Boston Properties, Inc., Q1 2008 Earnings Call Transcript

Apr.30.08 | About: Boston Properties, (BXP)

Boston Properties, Inc. (NYSE:BXP)

Q1 2008 Earnings Call

April 30, 2008, 10:00 am, ET

Executives

Edward H. Linde – Chief Executive Officer

Douglas T. Linde – President

Michael E. LaBelle – Chief Financial Officer

Raymond A. Ritchey – Executive Vice President

Bryan J. Koop – Senior Vice President

Robert E. Pester – Senior Vice President

Mortimer B. Zuckerman – Chairman of the Board

Claire A. Koeneman – Financial Relations Board

Analysts

Ian Weissman – Merrill Lynch

David Toti – Lehman Brothers

Mitchell German – Banc of America Securities

Michael Bilerman – Citigroup Global Markets

Jay Habermann – Goldman Sachs & Company

Michael Knott – Green Street Advisors, Inc.

Jordan Sadler – KeyBanc Capital Markets

David Cohen – Morgan Stanley & Company, Inc.

John Guinee – Stifel, Nicolaus & Company

James Feldman – UBS Investment Research

Irwin Guzman – Citigroup Global Markets

Operator

Welcome to Boston Properties’ first quarter 2008 conference call. (Operator Instructions) As a reminder, this call is being recorded on Wednesday, April 30th, 2008. I’d like to turn the call over to Claire Koeneman with the Financial Relations Board. Please go ahead.

Claire A. Koeneman

Hi. Good morning, everyone. Welcome to Boston Properties’ first quarter conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8K. In the supplemental packet 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 of these documents they’re available in the investor relations section of their website at www.bostonproperties.com. Following this live call an audio webcast will be available for 12 months in the same section of the website.

At this time I 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 reflecting 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 are detailed in last night’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 gone over all that, I’d like to welcome management. With us today include: Mort Zuckerman, Chairman of the Board; Ed Linde, Chief Executive Officer; Doug Linde, President, Ray Ritchey, Executive Vice President and National Director of Acquisitions and Development; Mike LaBelle, Chief Financial Officer; and Bryan Koop, Senior Vice President and Boston Regional Manager. Additionally, during the Q&A portion of the call all the regional management team will be available.

Without further ado, I’ll turn the call over to Doug Linde for his comments. Doug?

Douglas T. Linde

Good morning, everyone. Thank you, Claire. Well, I guess based upon the data that was released today, we’re technically still not in a recession. There was some GDP growth. But clearly the housing data continues to be pretty disappointing. The unemployment rate is still moving up. The ISM has dropped below 50%. And consumer confidence in the light of the headlines of $3.50, or $4.50 if you’re in California, per gallon gasoline, and more than $4.00 per gallon for milk, it’s pretty tough out there.

The financial system is still in pretty tough shape as well and while some of the credit markets are improvement, we in the real estate business are still getting accustomed to an environment where debt for commercial real estate is difficult to arrange and/or very expensive relative to the conditions that were prevalent over the last few years.

We are still in the business of buying, developing, and operating buildings that are very dependent upon jobs. So the questions that we continually ask ourselves are whether the slowdown will primarily impact the consumer or spread to the business sector, is it a domestic or international slowdown, and are the impacts going to be felt more deeply in the service/financial sector or the broader economy?

If you look at the leasing data we provided in the supplemental this quarter it’s pretty clear that releasing spreads are very healthy and that the portfolio has lots of embedded growth. The overall increase of 74% for the portfolio with 123% in New York City, 107% in San Francisco, and 28% in Boston are pretty consistent, in fact, with our previous expectations and the guidance that we gave you last year of same-store growth of between 3% and 4%.

Now, there are times when this data can be a little bit stale. Since the leases that rolled through the data may have been signed up to, in some cases, two or three years or at least 12 months before. But this quarter the deals that actually hit the statistics were really started in the second and third quarters of 2007 and the lease executions are really very, very fresh. So when we calculate our mark to market we kept a more conservative approach this quarter and we kept all our rents constant. We didn’t look to move anything either up or down. This produced a healthy $9.50 per square foot of embedded growth. Again, our occupancy continued to pick up a little bit. We are now running at about 95.3%.

Over the last couple of months we’ve toured a significant portion of our tenant space and we’ve really been pretty diligent about engaging in direct conversations with those tenants about their views on their business climate and their growth prospects. What we’re seeing and hearing is pretty market and industry specific, and while caution is prevalent across the board the overall business economy still seems pretty sound.

So let me go through the markets, and I’m going to start with Boston. Activity in the suburban Boston market is what I would define as robusto. It’s pretty consistent with the level of activity we saw 12 months ago. Our leasing associates are responding to both new requirements and organic growth from national and local businesses.

Technology, life sciences, and biotech continue to drive demand in the suburbs and in Cambridge, and these companies have not seen top line revenue pressure and, for the most part, are either middle market companies or major institutions with a pretty global consumer base.

In Waltham, where vacancy rates are under 9%, newly delivered product is still commanding rents in the low 40s. We just completed the leasing of our new development at 77 CityPoint leasing the remaining 165,000 square feet to a company that creates software for pharmaceutical and biotech industries. This tenant continues to look for more space on Prospect Hill. CityPoint Hill.

Cambridge, with a vacancy rate of under 5% in Kendall Square, continues to enjoy resurgence from strong tech companies looking to establish or expand their presence in close proximity to MIT. Rents, where the conversions of lab space has reduced the overall supply, ranged from the high 40s to more than $60 per square foot. While we experience a default this quarter of a 29,000 square foot tenant that was a start-up web designer whose lease commenced in July of 2007, we expect to really set rates that are 25% higher.

Lab rents have risen to a level where some emerging biotech companies have made the decision to move out of Cambridge into Lexington and Waltham, thereby reducing the available product in those markets as well.

In downtown Boston vacancy still is about 6% and 8% if you include sublet space. Short term activity in this CBD has moderated with most of the activity geared towards the extensive lease expirations coming in 2010 to 2012. We are thrilled to announce that we’ve signed a lease with Wellington which Bryan’s going to talk a little bit more about in a few minutes.

We have a number of tenants at the Prudential Centre with growth projections that have outpaced their contractual lease rights. In fact, this quarter we recaptured a floor at 101 Huntington Avenue and leased it to a growing tenant that doubled its premises and increased its rent by over 140% versus what was currently being paid on that space.

In comparison to Boston, the suburbs of Northern Virginia are pretty quiet. The traditional slowdown of GSA related requirements during the presidential election, along with the wait-and-see attitude from the significant concentration of defence and security related users that are pretty sensitive to potential changes in the administration or policy, coupled with the significant new construction which we’ve been talking about that has been delivered, has created a pretty uncertain environment in Northern Virginia.

In anticipation of these conditions we aggressively pursued every transaction that we sought in the Reston market and our South of Market project is now 72% contractually leased. We have about 85% sort of committed as we begin to recognize revenue this quarter. Our next Reston town center building where construction will commence later this quarter is 77% pre-leased and is going to be delivered in 2009.

Our Northern Virginia office portfolio, thanks to Ray and the leasing folks in D.C., including these new future developments, is 94% leased.

Activity on our Tower Oaks development in Rockville, Maryland, has been pretty slow. Thirty-seven-thousand square feet of that 183,000 square foot building is leased; but in contrast, inside the beltway at Wisconsin Place activity is very strong. You may recall the CapitalSource, which is a structured finance company, is the lead tenant in that building. They will occupy about 160,000 square feet. They are reviewing their space options and we may in fact have the opportunity to reduce their commitment and achieve higher rental rates than that which is under their contractual lease when we deliver that project in the second or third quarter of 2009.

In the District we were unsuccessful, unfortunately, in the pursuit of our Department of Justice requirement at New Jersey and (inaudible) and this quarter we wrote off the pursuit cost for that project. Just to give you a sense of the winning economics, our projected development costs with a $20 per square foot land basis was somewhere between $370 and $400 a square foot. We believe that the winning bid, with a gross rent of $48, which probably translates into a net rent of in the very, very low 30s, had a land cost that was $70 per square foot higher than ours and agreed to provide $60 a square foot of rental abatement. So by our calculations this works out to a flat 10-year cash-on-cash return of under 6.25%, which is clearly well below our hurdle rate.

If there is a positive aspect to the loss of the DOJ requirement it’s that the user groups from the Department of Justice has actually changed and the opportunity that we have to renew our Department of Justice leads at our 200,000 square foot 1301 New York Avenue building has greatly increased.

We closed on our ground lease with George Washington in March for 2200 Pennsylvania Avenue; construction on the garage, which will service a base of the development, is expected to commence later this spring and we expect to deliver the office building in 2011. The residential project, which we may ultimately joint venture or sell, should follow along similar lines. Leasing interest has been very strong and, as Ray will tell you, this is the best site in Washington, DC.

I can’t comment on New York City without recognizing the major financial institutions are continuing to support significant charges and that many of their structured debt markets are not functioning and overall capital raising activities are still way down. The banks and investment banks are clearly capital constrained. They don’t have the ability to underwrite capital transactions in any form that resembles the last few years. They continue to make strategic decisions to either greatly cut back or eliminate lines of business, which in some cases has and in other cases will likely result in headcount reductions in Manhattan.

We expect the legal profession is going to be affected by these same conditions. Now, while there have been a few isolated incidents of firms reducing head count, to date the law firms have shown great resiliency. Since law firms are private partnerships the decision to reduce their staff will ultimately be a question of how much of a reduction in partnership profits the various firms are prepared to accept. We expect the weaker firms will see partner movement. We have three separate firms in our existing buildings that are taking additional space in 2008 and 2009 as they assimilate new practice groups. The consolidation in the legal profession is going to continue and it’s going to result in some additional space requirements as well as some additional sub-letting.

Notwithstanding the general market uncertainty, announced impending job reductions just haven’t yet been accompanied by a significant increase in sub-let space in Midtown Manhattan. While the major financial institutions are absent from the market, activity is still healthy and driven by tenant consolidations, expansion from smaller financial and non-financial users, and normal lease expirations. Remember, Midtown landlords have very little spot availability with a direct vacancy rate of under 5% and availability of 8% if you include all sub-let space and new deliveries.

Concessions are up slightly and taking to acting rents spread they’re probably a little bit wider than they were six months ago. Remember, new supply in Midtown Manhattan has been and will be very limited in an overall market of 220 million square feet.

The leases that drive our New York statistics this quarter all originated from space recaptures from Citibank at Citigroup Centre. We continue to work cooperatively with Citibank to reduce their tenancy in our buildings, especially since we see tremendous upside from these givebacks.

Finally, let me touch on San Francisco. Activity in the San Francisco CBD is slower than last quarter, but again with a direct vacancy rate under 8% and in an overall vacancy rate under 9% the market is still very tight. There has been no change in asking rents and though it’s our belief that the market for tenants that are prepared to pay $100 a square foot asking rents for the top of buildings like 1 Maritime and 1 Market is pretty thin.

There continues to modest organic growth from smaller firms, but there are no large requirements in the market other than that created by contractual lease expirations. The new development at 555 Mission, which is 550,000 square feet, has completed two transactions totalling 150,000 square feet with average rent in the 70s. These leases were done towards the top of that building.

During the quarter we attributed our Mountain View assets to our value added joint venture, reducing our ownership position in those assets down to about 40%. The valley does continue to show job growth in the computer, electronics, and manufacturing sectors where new space requirements are in the 15,000 to 70,000 square foot range.

In addition, there continue to be large technology companies that are looking to satisfy either new requirements or building potential future demand. As an example, Brocade is negotiating to take 700,000 square feet, which is an expansion of about 200,000 square feet versus their existing premises, and Nevidia has just purchased a portfolio of R&D buildings that they will likely redevelop to support future growth of over a million square feet of space. While activity has moderated from the pace of six months ago, as we have said before, and smaller companies and start-ups are being cautious, we still feel good about incremental demand in the Silicon Valley.

Before I turn the call over to Ed and Mike I just wanted to make one comment on the sales market. It is really difficult to offer any conclusions – and I know you’re going to ask where cap rates are and where they’re going since transaction volumes have been basically anaemic since the fall of 2007, especially for larger quality products – there simply are few comparables. We do know the following though: excessively priced debt is not available above a loan-to-cost of 60% unless it’s made available by the seller or can be assumed. And we know that the pre-mid-2007 sales were fuelled by low cost debt at high loan amounts.

Underwriting strong rental rate growth over the next few years is going to be a stretch and it’s hard to imagine that buyers are going to use residual cap rates of 5% or less as was customary in 2006 and 2007. Unless sellers’ expectations change or they are left with no choice but to sell into the market, we think it’s going to take some time to see meaningful volumes of sales which will allow for a market check on private valuations.

With that, let me turn the call over to Ed.

Edward H. Linde

And I’m going to very quickly pass the ball to Mike LaBelle because I think we have a lot of stuff to cover. I will be available in the Q&A and rather than have any prepared comments let me let Mike go ahead and give you some background on what our report was.

Michael E. LaBelle

Thanks, Ed. Good morning, everyone. As a follow on to what Doug has said regarding the impact of the challenged capital market environment on the financial services and legal sectors I thought it would be helpful to provide a breakdown of our revenue.

In the first quarter we had annualized gross rental revenues of approximately $1.3 billion. Our top 100 tenants comprised 72% of our revenues. The average remaining lease term for these tenants is 8.3 years versus 7.4 years for the portfolio. Of this top 100 tenants law firms comprised 33.5% of revenue followed by 21% for financial services tenants and 11% for the GSA and government-related contractors such as Lockheed Martin.

We’ve spent significant time analyzing our tenant base and assessing our private, non-investment grade, and low-investment grade tenants. Overall, our tenant roster is made up of a diverse group of high quality household name companies with only three tenants contributing greater than 2.5% of our gross rental revenues. While all the legal firms are privately held, we were able to utilize industry information and our vast library of law firm financials to compare them when making underwriting decisions.

In addition, our major law firm exposure is spread among 30 separate firms with nearly 90% of law firm revenue generated from top 100 firms in the US and nearly 50% from top 30 firms. These firms are the leaders in their industry and are generally the acquirers in a consolidating field. In fact, we have benefitted from these trends in recent years, enjoying the expansion of acquisitive firms such as DLA Piper, O’Melveny & Myers, Bingham McCutchen, and Reed Smith. The point of this is that our long-held strategy of signing long-term leases to credit tenants should continue to serve us well in the current economic climate.

Now let me jump into a review of our first quarter earnings and some comments on our outlook for 2008. Our first quarter FFO was $1.11 per share or a penny above our guidance. Before I get into the core portfolio operations there are a few items that affect our bottom line this quarter on the negative side that I want to explain.

The largest impact involves SFAS 133 or hedge accounting. You may recall that we have pointed out the hedges we put in place last summer out of the money. We settled the majority of these hedges, $325 million worth, on April 1st at a cost of $33.5 million. Three-point-eight-million of this cost ran through our earnings this quarter. The rest, in addition to any liability associated with our remaining $200 million of hedges maturing in July, sits on our balance sheet and accumulated other comprehensive income, and depending on how and when we ultimately refinance our 2008 debt maturities, this expense may be taken over the term of the financing or at one time.

The next item is our accrued rent reserve. Each quarter we review the credit of our tenants that have an accrued rent balance. This quarter we increased our reserve by $400,000 stemming from a change in our credit view of a tenant in the student loan finance business and several retail tenants who have announced challenging results.

Finally, as Doug mentioned, we wrote off the costs associated with the pursuit of the Department of Justice requirement, which were about $1.1 million greater than our budget for abandoned project costs. On a net basis the sum of these items lead to a charge of $5.3 million or approximately $0.03.5 per share.

The core portfolio performance was generally in line with our expectations, although we did experience some one-time positives. During the quarter we received $4 million of termination income, including $625,000 associated with our value fund, versus our budget for the quarter of $2.8 million for a $1.2 million positive variance. We normally budget a million dollars per quarter, but as we discussed in our last call, we were already negotiating agreements with tenants in Cambridge, Prudential Retail, and our value-added property in the San Francisco peninsula. The bulk of the additional income came from a tenant in Carnegie Centre, 111 Huntington, and a couple of small suburban Boston tenants.

The other positive variances came from earlier-than-anticipated delivery, enhanced rent commencement at our South of Market development which contributed $1.3 million. We had operating expense savings net of recoveries of $1.2 million. The result of the receipt of prior year tax abatements and lots of small items that occurred throughout the portfolio.

We sold a portion of our Mountain View assets to our value added fund and are in the process of closing two third-party loans for the assets. In the interim, the REIT provided financing to the fund. The net result of the Mountain View transaction contributed $1.5 million in the first quarter on a one-time basis. The first loan closed on March 27th and we expect the second loan to close in early May, fully extinguishing the REIT loan.

Other positive variances consisted of third party fee income of $335,000, net interest income of $225,000, our hotel income taxes were lower than projected resulting in improved hotel numbers by $120,000, and we received the last piece of hold-over rent from the Washington Group in Princeton that we have discussed in prior quarters adding $200,000.

In summary, the net of the positive variances of $6 million plus and negative variances of $5.3 million resulted in our exceeding first quarter guidance by approximately a penny.

As mentioned previously, the vast majority of these items on both sides are one-time events and our core portfolio performance is right on target with our previous guidance.

I do want to make one comment on our 20F (sic) sale where we have generated a land profit of $23 million representing a phenomenal 480% appreciation over six years, an IRR of nearly 30%. We were approached by a user two years ago that was set on owning the building and determined our site was perfect. We have since entered into a development and construction management agreement which will provide a good stream of fees over the next 24 months. This is built into our third-party revenue guide.

Turning to our guidance for the remainder of 2008. Our first quarter run rate on the core portfolio is a good measure for the remainder of the year. Due to a modest amount of roll-over opportunity that we expect will be leased towards the end of the year our core portfolio occupancy is projected to be relatively flat. We expect our first quarter to fourth quarter 2008 portfolio NOI to increase 1% per quarter on average weighted toward the end of the year. Included in the GAAP number are straight line rents of approximately $48 million to $50 million.

Looking at 2008 over 2007 same-store performance, we reiterate our previous guidance of 3% to 4% over 2007 on a GAAP basis and 5.5% to 6.5% on a cash basis. Our same-store performance will moderate from our Q1 results.

Consistent with our practice, we are budgeting a million dollars per quarter in termination income for the remainder of the year.

For our developments we brought 70% of our South of Market project and 21% of our 77 City Point project into service mid-way through the first quarter. We expect to deliver 20% of our 1 Preserve Parkway project in the second quarter and the remainder of 77 City Point in December.

Our remaining available space at South of Market, 1 Preserve Parkway, and our share of Annapolis Junction are projected to deliver in the first and second quarters of 2009. As we suggested during our previous call, a 9.5% return on cost is a good approximation for the yield on these developments. These refined projections produced slightly higher income from our development projects in 2008 when compared to our guidance from last quarter.

Our hotel is expected to contribute between $10.5 million and $11 million in 2008, up modestly from $10.1 million in 2007. Third party management and development fee income is projected to be between $21 million and $22 million for the year, up slightly from our guidance last quarter. And G&A expense remains consistent with prior guidance and is anticipated to range between $18 million and $18.5 million per quarter.

With respect to interest income, our cash balances have dropped during the quarter due to the payment of our $5.98 per share special dividend in January. In addition, on April 1st we paid off our $260 million mortgage loan on the Prudential Centre. This combined with continued decline in short-term interest rates will have a material but budgeted impact on our interest income for the remainder of 2008. We assume no acquisitions and currently project our interest income to be $11 million to $12 million for the remainder of the year.

We are assuming an average earnings rate of 2.4% on our cash.

We expect a reduction in the second quarter interest expense with the pay off of our Prudential Centre loan. However, interest expense will increase in the second half as we anticipate completing of financing to replace this debt, as well as our maturing debt at Embarcadero Centre One and Two. The new financing, expected to be $525 million, has a projected interest rate of approximately 7.5% including the amortization of the projected cost of our hedges.

We do anticipate capitalized interest to increase consistently reaching $12 million in the fourth quarter as we fund out our development pipeline.

Rental rates in our markets continue to hold and our mark to market is strongly positive. With limited roll over we simply do not expect to capture much of this in 2008. Our second quarter SFO results are expected to range between $1.14 and $1.15 per share. We are narrowing our full-year SFO guidance to $4.57 to $4.65 per share.

When comparing our guidance to 2007 results it is important to focus on the fact that we sold $2 billion of assets in 2007, dampening our growth in 2008.

As has been our consistent practice, our guidance does not assume any acquisitions or dispositions. In addition, our guidance for the second quarter and the full year does not include any one-time expenses associated with the possible ineffectiveness of our hedges.

As mentioned previously, depending on how and when we structure our financing activity could result in dramatic differences in the way our hedges are charged through earnings.

A review of our balance sheet and scheduled debt maturities over the next couple of years demonstrate that we maintain a healthy liquidity in capital position. Our cash balances today are approximately $540 million and we have $580 million available on our line of credit. Our near term debt maturities are moderate and we currently have more than sufficient liquidity to pay off these financings with cash should we elect to do so.

Additionally, we are confident in our ability to access the capital markets to replace these debts or to fund new investment opportunities. Many of these markets remain expensive from a spread perspective compared to historical terms that the lenders, including the banks, insurance companies, and bond investors, are seeking to finance well-structured and prudently leveraged projects and high-quality corporate credits like us.

The markets do continue to be volatile. For example, the bond market has priced our spreads as wide as 425 basis points and as tight as 275 basis points just in the last month. There have been positive signs in the past couple of weeks though pointing to a moderation in credit spreads which we hope will continue. The only markets that appears irreparably closed for the foreseeable term is the CNBS market, which remains acutely dislocated.

I’ll now turn the call over to Bryan to discuss our development on the Boston waterfront. Bryan?

Bryan J. Koop

Thanks, Mike. Last Tuesday we executed a 15-year lease agreement with Wallington Management Company for 450,000 square feet at 280 Congress Street, which is the office tower portion of our Russia Wharf project. Wellington will occupy 82% of the building on floors 14 through 31, and then they will also lease (inaudible) the first floor of the office tower. Wellington will occupy the building in the first quarter of 2011.

The Russia Wharf project is an 815,000 square foot mixed-use development located on the Boston Harbour waterfront and also on Boston’s new greenway. The project is composed of 552,000 square feet of office tower, which we just mentioned, which rises 33 stories above two historic low-rise buildings which are permitted for residential use and street retail use. We also have the unique six levels of parking garage below these buildings which accommodate the parking needs of the entire project.

The lease with Wellington Management represents the single largest active requirement in the marketplace today. Wellington is one of Boston’s most respected companies. They are the leader in their industry and we certainly love, of course, the financial stability that comes with those positions. They understand as we do that well located, well designed real estate is strategically important in recruiting and retaining the best talent and the best associates.

The project is the first lead certified high-rise tower constructed in downtown Boston and is pre-registered at a Gold Level certification. The decision by Wellington to lease Russia Wharf as their headquarters really affirms the importance of premier companies understanding the environmental sensitivity of development.

It’s also interesting to note that with this decision Wellington, when they occupy this space, will have well over 50% of this space occupied in green, or call it sustainable designed buildings. The lease also indicates the attractiveness of the greenway as just a fabulous location. Along with views of the Boston Harbour there will be great views of the greenway, which will have 27 acres of open space. Neighbouring projects to us at Russia Wharf include Rose Wharf, the new InterContinental hotel, the Federal Reserve Bank, International Place, and then of course South Station with the amenities and accessibility of the transportation there.

The combination of high-level performance out of a lead certified building, the attractiveness of this location really has our leasing team fired up and enthusiastic about leasing the remaining 100,000 square feet of space which starts on level 10. This space will feature floor to ceiling glass. It will have fantastic breathtaking views of the harbour. It will look down the greenway. And then across the greenway beckons the Boston city skyline.

We acquired this site on March 30th of last year, 2007. We began demolition shortly thereafter and have been hard at work ever since. Update this morning confirms that we’re approximately 25% complete on our slurry wall panel pours.

With Wellington Management anchoring this project, the waterfront location, and then the first green tower status, great architecture that’s going to be really timeless in its design, we’re really excited about this project and it is destined to be a premier location and great address for the city of Boston. Thank you.

Douglas T. Linde

Thanks, Bryan. Mort (sic), before we go to the Q&A I just want to make sure you may not have anything you want to comment on or you may just want to start with the questions.

Mortimer B. Zuckerman

Just start with the questions. I just think in general the philosophy or strategy that we’ve had, the highest quality buildings which just like the highest quality residential, have had the best performance not only in good markets but particularly in difficult markets. We have really been relatively unscathed by the financial turmoil of the last year. That isn’t to say that there won’t be longer term effects or even immediate term effects, but I must say that given the pattern of our leasing we feel we’re in very, very good shape to withstand whatever is coming into the upper sector over the next several years.

Douglas T. Linde

Okay. Operator, why don’t you open up the questions, please?

Question-and-Answer Session

Operator

Thank you, Sir. Ladies and gentlemen, at this time we’ll begin the Q&A session. (Operator Instructions). One moment, please, for the first question. First question comes from the line of David Cohen with Morgan Stanley. Please go ahead.

David Cohen – Morgan Stanley & Company, Inc.

Good morning. Maybe you can just talk about the project on 55th Street. You talked about potential legal firms being impacted here. We didn’t see any leasing from you guys this quarter. Can you just talk about the negotiations there and if there’s been any delays or changes in what the tenants may be looking for?

Douglas T. Linde

Sure, I’ll start. Robert, you or Mort may want to chime in here. The project is under construction. The lease with Gibson Dunn was signed the end of 2007. Since that time we have been negotiating with a number of tenants. A couple of them are law firms. We continue those negotiations. The size of those other additional requirements are in excess of what Gibson Dunn took. Gibson Dunn took about 215,000 square feet. They are complicated. Some of those tenants are in fact the tenants that we referred to that are potential consolidators. So they are a little up in the air in terms of exactly how much space ultimately they are going to need. But we are cautiously optimistic that the progress that we are making will turn into additional leases.

David Cohen – Morgan Stanley & Company, Inc.

Okay. And just talk about Mackwell (sic) and that situation. Do you guys have any thoughts on where pricing may wind up and how that may impact the (inaudible) in the market?

Douglas T. Linde

Mort, do you want to start with that?

Mortimer B. Zuckerman

Let me give you a nice vague answer to that question. You know our history. We have always taken a look at premier properties which may fit very well into Boston Properties’ portfolio, as (inaudible) mentioned, plus the quality, location, etcetera. We also have a history of not commenting on transactions or potential transactions that are highly speculative until such time as we feel that there is something to say that has substance to it. I don’t think we can speculate on what the pricing of the Mackwell properties will be or anything else. It’s a complicated transaction for whoever makes it and we’ll see what happens.

David Cohen – Morgan Stanley & Company, Inc.

Thank you.

Operator

Thank you. The next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Jordan Sadler – KeyBanc Capital Markets

Hi. Could you guys just maybe outline for us where the best investment opportunities are today? Obviously the development I see, you guys securing a tenant up in Boston, I’d be interested in that return. But outside of development would you guys move away from just fee-simple ownership and trying to arbitrage the dislocation of the debt markets, maybe through MEZ (sp) or lend-to-own type of situations?

Douglas T. Linde

Let me give you the broad brush answer to your first question on return levels. It’s as follows, which is: on these larger CBD locations our goal is to have returns of somewhere in the high sevens, low eights. That’s our goal. That’s on our development. That’s a number that is a little bit understated from a GAAP perspective because we include in that number a cost of capital on our equity, which is a number that is clearly higher than what our cost of debt it, but doesn’t really run through the balance sheet. So when we actually report these numbers at the end of the day the numbers are generally higher than that.

With regard to other kinds of investments, we have been looking at a number of the property specific opportunities that have been in the marketplace for structured finance, if you will. I don’t want to call it a loan-to-own program, quite frankly, because I’m not sure we really want to get into a protracted legal issue with regards to one of these borrowers. So the focus that we have had has been on transactions which are more comfortably structured from an ability to cover debt service, either through strong appreciation in the asset and/or through cash flow and that have inappropriate return. I will tell you that clearly the returns that we at least would expect and whether or not we’re successful at getting these kind of returns we’ll be seeing are certainly double-digit unlevered returns given the risk.

Jordan Sadler – KeyBanc Capital Markets

Would you evaluate key where senior level debt at a discount or would you also evaluate sort of higher up in the LPV structure with some warrants or equity on the side?

Douglas T. Linde

You know, we haven’t actually been offered much in the way of that kind of a transaction, Jordan. Most of the stuff that we’ve been offered has, it’s the stuff that when it was originally underwritten it was, quote on quote, the most junior piece and it was the 75% to 85% of cost of value as it was referred to. We look at it today as the money that’s probably closer to 95% of value but it’s still in the money. And then there were situations where we see this debt that’s basically, they’re hope certificates. You’re being asked to take a position that will ultimately be a pick loan where you’re going to get all your appreciation from a hopeful refinance seven or eight years from now. Quite frankly, those are the kind of transactions which if we’re going to do that we’d rather own the equity.

Jordan Sadler – KeyBanc Capital Markets

How do your return parameters change? What kind of returns are you looking for when you’d be in these situations as opposed to ...

Douglas T. Linde

I think that, obviously they are short term situations. Typically they’re financing better between five and seven years. We’re looking for, as I said, unlevered returns that are close to double digit because there’s no appreciation.

Jordan Sadler – KeyBanc Capital Markets

Lastly, on the debt you did where you are currently anticipating closing. I think you’d mentioned on Embarcadero One and Two, the $525 million I’m referring to. I think Mike said a 7.5% all in cost. I’m curious as to, one, on the LTV and, two, the cost excluding the amortization of the hedge.

Michael E. LaBelle

You know, the pricing of that debt is based on where we’re seeing the bond market today with the 10-year treasury of about 380. The bond market that is probably 300 basis points approximately. The kind of changes that I said is volatile is where we are today with the remainder being the amortization of our hedges.

Jordan Sadler – KeyBanc Capital Markets

Ten-year money is what you’re looking at.

Douglas T. Linde

And Mike, what about if it was a secured loan?

Michael E. LaBelle

As we did, and we were also looking at a life insurance company loans and they’re very interested in providing financing on some of our larger assets. As Doug said, a 60% loan to value, those spreads are somewhere between 250 and 300 over.

Mortimer B. Zuckerman

I’d like to make just one comment here. Just so that I sort of reiterate what I think has been our philosophy and strategy for 40 years, we basically do best when we focus on the long-term appreciation of the best real estate. To the extent that there are unique opportunities, I think that’s going to be the focus of what we do going forward. I don’t think our interest is in playing the role of a hedging financing or arbitraging financing is what we really focus on. I think we’re much more interested in a value.

Jordan Sadler – KeyBanc Capital Markets

That’s helpful. Thank you.

Operator

Thank you. The next question comes from the line of Jamie Feldman with UBS. Please go ahead.

James Feldman – UBS Investment Research

Thank you very much. Mort, on the last call you talked about, you made a statement that nobody knows the vulnerabilities of the financial sector. You didn’t really give an update on your view of the economy. I was just hoping you could update that comment and kind of tell us what you’re thinking about the economy today.

Mortimer B. Zuckerman

Well, I have to say that I remain kind of pessimistic about the economy and the reason why is that I think the fundamental strategic danger to the economy remains plummeting house prices. Not rely on the sort of nominal house prices that are being listed, in fact, because there are so many sales incentives, quote on quote, that are attached to whatever sales are possible in the housing market. Those sales incentives do not show up on those pricings and they’re quite significant. The Merrill Lynch analyst estimated them to be over $50,000 per unit. Just to get an idea of how extensive they are.

I still think that is the most significant danger and I think the drop in housing prices took place without high interest rates or high unemployment contributing to it. So it really is the bursting of a housing bubble and that housing bubble is not over yet. The consequences of (inaudible) I think we’re still going to see housing prices in real terms drop between 1% and 1.5% per month. What that’s going to do when you have better than 10 million to 12 million homes where the mortgage exceeds the value of the homes nobody knows. We haven’t been in that kind of a position really since the Great Depression as a practical matter.

I cannot tell you this, but it’s not something that I deal with anything other than the most serious concern. It’s going to affect spending, consumer spending. When everybody, 68% of American families own their own homes, if they see a 15% to 20% drop in housing values between last year and this year it’s got to affect consumer spending. Investment spending is clearly weak. State and local government spending is going to be weaker. It just seems to me that these are the ingredients that go for a sustained period of either flat growth or no growth or in fact decline in growth. I don’t think that one can be optimistic.

Now bear in mind the market has to be segregated and segmented. The high end of the residential market, the best quality of the residential market, is not really hurting that much. It is the moderate and the lower ends of the residential market. I believe the same thing will be true, by the way, of the office market, as I suggested before. Nevertheless, you can see a $20 trillion, pardon me, $20 trillion is the estimated value of the housing sector. It’s the largest single asset on the balance sheet of the American family. You can see a 20% drop in that from where it was and you’re talking about $4 trillion. That’s got to have a huge affect on consumer spending.

So I remain fairly pessimistic about the economy. From the point of view of, again, Boston Properties, I have to tell you that could be a problem but it’s also a real advantage in terms of the ability to acquire assets at reasonable prices because the pricing was alluded to before based on lax financing had gone to levels that we thought were inappropriate. Which was one of the reasons why we sold when everybody else was buying. I cannot tell you how happy I am that we did that.

I do think that this economy is still in a place that nobody has been through. I think the financial markets have been somewhat stabilized. I think the feds absolutely did the right thing when they saved Bear Stearns because I think within the next week a couple of other major investment banks in New York could have gone under. The credit default swap market could have crashed. They had I think $46 billion of mortgage backed securities that would have had to be thrown on the market.

That issue of default or foreclosure is also the principle issue that we have to deal with in the housing market. If you get as we have now, we have at least 2 million homes a year now being foreclosed and where nobody knows who owns the mortgage you have service agents who are throwing these homes on the market. You could have an artificial break in the price of housing. So that’s the thing that is the most worrisome and I do not see where that bottom is. I don’t think anybody knows where that bottom is because we’ve never been there, really literally, in the lifetime of almost all the analysts that you and I know.

So I remain fairly pessimistic about that and I think it is important that the feds continue to play a very aggressive role and to take novel positions as they have done because they have done a great job in terms of restoring liquidity and confidence in the financial system.

I will just say to you, there is a word, “credit” comes from the Latin word “credere,” which means “to believe.” When they stopped believing in Bear Stearns that firm just was on the verge of completely collapsing within a matter of hours. That is one thing the feds must do is to preserve the financial system and I think they will do that.

What the national government will do is at this point indeterminate because our politics are so lousy, but I will say I do think it is also going to be the housing market that’s probably going to have the dominant influence on the election as we go forward.

Anyhow, that’s sort of the main thing. I see business spending going down. I see state and local government spending going down. I see consumer spending going down. But the feds are now running or the federal government is now running a gigantic deficit, $313 billion in the first six months of the year. The feds are playing a role in making sure that we are liquid. So I don’t see the kind of real collapse that was a real possibility, but I just don’t know where the bottom is yet. That is still unknown.

James Feldman – UBS Investment Research

Very helpful. You guys talked a lot about the insurance and balancing lenders as available capital. Can you talk a little bit about the depth of that capital? I know it’s a high end. The conversations we’ve had with them it’s a high end and for high quality real estate you guys are all able to get financing. Do you think that they run out of capital eventually or maybe towards the end of the year?

Douglas T. Linde

Well, I think there are two buckets to this. There’s what we refer to as the Jill (sic) lunch bucket, which is the $25 million to $35 million to $40 million loan that is going to be underwritten by some conduit lender in a very small securitization. That’s going to compete with the smaller insurance company transactions. My guess is there’s a limited appetite for that stuff. I don’t think they run out of it, it’s really a question of credit quality.

Then there is what I would refer to as the more institutional quality high-grade real estate located in the superior markets. The superior markets being the markets quite frankly that we’re in. Maybe you add Chicago and maybe you add some of the other markets in Texas, for example, right now because of what’s going on with oil.

In the case there I think that $100 million buckets of capital are plentiful, but the insurance companies will have allocations. I think $400 million buckets of capital are problematic. As we are seeing at Embarcadero Centre, most of the life insurance companies that are looking at the loan that we are in the market with today are very comfortable with the $150 million to $250 million loans. They’re not comfortable for much more than that. We’ll probably have to do some sort of a club, which by the way is no different than how we financed the Embarcadero Centre when we acquired it in 1998. Which was a consortium of three or four club loans of lenders, high-quality life insurance company lenders, and these were 60% LTV kind of loans. So we’re sort of back to the days of yesteryear, I guess.

Michael E. LaBelle

I would add to that, Doug, that we’re having conversations with these life insurance companies all the time. We’ve heard people in the market say that the life insurance companies are running out of money. When we talk directly to them what we hear from them is that they’re being cautious, that they’re being selective, and that they’re turning down transactions that don’t meet their quality standards. So when we talk to them about the assets that we want to finance they tell us that this is what they’re making credit available for. So we feel pretty good about that.

James Feldman – UBS Investment Research

Thank you very much.

Operator

Thank you. The next question comes from the line of Ian Weissman with Merrill Lynch. Please go ahead.

Ian Weissman – Merrill Lynch

Yes. Good morning. I know you guys touched on the Prudential loan, but could you just elaborate on your decision to use your cash position to pay this down? Was it a pricing issue or something else?

Douglas T. Linde

It was a real simple decision. The Prudential Centre loan was probably a 15% to 20% LTV loan and given that availability for up to $800 million loans was probably not something that we were ready to jump into in terms of putting together that size of a collateral pool we decided that the most prudent thing to do would be to unencumber the Prudential Centre given its massive value and the complications associated with how you would finance it and look at some of our other assets which can be financed on a more individual basis, which is why we’re looking at the Embarcadero Centre because each of those buildings is a stand-alone asset which has its own fee interest and can be financed in a relatively simplistic manner from the perspective of the lenders.

Ian Weissman – Merrill Lynch

And how do you guys feel about your leverage ratio here? Sub-30%. What do you think is a good long-term strategic position for leverage? In this environment, but really more long term. What is your targeted leverage ratio.

Douglas T. Linde

We’ve said all along, and we’ve said this to the rating agencies and to the bond investors, that this company should be able to run at a very, very comfortable 50% of value rate and, more importantly, a fixed charge coverage ratio of around two times. That’s more what our governor would be than what our, quote on quote, loan to value is or loan to (inaudible).

Ian Weissman – Merrill Lynch

And finally, the Wellington deal. What is sort of the implied return now that you’ve got that asset largely locked up?

Douglas T. Linde

As I said before, our goal in our developments is to achieve, our large scale developments, is to achieve a return of the mid-sevens to the low-eights. That’s what we’re hoping to achieve. There are obviously some additional leasing that has to get done and there are additional components to that project that will affect the outcome of the return on a short-term and a long-term basis. By that I mean there is a residential component to it. How we choose to either sell, joint venture, or develop that property, that segment of the project as we go forward will have an impact on what the ultimate return is.

Ian Weissman – Merrill Lynch

Is it fair to say then on those measures that the Wellington deal was for over $75 a foot?

Douglas T. Linde

We’re not going to comment on what the lease would be for any specific tenant.

Ian Weissman – Merrill Lynch

Okay. Thank you.

Operator

Thank you. The next question comes from the line of Jonathan (sic) Habermann with Goldman Sachs. Please go ahead.

Jay Habermann – Goldman Sachs & Company

Good morning. Doug, you mentioned in sort of the mid-sevens to low-eights, obviously returns on development. You also allude to the fact that cap rates are really sort of an unknown at this point, just given we haven’t seen any transactions in a while. I’m just wondering, number one, when do you start thinking about maybe even scaling back development? Because if you begin to see cap rates move up over the next, call it, 12 to 18 months is, I think Ed alluded to in the last call, obviously you need to see enough of a yield premium on development to sort of justify those returns.

Douglas T. Linde

Sure. Just two comments. The first is, and I think this is important to note, that when we provide you with returns on our developments we’re providing you with a first-year cash-on-cash return. I’m not aware of any development that we’ve done that doesn’t have contractual increases in it. In the case of what we do in Washington, DC, there are 2% to 3% annual increases. In Manhattan and Boston they’re contractual increases. So the actual return goes up over time. That’s point number one.

Point number two is we’re giving you cash-on-cash returns. When you talk about cap rates you’re talking about net operating income divided by price. And there’s something called capital which I know Ed has on more than one occasion talked about and seems to be overlooked when you’re looking at relative returns. So when you buy an office building in Manhattan for a five cap and it happens to be 200 basis points of capital that goes into that and whether it’s each year or every other year or every three years it sort of gets ignored for purposes of comparison versus a brand new building at West 55th Street which has leases that go for the next 20 years and there’s absolutely no capital. It’s hard to compare those two assets on a return basis and sort of say they’re about the same or one’s only slightly higher than the other. So therefore what’s the premium for the development risk. So you have to keep those two things in mind when you’re sort of looking at what the various return levels are.

As I said, the larger developments that we do have obviously are CBD locations and the land prices are more expensive and they’re more competitive. They also clearly have tremendous appreciation opportunities associated with them as well, which is again what we saw when we sold 5 Times Square and when we sold 280 Park Avenue is more alluded to during the last 12 months. So you can’t just look at the cap rate or the NOI rate when you’re thinking about how we declare capital.

Jay Habermann – Goldman Sachs & Company

Clear enough. I guess sort of in essence you are looking for a fairly substantial increase though on returns on acquisitions at this point. Given that you’re accessing data north of 6% today.

Edward H. Linde

I think it applies to the developments as well as the acquisitions. We just don’t look at it just in the short run. We have to look at what the longer term potential is for an asset and do what I would call an IRR. That I think is as important as anything else. We just do not believe that what’s going to happen in the first three or four years of an asset is the only way we look at it. We really have to look at what the quality of the asset is, what the opportunity is as we feel for the longer term appreciation. That’s been true of every major asset that we have acquired or developed and we’ve seen it work out in every single case. So this is going to be the same approach that we’re going to take in terms of development. It may be 7.75% to 8.5% going in, but we look at it over a much longer term. There are built in increases in the leases, there are built in residual values that we can estimate. That really becomes a part of our whole calculation.

Jay Habermann – Goldman Sachs & Company

Okay. That’s very helpful. Also, you painted a fairly negative picture for Manhattan, at least for the next 12 to 18 months, I’d have to say. How much down side do you potentially see in asking rents over that time period? (inaudible) such a good situation if it’s not really going to have much of an impact.

Edward H. Linde

You know, if we painted a negative picture I think that wasn’t quite accurate. I think what Doug was saying was that given all the announced or potential layouts in the financial services business, that reduction in head count, uncertainty is introduced into the market and it’s introduced into the market because of the potential of sublet space coming back on the market. But as he also said, certainly in the assets that we control and market every day we’re not seeing a drop off in demand. I think it’s going to be selective in terms of which buildings we’re talking about in the total Midtown Manhattan marketplace.

I think what we’re seeing is either a slowdown or perhaps a stoppage, although the brokers don’t report this by the way yet, in increases in rent. It’s not going to be the kind of incredibly dramatic rent increases that occurred over 2006 and 2007, but nevertheless I don’t think you’re going to see a drop in rent even in the short term. We certainly haven’t experienced that.

Mortimer B. Zuckerman

In Manhattan, if I may say so, there is very little inventory, particularly very little new inventory coming into the marketplace. A lot of firms remain in an expansion mode simply because they cannot expand in their existing facilities. That’s one of the reasons why we’re doing so well on the sites that we’re doing on 8th Avenue. The fact is, if you look at the Midtown market there’s very little in the way of new buildings being built. There is a constraint on new supply virtually in every market we’re in but particularly in Manhattan. This may be a little bit of a dramatic statement, but to a considerable degree Manhattan, both in the residential sector, I might add, but also in the office sector, is a part of the global economy, not just a part of the local economy. For that reason I think we’ll continue to do relatively well.

Again, as Ed says, I don’t think we’re going to see the kind of rent increases in the shorter term, but there’s very little ability to add prime space in Manhattan over the next number of years and ultimately you’re going to see I think continued growth in rents, at the very least at the rate at which the cost of new construction increases every year.

Jay Habermann – Goldman Sachs & Company

Just a last question. I know in the Wellington lease you can’t give specifics there on yield, but did any of the sort of lease arrangements change over the discussions with the firm over the last four to six months or is that really in line with original underwriting expectations?

Douglas T. Linde

I guess I’m not entirely sure. When you’re negotiating a lease things change day to day. Nothing that happened with Wellington would be outside of what we see with a lease negotiation of that size with a tenant that’s making a 15-year commitment that was not usual and customary.

Jay Habermann – Goldman Sachs & Company

But in general are you seeing more concessions?

Douglas T. Linde

I don’t think we’re seeing any more or less concessions in any of our markets other than I think that we recognized that the Northern Virginia marketplace, and Ray may want to comment on this, has got a significant amount of availability in it. As we complete the lease up of our South of Market projects we’re competing with landlords who are offering tenants significant amounts of free rent and significantly higher tenant improvement allowances because they don’t seem to have any prospects. Ray, I don’t know if you want to comment.

Raymond A. Ritchey

Well, the only other thing about that, Doug, is we’re trying to fill in the blanks on smaller pockets of space and those users have a much broader array of options as those of larger tenants that commit early. So it’s probably a function both of a supply in the marketplace and us just trying to finish up the leasing.

Jay Habermann – Goldman Sachs & Company

Okay. Thank you.

Operator

Thank you. The next question comes from the line of David Toti with Lehman Brothers. Please go ahead.

David Toti – Lehman Brothers

Good morning. Thank you. I have two questions. The first, I understand from your comments that you believe we’re in sort of the early days of the dislocation and re-pricing, but shouldn’t opportunity present itself for a fifth platform? Are there markets your interested in? Is this something that you’re increasingly considering?

Douglas T. Linde

We are not looking at any other markets at this time.

David Toti – Lehman Brothers

Okay. My second question has to do with land. Are you seeing any changes in prices? I know that market is a little bit more liquid, there are more transactions. Are you seeing this as an opportunity to increase your site assembly volume for the pipeline? Colour on that would be great.

Edward H. Linde

Well, if you’re asking whether land pricing has been impacted a friend of mine in the real estate business one told me about something called land owners disease. He told me that a long time ago and I’ve seen it work over and over and over again, which is land owners never drop their price. so I don’t think, you know, land owners are generally in a different position and prices don’t go down.

In the markets where we want to be the ability to assemble sites remains as hard as ever. We are talking about markets that are very constrained. We’d love to find another site in Midtown Manhattan. We’d love to find another site with the equivalent attributes of Russia Wharf where we’re building this building that Wellington’s going to occupy. We do our best to look and we pull rabbits out of the hat. Look at Washington, the CBD that Ray has done over the years. Or the sites that we’re doing on 8th Avenue.

The current overall economic environment I don’t think has really increased our ability to find those sites. It requires a tremendous amount of due diligence work, knowing everybody in the market, and you come up with the opportunities and sometimes you don’t know where you’re going to come up with them from.

Douglas T. Linde

I think the one thing I would add is that we may not be able to buy sites less expensively, but there may be opportunities where existing owners of land or people who were hoping to start developments may not have the financial capability to get those developments going and who are starting to implode under the weight of whatever financing they might have those particular lands. So they may come to the market and be available whereas a year or two years ago they could have gone to virtually any bank in the world and gotten a construction loan and probably not had to put any guarantees down or put an entity up that didn’t have any financial backing and be able to get those buildings started. I think those days are long gone.

Edward H. Linde

And those are the situations where land owners, and as they’ve done in the past, will come to Boston Properties and talk about JVs, which we are happy to do.

David Toti – Lehman Brothers

Great. Thank you.

Operator

Thank you. The next question comes from the line of John Guinee with Stifel, Nicolaus.

John Guinee – Stifel, Nicolaus & Company

Thank you. Just a couple quick clarification questions. Sale of 20th and F (sic) in DC, are you running that through FFO?

Michael E. LaBelle

That sale which announced and occurred in the second quarter will be again on sale, the majority of it. And then we will have some development fee income going forward over the next 24 months based on the fact that we are assisting the owner of that building with their development.

John Guinee – Stifel, Nicolaus & Company

But the $23 million will be a gain on sale that runs through FFO or doesn’t run through FFO?

Michael E. LaBelle

Does not.

John Guinee – Stifel, Nicolaus & Company

Does not. Okay. Great. Second, Doug, when you’re talking about your roll overs were just phenomenal this last quarter at 48% gross rent roll up and 74% net rent roll up, and then you went on to speak about a $9.50 embedded mark to market. A quick back of the envelope based on an average round of say $40 to $42 looks like an embedded mark to market of maybe 25% gross, 30% net going forward. Are we doing the math right?

Douglas T. Linde

I’m not entirely sure how you’re thinking about it. You could look at it on a first-year basis or you can look at it on a first-quarter basis. If it’s $9.45 then that’s what your number would be.

John Guinee – Stifel, Nicolaus & Company

Okay. You’re saying that on a per share or a per square foot?

Douglas T. Linde

No, on a per square foot. So the way, I mean, if you’re calculating and you’re just taking nine and you’re dividing it by your 42 then yes, that’s 25% or 30%.

John Guinee – Stifel, Nicolaus & Company

Okay. And then the last question. You’ve got a land option on 8th and 46th in Midtown but you spent about $26 million on it per your JV numbers. Can you expand a little bit on what’s going on there?

Douglas T. Linde

Sure. We have a lot more than a lien option. We own with the related companies pieces of ground, or I guess in some cases old buildings that will likely be demolished over the next call it three to four months, in or around that site assemblage. Some of the sites are under ground lease, some of them are sites that we have not closed on so they are under options, and then portions of it are in fact fee owned by the joint venture.

John Guinee – Stifel, Nicolaus & Company

Okay. So that’s going to come really out of your land purchase option and into owned land parcels in the last quarter or two?

Douglas T. Linde

You know, I’m not entirely sure how we’re physically characterizing it on the balance sheet.

John Guinee – Stifel, Nicolaus & Company

Gotcha. Okay. Thank you very much.

Operator

Thank you. The next question comes from the line of Michael Bilerman with Citi. Please go ahead.

Michael Bilerman – Citigroup Global Markets

Yeah, Irwin Guzman’s on the phone with me as well. Mort, there was some press regarding you potentially going after the GM Building personally with a minority interest from the REIT. Can you just talk about whether that was completely off base or, if it wasn’t, how would you manage those conflicts?

Mortimer B. Zuckerman

I’m sorry, I just missed the part as I was just switching buttons. Could you just give me that again?

Michael Bilerman – Citigroup Global Markets

Sure. There was some press during the quarter about you going after the GM Building on a personal basis with some involvement of the REIT. Whether that was just completely off base. If it wasn’t whether there’d be –

Mortimer B. Zuckerman

I am not embarrassed to say, as I am someone who spends some amount of time in the media, that that story was totally without merit, totally without factual basis, never one which was checked out in any way, and an embarrassment to the press, but not an embarrassment to us since it was totally false.

Michael Bilerman – Citigroup Global Markets

That’s what I thought. Irwin Guzman had a question as well.

Irwin Guzman – Citigroup Global Markets

Hi. You mentioned the high seventh, low eight return that you target involves some cost of your own capital. Can you talk about what costs you’re assuming for your own equity and how that’s changed over the last 18 months?

Douglas T. Linde

I can tell you that the rate has come down. I’m not going to give you a specific number. It was a short time placeholder that we used. But we do charge ourselves the cost of equity and it is tied to whatever our relative cost of debt is at that time. But it’s a high single digit type of number if debt rates are where they are today.

Irwin Guzman – Citigroup Global Markets

And are you targeting construction lending for New York and Boston and what volume and what rate are we talking about?

Douglas T. Linde

At the moment we don’t have any firm decisions. It will depend on what other kinds of capital might be available and whether or not the most efficient use of our balance sheet would be to finance those projects on a secured construction basis. If we were going to do them, Mike, you may want to just sort of give your perspective of where you think construction will be priced today.

Michael E. LaBelle

Yeah. We’re in consistent discussion with our banks and in addition to, similar to the life insurance companies, the banks are still out there seeking to provide financing for well conceived, high quality, prudently leveraged projects like ours. We’re just a little more visible when the size of the loan gets to a significant amount where there’s some syndication involved. Because the banks today are not willing to take significant underwriting risks on their books.

Also what’s important today are the relationships that you have with banks. What we have done is we’ve maintained a very strong relationship with a core of banks that are in our line of credit, many of whom are involved in the relationship because they want to provide construction loans. And we’ve put together club loans where we’ll put together five or six or seven of these banks to provide financing for construction projects.

The pricing of those loans states over LIBOR and can range anywhere today from I guess on the low maybe 175 basis points to somewhere in the low to mid-twos over LIBOR. With some up-front fees.

Irwin Guzman – Citigroup Global Markets

Mike, can you just comment on Embarcadero, what would be the size of the total loans that you’re going after? Would that be if you went to $525 million on secured issuance would it be one or the other or are you targeting both?

Michael E. LaBelle

Well, I think we would probably not put a single $525 million loan on one asset. It might be half of that size or maybe slightly higher than that size on a single asset. We’ve had conversations with both banks and life insurance company markets about that potential and we feel comfortable that those lenders are excited and actively interested in doing that. We haven’t made a decision today as to whether we’re going to do secured mortgage or if we do a half a billion dollar bond deal. We’re kind of keeping our options open and watching those markets today.

Irwin Guzman – Citigroup Global Markets

And just lastly, Doug, you comments that your 7.5 to 8 yield included that cost of equity. What would be your sort of initial cast if you’re not going to put that cost in?

Douglas T. Linde

The problem is I can’t give you a real number because it depends upon the length of the project and the outflows of the cash flow and just with how the calculus works. My guess is it’s probably somewhere at a minimum 50 basis points and it could be higher than that.

Irwin Guzman – Citigroup Global Markets

And then on Russia Wharf, you moved out your stabilization two quarters and the cost went up $25 million. Can you just talk a little bit about what sort of drove that and did that negatively impact yield at all?

Douglas T. Linde

We hope that it won’t impact the yield in a significant way. Somebody on our side is close to the phone and is breathing heavily, so we’re having a hard time hearing everybody. Thanks. The reason for the stabilization is that we didn’t know where Wellington’s lease commitment would be from a size perspective and as the clarity came with that we obviously changed the stabilization because the first tenant in the building will likely be Wellington in the first quarter of 2011 and then generally you’re stabilized when you’re 95%. So we gave ourselves some room to finish the leasing of that building.

The budget for that building is a hard one to get your arms around in terms of how you think about the cost because the way the budget is put together today, and this will I am sure change so you will be seeing changes as we go forward, what we have is a budget for the entire office building plus the shell and core of the residential building with a potential assumption that we sell that residential building at some point in the future to somebody who will then finish the residential building and then lease it and it will be owned as a condominium. If we actually complete the development of the residential the cost will go up. If we sell the building before we complete the shell and core of it the cost will go down. So it’s very hard to come up with a good surrogate for what the actual final total cost for that total will be.

Irwin Guzman – Citigroup Global Markets

Okay. Thank you.

Operator

Thank you. The next question comes from the line of Michael Knott with Green Street Advisors. Please go ahead.

Michael Knott – Green Street Advisors, Inc.

Talk about any activity that you’re having on development projects outside those listed in the supplemental. Have you scaled back in those other projects?

Douglas T. Linde

I would say that we haven’t scaled back any of our desired start projects, Michael. We are making proposals to tenants on a build-to-suit basis or a partially build-to-suit basis in both Washington, DC, as well as in the Boston suburbs. We are moving ahead with our planning and our entitlements in the greater Silicon Valley. Bob Pester is aggressively pursuing some build-to-suit types of development assets in the greater San Francisco area, both suburban and urban. So I think the appropriate question probably to ask is would we start something on a speculative basis in today’s environment. And I think the answer is we are less likely to start on a speculative basis than we would have been 12 months ago.

Michael Knott – Green Street Advisors, Inc.

And you talked about a low sales volume environment. Do you expect that we’ll eventually get back to the type of environment when BXP could be an acquirer as in the late 90s?

Douglas T. Linde

I hope that we will get there. I’m not optimistic that the environment will get to the point where we will be able to see the kind of opportunities we saw when we bought Embarcadero Centre or when we bought the Prudential Centre. We’re hopeful.

Anything else?

Michael Knott – Green Street Advisors, Inc.

That’s it. Thanks.

Operator

Thank you, Sir. The next question comes from the line of Mitchell German with Banc of America Securities. Please go ahead.

Mitchell German – Banc of America Securities

Good morning. Doug, you mentioned concessions picking up a bit. Can you quantify?

Douglas T. Linde

Sure. I would say a bit is an example of, in New York City for example if things got to the point where you were giving somebody four months of free rent to do their build now you’re giving them five months of free rent to do their build up. That kind of a change.

Mitchell German – Banc of America Securities

Okay. And does Citigroup take that space, was that leased to current tenants in the building?

Douglas T. Linde

No. None of it was leased to current tenants in the building. It was all leased to the new occupants that were going to look (inaudible) a terrific address. And just so everybody is aware, we are in the process of doing a review of the lobby at Citigroup Centre and there may be a significant capital expenditure that you see running through the numbers starting at the end of 2080 as we consider a review and redesign of the lobby in that building.

Mitchell German – Banc of America Securities

Great. And just my last question. Based on your comments, is it safe to say that you haven’t seen an increase in distress selling at this point?

Douglas T. Linde

I would say that we have seen an increase in sellers who are actively engaging the marketplace in discussion. What we have not seen, Mitch, is any transactions get completed.

Mitchell German – Banc of America Securities

Okay. Thanks a lot for your time.

Operator

Thank you. The next question is a follow up question from the line of Jamie Feldman with UBS. Please go ahead. Jamie, if you are using speakerphone or if you have a mute button please check that and pick up a handset. Mr. Linde, we’re not getting a response.

James Feldman – UBS Investment Research

I’m sorry. I was hoping you could quickly comment on the impact of a potential Yahoo! merger on Silicon Valley and how we should think about that.

Douglas T. Linde

Bob Pester, I’m not even going to try and get into that one.

Robert E. Pester

I’m not going to try either. I don’t think there’s a way to evaluate the impact right now. If the merger occurs it’s uncertain whether or not they would keep all the people at Yahoo!. I think the likelihood is probably high, but I think you have to wait to see what happens.

James Feldman – UBS Investment Research

Good enough. Thank you.

Operator

Thank you. At this time there are no further questions. I would like to turn it back over to Management for closing remarks.

Douglas T. Linde

Okay. Thank you for your time and patience. We appreciate all the questions and we look forward to challenging financial times, but hopefully positive results from the real estate business at Boston Properties. We will speak with you at NAREIT in June and then again in July or August when we have our next call. Have a good afternoon.

Operator

Thank you. Ladies and gentlemen, this does conclude the Boston Properties’ first quarter 2008 conference call. You may now disconnect and thank you for using AT&T teleconferencing.

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