Boston Properties, Inc. (NYSE:BXP)
Q2 2016 Earnings Conference Call
July 27, 2016 10:00 ET
Arista Joyner - Investor Relations Manager
Owen Thomas - Chief Executive Officer
Doug Linde - President
Mike LaBelle - Chief Financial Officer
John Powers - Executive Vice President, New York
Bob Pester - Executive Vice President, San Francisco
Bryan Koop - Executive Vice President, Boston Region
Michael Bilerman - Citi
Jamie Feldman - Bank of America
Blaine Heck - Wells Fargo
John Kim - BMO
Vincent Chao - Deutsche Bank
Craig Mailman - KeyBanc Capital Management
Jed Reagan - Green Street Advisors
Brad Burke - Goldman Sachs
Tom Lesnick - Capital One Securities
John Guinee - Stifel
Good morning and welcome to the Boston Properties’ Second Quarter Earnings Call. This call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.
Good morning and welcome to Boston Properties’ second 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. If you did not receive a copy of these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.
At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday’s press release and from time-to-time in the company’s filings with the SEC. The company does not undertake a duty to update any forward-looking statement.
Having said that, I would like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the question-and-answer of our call, 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.
Okay, thank you, Arista. Good morning, everyone. As usual, I will cover our quarterly results, the macro market conditions as we see them as well as our current capital strategy and investment activity. On current results, we produced another strong quarter with FFO per share $0.04 above consensus primarily due to accelerated lease termination income. We have also increased the midpoint of our full year 2016 FFO per share guidance by $0.06.
In the quarter, we leased 925,000 square feet, nearly half of that in the New York region and this quarterly volume is above historical averages by number of leases but below on total square feet. Our portfolio occupancy is now 90.8%, down 20 basis points from the end of the first quarter. We had another quarter of strong rent rollups in our leasing activity with rental rates on leases that commenced in the second quarter up 18% on a gross basis and 28% on a net basis compared to prior lease. As we anticipated our leasing spreads continue to be strongest in San Francisco and Boston and positive in all regions.
Now, moving to the economy, U.S. economic growth continues to be sluggish and slowing. First quarter GDP has been reported at 1.1%, down from 1.4% in the fourth quarter of last year and estimates for all of 2016 are approximately 2% after downward revisions. The employment picture has been recently healthy with 287,000 jobs created in June, but has been volatile throughout 2016. Also, the unemployment rate has been relatively flat at 4.9%.
Now, economically, the most significant news for the quarter was the UK surprise referendum outcome to leave the European Union. We have also had a series of tragic terrorist events and an attempted coup in Turkey. There is already evidence of a slowdown in the UK economy and the IMF predicts the global GDP will follow. Sterling has dropped over 10% and central banks in Europe and the UK are all signaling an accommodated posture. Given dollar strength and slowing growth, we believe it will be more difficult for the U.S. Federal Reserve to increase rates further in the near-term. The 10-year U.S. treasury has dropped 30 basis points to 1.6% over the quarter as a result.
Lower rates have fueled record highs for the S&P 500 and a surge in REIT share prices in the U.S. Given the growth in the U.S. economy, albeit anemic, office markets nationally continue to improve slowly. Net absorption was 8.4 million square feet for the second quarter. Vacancy improved 10 basis points to 13.8%. Asking rents rose 6.5% year-over-year. Construction levels are up 5% year-over-year, but remain at 2.2% of total stock, which is slightly above long-term averages. We continue to see the strongest space demand in innovation centers.
So, how are we managing our business given this environment of sluggish growth, punctuated by increasingly frequent economic and political events and an uncertain Presidential election in November? First, we will continue to take advantage of reasonably healthy tenant demand and lease up our existing vacancy and new developments. Second, we will focus our new investment activity around innovation centers where we see the strongest prospects for growth. And lastly, we will also protect the downside given the prospect of volatility by requiring pre-leasing for new office developments, avoiding the purchase of stabilized assets at low cap rates and keeping our overall corporate leverage at conservative levels.
Moving to private market real estate valuation, we believe prices remain strong for prime assets and gateway markets. As evidence, we have seen a number of transactions in addition to what I have discussed last quarter in our core markets that were recently committed in 2016. In Cambridge, 1 Kendall Square which is a 645,000 square foot office lab and retail asset sold for $1,124 a square foot and a low 4s initial cap rate, though the sales did include a 173,000 square foot development site. The buyer was a U.S. REIT with a capital partner. In New York, a partial interest in 7 West 34th Street, which is a 477,000 square foot office building fully let to Amazon was sold for $1,176 a square foot at a low to mid-4s cap rate to an Asian investor. In San Francisco, the peers on the Embarcadero waterfront, albeit a small 82,000 square foot building sold for a low 4s cap rate and $1,250 a square foot, which is a record for San Francisco and this was sold to a U.S. pension advisor. And in L.A, 12100 Wilshire and 11601 Wilshire sold in separate transactions to U.S. REITs possibly with non-U.S. capital partners at mid-3s cap rates in approximately $625 a square foot. As cap rates spreads widen with decreasing interest rates and risks the European investment are exacerbated by Brexit and other geopolitical events, we continue to see a tailwind for U.S. real estate valuations, particularly in our core markets.
Our capital strategy remains unchanged and that we are investing primarily in new developments and redevelopments funded partially by select asset dispositions and the balance with debt financing. So, let me start with acquisitions. This quarter, we closed the purchase of a 50% interest in Colorado Center located in Santa Monica, California and that closed on July 1. Colorado Center comprises 1.2 million square feet on a 15-acre site and is one of the premier office campuses in West Los Angeles. Though the complex is very well parked with 3,100 stalls it’s located one block from Bergamot Station on the newly opened commuter rail line between downtown Los Angeles and Santa Monica.
Moving to economics, the property is 68% leased, which provides us with a significant upside opportunity. Our net purchase price is $504 million or $850 a square foot and renovation and tenant capital will be required to lease the property. So, the going in NOI cap rate is 3.4%, upon full lease up of the complex, we expect to achieve yields of approximately 5.5% and over 6% after a full mark-to-market of the tenant base. Teachers’ owns the other 50% of Colorado Center and we will provide all leasing property and construction management for the asset. We also look forward to advancing our relationship with Teachers as part of this investment.
In addition to the financial aspects of transaction, Colorado Center has provided Boston Properties with the opportunity to enter the West Los Angeles market with a significant asset. We view West LA as an important innovation center and currently one of the most vibrant office markets in the United States. Our intent is to methodically over time, build up Los Angeles into a full independent region for our company. We have hired the onsite property management staff and Ray Ritchie is providing senior-level direction to our Colorado Center in Los Angeles efforts. Property management oversight, construction development and other support are all being provided from our San Francisco office. As the Los Angeles region grows, we anticipate a migration to local personnel, both hired externally and internally transferred. Lastly, I am also pleased to report we are off to a very strong start in the leasing program for Colorado Center and Doug is going to provide more details on this.
Now on dispositions, we are in the market with VA 95, our 11 building 740,000 square foot suburban office campus located in Springfield, Virginia. This park may be sold in whole or part. We are pursuing a recapitalization of Metropolitan Square, a 660,000 square foot office building located in the CBD of Washington, D.C. Given these transactions and our completed sale of 7 Kendall Center, we could reach as much as $350 million in 2016 asset sales. Moving to development, we remain active delivering assets into service, advancing our predevelopment pipeline and evaluating new investments. In terms of potential starts for 2016, we are competing for a 630,000 square foot office build-to-suit for the TSA in Springfield, Virginia. We are also commencing the full rehabilitation of the low-rise building at 601 Lexington Avenue. The building is being renamed 159 East 53rd Street and will have a segregated street entrance and lobby for our 195,000 square foot office building.
We remain very active advancing our predevelopment pipeline for projects that would start after 2016. Several important updates from the second quarter include at Kendall Center in Cambridge, we are in advanced discussions with an office user to fully pre-lease a 400,000 plus square foot office building which will require demolition of an existing 80,000 square foot low-rise building. This project would not commence until 2017 and efforts continue on developing commitments and projects for the remaining approximately 500,000 square feet of potential entitlements at Kendall Center.
It has been reported that Boston Properties and a local developer attempting to entitle MacArthur Station Residences, which is a 402 unit, 25 storey residential development located adjacent to the MacArthur BART Station in the Temescal neighborhood of Oakland, California. We signed a letter of intent to invest in the project and are working on the entitlement process. Given the high cost of multifamily products in the San Francisco market, we believe we can deliver high quality units at approximate a 20% discount to San Francisco rents in a location that is a 16 minute transit ride from the Embarcadero station in downtown San Francisco. The project will not commence until 2017, also subject to achieving entitlement.
This past quarter, we also delivered three projects fully into service including 601 Mass Avenue in Washington, 10 CityPoint in Waltham and 804 Carnegie Center in Princeton. In the aggregate, these buildings comprise 850,000 square feet or 94% leased, cost $487 million to build and are being delivered at a 7.8% NOI return on cost, which is above our projection. Given the value of the properties is at a much lower cap rate, deliver of these projects again demonstrates the value creation power of our development platform.
Now given the deliveries, at the end of the second quarter our development pipeline now consists of eight new projects and one redevelopment, representing 3.8 million square feet and $2.1 billion in projected costs. Our budgeted NOI yield for these developments is in excess of 7% and the commercial component of the pipeline is 52% pre-leased. We expect the addition of these projects to our in service portfolio to add materially to our company’s growth over the next 3 years.
So to conclude, we remain very enthusiastic about our prospects for success and ability to create shareholder value in the years ahead. We have a clear and achievable plan to materially grow FFO to the lease up of existing assets and the delivery of new buildings through development. We have selected non-core assets for sales to raise capital and ensure continued portfolio refreshment. We have significant entitled and un-entitled land holdings that we will continue to push through the design and permitting process and add selectively to our development pipeline in future years. Our balance sheet is strong with conservative leverage which will allow us to pursue and act on investment opportunities that present themselves in the coming quarters.
So with that, let me turn it over to Doug.
Thanks Owen. Good morning everybody. Owen touched on the global interest rate environment and the pending election, Brexit, global political events. And if you take these things altogether, these issues elevate uncertainty and volatility and may impact capital spending decisions. In our business, a long-term lease is a major investment and requires a significant capital outlay on the part of the tenant. If you listen to any of the real estate market conditions calls or read the quarterly updates that are put out by the leasing brokerage community, I think it’s pretty clear that the leasing velocity across many of our markets is feeling this impact. In addition, while the national statistics may show very little general inflation, we can tell you that very tight labor conditions in the construction industry has pushed up the price of tenant improvement work. So it’s easier today to delay all these commitments and it’s cheaper from a capital investment perspective to renew.
So let me give you some specific of our reasons and I am going to start with San Francisco. During the first quarter, we completed a 128,000 square feet of office leasing at EC. During the second quarter, we completed over 158,000 square feet of office leasing. And as of July 1, we had more than 233,000 square feet of full floor leases under negotiation. These leases average a positive mark to market of more than 40% on a gross basis, 70% on a net basis, very consistent with the leasing spreads that were reported in our quarterly supplemental. Yet at the same time, I will tell you that the overall leasing velocity in the San Francisco CBD is well off the levels of 2014 and early 2015 and there are couple of explanations for this.
First, as I described last quarter, the city at the moment is not the experiencing the unprecedented large growth from tech companies Google and Dropbox and Salesforce.com, Uber, Stripe, Slack, LinkedIn, were so active in 2014 and 2015 with significant expansions. Yet there is still growing tech demand in the first quarter, Airbnb and Twilio and Quantcast and Stripe also down blocks of about 100,000 square feet and during the second quarter Lift, Fitbit, Travana, Expedia, Reddit combined have leased over 650,000 square feet of space. And today, there are more than a dozen active requirements from technology users looking for 100,000 square feet or more including a couple that are close to 200,000 square feet Twitch, NerdWallet and Meraki are those.
Second and mostly recently, high quality well built sublet space has served as the dominant large block availability. And much of the recent demand has flowed into this quadrant. Three of the four largest yields in the second quarter of over 100,000 square feet went to sublet space. Sublet availability has remained flat with the activity compensating for additional availability. Third, small space sublets are much less active, if you exclude capital raised by Uber and Snapchat during the second quarter. Overall, venture investing is pretty down significantly year-to-year. Seed in early stage investing is down from the prior year and first time, investing is also down. These are the kinds of companies that gets funded and that are putting small spaces on to the market and are also the kind of companies that would be occupants.
Finally, financial services and professional services firms continued at best to be neutral demand generators. At Salesforce Tower, we continue to negotiate with the same group of transactions we were working on last quarter, plus a few additions. Most of those discussions involve tenants with late 2017 and 2018 lease expirations. The structure of the building is up to about the 40th floor and we expect to have our first tenant in occupancy in late 2017 or early 2018. We anticipate delivering the first block of space to Salesforce.com in the second quarter of ‘17 and then we have four future delivery dates that extend out into the fourth quarter of 2018. We will not recognize revenue until the tenants has completed their build out on a floor by floor basis. Even though we are going to be receiving cash rent. So at this point, we think it’s prudent for modeling purposes to assume no NOI in 2017 as startup operating expenses will offset any revenue.
We had an extremely active quarter in the New York City region while statistically, overall midtown market activity was a little bit light, we think it’s largely because renewals have been prevalent and they are really not that typically included in the leasing activity as measured by the major brokerage firms.
Our total New York regional activity in the second quarter was over 435,000 square feet and it included 320,000 square feet of renewals in expansions at 399 Park Avenue. We have now released 155,000 square feet of the 2017 City Bake Office explorations and 49,000 square feet of the 2017 Morgan Lewis explorations. The overall rent up in these spaces was about 2%, which is very consistent with my past remarks, where I said the 399 was basically a flat building. They included over 110,000 square feet of space at starting rents over $100 a square foot. This quarter across the portfolio, our New York City rollup was about 14%.
Our repositioning preconstruction activities are underway at 399 and we should be under construction by the fourth quarter. On July 1, two full floor high-rise floors at the General Motors building became available. While we continue to see a consistent and steady flow of leasing volumes at between $80 and $125 a square foot, the vastly above this is a little bit slower. We have been successful leasing smaller suites across our portfolio and are going to take a similar approach to the two General Motors floors. We have shown the space and we have issued proposal to a number of tenants for portions of these floors. The most exciting news at the General Motors building is that the Under Armour has leased 53,000 square feet of the former FAO space. Their plans are being developed as we speak and we expect they will create an incredibly dynamic experience for their brand, the building and the city when they open.
At the moment, we still have a temporary tenant utilizing the space and we anticipate turning the space over to Under Armour sometime in 2018. There are 17,000 square feet remaining and it will likely become part of one of the other retailing units at the building. We don’t believe it’s appropriate to discuss the economics of the lease, but our contribution to our $80 million revenue bridge is consistent with our prior projections. We are in deep lease negotiations with more than 55,000 square feet of the space that was subject to our lease termination last quarter at 250 West 55th. While we expect to have the lease signed in the third quarter, the space is in raw condition and we will not recognize revenue until the tenant has completed its installation, which will likely not occur until the end of ‘17 or early ‘18. All of our remaining pre-built suites are under lease negotiations and we may break one of the two remaining floors at the top of the building to create additional inventory.
At the June NAREIT meetings, we have got a number of comments suggesting that the D.C. CBD office market had turned the corner again. Our view has not changed and we have not seen any demonstrable positive change in the leasing market in D.C. in the CBD. Between ‘16 and ‘19, we are tracking only one uncommitted law firm expiration over 100,000 square feet. D.C. is truly a forward leasing market for any sizable space. We are currently engaged ourselves with two law firms with 2020 explorations of over 100,000 square feet for our availabilities at that time. The GSA continues to have a very measured approach to their renewals and we are not aware of any requirements with our net demand generators. The market is now hunkering into its election inertia, which contributes the pushing out decisions.
In spite of the challenging environment, we did complete 20 office leases totaling 150,000 square feet across the region. D.C. will continue to see new products come on the market either in the form of gut renovations and in some cases, ground-up developments such as Capital Crossing which is currently building 900,000 square feet of speculative product right now. This is likely to govern any significant recovery. As we enter the quarter, our Reston portfolio was 97% leased, leaving us with a smattering of small spaces. We did six small deals this quarter, with starting rents in the mid-50s. Our Town Center portfolio continues to outperform the rest of Northern Virginia. The merger of a number of government contractors with large installations in our Reston Town Center assets have created a medium term sublet space in our portfolio.
While all the space is being used, these contractors are looking for cost saving opportunities and this space is their most marketable in their portfolios. With very little direct space, we are eager to work with our tenants on these potential transactions which typically require additional sub-terms. We continue to see the Boston suburban market as having the strongest relative demand growth across our portfolio. While we only completed 55,000 square feet of leases this quarter, we have more than 400,000 square feet of leases in negotiation from a series of life science, technology and even a few financial services organizations. Leasing velocity in the Waltham/Lexington submarket has accelerated during the last few months as a result of this demand and much of it is organic expansion.
Last quarter, I mentioned we had over 450,000 square feet of technology and life science company used at Bay Colony. Today, we are negotiating another 100,000 square feet of life science and technology expansions or relocations at that park. It’s been widely discussed that the Cambridge market continues to be one of the tightest in the country with availability rates under 5%. Virtually every major pharma company has put down a base in the Cambridge market and coupled with the growth of the biotech industry and the tech titans, there are very strong demand drivers.
I will describe the active lease discussion on the first phase of our new development on the North Parcel. In addition to our development, MIT has approvals for an additional 1.3 million square feet of office and lab space and the RFP for the Volpe site has been issued and offers will be due in the coming weeks. The current zoning on the Volpe site for a nongovernmental owner allows for 1.17 million square feet of commercial space and 970,000 square feet of residential development. I mentioned a few quarters ago that Microsoft, which leases 124,000 square feet in our 255 Main Street building, had chosen to consolidate and might exercise a termination option in its lease. Well, we did in fact receive that notice and the lease will expire on December 31, 2017 allowing us the opportunity to release that space well before the original expiration date.
As lease today, the weighted average rental rate on the 216,000 square feet at 255 Main Street is more than $25 a square foot below market. The Boston CBD continues to be a lease expiration driven market with a steady flow of new technology companies entering or expanding, but that’s nothing like what’s going on in San Francisco. We leased another mid-rise floor at 200 Clarendon. We signed our first LOI for a full floor at 120 St. James. We have a full floor lease under negotiating at 111 Huntington Avenue on a floor we are going to get back in 2017 and we are negotiating a 2.5 floor deal for Prudential Tower. 888 Boylston Street, our new office building is going to be opening in the third quarter, 71% leased with 2 or 3 floors in occupancy. The retail is going to open in December and the anchor office tenant, which is 154,000 square feet, is not planning on moving in until the fourth quarter of ‘17. So, we don’t anticipate our full run-rate until the very end of ‘17 on that development. The flagship Prudential redevelopment is fully leased. We anticipate Eli will be opening in the fourth quarter of ‘16 and the final retail tenants will be opened by mid 2017.
We are off to a great start in Los Angeles as Owen suggested. Colorado Center is a 6 building campus with floor space between 30,000 square feet and 62,000 square feet. It is a large user project and it fits terrifically with our operating platform design. The West LA market has had a string of strong quarters of rental rate growth as it benefits from both the creativity and entrepreneurship of local content, creators and providers and it is a growing labor market for a number of the San Francisco-based tech companies that are trying to broaden their workforce reach. In the four weeks that we have owned the property, we have signed a letter of intent with 160,000 square feet user and are in active discussion with another tenant for 60,000 square feet as well as discussions with existing tenants for expansion. If we complete simply these two leases, we will have leased 63% of the available space. We have also hired a set of design professionals and consultants that are assisting us with our future repositioning plan.
Let me end my comments with a further update on our revenue bridge. With the additional leasing at Embarcadero Center and at the General Motors building, we have now pushed our completed transactions to over $58 million of the $80 million that we anticipated to receive by the end of 2017.
And with that, I will turn the floor over to Mike.
Great. Thanks, Doug. Good morning. I just want to start with a quick summary of where we see the debt markets today. We do have some refinancing opportunities coming up and the debt markets have been open and improving in the face of the recent volatility in the rates market and the uncertainty in the global recovery after Brexit. We have two mortgages that are maturing in the next 8 months. One is the $350 million mortgage on Embarcadero Center floor. It has a 7% GAAP interest rate that expires on December 1. And the second is the $750 million mortgage on 599 Lexington Avenue with a 5.4% GAAP interest rate that expires on March 1, 2017. Both of these loans have an open window and we can pay them off with no penalty commencing this September and refinance at significantly lower interest expense.
We also used $500 million of our cash balances to fund the acquisition of Colorado Center in July, bringing our available cash down to approximately $700 million after quarter end. With $1.3 billion remaining to fund in our development pipeline over the next couple of years, we may also look to enhance our liquidity with additional financing. Overall, our balance sheet remains conservatively leveraged and we have substantial capacity to add debt to fund new investments. Our leverage is expected to improve as we achieve the significant earnings contributions projected from our development as we move into late 2017 and 2018.
Additionally, last week, Moody’s announced the positive outlook on our unsecured debt ratings. The bond market has performed well through the recent volatility and our credit spreads have tightened. Even with the most recent slight run up in long-term rates, we believe that we can borrow for 10 years in the unsecured bond market at around 3%. We also have access to the secured debt markets where comparable borrowing costs are in the low to mid-3% range for high quality properties that have reasonable leverage. You should also recall that we have entered into hedges for a notional amount of $550 million, targeting financing in the second half of 2016 at the 10-year swap rate of 2.42%. So at today’s interest rates, we would have to amortize approximately 100 basis points of hedging costs into our interest expense on the first $550 million of financing. Although we are evaluating the markets as we always are, we have not assumed any early financing activity in our earnings guidance.
Turning to our earnings results for the quarter, you can see from her press release that we reported second quarter FFO of $1.43 per share, that is $0.06 per share or about $10 million higher than the midpoint of our guidance range. The biggest factor and are exceeding our guidance was termination income that was approximately $6 million or $0.04 per share higher than our projection. All of this income was in our guidance for later in 2016, so it represents an acceleration of the timing of income recognition into the second quarter, but has no impact on our full year projection. The largest piece was related to 100,000 square foot space at 399 Park Avenue that had a natural lease expiration in late 2017. We were able to sign a replacement lease for this space with the client seeking to occupy earlier and this in conjunction with the other leases that Doug mentioned represents 200,000 square feet of forward leasing which is a great start in covering our late 2017 exposure at 399 Park.
The performance of our portfolio drove approximately $4 million or $0.02 per share of the out-performance this quarter. Revenue was slightly ahead of expectations, while expenses, primarily utilities and repair and maintenance expense, were lower by about $3 million. Over $2 million of the expense reduction is related to R&M projects that have been reforecast into the back half of the year. So this portion will not flow through to our full year guidance.
Our same-property performance moderated this quarter, but it was still strong with our share of combined cash NOI of 4.7% and combined GAAP NOI of 0.7% from the same quarter last year. The most significant impact affecting this quarter was 140,000 square feet of space at 601 Lexington Avenue that expired midway through the quarter. As we discussed last quarter, we anticipate our same property NOI growth to continue to moderate for the rest of 2016. We will have downtime between leases for the 80,000 square feet of high-rise space at 760 75th Avenue that Doug talked about. We also have 160,000 square feet expiring this quarter at 191 Spring Street which is in suburban Boston from a client who relocated and expanded at 10 CityPoint. We are working on a proposal for the majority of this space, but there will likely be 12 months to 18 months of downtime between leases. On the positive side, we are and expect to continue to see growth from lease-up and roll-up of rents at Embarcadero Center, Prudential Center and 200 Clarendon Street. Overall, the leasing activity we are seeing is in line with our expectations and we assume our share of same-property combined NOI in 2016 will be up between 0.25% and 1.75% on a GAAP basis and between 2% and 4% on a cash basis over 2015.
In our non same-property portfolio, we acquired Colorado Center this quarter and it is projected to add approximately $0.05 per share to our 2016 FFO. Based upon its addition, we are increasing our guidance for the incremental contribution from the non same-property portfolio to $46 million to $52 million over 2015. Colorado Center also has an impact on our non-cash rents as there are several leases that are in free rent periods for the remainder of 2016. We received a credit from the seller equal to the amount of free rent, but the accounting rules require this to be reflected as a reduction in the purchase price as opposed to rental income, which is part of the reason why the net purchase price came down to $504 million. We now project our non-cash rents in 2016 to be $52 million to $65 million.
As you think about the change in our full year guidance, remember that we had included within our prior guidance virtually all of the second quarter earnings fee. We just expected it to occur later in the year. So the impact of the remaining changes results in our increasing our guidance range for 2016 funds from operation to $5.92 to $5.99 per share. This is an increase of $0.06 per share at the midpoint, consisting of $0.05 per share from the acquisition of Colorado Center and $0.01 per share of better projected portfolio performance.
I just want to close by adding some comments about 2017, although we will not be providing formal guidance until next quarter. First and just a reminder, that in 2016, we have recorded $57 million in termination income which is much higher than typical and is primarily due to the large termination at 250 West 55th Street the last quarter. This represents $0.34 per share of 2016 earnings that we do not expect to recur at the same level in 2017. Second as Doug described in a development pipeline, more than half of the leasing at 888 Boylston Street and all of the pre-leasing at Salesforce Tower will not commence GAAP revenue until late in ‘17 and into ‘18. The space is leased and the revenue commitment is in line with our previous projection that we outlined in our investor presentation as recently as June that show the projected quarterly development run rate accelerating as we move into 2018.
Also, we have captured a good portion of the $80 million in NOI growth that we have been projecting and we will see the impact in our revenues, particularly at the Prudential Center and Embarcadero Center next year. As Doug described, the majority of the projected revenue from the lease up of other properties such as 760 75th Avenue, 601 Lex, 200 Clarendon Street and 120 St. James will likely hit by 2018.
That completes all of our formal remarks. Operator, if you could open up the line for questions that will be great. Thanks.
[Operator Instructions] Your first question comes from the line of Manny Korchman with Citi.
Hey, good morning. It’s Michael Bilerman here with Manny. Question, Owen or Doug, as you think about your stated strategy and one of the components is to being astute investors and looking at market timing for investment decisions by acquiring properties in times of opportunity, I take it sort of view Colorado Center as part of LA. but I am curious if you think about what’s going on in UK, certainly what’s going up in Canada, you go to Toronto and London in the past, the U.S. currency is certainly a lot more stronger today and one could argue that those are the opportune times to get into the market, so how should investors – how should we think about how you are thinking about it today and whether that could be something that’s on the table?
Yes. So Michael the – we have as you know targeted a handful of markets for potential expansion of the company, one of those was LA. We obviously made a significant move on that piece of the strategy last quarter and also London has been on our list. And our view of London is that it will continue to be a great world city and will be an interesting market for real estate investment and development. So that hasn’t changed. However, in the short-term and medium-term, given the Brexit vote, there are more uncertainties about economic growth and space demand. We don’t know the impacts on trade policy, what that’s going to do to GDP growth. We don’t know the impacts on passporting for financial institutions, what impact that will have on jobs in London. And so as we think about London, there has already been a 10% drop in the pound, which is helpful as the dollar investor, but we also think pricing for assets should also change given these uncertainties that I described. So, we are still looking, we are still active, but we are conscious of these additional risks and would expect those to be reflected in pricing. And then lastly, we are not particularly active looking at Toronto.
Hey, guys, Manny here. If we just think about the comments you made on Colorado Center with a good backlog of leasing that’s going to come in. Is there going to be an outsized capital commitment needed to get those tenants into that project or is that going to come with sort of the second phase of re-planning the project overall?
Manny, I think we have made a commitment to our tenants and we have I think had these conversations with our partners that the buildings, common areas need to be refreshed in a more significant way than simply painting carpet and so we have hired a series of design professionals that are going through a programmatic view of all of that right now which we are going to do one way or the other regardless of the leasing. And I think that those commitments are being described to the tenants as they talk about coming to the property.
And Doug, maybe one last one for me, if we think about leasing at 399 and GM, you mentioned smaller spaces at GM, was that sort of your plan all along or has there been a shift in the market or demand profile of tenants that’s now making you sort of rethink strategy to get those spaces of lease?
I don’t think our strategy has changed significantly. I mean, I have talked about this before that if you go back, call it, 4 to 5 years and you look at the number of relocations that involve tenants that are paying over $125,000 a square foot, you can probably count them on one hand. And so the market naturally is one that is a smaller market meaning a floor at a max and generally less than that. And so having grown through the experience of 510 Madison Avenue plus the top of 250 West 55th Street, I think we have become pretty acute and adept at doing the right kind of pre-built suite in marketing those types of spaces to the appropriate kinds of tenants and we recognized that it’s a velocity game and we have got to increase velocity. And the best way to increase velocity is to be much more attuned to doing smaller deals.
Great. Thanks, guys.
Your next question comes from the line of Jamie Feldman with Bank of America.
Hey, thanks. Good morning. Mike, I appreciate the comments on 2017 as we are building out our models. You talked about moderating same-store NOI heading into the end of the year. Based on the leasing you guys have done, when do you see the inflection point for same-store to turn positive or kind of start growing again?
Well, I think we expect it to be positive, right. I mean, it’s we are saying it’s going to be 2% to 4% in 2016. So, it’s just – it’s been higher than that in the first two quarters. So, it’s just going to come down a little bit, because we have got some of the vacancies that we talked about. But as we have seen our leasing stats, for many quarters in a row, we are having a positive mark-to-market on everything that we do. And I do anticipate that our occupancy is going to turn the corner in 2017 as well as we filled some of the vacancies at 120 St. James in the Hancock and the Peru. So, I don’t have a number to give you right now, but I would expect positive performance in 2017 on the same-store.
Yes, I guess I am sorry, I shouldn’t have said positive, I meant accelerating. So, do you think ‘17 same-store is on track to be better than ‘16?
Again, I don’t want to tell you where it’s going to be, to be honest with you, Jamie, I just think it’s going to continue to be positive. There is a lot of space that we can fill that it’s going to add to us over the next, I would say, 24 months. The question is the timing of when some of those spaces gets filled and when the revenue recognition associated with those spaces are and whether that is in ‘17 or pushing into ‘18. So, there is a little bit of a timing game but these are all really, really high-quality spaces and I think we are proving that we are getting all the rollups through the leasing that we are doing. So, I feel very optimistic and positive about our ability to continue to grow our same-store and achieve the NOI bridge that we have been talking about.
Okay, that’s helpful. And then as we think about AFFO for the year, how are you guys tracking now?
So, on the FAD side, I would say that our guidance for 2016 is still somewhere in the low $4 range, I think $4 to $4.20 something like that per share. We did have a little bit of elevated transaction cost this quarter associated with some long-term leases that we did both in Washington and New York City. There were two in particular that were longer term and had some higher transaction costs associated with it that kind of hit our FAD a little bit this quarter, but we still expect to be generally where we were when we talked about this last quarter.
Okay. And then any early thoughts on the train shutdown heading to Brooklyn and what it means for your project out there longer term for leasing?
I will make a quick comment and then John Powers you can comment on this too. The good news for us is that we don’t anticipate delivering our space until the second or third quarter of 2018. And from what we are told, the L train is going to be out of service for 18 months, which would line it backup for when in fact we deliver, but John, I don’t know if you have any other thoughts?
Yes, the L train – it’s unfortunate for the Brooklyn residents, but not unfortunate for our project, because that goes into Williamsburg and we are south of that. So, the lines that the subway takers would use to get to our project, Dock 72 will not be affected.
Okay, alright, great. Thank you.
The next question comes from the line of Blaine Heck with Wells Fargo.
Thanks. Good morning. Maybe just the follow-up for Mike on same-store NOI just looking at the trend, your cash same-store NOI guidance and your share 2% to 4%, if my math is right, it looks like you will have to average around 0% for the rest of the year to get to the midpoint. So, is it just that you are looking for significant same-store occupancy drag for the rest of the year or is there something with straight line rent, because it seems like rent spreads and rent ramps are pretty strong, so was there something else I am missing?
Look, I think the biggest drivers are New York City where we have the two floors at the General Motors building coming back in July. We had the four floors at 601 Lexington Avenue that came back midway through the second quarter. And then we have this space in suburban Boston that I mentioned in my formal remarks that it’s coming back. And so you are going to see some degradation in occupancy in the third quarter. And I think we make – hopefully, we will see some come back in the fourth quarter and late in the fourth quarter, but those are the things that are driving our share of the same-store being, I would say, 0% to 1% probably in the next couple of quarters.
Okay, that’s helpful. And then maybe for Doug or Ray Ritchey, it sounds like you guys are off to a great start with the leasing at Colorado Center, but can you talk a little bit about the amount of interest you are seeing in the balance of the vacant space and whether the peso leasing has surprised you guys or were any of the leases that anticipated kind of when you bought the asset?
So when we started the diligence on the asset after we reached our agreement with Blackstone to purchase their interest, there were a few tenants that were “shopping the property” but had no real sense of who the ownership was going to be. And so I think there was a lack of concrete proposals. Ray has done a fabulous job of walking the walk and talking the talk and being out there. He is actually there right now, which is why he is not on this call and he has been very proactive about meeting every tenant that we have made a proposal to, which I think is a different approach than the current – the former ownership had with regards to leasing. And so I think we have turned the lot of heads in terms of the way we were managing this asset. And quite frankly, as I said before, these kinds of buildings and these kinds of clients match up with the way we run our platform. And so we are used to and anticipate doing these types of things when we buy a property or when we are developing a property. So, I think – I don’t want to say we are surprised by the level of activity. We are very encouraged by the receptivity that the activity has had to our approach and the way we are pricing the property and the way we are committed to enhancing the environment and the experience for our tenants and our customers, because that’s what this is all about.
So, what’s the kind of reasonable timeframe for expecting that asset to be leased up to a stabilized level?
So the underwriting that Owen was describing assume that we weren’t going to do any leasing for 18 months. Obviously, we are going to be doing a lot more leasing than that. And so, I would anticipate that we will get these first couple of leases done some time in 2016. Again, when the tenants actually occupy the space and revenue recognition occurs is a little bit out of our control, but we are hoping that we are going to be in the 90s by the middle of 2017, which is 12 months after we bought the property.
Great. Thanks a lot.
The next question comes from the line of John Kim with BMO.
Thank you. I think Owen you mentioned methodically building your presence in LA, but your balance sheet position allows you to acquire almost anything accretively and you have had some good leasing progress so far, so why not acquire more rapidly in the market?
Well, our approach is to create value and not to buy assets that are stabilized at low cap rates. So most of the investment that we have been making is – has been in ground up development as you know. I described three projects that we delivered this quarter at 7.8% cash yield for a brand new asset, again in our core markets which we think is very value creative. So we are looking at everything that’s offered in West LA. We are looking at development opportunities are not as many, given the restrictions that are on development in West LA which is one of the attraction, honestly of the market. So we are looking at that. And I think would also certainly be much more interested in assets like Colorado Center that are very high quality, but they had something that needs to be done. So when we bought Colorado Center, it was 68% leased and there was an upside opportunity in our minds from leasing it up which I think as Doug described, we are very much on track in doing. So yes, we could go out and pay, purchase the pipeline of assets that continue to be offered in the marketplace, but we want to be selective about getting a high quality asset, giving an asset that is positioned for our type of tenants which are generally larger and also we would prefer an acquisition where there is something that we can do to add value as a property company.
Okay. And Doug I think you mentioned that you have achieved $50 million of the $80 million organic growth forecasted through 2017, given that progress so far, is there an upside to this organic growth number?
So, what we are talking about is the bridge. So, what we basically said was here are all the major holds in the portfolio in ‘16 and ‘17 and if we sell them all up, we will get to $80 million. So, I think the number is a consistent number and its $58 million, not $50 million.
Okay. Can you provide some color on the Under Armour space, the remaining 17,000 square feet available, where is that located within the Former FAO Schwarz space. And if you could just comment generally on experience based retail and there are any other opportunities in your portfolio where you have leasing opportunities like this?
Sure. John, do you want to take a crack at describing sort of the space and how the FAO space was configured and what’s going to happen?
Sure. The FAO spaces are on four different floors and we are re-leased, as Doug said, majority of the space. The balance of the space is not on the main floor and there are some different possibilities of how we can continue that and we have worked out that with Under Armour.
And with regard to the experience of retail, I think it’s a critically important component of what we are doing and Bryan, you might wanted to describe what we are doing at Prudential Center and our decision for example to bring Italy [ph] into that property and why we are doing that?
Yes. Several years ago, we came to a conclusion that in order to be relevant in terms of retail formats, which is so important to our mixed use projects, we had to have a large component of experience for retail. Our major decision was the decision to shutdown our traditional food court, which was a high performing food court, one of the highest grossing in North America and repositioning with Italy that will open up this November. We continue to see strong demand, not only in these mixed use high density projects but the urban markets are incredibly high in demand and we consistently see it whether it’s a Prudential Center where we have very few spaces remaining in terms of our repositioning of the entire asset, but we are also seeing it in our limited amount of retail, we had in Cambridge and then also the significant amount we have pre-leased at our Hub project at North Station with our partners, with Jacobs, at Delaware North. And I think both those projects are indicative of that. You will also see it just in terms of the urban storefront in our downtown assets as well.
And just to sort of keep going, so we are doing a similar project at 100 Federal Street where we are building basically a glass experiential box that we hope is the gathering place for the downtown market. And John, you may want to describe what we are doing at 601?
Well, 601 is a very exciting redevelopment. Doug mentioned – or I think Owen mentioned initially, the smaller building which used to cover atrium building, we are re-branding that completely. We are taking skin off the building. We are taking all the mechanical systems. It will be essentially down to a slab and steel structure and rebuilding it from scratch up. So that’s going to be very well received in the market. That’s almost 200,000 square feet. We are also looking at that the atrium and have plans to make that into a spectacular food hall and that will be just a little later and it’s timing relative to the office building.
That’s helpful. Thank you.
The next question comes from the line of Vincent Chao with Deutsche Bank. Your line is open.
Yes. Hi guys, sorry about that. Just a question on the development side of things and some of the commentary around protecting the downside, pre-leasing has been a part of the strategy for a while but I was just curious if the continued sort of slowness in the economy has raised the bar in terms of what you would require from a pre-leasing perspective relative to maybe a year ago or so, I just also – just a question on just leasing activity you are seeing at Dock 72?
So to answer your question and I have talked about this over the last couple of calls. Yes, I think given the slowness in the economy, we have raised the bar, so to speak in the level of pre-leasing that we require on new development. It’s everyone always asks for a number of this and that’s not possible to provide, because it depends on the size of the building, the activity level in the market, the speed of delivery, every circumstance is different, where is the tenant coming from, our existing portfolio from outside. But there is no question – as we evaluate new developments and we have a lot to evaluate even in our company because of the large land holdings that we have, pre-leasing is an absolute requirement and our desire to have it be larger in the portfolio is there. So that is definitely happening. However, I think we still see projects and I have described a couple of them, particularly several of the projects that we are looking at right now are actually 100% pre-leased. And those are the kinds of projects that we want to be doing and will create value for shareholders even if we are layer in the economic cycle. As it relates to Dock 72 leasing, we are just too far away from delivery to expect much significant pre-letting. We are clearly in the market speaking with potential tenants marketing the asset, but I think it’s too early to expect – for us to expect to have significant pre-letting.
Okay. And just with regard to WeWork, I guess they have been in the news lately not necessarily for great reasons, but I am just curious, I mean there is no – I guess there are no discussions with them potentially re-trading that or…?
No, we are full systems go with WeWork at the Brooklyn Navy Yard and at the other two properties where we have leases. Let me comment that as we have, in our discussions with WeWork, all evidence that we have points to the fact that the facilities that they have opened are very successful. They are fully let and they are creating attractive margin to WeWork. And we are seeing it in the projects where they are opened with us, particularly 535 Mission has been very successful. So a lot of the press that you are describing is more about WeWork as a company. And again from reading the same press, a reduction in the projections that they are projecting for their overall company, but as it relates to the performance of the individual installations we are evidence I think suggest that they are doing well.
And this is John, if I could just like to add one comment. We are very actively engaged with them at the Navy Yard. We are driving piles it was Owen said it’s early on. It will be more exciting in the fall when this deal goes up, but we are in weekly communications with WeWork. They have submitted their build out plans. We are adjusting the build out plans. We are co-working with them on the amenity space. They are very, very excited about the project.
Okay, thank you very much.
The next question comes from the line of Craig Mailman of KeyBanc Capital Management.
So, follow-up on FAO space, I think Doug, you said that the lease with Under Armour represents what you guys thought it was $80 million? I am just curious when you guys kind of underwrote the backfill the FAO space, does Under Armour just by itself represent the backfill, then the 17,000, it includes pro forma, the balance will lease up?
I think the answer is yes to both. So, I am not being sort of tongue and cheek about it. We are comfortable with the rent that we pro forma for Under Armour and based upon what’s available we think we will do a little bit better.
Okay. And then I thought that space was 60,000 square feet, it looks like it’s closer to 70,000, was FAO just not leasing all the leasable space you guys creating the low rate space?
No, there was 68,000 square feet of space. Some of it might have been as John suggested it was on four levels. So, there was second floor space. There were sort of two-storey, two-storeys of first floor space, because that’s the level on Madison Avenue and the level on Fifth Avenue are on slightly different planes and then there was some sub-grade space or concord space and sub-concord space. So, there is a plethora of levels there and it was about 58,000 square feet.
And those levels can connect differently. We could put the second floor level connected to the Madison. We can take part of the sub-concourse and put it with the bank. If the bank doesn’t stay that’s on Madison, because it’s fairly complicated, but we have worked it out, I think with Under Armour. They are committed to block a space of square footage that Doug mentioned.
Okay, that’s helpful. And then just switching to the debt side of things, Mike, your comments were helpful. I am just curious, it sounds like you guys don’t necessarily think rates are going higher that quickly here. As you look to fund the remaining development spend, are you more apt to put construction facilities in place or kind of hit the unsecured market and sit on the cash?
No, I think that we will do some construction financing on some of the joint venture development projects that we have. So, we are in the market for both the Brooklyn Navy Yard and for the Hub on Causeway. So, we will be leasing construction financings on those projects. For the remaining cost for the wholly owned developments, I would expect that we would use cash on hand. And then at some point, we would do some long-term financing rates that we feel are very, very attractive to kind of lock in and make sure that we lock in as low rate as we can. So, we will be evaluating that.
And just as a surrogate, right? So, a construction loan space probably LIBOR plus 200 at the lowest level and 300 and you can do a 10-year financing at 3%. So, the value of a construction loan from a rate perspective is de minimis.
That’s an excellent point.
You are welcome.
The next question comes from the line of Jed Reagan with Green Street Advisors.
On the Oakland department development, there have been some concerns about softening conditions in the Bay Area residential marketing. Just curious how you are thinking about the risk from slowing job growth in new supply in the metro area there as you move forward on the project?
Sure. Bob, you want to take that one?
Sure. First off, we are underwriting at rents that are approximately 25% to 30% less than San Francisco. It’s going to take several years to get it entitled and we don’t anticipate delivering that building until probably 2019, 2020. So, we are quite ways off based on current market conditions from a standpoint as the market is softening right now which we are seeing in San Francisco.
And Bob, you might just want to describe sort of the Temescal area and the Rockridge area and sort of what that is, because it’s not downtown Oakland?
It’s – this site is right adjacent to the MacArthur BART station. This is an area that has become very popular for restaurant shops. It’s one of for lack of a better term, one of the hipper neighborhoods in the Oakland Berkeley market and it’s one that is gentrifying quite rapidly. So, we see it as a very good location long-term.
Okay, that’s hopeful. And just sticking on the Bay Area, on Salesforce Tower, you had mentioned earlier this year that you thought you might get 5 to 15 new floors on this year. I think it was based on what you have done so far this year, how much additional space do you think you could get committed by the end of this year and then maybe by this time next year?
So, look the deals that we have in the works right now add up to about 8 floors? So, if we are able to do half of them, we probably will get 5 or 6 of those floors done. And I think that our expectation is that we are going to continue to go with that type of a pace so that as we get closer to people actually being able to go into the building and go to their floor and to sort of experience the spectacular configuration views, curtain wall, airflow, ceiling height that, that will ramp up the activity and we anticipate that will be happening towards the end of this calendar year where we have to actually do those tours on finished floors. And so, I will let Bob be the spokesperson, because he has already made a commitment for the company, but we continue to be very encouraged by the leasing there. Bob?
I think Donald Trump would refer to the building as something really, really special. It’s the A1 location in San Francisco. It’s going to be the biggest and the best building that’s in the marketplace and I am very confident that it’s going to lease up rapidly.
Okay, thank you. And then just last one for me. Can you talk about the tempo of leasing demand you are seeing across your portfolio between larger tenants versus smaller tenants? Would you say it’s fair to say that larger tenants are more cautious today?
I think that larger tenants are not necessarily more cautious. I think the larger tenants are fully committed to lease exploration driven decisions that allow them to build out space. So, anybody who is looking for hundreds of thousands of square feet of space is doing that, because across the broad markets that we are in, because they have a lease expiration and I don’t think anyone is looking at the market and saying, well, we think things are going to get worse and therefore we are going to hold off. I think there people feel relatively good about sort of the position that the markets are in. On the smaller side where there is a lot more flexibility, I think the volatility that Owen described and issues associated with the world at large are creating uncertainty and uncertainty just doesn’t drive significant capital decisions and so we are seeing a lot more reticence to making decisions on new space for smaller companies.
Okay, thank you.
The next question comes from the line of Brad Burke with Goldman Sachs.
Hey, good morning guys. Just a question on the guidance, what you have done so far for the year and then the midpoint of guidance for the third quarter of 141, it looks like it would imply about 149 for the fourth quarter, so just wanted to understand anything we are going to be thinking about that would drive that sequential improvement from Q3, Q4?
I think there is really three things that we have. One is developments that are occurring and leasing up, which is part of that. We will have a couple of tenants at 888 that will take occupancy later this year that have a benefit to the company. Also interest expense, we talked about the fact that we don’t have any early refinancing in our guidance, but we do have the Embarcadero Center and it’s a 7% loan. So, there is an assumption on our guidance. So, there is going to be much lower interest expense when we refinance that in the fourth quarter. The other thing I would mention would be operating expenses which are cyclically highest in the third quarter and lower in the fourth quarter primarily due to utilities, where the HVAC is obviously a little more expensive in the harder times of the year that we are sitting in right now, actually. So, those are kind of the most of the drivers and there is some positives that we talked about in terms of leasing activity later in the year that we are guiding later in the year things like continued activity at Embarcadero Center where we have got renewals that we are working on that we are trying to sign that we have kind of a blend and extend where we will get some GAAP lift later in the year. So it’s those kinds of thing.
Okay. And then also related to guidance, of the $58 million of the $80 million NOI bridge, just wondering how much of that is already being recognized as GAAP NOI and to the extent that you are not recognizing any of it yet when you would expect that to roll on in your numbers?
We have provided some information as to the timing of that. I can’t give you exact numbers. I would say that somewhere between $15 million and $20 million is in today, because that was if you look at our slide, there was 535 Mission and existing rent lease up within in that and that is done. A good chunk of, I would say, half of the Embarcadero Center stuff will be in late this year and next year. And then the Prudential Center stuff would be in next year, but not this year. And then there are some big pieces that I think will be later. We are going to get some of the lease up at 200 Clarendon Street and perhaps a floor at 120 St. James that will hit sometime in ‘17, the majority of that I see has been later because that is – most of that space is we have to wait until the tenant occupies to recognize revenue on that space. And then we have talked about Under Armour and the timing of that. And then, 100 Federal Street which is another big piece of it, the lease is fully signed. But right now we are relocating another tenant to create the floors. We are not going to be able to deliver those floors until sometime in the middle of ‘17. So some of that will be into ‘17 and then into ‘18. So I didn’t give you the numbers, but that’s hopefully helpful with some guidance on the timing.
Got it, that is helpful. Thank you.
The next question comes from the line of Tom Lesnick with Capital One Securities.
Hi, good morning. Thanks for taking my questions. I will be brief since we are going late in the call here. But quickly on Boston, we have seen pretty strong job growth here over the last quarter especially relative to some of your other markets and I think you mentioned in your earlier remarks about the strength of pharma and biotech right now, but I am just wondering are you seeing that wholesale across the entire region or are you seeing any sort of bifurcation between suburban and infill?
So most as of the technology oriented companies in the biotech and the pharma and life sciences companies are concentrated in the Cambridge market and then in the suburban markets, so there has been some migration into the city. So I would tell you that on a sort of ranking, Cambridge is the strongest market, the Waltham, Lexington market is the second strongest and then the CBD downtown markets are below that. And I think what our view is that the markets are very strong at the sort of lower level of buildings, but that there is a little less activity at the top of building and largely that’s because the tenants that are driving demand. The top of the buildings traditionally are professional services and financial services companies and there is just less growth there.
We have seen it and then really a beautiful stat, the P2 corridor as we call it between the Mass Turnpike and Route 2 at Lexington sites of the north along Interstate 95, the competitive set of buildings that we follow, 32 buildings are now at 4.25% vacancy, it’s lowest I have seen in my career there. And I think it’s indicative of your question, which was you have good strong demand from pharma, biotech sector that’s looking and as Doug mentioned, solid company is not particularly huge companies, but companies that have growth in financial statements, so we were encouraged about that corridor in particular.
Appreciate that insight. And then Bob, maybe one for you, there has been some recent news reports of Facebook pursuing a significant office expansion in the San Francisco proper, are you able to comment at all on what kind of chatter you are hearing among the brokerage community and if at all, it has this changed leasing dynamics, particularly in Central SoMa?
Yes. It’s very preliminary as far as them looking into market. It’s been rumored that they are interested in the Central SoMa area. The Central SoMa plan is not approved and won’t be approved probably until the end of this year or early next year. So I think as far as them expanding in San Francisco unless they get an existing building is going to be quite sometime off.
Great. I appreciate that. That’s all we got. Thanks.
Your final question comes from the line of John Guinee with Stifel.
Okay, great. Hey, I am not sure this is for, but it looks like your earnings per share is over $3 this year, it looks like it’s going to increase fairly rapidly next year, you have got a dividend of 2.60, sub-2%, it looks like you will have some gains on sales, you may or may not be able to 1031 exchange that into Colorado Center, but the long and the short of it is your sub-2% dividend may be holding back your stock price, you may have some taxable income issues, can you talk about both the regular dividend and the special dividend?
Yes. Good morning, John. So on the special dividend, as you know, that’s driven by asset sales. I described three deals that we are working on. There are a couple of other little smaller things. And I said in my remarks that sales could be as high as $350 million. I would assume that’s the highest they would be. All those deals may not happen. We don’t know where they are priced. The original direction on asset sales was to 2 to 2.50. So we don’t know yet exactly what the asset sales are going to be. So it’s difficult for us to predict what the gains and so forth are going to be associated with that. So we are clearly – look at that and working with our Board later in the year to determine what if any special dividend, we would pay. And then as it relates to the recurring dividend, as you know, we mirror that to net income and as you pointed out, net income will be rising. So again, with our Board as we get into later this year, we will be evaluating the ongoing dividend to determine whether and how much we could increase it.
Any idea Mike, what’s your – and if your earnings per share is $3 or more, what your taxable income is for 2016?
I don’t have a number for you here. And I think that I can say that our taxable income is fairly close in line with where dividend is.
Great, okay. Thanks a lot, gentlemen.
John, thank you. I think that concludes our questions and concludes our formal remarks. Thank you for your time and attention and interest in Boston Properties.
This concludes today’s Boston Properties conference call. Thank you again for attending and have a good day.
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