the year. And both GAAP and cash NOI will be negatively impacted by the pending vacancy of 70,000 square feet in the mid-rise at 757 Fifth Avenue and 150,000 square feet at 601 Lexington Avenue where we’ve completed a series of lease terminations and relocations that will allow us to redevelop the low-rise building starting later this year. We expect this portion of the building to be out of service for about two years. The redevelopment will result in a longer period of downtime, but in late 2018 when we reintroduce both the new retail and low-rise building to the market, we expect it will enhance the long-term value and future cash flow from the building.

Our leasing activity in the portfolio is steady and generally in line with our prior projections. Overall, we’ve modestly increased our combined same property NOI growth projections for GAAP NOI, but we still project roughly breakeven growth from 2015, and we continue to expect our combined same property cash NOI growth to be 1% to 3% from 2015.

Again, when you remove the non-controlling interest share from the consolidated portfolio, our share of growth for both GAAP and cash is projected to be 100 basis points higher. The increase in our GAAP NOI projection is reflected in our guidance for non-cash straight line rents, which is now $40 million to $55 million for the full year.

We acquired Peterson Way this quarter with a plan to complete entitlement and develop the site in the future. In the meantime the building is a 100% leased for the next five years and it’s projected to generate approximately a 4.6% cash return and a 5.8% GAAP return. As a result, we’ve increased our 2016 guidance for the incremental NOI contribution from our non-same property portfolio that includes our new developments and our acquisitions to $38 million to $44 million. The projected 2016 incremental contributions from these developments and acquisitions for 2016 represents 3% year-over-year growth on our share of the total portfolio NOI.

We also increased our guidance for development and management services income by $2 million at the midpoint and now project services income of $22 million to $26 million for the year. The impact of these changes results in our increasing our guidance range for 2016 funds from operations to $5.85 to $5.95 per share. This is an increase of $0.05 per share at the midpoint, consisting of $0.02 per share from better projected portfolio performance, $0.02 from acquisitions and $0.01 from higher projected development and management services income.

That completes our formal remarks. I’d appreciate if the operator would open up the lines for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Emmanuel Korchman with Citi.

Emmanuel Korchman

Maybe if can we just stick to New York City for a second and we think about the Madison Avenue corridor, that sounds like it's going to have a bunch of new supply coming on if all these projects go forward over the next few years. Do you think that that submarket can handle the new supply coming from One Vanderbilt, if we classify it as Madison, MTA site, and now Sony coming back to office?

Doug Linde

So you just mentioned three projects, one of them is the existing building and the other two are new development. I can’t comment on the timing of the One Vanderbilt, but I think that the MTA site is a site that will take some time to go through entitlement, and hopefully over time that the city of New York have a demand generator that allows us to start that building with a significant pre-leasing commitment associated with it. I think that the challenge with New York City, and I will let John Powers comment on this, is that while there are plenty of tenants who are paying above $100 a square foot, there are not a lot of big tenants that would be anchored tenants that would be paid over $100 a square foot in size. And so, I think the market has to be naturally positioned to accommodate the demand that is there as opposed to a hope that simply rising rents will be achieved by the traditional large scale tenant demand that the city currently sees. John, do you want to comment anymore?

John Powers

No, I think you have it Doug. On the Madison comment, as you said there is a big timing difference, 550 is vacant now, and the MTA site has to go through the whole Euler process, so their objective is to have that done when East site access comes, which is 2021, it’s a long way from now.

Emmanuel Korchman

If we switch course for a second, given your positive commentary on Silicon Valley in Santa Clara specifically, can your express your interest or your views on the Yahoo site that seems to be coming to market?

Doug Linde

Bob, do you want to take that one.

Bob Pester

Yeah, it’s a big site. They’re looking for approximately $300 million, it’s not a bad site. We think the site that we purchased is a smaller and more manageable and closer to the center of activity. The Yahoo site has been on the market for quite some time, so that will tell you how many buyers are out there for a $300 million site.

Emmanuel Korchman

I will take it that you’re not a likely buyer there?

Bob Pester

No, I don’t see there is a likely buyer at this time.

Emmanuel Korchman

Thanks guys.

Operator

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

John Kim

Your cash pre-leasing spreads at 26% was more than double what you achieved last year, would you characterize this as unusually high this quarter or a reflection of what you’re seeing for the remaining of the year?

Doug Linde

So, the challenge with our pre-leasing spreads is that they’re so dependent upon the particular portion of the portfolio that’s rolling over at any one time. So we may have a quarter where we have much more significant growth and then we may have a quarter where we have a much more muted perspective because of the specifics associated with – again the granularity of that. In general, the dominant quarter is relative to its San Francisco rollover, the higher that numbers will be because on average there is – it is probably somewhere around 50% or 55% mark-to-market on virtually everything that we are doing in Embarcadero Centre, so as that gets a larger portion of each particular quarter that’s what’s driving it, and then I think the second area would be our New York portfolio at new General Motors building where we have significant embedded upside, so when those things rollover into the market you’re going to see a much higher number and then our Cambridge portfolio where there is a significant embedded upside, those are the sort of three portions of the market, where when they hit the statistics in any one quarter they will push it in the right direction.

John Kim

So outside of those buildings there would be more of a 10% to 15% number?

Doug Linde

I wish I could give you specific number, I just can’t because it’s really dependent upon the granularity, there is not much in the way of roll up on our CBD portfolio. So if 100% of that was occurring in anyone typical quarter it will be more muted.

John Kim

Okay. And then can I ask you about 767 Fifth Avenue, more on the re-financing side with a fair amount of debt due next year. I know you swapped – swap rates are part of it earlier this year, but can you talk about the overall financing strategy next year and if you’re planning to utilize similar amount of debt of the mortgage mezzanine debt?

Doug Linde

I mean, I think that the amount of debt we will be able to get will be at least equal to what is there and it will all be senior. We won’t need the used mezzanine debt to get to that level. The cash flow that property has grown pretty dramatically over the last 10 years that we owned it, as we’ve rolled up rents pretty consistently over that timeframe and there is still – it’s still under rented from a lease rate perspective. So from a debt underwriting perspective, lenders will be comfortable with the cash flow characteristics and the future cash flow characteristics, it’s obviously a large loan. So that’s the biggest challenge with it, is that the current financing is $1.6 billion, it’s naturally going to be good for the CMBS market, CMBS market can easily handle a loan of that size typically, but that market has been a little more volatile over the last six to nine months.

Although I would say that most of the volatility is when you start to get into the higher leverage points, so when you’re talking about a loan that is 40% to 50% leverage, that market is more -- is a better place to be today than if you’re talking about a loan that is 60% to 65% leverage. So we could finance this loan today in the CMBS market based upon the leverage point that we have. The existing loan is indicative of bunch of banks and insurance companies, so it’s also possible to execute in that type of environment where you would have somebody help you put together a large syndicate. So I think there is a couple of different ways for us to tackle this, it doesn’t expire until the end of 2017, so obviously there is time, but we’re – we’ve put in some hedges for about a third of the exposure at this point. So that’s kind of where I see that standing.

John Kim

And can you remind us what the on cost of that is versus where you think you could refinance it?

Doug Linde

So that debt on a cash basis is 6% debt. On a GAAP basis because of the – when we consolidated this thing the GAAP debt is about 3%. I would say the CMBS market today for 50% financing is somewhere in the high 3s to 4.25, and as you go leverage say towards 60% and kind of get into that 4.5 level, so that’s a significant reduction I would see from a cash interest basis based upon current interest rates.

John Kim

Thank you.

Operator

Your next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

Jamie Feldman

Good morning. I guess to start, can you talk about leasing prospects for 888 Boylston, which is coming online in the third quarter.

Doug Linde

Sure, so the 888 Boylston Street is a 17 storey building and floors three through 11, and floors 15, 16, and 17 are already committed and leased, and so we have four floors left and I think we have strong interest in the building from anyone who comes to the building and looks at it because the design and development group here have created a building that is paramount to the most sustainable, exciting, innovative building that the City of Boston has ever seen. And the issue is that we’re going to – we’re looking for premium rent, and so the number of tenants that are prepared to pay a premium rent is a smaller number than the average of the marketplace, and so we have to be patient with regards to the progress that we’re going to make at least in that space, as what our expectations are.

Jamie Feldman

Okay. And in terms of the on 2016 guidance, I guess there is none – 2017?

Doug Linde

Yeah. The large tenants in the building are coming into the building from a rent commencement in 2017, I think there is about 75,000 square feet that could hit the fourth quarter with the top three floors.

Mike LaBelle

That’s already in our guidance and I think it’s a 25 that’s in 2016, and then a couple of those other floors are in the beginning of 2017, and then the anchor tenant is towards the end of 2017.

Jamie Feldman

Okay. Then I appreciate the color on San Francisco and the Bay Area. Can you guys talk a little more about supply, like how you guys are thinking about the competitive supply both in San Francisco and in the Valley?

Doug Linde

Bob, you want to take that one?

Bob Pester

Yeah, in San Francisco, I mean, right now in addition to Salesforce Tower there is the 181 Fremont project in Block 5, which is under construction. I don’t see anything else coming out of the ground that’s entitled in the Central SoMa district or the SoMa district or the Downtown any time soon, so that’s the main competition that we have. Mission Bay does have the Kilroy project that's under construction. But we really don’t think that anyone that’s going to be looking at that project is going to be looking at our project at Salesforce Tower.

And then down in Valley, there is numerous projects that are under construction and planned several million square feet and we think that will offer opportunities for tenants to expand in and temper the vacancy rate somewhat from a standpoint of possibly increasing. But in San Francisco overall there is the very little competition that’s going to come into play in Prop M, obviously is going to have an impact on future development because there is nothing that’s being resolved on Prop in one way or another and I don’t see anything getting resolved on it in the near future.

Jamie Feldman

Okay. But I guess going back to the comments about not that many large tenants looking for space right now, how do you think about some of the buildings that are under construction in the CBD, that space going – that space getting leased? Do you think they will sit for a while or we'll see that stuff get leased up pretty quickly once it's done?

Doug Linde

We’ve heard there is a couple of Silicon Valley users that have looked at Block 5, they have a no commitment. 181 is a smaller – a much smaller floor plate building, so whether that appeals the tech remains to be seen. I can only talk from the standpoint of the activity that we’re seeing at Salesforce Tower and we continue to do tours weekly and presentations weekly and we continue to exchange paper proposals within it, you know we hope in the next – by the next quarterly call that we’ll have done hopefully another 100,000 square feet in leases.

Jamie Feldman

Okay. Then finally for Mike LaBelle, can you just talk about what the new guidance means for AFFO and dividend coverage for the year?

Mike LaBelle

So yeah, I’m happy to, you know our AFFO is going to be better than it was last year where we had a lot of pre-rent. So pre-rent last year was a well over $100 million, so this year’s pre-rent guidance is $40 million to $55 million, so that’s going to be a benefit to it. I mean I would say on a per share basis, the way we calculate FAD in our supplemental, we expect it to be similar in the $415 million to $440 million range. You’re talking – in order to meet our occupancy guidance that we’re going to have leasing cost of somewhere in the $150 million range, and CapEx of – on a recurring CapEx basis, somewhere $75 million to $90 million, which is pretty similar to last year, maybe a little bit higher.

Jamie Feldman

Okay, great. Thank you.

Operator

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

Jed Reagan

Morning, guys. You mentioned seeing a slowdown in high-end tenant demand in New York City this past quarter. Just with some of the market volatility settling down in the past couple months, are you seeing signs of those types of tenants getting more active again?

Doug Linde

I’ll start and I’ll let John comment. So I actually – I talked to a handful of brokers in the third week in January, and then I talked to them again last week. And I think to describe their personality is somewhat manic, on the good and the bad. And the number of tours that is occurring right now in the greater Midtown small tenant market is significantly accelerated versus where it was when the Dow and the credit markets were a little bit more in turmoil. John, do you have any other perspective?

John Powers

No, I mentioned on the last call that we had this in August and the beginning of September when the equity markets had a lot of jitters and spread and widened in the bond market. And we had the same thing happen in January, but it didn’t stick with leasing market in the fall and I don’t think it’s going to stick with the leasing market now. Certainly on the high-end financial hedge funds et cetera, they’re very, very close to that market and when there is issues there they have concerns.

Jed Reagan

Okay. That's helpful. Just switching to DC, can you talk about your outlook for DC beyond 2016 as far as leasing activity and rent growth is concerned? Do you think that's a market that turns the corner in a noticeable way in 2017 and 2018, let's say, following the election?

Doug Linde

I will take a crack at it and then Peter can add to it. Well we lack in DC that you hear in the other markets are kind of unexpected demand drivers. Right now, we’re still pre-dominantly lease expiration driven market, so we’re going to look in advance and see where the demand is coming from, from existing tenants and thus match up relative supplies, is pretty equal. We’re not going to see a tremendous increase in vacancy, nor are we going to see a tightness, it’s a pretty balanced picture right now, but what we really need is for the election to take place, clear the slate and look at some technology and some other demand drivers coming to the marketplace. Until that additional demand comes, we’re going to be pretty status-quo market. Peter, do you have anything to add.

Peter Johnston

I would certainly say, that’s true, it relates to the election. I do think looking at the job growth numbers and looking at where the GSA has been, they’ve been shedding that jobs and that has stabilized in the last 12 months and they’re actually starting to add jobs again, which I think will be a positive, but as is always the case, the money won’t start to flow till after the election for those things.

Jed Reagan

Okay. Thank you.

Operator

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

Blaine Heck

I guess Owen or Doug, just more generally, you guys talked about the development pipeline; but can you just talk more about where you think we are in the cycle, and how that pertains to the shadow development pipeline? Has your level of comfort going ahead with any of those projects changed as we've come through the cycle? And how do you think about the importance of pre-leasing at this point?

Owen Thomas

I don’t it’s changed, but I do think it is shifting gradually. In terms of your question about the cycle obviously it’s difficult for us to predict exactly when the cycle will end and when we’ll have the next recession, there are number of people predicting it, in the near term, I don’t think we’re quite as concerned about a near term recession, but as I mentioned in my remarks growth is clearly slow and I think we anticipate that by continuing here for some period of time. But we’re not blind to the prospects of a recession in the – certainly in the medium term. And then, what I mean by saying a shift, I do think our thinking about launching new development is shifting. I think our pre-let requirement is higher, it’s difficult for us to say precisely that we need x percent for a building pre-let to launch it because it depends a lot on other factors, like where is the tenant coming from, what’s the size of the building, what’s the nature of the market at the time, so we don’t set those kinds of fixed hurdles. But I do think as we look at our portfolio and we look at projects that we want to launch a pre-let requirement is clearly required and I mentioned in my remark three projects that we’re looking at now for 2016, and we’re not going to launch any of them without some kind of significant pre-let.

Blaine Heck

Okay, that's helpful. Then it sounds like you guys are progressing well with the tenant for the FAO space. Can you give any estimate as to the potential NOI upside versus the temporary tenant that you have there, and maybe even versus what FAO was paying?

Owen Thomas

We’ve been reticent to talk about the specific economics of the deal. We’ve talked in sort of big picture perspective about the income that’s been generated by the overall resale space in the past at the General Motors building. I think we’ve said in the past and if you could figure it out from our disclosure that the rent that FAO is paying was about $20 million a years and we think the number is significantly higher than that.

Blaine Heck

Okay, great. Fair enough. Thanks, guys.

Operator

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

Steve Sakwa

Thanks. Doug or Owen, when we look at your occupancy by market, there is a real bifurcation in a couple places between the CBDs and the suburban’s. And I am just wondering if you could sort of comment on Princeton, you know it's 75% occupied today versus your New York, which is 95%. You've obviously got a few things you talked about down in South San Francisco that may get cleared up. But then when you look at the Washington portfolio, you're doing well in DC, specifically in Reston, but then suburban Maryland. How do you think about those markets in particular? And maybe Ray can comment on the Annapolis Junction, which just doesn't seem to be getting much traction on the leasing front?

Doug Linde

Sure. Let me take a quick stab at that, Steve, because it’s a fair question. So the good news is that the occupancy number you're describing and the contribution from the properties that the occupancy number is significantly underweighted. In other words, if it were leased, it’s the relative rent that it would achieve is de minimus relative to the rents that we are achieving in our CBD property. So as an example, the Washington DC vacancy is in our VA 95 product, and it’s interesting, it’s actually the first time in the 20 some odd years that we’ve been a public company we’ve had significant availability in that particular park, but the net rents that we are achieving here are $13 a square foot. The big pieces of availability in our portfolio are at Tower Center in New Brunswick, which is an excess of 300,000 square feet of that availability and then the property in South San Francisco at Gateway. So if you pull those three out, the VA 95, the Gateway and the Tower Center, we have a very different picture, but it is true that the majority of our challenge space is in the suburban marketplace.

Steve Sakwa

Yeah. I guess, Doug, it just seems like it takes a lot of management effort for maybe not a lot of reward. And I guess is it worth longer-term keeping it versus focusing your efforts on other things in the portfolio?

Owen Thomas

So Steve, it’s a great point. Just to debate we constantly have as a management team. And I described a lot of investor’s enthusiasm for real estate, but it’s primarily for lease buildings in our core markets and there is less investor enthusiasm for unleased buildings in suburban market. So, our tradeoff is – we don’t want to sell assets just to sell them at deeply discounted prices. We want to perform the real estate skill, lease the buildings, and get a proper price for them. And I would say if you go back and look at the asset sales that we’ve done, clearly we’ve done some of the large joint ventures on the urban assets, but mixed in with that, if you go back over the last couple of years, we have sold non-core assets in some of our suburban locations in Boston and in Washington DC. And also as Doug said, one of the things I just want to clarify when you talked about the Princeton vacancy, the Carnegie vacancy is – the Carnegie occupancy is 86% of all resident in that Tower Center as Doug described.

Steve Sakwa

And I guess, any comment from Ray on just the Annapolis Junction? That just doesn't seem to be getting a lot of traction at this point.

Ray Ritchey

I’ll be glad to take a crack at that, Steve. First of all, again, we only own 50% of those buildings with our partners the Goulds, and we are seeing the NSA demand be focused more back on the base as oppose to reaching out to satellite office location. And the MegaCenter which was the main driver for the Annapolis Junction project, they changes the use of that that was like a – it was like WeWork for spies. It was a scenario where people would come in and have temporary occupancy. Those requirements are also getting moved back on the base. So we are seeing a slowdown in the demand, but again our presence there is relatively small on a relative basis to the overall Boston Properties Enterprise.

Steve Sakwa

Okay. And I guess just one last question for Bob Pester. I know this is hard. You say there is not a lot of large requirements in the marketplace today, but what we've heard from brokers in the past is a lot of these large requirements are stealthfully done, maybe either away from the brokerage firm or directly with some landlords. Any perspective you can just sort of offer on that today? I realize if they're not on a brokerage list and maybe they're not in the market or you would know about them, but how should we think about that?

Bob Pester

Yeah, I think that's a bunch of baloney, Steve. We haven’t seen after the years we’ve been in this marketplace where some mega deal happens that nobody knew about.

Steve Sakwa

Okay. Thank you, guys.

Operator

Your next question comes from the line of Erin Aslakson with Stifel.

Erin Aslakson

Good morning. So yeah, my question was kind of along the same lines, just regarding the Annapolis Junction asset. I realize it's 50% owned, but it had a huge loan-to-value in place, $339 a square foot. That we assume is being relocated on base. Is that what you were referring to, Ray?

Ray Ritchey

Yeah, basically, Erin, they seemed to be concerned about security now more than ever. So the outreach to – again, third-party space providers is not as great as it was before. We still have a strong presence there. We are pretty well occupied in the other buildings of the MegaCenter and Mike wants to talk about the debt, you can go ahead and ask questions to him.

Erin Aslakson

Okay, that's fine. Then that was on AJ One, where the big debt was in place. On AJ Seven, there was a one year extension done on the loan there, which is much more reasonable, $170 a square foot. But is there a lack of demand? I mean, that's a 100% leased asset, but is there some expectation that that tenancy goes away as well?

Mike LaBelle

Was a short-term lease, and no, there is no anticipated vacancy. We just decided to stay short and kind of evaluate the overall positions as we go forward. That lease is actually – as Ray correctly stated to one year lease. However, the government invested about $40 million in technology and that building and for better or worse the nature of that Park, those one year leases are just the way they get allocated funding. So what they do is basically give you a one year deal and then nine one-year extensions. So we have every expectation that they are going to stay in that space.

Erin Aslakson

Okay. And then how much did the government invest in the One Annapolis Junction asset?

Mike LaBelle

Actually we put the bulk of that investment in, and as Ray described it really was a plug-in play skiff with raised flooring all the way down to the desktop, computers and a 24 hour operating entity in there which was first SAIC and is now Leidos one of their successful entities with staff, help desk, 24x7. And as Ray indicated, what happened – having met with the director of logistics and facilities early in this part of the year – earlier this year rather, they’ve had a couple of security issues up there. There was a fidelity outside the base. There was obviously the Edward Snowden incident, and it has – I think scared them into moving certain requirements on base when they’ve been able to do that. We are in the process now with Leidos of throttling back, based on our conversations with the logistics folks from NSA. The level of services that we’ve been providing to a number that we can adjust the rent downward and take that part of the operating expense if you will. So where we’ve been leasing space there in the $120 to $130 range, we just did a deal at $95, which quite frankly if can continue to do deals with that rate, I think we can put the building back on a pretty sound footing.

Erin Aslakson

Okay. Is there any indication in the size of the amount of square footage going back on base in total?

Mike LaBelle

They didn’t really share that. They didn’t really share that information with us.

Erin Aslakson

Okay. Well, thank you, guys, very much.

Operator

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

Vincent Chao

Good morning, everyone. Just going back to San Francisco here for a second, I know we've talked about it quite a bit, but just curious. It does look like you got some leasing done at Salesforce Tower. Can you just comment on – and I think you said that you’re hoping for another 100,000 square foot or so in the next couple of quarters. Just curious who is taking space there today? Obviously, the larger guys are not out there, but where is the demand coming from today?

Owen Thomas

We’ve talked about this in the past and it hasn’t changed, but I want to just reiterate that. So all of the demand that we are seeing at Salesforce Tower is really lease expiration driven demand. I mean there maybe a couple of tenants that are in the market for a floor that have asked for a presentation, but it is a truly representative FIRREA-oriented group of tenants that are looking for high quality brand new visible state-of-the-art office space. So its brokerage firms, consulting firms, accounting firms, lawyers, investment professionals, asset managers, venture capitalists. That's sort of the laundry list of the type of users who are the most likely tenants to be in that building. Remember the first available floor is now 32, and so, you know, you're in the high-rise of high-rise office building in the clinical location in San Francisco.

Vincent Chao

Okay; thanks for that. And then just maybe going back to the East Coast, just any comment you can provide on the Penn Station redevelopment, your interest and maybe the process from here?

John Powers

We’re not bidding on the Penn Station redevelopment. We looked at it carefully, there is two opportunities, one is Penn Station and the other is the Fairway Building. It’s very complex, both of them are very complex. Penn is primarily exclusively a retail play and Fairway has a combination of retail, probably some hotel and office, but it’s very complex. And as I said, we analyzed carefully and decided not to participate.

Vincent Chao

Okay, thanks

Operator

Your next question comes from the line of Alex Goldfarb with Sandler O'Neill.

Alex Goldfarb

Good morning and thank you. Just two questions here. First, you guys obviously spoke a lot about Midtown and what's going on, and then also the growth out West. But looking at your portfolio mix, New York is still a pretty big component of BXP relative to the West Coast. And if we look at where a lot of the economic growth is, there seems to be a lot more coming out of the Bay Area versus New York. So should we expect more and more of the investment to be out West? Or should we expect it to be as it's been right now, where there is a West Coast investment announcement and at the same time you have a New York investment announcement as well?

Owen Thomas

So Alex, we certainly think about our portfolio mix and our balance across the various regions as we think about making new investments and buildings or in developments. And for that reason if you pro-forma-ed what we’re going to look like over the next few years, the San Francisco component of our overall results is going to grow materially, primarily driven by the sale – the delivery of the Salesforce Tower, but also by some of the other project that we delivered last year like 680, 690, 535 mission and so forth. So there has been a conscious effort and I think it’s going to continue to be a conscious effort that we're going grow our company is areas where there is the greatest tenant demand, which today is technology and life sciences. So, the answer to your question is, yes, but I would also say that the investment that we make are also opportunity driven. So, you know, our team in each of the regions work vigorously on identifying new investments, switching our development pipelines forward. And so that we think about a top-down the actual allocation are also driven by where the opportunity is opportunities present themselves.

Doug Linde

I mean, Alex, just if you take Salesforce Tower rate, it’s 1.4 million square feet and if average gross rent in there is in the mid-80s, we are talking about $150 and $120 million of additional revenue, which is a significant jump in the overall percentage that San Francisco will have when the building is fully in service in 2018 or early 2019. I also think that – and I think we’ve been pretty consistent in our description of this, which is we're a demand oriented company. We are looking to serve those users who are growing and where the demand is been generated. And to the extent that there is more demand and users that are sort of technology oriented and it happen to be in the West Coast. We’re going to see everything we possibly can to service those companies. On other hand, New York City and the Boston and the Cambridge marketplace is in to some degree Northern Virginia also have a pretty interesting feature demand pool that we are going to try and serve as best we can as well. And so I think that we are going to be aggressive about making investments in all of those places where we think there is an opportunity there to find tenants who are growing and we are looking for high quality office space.

Alex Goldfarb

Okay. And then the second question is, I think in your opening comments you said the activity down in Silicon Valley area is much more active than in San Francisco, did I hear correctly?

Doug Linde

Yeah, I mean if you look at the activity in the Silicon Valley in 2015, the work what went on in San Francisco.

Alex Goldfarb

Okay. Then my question is, how much of that is just where businesses are growing because of what's happening internally in the business versus there may be easier access to, quote-unquote, cheaper, more affordable housing that's causing people to maybe – down South maybe there's San Jose or South of there, there's more affordable housing for people versus the explosive residential rent growth that's been in San Francisco. So how much of it has been employee driven versus business driven?

Doug Linde

So, I will make a few comments and then I will let Bob and Owen chime in. So, the first is that, Google and Apple are by far the most dominant users of office space in the Silicon Valley. And their headquarters is in the Silicon Valley and I think there’s absolutely no expectation that whether that’s going to change. I also think that, the number of people who are living in the city of San Francisco and that are using commuter oriented transit, mostly in the form of private buses to get to those campuses down in the Silicon Valley is very, very significant. And so I think that the value of the affordable housing is less critical to the growth of the Silicon Valley than the natural establishment of those campuses and those businesses in terms of historically where they have been and their ability to still be able to attract labor from the urban market, if they’re looking for younger and more transit oriented types of opportunities. Bob, any other thoughts?

Bob Pester

Yeah, I’ll just add, I think the housing prices in the Silicon Valley have anything to do with the growth, I think all the growth is organic growth where they’re growing and getting bigger. If they were looking about residential values they would move to the East Bay, because that’s the cheapest housing in the Bay area.

Alex Goldfarb

That's one heck of a commute. Listen, thank you.

Operator

Your next question comes from the line of Tom Lesnick with Capital One Securities.

Tom Lesnick

Good morning; thanks for taking my questions. Just a couple of quick ones. First, I understand it's a relatively small segment of your overall business, but it looks like the multifamily and hotel segment has been dragging on same-store NOI the last little bit here. What's your prognosis for that segment going forward?

Mike LaBelle

I think on the same-store side our hotel was down a little bit that drove it this quarter. The challenge is, it’s such a small portfolio that any kind of little change has an impact and also if you look at the residential page of our supplemental, the avenue is in one year and not in the other, so you really have to look at the same-store days, which is not as – it’s not as bad because that excludes the avenue, which was sold during the year.

The Avant and the Atlantic Wharf property, retro-wharf, have both stayed very, very well occupied year to year and continue to improve.

Doug Linde

And I would also just add, we are interested in continuing to grow our residential portfolio, primarily through development. And if you look at our active pipeline and our pre-development pipeline, we have a number of projects that we anticipate, under construction now where we anticipate building, we talked a little about Reston, certainly in Cambridge, North Station; there are several examples to this around the company.

Tom Lesnick

Got it, thanks. Then maybe one for Ray. It looks like you guys are introducing paid parking at Reston Town Center. Just wondering; is it possible for you to quantify the incremental revenue opportunity there? And are there any other opportunities across the entire portfolio where you could also realize upside potential?

Ray Ritchey

I’ll let Peter address that he’s away more political than I on those type of investments, so go ahead Peter.

Peter Johnston

Well, I don’t think we want to get into necessarily quantifying it, I would say that there is approximately 8,000 parking spaces there. We undertook for a couple of reasons, obviously revenue is one, but we’ve got a circumstance where we have to control to honor our obligations with both the retailers and the office tenants there, and people in adjacent resident parking in our space is so to speak, as well as commuter is doing the same thing. And part of implementing it now is we’ve got enough runway that with the introduction of Metro proximate to Town Center probably in about three, three and a half years. We want to be in a position where this system is up and running. It’s going to be a licensed plate recognition system, you’ll be using an app to park there and we think it’s going to be a pretty significant enhancement for our customer base coming to the Town Center.

Doug Linde

One point I would like to make is we talked to some other major retailers about the experience of implementing paid parking and after the fact they actually noted an increase in sales of up to 10% of the retailers because the people who do come to the malls now find it way more convenient and as a result spend more time there and spend more dollars. So we view it as a great thing for our retailers and our office tenants and the income we get will certainly be helpful, but by no means the main driver.

Tom Lesnick

Interesting, I appreciate the insight. That's all I've got.

Operator

We have time for one final question and that question comes from Craig Mailman with KeyBanc Capital Markets.

Craig Mailman

Thanks, guys. Just curious, going back to San Francisco, your commentary on it being a little bit slower. Just curious if that's filtered in, impact at all, rent level discussions as you're trying to fill up the rest of Salesforce?

Doug Linde

It actually hasn’t, the overall availability in San Francisco I think is under 6% right now. And I think what we’ve done is we’ve tried to price all of our product appropriately for the market, we are not striding to set record for the sake of setting records, where we think we are hitting the market bid and we are doing it pretty consistently because we’re acting a true, honest market price that both the tenant and the landlord feel good about. And so we’ve not seen any diminishing in our pricing component of our concession package and rental rate economics over the past three to four months.

Craig Mailman

That's helpful. Then just lastly, down at Peterson Way, I know it's a longer fuse on this one, but would this be spec or build-to-suit?

Doug Linde

I would hope that it will be build-to-suit, but in 2023 we’ll be in a different environment, so we’ll see where we are when we get there.

Craig Mailman

Great. Thank you.

Owen Thomas

So that concludes the questions and our formal remarks. Thank you for your time this morning and your interest in Boston Properties.

Operator

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

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