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Edited Transcript of BXP earnings conference call or presentation 26-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Boston Properties Inc Earnings Call

Boston May 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Boston Properties Inc earnings conference call or presentation Wednesday, April 26, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arista Joyner

Boston Properties, Inc. - IR Manager

* Bryan J. Koop

Boston Properties, Inc. - EVP of Boston Region

* Douglas T. Linde

Boston Properties Limited Partnership - Director and President

* John Francis Powers

Boston Properties, Inc. - EVP of New York Region

* Michael E. LaBelle

Boston Properties, Inc. - CFO, EVP and Treasurer

* Owen D. Thomas

Boston Properties, Inc. - CEO and Director

* Raymond A. Ritchey

Boston Properties, Inc. - Senior EVP

* Robert E. Pester

Boston Properties, Inc. - EVP of San Francisco Region

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* Erin Thomas Aslakson

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* John Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Joseph Edward Reagan

Green Street Advisors, LLC, Research Division - Senior Analyst

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Nicholas Yulico

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's

* Thomas James Lesnick

Capital One Securities, Inc., Research Division - Associate

* Vincent Chao

Deutsche Bank AG, Research Division - VP

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Presentation

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Operator [1]

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

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Arista Joyner, Boston Properties, Inc. - IR Manager [2]

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Good morning, and welcome to Boston Properties First Quarter Earnings Conference Call. The press release and supplemental package were disturbed 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 requirement. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

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

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

Having said that, I'd like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchey, Senior Executive Vice President, and our regional management teams will be available to address any questions.

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

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [3]

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Thank you, Arista, and good morning, everyone. On current results, our FFO per share for the quarter was in line with our prior forecast, and we increased the midpoint of our full year 2017 guidance by $0.01 driven by operational improvements. We leased 565,000 square feet in the first quarter, which is below our long-term averages for this period. This level of leasing is not a reflection of the health of the market or the vibrancy of our tour and proposal activity, but it is due to the cadence of our lease expirations, the lumpiness of our large lease transactions as well as the fact that we leased 3 million square feet in the fourth quarter of last year.

Our in-service office portfolio occupancy is now 90.4%, which is up 20 basis points from the end of the fourth quarter. We also had another quarter of positive rent roll ups in our leasing activity with rental rates on leases that commenced in the first quarter up 13% on a gross basis and 20% on a net basis compared to the prior lease, which was driven substantially by our California assets. New investment and disposition activity was relatively light in the quarter, but we recently completed 2 major financings at very attractive terms, which Mike, who, by the way, is having a $4.5 billion financing week we'll discuss in detail later in the call.

Moving to the economic environment, U.S. economic growth continues to be a little sluggish with fourth-quarter GDP growth estimates at 2.1%. The employment picture also continues to improve incrementally with 98,000 jobs created in March and the unemployment rate dropped to 4.5%. In the capital markets, the 10-year U.S. Treasury also dropped around 30 basis points to 2.2% since the end of the last quarter.

Though financial markets are reflecting increased skepticism over fiscal and tax stimulus related to the new administration, the Federal Reserve has not altered its rhetoric on increasing rates at a more rapid rate in 2017. Notwithstanding current said posture, given continued sluggish growth, low inflation, the uncertainty associated with Federal fiscal stimulus and tax cuts and the current realities of demography, we're not overly concerned about a sharp rise in long-term interest rates and anticipate, at least for now, a continuation of reasonably healthy operating and financial market conditions.

I commented last quarter on the potential likelihood and impacts of proposed tax reform on Boston Properties' business. Though tax reform continues to be high on the agenda in Washington, D.C. I will reiterate that the probability, terms, timing, and potential impact of such reform on Boston Properties is very difficult to project, particularly with the recent challenges of ACA reform efforts.

Now given the growth in the U.S. economy, the office markets where we operate have positive demand and healthy activity but are in relative equilibrium given additions to supply. In the CBDs of our 4 core markets and West L.A., net absorption is projected to be 4.7 million square feet or around 0.8% of stock for all of 2017 while additions to the supply projected to be 6.4 million feet or approximately 1% of stock over the same period. Asking rents are projected to rise 1.5% in '17 while vacancy is projected to increase 30 basis points to 8.3%. Our leasing activity remains active with pockets of strength and weakness, which Doug will describe later in the call.

In the private real estate market, there continues to be a strong bid in size for high-quality office assets in our core markets as, once again, several transactions were completed at attractive pricing over the last quarter. Notable examples in -- are as follows. Starting in Santa Monica, 1299 Ocean Avenue, a 206,000 square foot office building with an oceanfront location, sold for $1,385 a square foot and a 2.5% initial cap rate to a domestic REIT partnered with non-U. S. capital. This is a record price per square foot for the L.A. region though the yield is low because the top 2 floors of the building are vacant. We think the stabilized cap rate is probably in the mid to high 4% range. In Boston, 45% interest in the Vertex buildings, 2 assets comprising 1.1 million square feet located in the Seaport District sold for $1,058 a square foot and a 4.3% cap rate to a sovereign wealth fund.

In Arlington, Virginia, Waterview, a 647,000 square foot office building sold for around $711 a square foot, which was a 5.5% cap rate to a domestic pension adviser. This is also a record price per square foot for suburban Washington. The major tenant of the building is expected to relocate, though there is term on the lease and the underlying submarket has a material vacancy.

And lastly, in New York, 245 Park Avenue, a 1.8 million square foot, 50-year-old office tower located near Grand Central and likely requiring some future renovation, is being sold to a Chinese corporation for $1,243 a square foot at a 5.1% cap rate. By the way, it's our understanding this transaction is being financed with a $1.8 billion mortgage, which is around 81% of the purchase price at a rate of approximately 4.5% for 10 years. Given these examples and dialogues that we are having, we continue to see strong private market interest from domestic and non-U. S. capital sources and high-quality real estate, particularly CBD office in our core markets.

So in summary, given the relative steady state of the operating and capital markets where we operate over the last quarter, we're continuing to execute the capital strategy we've been employing over the last few years, which entails growth through aggressive leasing, selected development of preleased projects and targeted acquisitions of underlet assets. We'll protect the downside by keeping leverage low and financing development through asset sales and additional debt capacity from our (inaudible) NOI.

Moving to the execution of our capital strategy for the quarter and starting with acquisitions, we continue to actively pursue development in value-added building investments. Though we are looking in all of our core markets, L.A. remains a priority, given our desire to build on our presence in the market. In terms of specific deals, last week, we committed to enter into a long-term ground lease with a purchase option and to build MacArthur Station Residences, which is a 402-unit, 24-story residential project with 13,000 square feet of associated retail located in the Temescal neighborhood of Oakland.

Temescal is an increasingly desirable area of Oakland with limited quality rental housing and no high-rise development. And the complex provides residents with immediate proximity to the MacArthur BART station with direct access to downtown San Francisco, downtown Oakland and Berkeley. Likely, renters will be commuters to downtown San Francisco given we expect our rents will be a 15% or greater discount to rents in the CBD, workers in the hospitals that are located proximate to our site and/or students at Cal Berkeley. The total cost of the project is approximately $265 million, excluding land value that will be determined based upon a formula following stabilization. And construction will not commence until mid-2018. MacArthur Station Residences is our first standalone and San Francisco residential project.

On dispositions, we're actively in the market with 500 East Street in Washington, D.C. and in various stages of selling a handful of land sites and buildings in the suburbs of Washington and Boston. For 2017, we continue to anticipate projected total gross proceeds from dispositions in excess of $200 million.

Moving to development, this past quarter, we delivered into service the 15,000 square foot expansion of our Prudential retail center and remain active, advancing our predevelopment pipeline for projects that will start after 2017. At the end of the first quarter, our development pipeline consists of 6 new projects and 3 redevelopments totaling 4 million square feet and $2.3 billion in our share of projected costs, of which $1.3 billion has been funded through the end of the first quarter. Our projected cash NOI lease developments remain in excess of 7% and the preleasing of the commercial component increased 6% in the quarter to 54%.

Looking forward in the development pipeline, we anticipate construction completion of the Salesforce Tower later this year with initial tenant occupancy in early 2018 and have already identified several projects to refill this important growth component for Boston Properties. As discussed in previous calls, we'll be commencing a new headquarters for Akamai in Cambridge this month. And over the next 3 years, we'll likely add a new headquarters for Marriott, 2100 Pennsylvania Avenue and MacArthur Station Residences. In aggregate, these projects alone represent nearly 2 million square feet, $1.2 billion of cost on an our share basis, have extensive preleasing and we believe can be delivered at an initial cash return approaching 7%.

So to conclude, we remain very enthusiastic about our prospects for growth and creating shareholder value in the quarters and years ahead. We're making good progress on our clearly communicated and achievable plan to increase our NOI by 20% to 25% by the year 2020 through development and leasing up our existing assets from approximately 90% to 93%. And this growth, of course, excludes our recent new business wins and potential new investments for which we have significant capacity.

Let me turn over to Doug.

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Douglas T. Linde, Boston Properties Limited Partnership - Director and President [4]

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Thanks, Owen. Good morning, everybody. The tone of the market color that I'm going to convey this morning is very consistent with our comments over the last few quarters. And I think it's really in sync with the overall tenor of the economy that Owen just described. Demand growth from technology and life science businesses are the primary drivers of positive absorption across all our markets, while lease expirations are dominating overall activity. Space utilization by large additional office tenants in the legal and the large financial services sectors have stabilized, though we continue to see space reductions stemming from design changes as leases expire and the ebb and flow of growth and decline from smaller alternative asset management firms as specific investment strategies don't always work out forever.

Under the current macroeconomic conditions, we believe the most dominant issue is the impact of new supply with ensuing tenant relocations versus incremental demand and the realities of the time needed to rebuild, reinvest and retenant existing inventory in all our markets.

Looking at the statistics from this quarter, the size of the pool of the leases that's reflected in our first quarter same-store portfolio, was pretty small, about 150,000 square feet in Boston, 100,000 square feet in New York City and in Washington, D.C. and 240,000 square feet in San Francisco. The Boston same-store statistics included a full floor deal of the Prudential Center, which was actually cut on a low-rise floor back in late 2014, early '15 and where the rent have declined from $76 to $61. So if you exclude this transaction, we were actually up about 6% in the Boston area.

And in New York City, the re-lease of one of the low-rise Citibank floors at 399 where the rent moved from $92 down to the low $80s, impacted those numbers and that's what we've been describing would be going on at 399.

San Francisco continues to benefit from the massive roll up that we've been seeing over the last couple of years. And interestingly, in D.C. this quarter, all of the transactions were in Northern Virginia. There were no D.C. proper deals that were in those same stores.

So I'm going to start my regional comments with Salesforce Tower. I'm delighted to be able to report that we signed a 100,000 square foot lease this quarter, which brings our signed leases to 960,000 square feet or just shy of 70% of the building. We have 2 contiguous blocks remaining, floors 35 through 44, 250,000 square feet, and floors 51 through 58, 170,000 square feet. During our internal marketing call last week, we discussed half a dozen active proposals from 200,000 square feet to a single floor, 25,000 square feet.

The current discussions involve law firms, some tech firms, coworking firms and an assortment of small financial services organizations, private equity firms, D.C. firms and hedge funds. We topped off the building a few weeks ago, but initial tenant improvements, stocking and layout have yet to commence for any of the tenants that have signed leases. So we -- again, we don't anticipate having any occupancy or revenue recognition in the building in 2017. As tenants physically complete their space, we can start recognizing revenue, even though the space is leased and in many cases, we are paying rent.

The available space left in the building is priced at the upper end of the market, high 80s and up. With our lowest for being 35, we are offering a very attractive price relative to the other new high-rise construction in the market. During the last quarter, there have been a handful of transactions and traditional inventory, Embarcadero Center 4, One Market, the Ferry Building that have all been completed at over $90 a square foot as compared to our pricing expectations at the brand-new Salesforce Tower.

Market conditions in the city are consistent with previous quarters. There are limited large blocks of sublet space and there continues to be a number of larger requirements in the market, but they're under 200,000 square feet, not the 500,000 square foot tickets that we saw in 2014 and 2015. This quarter, Google expanded by 100,000 square-feet, The Auto Group took 130,000 square feet, Adobe expanded by 130,000 square feet, Slack took 200,000 square feet and we did our deal at Salesforce Tower. CBRE reports that there were 12 deals over 100,000 square feet in '16 and there have been 6 deals year-to-date in 2017, over 100,000 square feet.

So the story of following the San Francisco CBD will be the continued demand growth and tenants' response to the price of new construction. During the first week of April, we signed another 62,000 square foot deal at Colorado Center, bringing our committed space to 93%. So Ray and our outside leasing teams have brought the property from 65% leased to 93% leased in 8 months. We have a number of discussions ongoing on the final piece of space.

Our repositioning plans are close to complete and we're working with the local permitting authority with the goal of commencing construction on the interior work by the end of 2017. Overall, leasing velocity in the greater West L.A. market has moderated slightly, but we were actually in discussions with one large tenant in the market with growth plans that we can no longer satisfy at Colorado Center.

Turning to the Boston region. We ended the first quarter with the issuance of our special permit for the construction of 145 Broadway, the Akamai building. We're underway with the demolition of the existing 79,000 square foot building and 31 months away from delivering our new 486,000 square foot fully leased building. This investment will be added to our supplemental next quarter at a total GAAP cost of approximately $375 million, but the budget is still evolving. Our other near-term opportunity in Cambridge will be in early 2018 when we have the opportunity to re-lease the 100,000 square feet of currently occupied space by Microsoft at 255 Main that is expiring at the end of this year. Not only is this in the heart of Kendall Square, but the space has its own dedicated entrance if a tenant is interested in expressing its brand.

The Cambridge office market continues to be very tight and expensive, forcing tenants to consider alternative locations like our Hub on Causeway project. Across the river at 120 St. James and 200 Clarendon, we are making significant progress leasing our vacancies. We completed our third lease at 120 St. James, 32,000 square feet, and are negotiating another lease for 50,000 square feet, which will bring the low-rise building to over 75% leased and we have activity under our remaining 50,000 square feet.

There are not a lot of large exploration-driven requirements in the Boston CBD market, so we expect leasing activity will be concentrated in transactions between 5,000 square feet and 50,000 square feet. Rents are stable, so depending upon the condition of the space, the landlord's contribution to tenant improvement has risen. We are also in discussions on 2 full floors in the mid-rise and have commenced our first prebuilt program in the building, i.e. higher TIs, in the hope of accelerating occupancy and are negotiating our first deals today.

At The Hub on Causeway, we signed a lease with Live Nation for 32,000 square feet, which will create another entertainment venue and we're seeing lots of interest for the 175,000 square feet of office space, which is under development and will deliver in the first half of '19. The demand is primarily technology tenants that are either considering relocations from the suburbs and Cambridge or expansion.

In our Lexington and Waltham suburban portfolio, we completed a lease of -- for about 50% of our redevelopment at 191 Spring Street where we hope to have initial occupancy by the fourth quarter of '17. We've also responded to a number of build-to-suit proposals at our CityPoint landholding. And if we were able to land one of those major lease commitments, this would add to our investment pipeline for '18 and beyond. If any of these projects get going, rents will likely be in excess of $50 a square foot gross.

I want to focus my discussion in New York this morning at 399 Park Avenue. Supply continues to come into New York in the form of new deliveries at Hudson Yards and Manhattan West and the World Trade Center and the corresponding large blocks of space returned to the market in buildings like 4 Times Square, 65 East 55th, 1271 Avenue of the Americas and soon, 399 Park Avenue.

Landlords that are putting capital into older assets are attracting tenants, and space that is attractively priced, mid to high $80s starting rents, is seeing very strong activity. While we're not anticipating office rent growth and we do expect higher concessions versus 2016 in our portfolio in '17 and '18, our repositioning activities are accelerating, and we are offering products at varying pricing levels from the mid-$80s at the base of the building to over $140 a square foot for our 40,000 square foot glass box with 13-foot finished ceiling and dedicated outdoor space.

In 2017, we're collecting $31 million (inaudible) the expiring tenants at 399 Park. We get the space back at the end of the third quarter. There are lots of midsized financial and business service tenants in the market. We're making proposals, we're going to lease the space consistent with the economics that I just described, but in almost every case, we're going to have to demolish the space. The existing improvements can't be reused and occupancy will not be in until 2019, which will mean the space will not generate revenue in 2018.

At 159 East 53rd Street, which is currently out of service, it's also under heavy construction today. We've made a number of proposals on the 195,000 square feet of office space that's being rebuilt and can be delivered in early '18. We're optimistic that we'll have signed leases in place contemporaneously with the base building completion, but again, revenue recognition is not expected until 2019. We're marketing a brand-new building with greatly enhanced window lines, a brand new mechanical plant and tremendous outdoor amenities on each floor.

Leasing activity on the space price with starting rents above $100 a square foot continues to be active as measured by the number of transactions but size continues to be the real governor. In the first quarter, there were very few deals above 30,000 square feet, though we're aware of a few 50,000 square foot plus requirements that will land next quarter above $100 a square foot starting rent. We have a few smaller deals under negotiation at the General Motors Building. And to preempt the question, yes, our large tenant with a 2020 lease expiration has been actively evaluating their alternatives, and we do not believe they have made any decisions yet.

Finally, in D.C., the spot market fundamentals continue to be a challenge with significant available inventory and tenant-favorable concession packages, yet we are probably as busy as we have ever been pursuing new business which involves long-term forward leasing commitments. In addition to the 720,000 square foot headquarters transaction from Marriott, we're in discussions with a [new tenant] for 70% of the office space we're permitting at 2100 Pen, that's a 410,000 square foot office building with a 223 -- 2023 delivery, and we are now in dialogue with a tenant for 100% of our proposed new development in Reston Town Center 1750, a 275,000 square foot office building.

And finally, we continue to patiently await word from the GSA on their selection of a site for the 620,000 square foot TSA requirement. This quarter, we executed a 53,000 square foot lease with a GSA at our VA 95 Park, which is in close proximately to Fort Belvoir, and we're in discussions with a contractor for a 70,000 square foot base in that same park. And in the Reston Town Center, in addition to our build-to-suit proposal, we have strong activity on a 38,000 square foot block of space which we have yet to get back but we'll be getting back at the end of this quarter where we have multiple tenants competing for the space.

Before I turn the call over to Mike, I just want to give a quick update on our contractual income that's coming from our lease-up in our high-contribution buildings. So as of the end of the quarter, we've completed leases with annualized revenues of $62 million towards our target of $111 million. $24 million of that is in our 2017 projection. Finally, we're now 54% leased on our development pipeline where we anticipate 2020 annual incremental NOI of $238 million upon stabilization versus year-end '15.

And with that, I'll give the call to Mike.

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Michael E. LaBelle, Boston Properties, Inc. - CFO, EVP and Treasurer [5]

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Great. Thank you, Doug. Good morning, everybody. I plan to discuss our recent financing activity, earnings for the quarter, the increase in our 2017 guidance as well as touch on a few assumptions we think are important for you to consider as you think about our 2018 projected earnings. I'm going to start by describing our activity in the debt markets because we've been quite busy, again, this quarter, including executing $4.3 billion of new financing commitments.

Earlier this week, we closed on a 5-year renewal of our revolving line of credit. We increased the size from $1 billion to $1.5 billion and we improved our pricing. This extends out the availability on our facility from its prior maturity date in 2018 to 2022. At the same time, we closed on a $500 million 5-year delayed draw term loan, priced at LIBOR plus 95 basis points.

We have not borrowed under the facility and it includes a feature that allows us to delayed usage for up to 12 months, which makes it an ideal facility to fund a portion of our committed future development costs. Our bank group that includes 16 of our trusted partners helped us put together this $2 billion in bank financing, and we truly appreciate their continued support.

The most significant financing that we plan to complete this year is the refinancing of 767 Fifth Avenue, the GM Building. We own 60% of the building and it currently has $1.6 billion of first mortgage and mezzanine loans that expire in October of 2017 at an interest rate of 6%. We've been in the market for replacement financing to repay both the existing loans and provide additional proceeds based upon the significant growth in cash flow we've generated since our acquisition.

As outlined in our press release, we have entered into a rate lock and commitment for a 10-year financing of $2.3 billion at a fixed interest rate of 3.43%. Our share of the cash interest payment on the new facility will be $9 million less per year than the existing loan, even though we're borrowing an additional $700 million. We expect to close the loan in early June when the current loan becomes open for prepayment without penalty.

Since we have been recording a noncash, fair value interest component on the current loan, which effectively brings the interest rate down to 3%, this refinancing will actually be dilutive to our future FFO by approximately $0.12 per share annually.

The refinancing will have a significant impact on second quarter results. First, the remaining fair value interest on our balance sheet will be accelerated through our P&L and is expected to result in an additional $14 million of gain on debt extinguishment. Our 60% share of this is approximately $0.05 per share.

Additionally, the original structure of the deal required investments by the partners in the form of partner loans in lieu of equity. We have been booking interest expense due to the outside partners' loan every quarter and it is fully allocated to them through noncontrolling interest. The net impact to our earnings of this is 0. We expect to pay off the loans as part of the refinancing and going forward, both our interest expense and our noncontrolling interest will be lower by the amount of the interest.

So starting with the third quarter of 2017, our consolidated interest expense will be much simpler to model and we expect a run rate, starting in the third quarter, of approximately $90 million to $95 million per quarter. In 2018, our interest expense will be higher as our capitalized interest will start to roll off with the delivery of our developments. In addition, we're in the process of finalizing documentation for a construction loan on the first phase of our Hub on Causeway project in Boston. The loan will fund the vast majority of remaining costs for the $284 million project where we are a 50% owner.

So overall, our share of our current development pipeline has $800 million of equity remaining to fund through completion over the next couple of years. As Doug described, we're starting the enabling work on our next Cambridge development and have several additional potential projects in the pipeline that will add to our capital needs. These 3 financing transactions provide the funding necessary to complete our current development program as well as ample liquidity for future investment.

Now I want to turn to our earnings. For the first quarter, we reported funds from operations of $1.48 per share that was right in line with our guidance. The quarter was impacted by $2 million of timing difference associated with the recognition of termination income for the tenant at the GM Building we spoke about last quarter. We still anticipate earning the same amount of income but a portion of it has been moved from the first quarter to the second quarter, which negatively impacted our earnings in the first quarter versus our guidance. Excluding the timing change, our FFO would have exceeded our expectations by about $2 million or just over $0.01 per share. This improvement emanated from a combination of about $1 million of higher portfolio NOI and the rest from service fee income.

As we look ahead to the rest of 2017, there are a few changes to our prior guidance. As I mentioned earlier, our refinancing activity will result in a shift in dollars out of interest expense and into our noncontrolling interest and property partnerships line but has minimal impact on guidance. We have reduced our guidance range for net interest expense, which includes debt extinguishment cost to $355 million to $368 million. That represents a $0.13 per share savings. However, our guidance for deduction for noncontrolling interest and property partnerships increased from $117 million to $132 million, representing $0.13 per share of additional deduction from FFO. So net-net, a lot of moving pieces but no change on our FFO guidance from this.

In our same-property portfolio, we have elected to an early take back of 170,000 square feet at 399 Park Avenue from Citibank. This space had a natural exploration date of September 30, 2017. Citibank has been in this space for a long time, and it will need to be demolished and then refit for a new tenant. Taking it back early allows us to start preparing the space for marketing with the goal of shortening the downtime. It is possible we could take additional near-term expiring space back if it is vacated.

The impact of this is a shift in revenue categorization from same-property rental income to termination income. We will still generate the same amount of revenue, but we'll pull it out of our same-property bucket. For this reason, we have reduced our assumption for same-property growth for both GAAP and cash NOI by 50 basis points, and we increased our assumption for termination income to $21 million to $25 million for the year.

Overall, we have increased our guidance range from last quarter to $6.15 to $6.23 per share, representing an increase of $0.01 per share at the midpoint. The increase is due to better-projected portfolio NOI.

As you start to look at your 2018 models, there are 3 things that we think you should keep in mind: First is interest expense. We project our fourth quarter 2017 run rate to be $90 million to $95 million. We anticipate capitalized interest on our developments to start to run off in 2018 as we deliver some of our larger projects like Salesforce Tower. Based on what we know today, we expect our interest expense in 2018 to be between $390 million and $410 million. As we bring our development income into service, there is an increase in interest expense.

Second is our same-property growth. As Doug described, we signed leases for a significant amount of our NOI bridge, which we expect contribute to solid growth in our same-property NOI over the next couple of years. But remember that the impact of lost revenue from lease expirations of 399 Park Avenue will moderate our same-property growth in 2018. The expected lost income from 399 Park from 2017 to 2018 equates to approximately 2% of our same-property NOI pool.

And lastly is our development pipeline. We've provided a very clear path of the projected growth in NOI from our development deliveries in our quarterly investor materials. Between late 2017 and end of 2018, we will be delivering some of the most significant projects in our pipeline. These include completing the lease-up of 888 Boylston Street, including the occupancy by Natixis in 155,000 square feet from the fourth quarter of 2017, the initial occupancy of tenants in Salesforce Tower beginning in early 2018 where occupancy is projected to phase in through 2019 and the delivery of our 2 residential projects in Cambridge and Reston in early 2018.

So revenue recognition for these projects will not all occur in 2018. It will be split between 2018 and 2019 as tenants occupy their space. We have contractual leases that are projected to generate incremental NOI growth in 2018 of $25 million to $30 million from 2017. The remaining lease-up is projected to generate additional income in 2018 and into 2019 as full lease-up is achieved.

The last thing I want to mention is that we are planning our triannual BXP Investor Conference this fall. The day will be on October 4, it will be in Boston and we'll be sending out more information to you soon. We look forward to seeing you all there and as always, appreciate your support.

That completes our formal remarks. Operator, if you could open up the line for questions that would be great.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jamie Feldman with Bank of America.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [2]

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I was hoping you could focus on the leasing spreads in the quarter. Big difference across the markets. Can you maybe talk through your expectations going forward and whether the net and gross leasing spreads we saw are representative of the mark-to-market in those markets for you guys right now?

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Douglas T. Linde, Boston Properties Limited Partnership - Director and President [3]

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Sure, Jamie. This is Doug. Again, I think I gave a little bit of color on what you saw this quarter. And again, it was a pretty small portfolio relatively speaking that pushed their way through in terms of when the new cash rents commence. I think that you will continue to see very strong numbers in San Francisco as we complete the 1 million plus square feet of rollover that we had in Embarcadero Center starting in late 2015 that's going into '16 and '17. I think you'll see a reasonably strong number in Boston as you see the rents rolling through at 120 St. James and 200 Clarendon Street, which is where the bulk of the vacancy is because those rents were so low. And you'll recall when we bought the property, we told you that the rents were $35 to $38 at the base of the building and in the mid-$50s at the space at the top of the building, and we're obviously doing deals in the mid-$50s at the base and in the $60s, $70s and $80s up at the top of the building. In the Washington, D.C. portfolio, the challenge with the mark-to-market is that every single year, we're able to negotiate leases with 2.5% to 3% increases. So as those increases occur, those -- obviously, the rents go up. So generally, when you get to the end of a lease in Washington, D.C., there's not much of a jump in the mark-to-market. And then in New York City, as I've described before, it's very, very hit or miss. And so at 399, which -- that we've been very clear about, we're basically going to be moderately higher overall in that building on a 500,000 plus or minus square feet that's rolling over because the majority of that space was leased to Citibank with -- at the end of their, obviously, their terms where they were bumped and there were (inaudible) with the new escalation payment. And then we'll see good increases at all of the space that's rolling over at 767, the General Motors Building, and then we'll -- the other portfolio is very space dependent. There are spaces that are way above market and there are spaces that are way below market.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [4]

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Okay. And then just a final question. Can you just talk more about the Bay Area, the market conditions in Silicon Valley versus the CBD in terms of tenant demand and how supply is impacting the market in those different markets?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [5]

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Sure. I'll start and I'll let Bob Pester make some comments as well. Overall, we have -- I'd say we have seen a very consistent stream of demand in the CBD and the vast majority of that has been growth. And while the ticket size has declined from the large scale 500,000 to 700,000 square foot requirements that were growth requirements that we saw in 2014 and 2015, there's a pretty strong number of 100,000 plus square foot new tenant demand drivers that is in the CBD. In the Silicon Valley, there are 2 or 3 primary drivers of growth that have been occurring for the past 3 or 4 years. Google is the first, Apple is the second and to some degree, Facebook has been the third. They have been exceedingly large absorbers of space. There are a lot of opportunities to build new buildings in and around the Silicon Valley, which, for the most part, have been teardowns. And while there is a plethora of midsized and other companies that are there, I would say that those are generally not B.C., young growing companies, those are stable engineering firms that have a more stable and a less expansive growth trajectory than the 3 companies that I just described. And so I would say that overall, there has been less incremental demand down in the Valley. Now there have obviously been new companies that have gone down there like LinkedIn that's a big grower on a relative basis compared to those first 3. They're smaller. Bob, I don't know if you want to add anything.

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Robert E. Pester, Boston Properties, Inc. - EVP of San Francisco Region [6]

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Yes. I think if you'd talk to the brokers in the Silicon Valley, they would say the quarter was somewhat flat, but there still were several transactions that happened. I mean, Amazon took almost 550,000 square feet in a couple of projects, Applied Materials took another 128,000 square feet, in Sunnyvale. Bosch signed a lease in Sunnyvale for 104,000 square feet. Adobe is rumored to be looking in downtown San Jose for expansion of another 300,000 to 400,000. And Google, who has been rumored for quite some time in downtown San Jose, looking at the Diridon Station site that Trammell Crow has that potentially could be in the market for 1 million square feet. So overall, I would say the activity is still pretty good from an expansion standpoint down there. In San Francisco, just in the past month, we've had 3 tenants go through Salesforce Tower, all for between 150,000 square feet and 300,000 square feet, and we have another one coming by Friday, a tech tenant, for 300,000 square feet. And that's probably the best activity of the large tenants that we've seen at any one time in the marketplace in the CBD, I'd say in the past 2.5 years.

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Operator [7]

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

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Vincent Chao, Deutsche Bank AG, Research Division - VP [8]

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Just curious. I mean, I know you touched on the deal flow in the private markets and still very attractive cap rates that you're seeing. Just curious, in L.A., outside the Santa Monica deal that you mentioned, what other opportunities are you seeing in that market to expand beyond Colorado Center now that you're 93% or so preleased or leased there?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [9]

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Well, we -- well, as I mentioned in my remarks, we -- it is a focus for us in terms of new investment activity. We do have a broader geography perimeter that we're focusing on beyond just Santa Monica. And I think, as described in prior calls, we've been looking at things in Playa Vista, Century City, a couple of other communities in West L.A. I would say right now, we are chasing with various levels of intensity, probably half a dozen different types of investments. Some are existing buildings that require some rehabilitation or value added and in a handful of situations, we're also looking at development. Though L.A. will remain a priority for us in terms of new investment, we intend to stay disciplined. We don't have a target by year-end or by year-end 2018 of a certain dollar amount that we want to invest. We want to do -- we want to continue to do what we did at Colorado Center, which is to invest in a property at a, we think, a reasonable price and create value at the asset level for shareholders. We're not going to make investments just to grow in L.A.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [10]

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Right, okay. And that market has seen some slowdown in job growth for a couple of months now. And it sounds like the commentary was that there's some moderation in Santa Monica just from a leasing activity perspective. Is that having any impact on the opportunity set, things like that or cap rates in that market besides obviously, the Santa Monica deal that you mentioned?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [11]

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I think the pricing is at elevated levels in West L.A. But honestly, it's true in other markets that we operate in. The capital markets are very robust. I described deals and have on prior quarters and other markets like Washington that are weaker than Santa Monica that are also at high levels relative to history on a per square foot basis. So I don't think some of those underlying fundamentals that you're describing are impacting the capital market for buildings in West L.A.

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Raymond A. Ritchey, Boston Properties, Inc. - Senior EVP [12]

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Hey, Owen?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [13]

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Yes, sir.

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Raymond A. Ritchey, Boston Properties, Inc. - Senior EVP [14]

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This is Ray. I just would add that virtually everything we're looking at in Los Angeles is off-market transactions because if we get a book on something we know, it's probably going to be overpriced. So we're really focusing on identifying opportunities that haven't hit the market yet. And the Boston Properties story is being very well received by some of the local smaller developers as great partners for their vertical development, so we're excited about that.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [15]

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Okay. And just the last question with me, just going back to the East Coast, Reston Town Center, it just sounds like there's good demand there and you mentioned one of the blocks, the smaller ones that you're working on. Just curious, I mean, we saw kind of an interesting article out there, just talking about the paid parking transition and some tenants complaining about how that's hurting their business. So just curious if you have any commentary on that.

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [16]

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Yes. So we did implement paid parking at Reston Town Center at the beginning of the year. As you know, Reston is an urban location. It has structured parking primarily, and there is going to be the arrival of mass transit to the region and certainly not uncommon for areas with this kind of density to have paid parking. We are utilizing a state-of-the-art parking system that is being used in cities all over the U.S. and actually, the use of these systems is growing around the U.S. In Reston, specifically, the system has been adopted by 140,000 users so far. Now that being said, as you suggest, certainly not all of our customers -- some, but certainly not all of our customers, have expressed some concerns about the system or simply having to pay for parking. And we are continuing to evaluate our execution and make adjustments to ensure that Reston remains a preeminent location for business and residence in Northern Virginia.

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Operator [17]

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Your next question comes from the line of Manny Korchman with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [18]

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It's Michael Bilerman here with Manny. Owen, I was wondering if we can go back to your discussion during the call about private capital and you made mention of dialogue we are having. And I'm just curious if you can elaborate a little bit on the types of dialogue you're having? Is it to purchase properties? Is it to sell additional properties? And can you just delve a little deeper into those sorts of conversations and what you're hearing and learning from them?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [19]

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So let me just say, Michael, first, don't read anything into that. We are having dialogues with capital sources as we should be but you shouldn't read anything more into it than -- other than that. But look, as you might expect, onshore and offshore investors that are interested in Class A office, they're interested in partnering with us, purchasing buildings, investing in our developments, and we've talked to those kinds of groups. There are intermediaries that work with those groups that also approach us about such opportunities. And so that -- in addition to watch or to see the transactions that are going on in the market, and I try to describe them for all of you each quarter, we are having some direct dialogues with these folks. But as I mentioned, our disposition targets for this year are more in the $200 million range.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [20]

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So I guess, were you looking at predominantly any big acquisitions with capital partners? And I guess, how do they think about those acquisitions versus how you would be underwriting them?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [21]

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How the capital partners would underwrite acquisition versus how we would underwrite them?

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [22]

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Yes. I mean just an element of -- if you've had discussions with capital partners at seeking some of these larger assets that have come to market, I guess, how aggressive are they willing to underwrite versus what you're willing to do? Or are they really seeking your lead? And how do they think about unleveraged returns versus you?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [23]

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Yes. Well, I'd say that generally, Michael, as you know, we haven't been acquiring stabilized assets without upside at the cap rates where the market has been trading over the last several years. If anything, we've sold more than we've bought in that kind of market environment. We did these very significant joint ventures with Norge just a few years ago to raise capital for our development pipeline. So when we look at acquisitions, there are more things like, I would say, like Colorado Center, where the building initially was 66% leased. The cap rate was quite low, but upon leasing and then rolling the existing tenants to market, the yield on the investment is much higher than where a stabilized building will trade. So in general, we haven't been prepared to purchase buildings at the yields that I described earlier in the call and therefore, we haven't done a lot of acquisition, joint ventures with these groups.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [24]

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And just a question, I don't know, maybe for LaBelle, just on the GM Building refinance, can you talk a little bit about sort of the underwriting of that asset? So where was it targeted from a leverage perspective to underwritten value, a coverage perspective to cash flow? And then of the proceeds, how much are you going to be able to pull out onto Boston Property's balance sheet versus held for some of the redevelopment efforts and tenant work that you're doing in the building?

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Michael E. LaBelle, Boston Properties, Inc. - CFO, EVP and Treasurer [25]

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So honestly, I really don't want to touch on the characteristics of the financing until it closes. It's not going to close until June, so we're still kind of going through the process. But we've got a number of institutions that are sharing in what they have underwritten and agreed to lock in a commitment with us. With regard to the excess proceeds, there's a pretty significant of closing costs because we've got a -- we anticipate that we're going to be paying mortgage tax. And obviously, we unwound our hedge, so I would say closing cost of probably north of $40 million in total. And then my expectation is that we would hold back somewhere between $50 million and $75 million for TI's and capital improvements at the asset level. So if you pull out $100 million or $120 million from the $700 million of excess proceeds and you take our share, then you're talking about $300 million, $275 million that we would be able to distribute to ourselves and some to our partners, obviously, to fund the remainder of our development pipeline that we have as well as future development pipeline.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [26]

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Can you give me a range on the leverage level at $2.3 billion that you've targeted? I'm just trying to figure out how leveraged the asset is to get the rate that you were able to lock in?

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Michael E. LaBelle, Boston Properties, Inc. - CFO, EVP and Treasurer [27]

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I would say that the leverage is low, but this is a fully investment-grade, institutionally priced loan at these credit spreads. We haven't completed an appraisal yet but there's certainly been an analysis of it. And our view on how we finance these assets is that we want to maintain a reasonable amount of leverage but we want to put sufficient capital on the asset so that we are borrowing at very, very attractive rates. And as soon as you kind of get up into beyond the kind of BBBs on a CMBS into the BBs, you start to get into a credit spread that is significantly higher than what we could borrow from a corporate side, so we kind of shy away from that. So the LTVs for investment-grade CMBS kind of range, depending on the characteristics of the asset. This asset obviously has great cash flow characteristics, long-term leases and still has a lot of built-in growth because of the below-market in-place leases.

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Operator [28]

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

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Thomas James Lesnick, Capital One Securities, Inc., Research Division - Associate [29]

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My first question has to do with just general activity with the GSA and the contractor community. I think you guys mentioned one lease with the GSA and then conversations with a contractor at VA 95. But can you just comment overall about what kind of optimism you're seeing in that community and if it's waned at all now that Trump's approaching 100 days?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [30]

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Ray, do you want to take that?

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Raymond A. Ritchey, Boston Properties, Inc. - Senior EVP [31]

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Sure. There are still a lot of people waiting on the sidelines. I can't tell you how many tenants at Annapolis Junction, which is our project up near NSA, that have proposals from us, contract dependent. So first of all, I want to confirm that it's our belief that the budget will get resolved this week and have minimal impact, if any, on the real estate market. So that should not be concerned. But there's still a tremendous amount of demand on the contracting inside, especially in intel and defense. We think that those sectors will come back very strong under the Trump administration. Life sciences, social services, maybe not so much. But fortunately, with our focus in Northern Virginia, we're in really good shape to take advantage of a recovering market there. But the headline is still a tad uncertainty, but the prospects look very good for increased demand on the contractor side.

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Thomas James Lesnick, Capital One Securities, Inc., Research Division - Associate [32]

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Appreciate that. And then one last one on Colorado Center. I believe you mentioned that one of the remaining 2 spaces had been leased subsequent to quarter end. Am I correct in understanding that there's just one space left?

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Raymond A. Ritchey, Boston Properties, Inc. - Senior EVP [33]

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Yes, there's one block. And we have -- we could do that -- we could do a deal there tomorrow on that space. We're just trying to make the right decision on the last piece of space.

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Operator [34]

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

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [35]

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Can you give us an update on the entitlement process at the Oakland residential site? And then does that deal signal that you'd maybe be interested in the Oakland office eventually?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [36]

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Bob?

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Robert E. Pester, Boston Properties, Inc. - EVP of San Francisco Region [37]

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We are fully entitled on the open site as of a couple of weeks ago. And we've looked in downtown Oakland, but -- for -- at office opportunities, but I just don't see it as something that we would have an interest in at this point.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [38]

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Okay. And separately, you mentioned that New York City leasing tempo, velocity is accelerating. I mean, to what extent do you think that's a function of overall market health improving? Or are those more BXP-specific factors? And then would you say market rents are falling for spaces above $100 a foot in New York at this point?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [39]

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John, do you want to take that?

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John Francis Powers, Boston Properties, Inc. - EVP of New York Region [40]

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I think the market is pretty flat here. The availability rate didn't move in the first quarter, move 0.1% in Manhattan. And the leasing velocity was up just a shade from the 12-year average, so it's pretty flat.

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Joseph Edward Reagan, Green Street Advisors, LLC, Research Division - Senior Analyst [41]

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And how about the sort of high-end market rents, any changes you're seeing there?

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Douglas T. Linde, Boston Properties Limited Partnership - Director and President [42]

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Yes. I think there's more -- there's a little more interest in the high-end market rent than there has been. I think that the sticker shock that was there a year or 2 is not necessarily there now, but it's all on the margin.

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Operator [43]

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Your next question comes from the line of Eric Aslakson with Stifel -- Erin, I apologize.

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Erin Thomas Aslakson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate VP [44]

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Quick question on -- we heard the commentary -- I guess, preliminary commentary on 2018. When do you expect same-store NOI growth to actually start to pick up for BXP?

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Michael E. LaBelle, Boston Properties, Inc. - CFO, EVP and Treasurer [45]

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I think that our same-store growth has continued to be positive. The cash same-store was over 4% in 2016. It's a little bit less based upon our projections in 2017 because we're -- we've got this big rollover that we mentioned, that Doug mentioned, that we've got -- basically, we're going to lose $30 million from year to year. So there's other growth in the portfolio. We still believe we're going to have positive rental rate growth obviously in '17 and also in '18. It's just going to be more moderate. I think that the cash growth actually in '18 will outstrip the GAAP growth. We've built in a lot of these early renewals that we've done where in California, the Embarcadero Center and in Cambridge that we've kind of been blending in that had 2018 expiration. But cash rents are going to start to hit in 2018. So I think the cash picture will be a little bit better in '18 than the GAAP picture. But if you think about 2% down kind of starting, I mean, again, we're going to be positive. But until we re-lease that 399 space, which we believe won't occur -- won't hit the books until 2019, I think seeing real acceleration beyond kind of more of an inflation level is going to be difficult. But we did comment that we anticipate this $110 million to come from this handful of assets, which is again only 8 or 9 assets. And $110 million is about 7%. So we are expecting 7% growth just from that select group of assets over a 2.5-year approximate period. And then there's the rest of the portfolio that obviously is going to grow at some level. So we -- if you kind of look out through that whole period, I think we will see good, good same-store growth, it's just again a little lumpy because of the expirations and when they are.

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Operator [46]

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Your next question comes from the line of Nick Yulico with UBS.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [47]

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A couple of questions. Mike, I was wondering if you could give a little bit more of a feel for when you talked about the development NOI that's going to come in, in '18 and '19 and there being a split, kind of an early sense of what that split might look like.

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Michael E. LaBelle, Boston Properties, Inc. - CFO, EVP and Treasurer [48]

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It's hard for me to say right now. I mean, I think what I said was $25 million to $30 million is signed leases that we have a good projection for when those tenants are going to take occupancy. So we feel very confident about that. There's additional leasing that we should be able to get done in 2017 for tenants that will need to be in occupancy in 2018. I think we'll do some more leasing at Salesforce Tower, for example, for tenants that need to be in space sometime in 2018. But some of those tenants are going to be in 2019. We're talking to tenants that have kind of both requirements and again, we can't book revenue until the tenant is in, in a new development. And then if you look at the residential properties, so we've got 600 plus or minus units to deliver. We're delivering them in the first quarter of '18. Our expectation is there's a 12- to 24-month lease-up time frame for that type of residential development. Obviously, the expenses for residential development, you have to kind of experience them early on. So I would think that we're probably going to get 25% to 30% of the NOI out of those 2 residential developments in aggregate in 2018 and then the rest would come in 2019. So those are kind of 2 of the bigger developments that we have. 888 Boylston Street is going to be basically done at the end of '17. There are only 1.5 floors left that -- I expect we should be able to lease that and get occupancy sometime in '18. So those are the big ones.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [49]

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Okay, that's helpful. Just last question, you also -- you talked about you could take some additional near-term expiring space back, I assume you meant at 399 Park. Based on what that possibility is today, what would the financial impact of that be specifically? Would this create another adjustment down in your same-store NOI guidance if you did this?

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Michael E. LaBelle, Boston Properties, Inc. - CFO, EVP and Treasurer [50]

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I think it could. I mean, that's why I said it. I mean, we -- to the extent that we can get the tenant to pay the full amount of rent that they owe us so we get the space back and we can start to work on the space, we may elect to do that, if we think it's going to help us lease the space on the backside of this more quickly. So -- and obviously, we have our rule that we don't include termination income in same-store and we do that because it can be more volatile and we want to depict what the same-store is. But in situations like this, unfortunately, it works the other way. So we try to be very clear about the ins and outs because it's not a reduction in the overall revenue that we're going to be getting or expected to get in 2017. It's just in 2 different buckets.

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Nicholas Yulico, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst- REIT's [51]

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Right. Any square footage amount you can give us so we can put a parameter on this?

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Michael E. LaBelle, Boston Properties, Inc. - CFO, EVP and Treasurer [52]

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There could be another couple hundred thousand square feet. As we get closer to the expiry, right, I mean, the expiry of these leases are in August and September, there gets -- there's less termination income, right, as there's just less time.

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Operator [53]

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

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [54]

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Mike, so just continuing on the 2018 conversation. You had outlined cap interest coming off next year that's going to cause the GAAP interest rate to increase. From a GAAP perspective, so not a cash, but from a GAAP perspective, should we expect the NOI coming from those developments to equally offset the cap interest? Or is there going to be drag so that as we're revising our models or updating them, we're probably going to see a negative impact as more cap interest comes off versus GAAP contribution from NOI, from the developments next year?

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Michael E. LaBelle, Boston Properties, Inc. - CFO, EVP and Treasurer [55]

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The -- I mean, the developments are generating a yield of around 7%. So it's well in excess of what our capitalized interest rate is, which is currently around 4%. So that won't be a drag, it will be an improvement.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [56]

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Okay, that's helpful. And then the second question is, as you guys are doing a bunch of these redevelopments and you look at expanding or activating more of the base of the buildings, clearly, restaurants are a big thing. You saw SL Green invest in their restaurant at the base of One Vanderbilt. But from a tenant's perspective, do they really care as much whether there's a marquee-type restaurant at their base or as long as they have a good food offering that is what they're after? And then the second part of that is, from an economic standpoint, are the marquee restaurants the same as putting in a bunch of lower price point restaurants or there's an economic bias of one versus the other?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [57]

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So I'm going to let Bryan Koop answer that question relative to what we did with Eataly at the Prudential Center, which I think will give you some context to what we're doing in our -- some of our other assets.

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Bryan J. Koop, Boston Properties, Inc. - EVP of Boston Region [58]

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So we are consistently seeing the customer, the tenant looking at the power of how do they attract their talent to their location. And the restaurant and the total mix of not only the base of the building but the entire neighborhood is becoming more important. And like never before, we've seen companies do analysis on this in terms of what that mix is about, the demographics of the neighborhood and how they're going to use that and their strategy to attract talent. But Doug is right on with the response that we've received on the repositioning of the Prudential Center, with the addition of Eataly versus the food court we had before, which was absolutely a strong performer, one of the best in the country, the response from our customers has just been really outstanding from all our existing clients. We're seeing the same thing at the Hub as well, where there is focus on, call it, the geography of neighborhoods, right? And with our additional anchor that Doug announced today, we're seeing an increase in terms of what does that play in terms of how they're going to use the office space? We have one particular user who's very focused on the fact that we've landed Live Nation. They see it as a place that they can throw their events and again, attract talent for their customer, for their internal fee purposes.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [59]

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Okay. But from your perspective, a marquee brand versus -- I mean, Eataly does high volume. Are the economics to you the same? Or it's better with an Eataly type versus a more formal marquee type?

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Douglas T. Linde, Boston Properties Limited Partnership - Director and President [60]

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I don't know what the economics of a [blue] concept are if that's what you're describing. But I can tell you that high-end restaurants have exceedingly high upfront costs. And so there's a long payback associated with achieving a return as opposed to a more, I don't want to use the word unkindly, but a pedestrian kind of concept. So as an example, we are talking about more of a food hall at [6th Avenue] and where I would expect that the investment will be far different than the kind of investment that would be required for a 3 or 4 or 5 Michelin star restaurant. And the revenue will obviously be different and the return in the early periods of time will be significantly different as well.

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Bryan J. Koop, Boston Properties, Inc. - EVP of Boston Region [61]

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Yes. And echoing what Doug is saying, but marquee versus let's say a brand name that's more pedestrian, each situation is different. But what we've seen here is that the desire by our client that initially have a, let's say, a top chef below their space, isn't necessarily as important as -- what do they think the bulk of their population wants? I'll give you an example. So we have Earls coming to the Prudential Center. The response by Earls, which is a chain out of Canada, has been just outstanding from senior executives that are top firms at the Prudential Center. And it doesn't have to be that marquee, top chef to get a result that you're looking for, for creating a great place.

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Operator [62]

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

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [63]

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I just wanted the clarification on your guidance change. I realize now a few items cancel each other out. But excluding those items, you still have a $0.05 gain from the debt extinguishment, but your guidance for the full year only increased by $0.01. So it looks like the guidance overall declined on your core business. Can you just clarify that?

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Michael E. LaBelle, Boston Properties, Inc. - CFO, EVP and Treasurer [64]

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So the gain on our debt extinguishment is simply accelerating the fair value interest that we would have already gotten had we let that loan run through its natural maturity of October 1. So that was in our guidance. We were expecting to get it in the third quarter because it's simply the fair value component of our interest expense. So as I said, the June billing has an interest expense of 6% on a cash basis. But on a GAAP basis, the interest rate is 3%. So we have this positive 3% that we put in every quarter to bring it to fair value. So now that we are going to pay off the loan in June, we have to accelerate the rest of that piece because it's sitting on our balance sheet, so it has to come in as a positive. So it's really just timing from third quarter to second quarter, that's all it is.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [65]

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At Salesforce Tower, appreciate all the updates on the leasing interest. I'm was just wondering if you still feel comfortable with the building being fully leased upon completion as stated a few quarters ago?

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Robert E. Pester, Boston Properties, Inc. - EVP of San Francisco Region [66]

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We've -- as I said, we've got good activity. I don't know if we'll be fully leased by completion, but I think we'll be well along by the end of the year.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [67]

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Okay. And then Owen, I think you discussed at a recent conference being more reserved about selling your prime assets and being market timers at this time in the cycle? Can you just elaborate on why this is the case? Particularly as you see potentially more discrepancy between private and public market valuation?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [68]

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Yes. Well, a couple of dimensions to that. I mean, first is capital need. You've seen our leverage ratios, we just completed $4.5 billion of financing. We've put away our unfunded development capital needs with this and have created capacity for additional investment. Our overall leverage levels remain low, so we don't have a need per se, for capital right now. And then as we look at the markets, I talked about this in my remarks, our -- we don't see a big spike in interest rates in the near term. We're continuing to have sluggish growth. We certainly expect, at some point, to have an economic and valuation cycle for real estate, but I think the timing of that is, right now, is difficult to divine. And from what we see, we continue to believe we're going to have a constructive operating and capital market environment for the -- at least for the near to medium term. So for all the -- and I talked a little bit about where pricing is and our lack of desire of taking on new assets at these 4-ish cap rates. For all those reasons, we haven't done any, what I'd call major asset sales. We've been selling $200 million, $300 million of assets a year, but we haven't done any major asset disposition since the Norges joint ventures we did a couple of years ago.

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John Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [69]

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And you mentioned the sale potentially of suburban assets in D.C. and Boston. Any updates on New York, suburban New York?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [70]

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No, we are not actively in discussions or selling anything in the New York area at the current time.

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Operator [71]

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We have time for one final question, and that question comes from Manny Korchman with Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [72]

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Colorado Center, the leases that you mentioned or talked about, are those contingent on redeveloping the property? And then what's your sort of planned redevelopment budget for the properties?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [73]

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None of the leases that we have signed are contingent on doing anything from a legal perspective. We have an expectation that we've set with our tenants that we're going to do the right thing by the property, and we've shown them the conceptual plans and architectural changes that we're going to be making. And we've told the city of Santa Monica we intend on doing these things. And we're going to get this stuff done sometime in the next 12-plus months, and it's somewhere between $12 million and $20 million, probably, is that sort of big picture ballpark redevelopment budget.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [74]

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And then on Salesforce Tower, I think you mentioned amongst the potential tenant set coworking companies. Can you just give us an updated view on how you think about coworking and sort of a user space and especially in a trophy asset like that?

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [75]

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Yes. So we have been a supporter of the coworking platforms. We have done a handful of leases with WeWork and we have been in discussions with their operators. We have considered -- we consider the coworking phenomena, for lack of a better word, as positive for the office market. These companies have aggregated demands from individual users that we, as a major landlord, have a more difficult time doing direct leases with. They've aggregated this demand and created significant net absorption in most of the markets where we operate. And so we think it's been a positive force. And then lastly, we think the tenants, when they're in our buildings actually are positive for the building. We think they create energy and activity around the space, and we have been positive about it. We continue to monitor the industry carefully. There are evolutions going on. Some of these groups are doing more business with corporations as opposed to -- or larger users rather than individuals, and we're certainly monitoring that. And we are considering additional leasing with some of these groups and some of our assets. But again, a good example, Bob, you might want to comment, WeWork is in 535, and we think -- which is a brand-new building we completed a couple of years ago and we think it's been a positive.

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Robert E. Pester, Boston Properties, Inc. - EVP of San Francisco Region [76]

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Yes. They actually refer to that as their flagship in San Francisco, and it's been extremely positive on both the building and the surrounding marketplace. They're looking -- now looking at space right across the street at 560 Mission because they can't get any more in 535 because it's fully leased. And the experience we have with them at -- in Embarcadero Center, which has been very short, because they just opened there earlier this year, has been nothing short of phenomenal. They leased out major blocks of spaces to companies like Twitch and a few others and actually are potentially looking at more space in Embarcadero Center.

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Operator [77]

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I would now like to turn the call back over to our host for closing remarks.

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Owen D. Thomas, Boston Properties, Inc. - CEO and Director [78]

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Okay. Thank you very much for your time and attention to Boston Properties.

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Operator [79]

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