Arista Joyner - Investor Relations Manager Owen Thomas - Chief Executive Officer Doug Linde - President Mike LaBelle - Chief Financial Officer Ray Ritchey - Executive Vice President, Acquisitions and Development Bob Pester - Senior Vice President, Regional Manager San Francisco Office John Powers - Senior Vice President, General Manager New York Office.

John Guinee - Stifel Manny Korchman - Citi Jed Reagan - Green Street Advisors Jamie Feldman - Bank of America Ross Nussbaum - UBS Securities Brendan Maiorana - Wells Fargo Vance Edelson - Morgan Stanley John Kim - BMO Capital Brad Burke - Goldman Sachs Ian Weissman - Credit Suisse Alexander Goldfarb - Sandler O’Neill Vincent Chao - Deutsche Bank Tom Lesnick - Capital One.

Good morning and welcome to Boston Properties Third Quarter Earnings Call. This call is being recorded. All audience lines are currently in listen-only mode. [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 third quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Forms 8-K.

In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com.

An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

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

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

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

Okay, thank you, Arista and good morning everyone. Our focus today in addition to market conditions and strategy will be on the 2016 guidance we provided in our release last night and a further discussion of our growth opportunities in 2017 and beyond.

On current results, we produced another solid quarter with FFO per share of $0.05 above consensus and $0.06 above our guidance. We have increased our full year 2015 FFO guidance by $0.06 per share and provided you a projection for 2016 FFO per share over 2% above 2015 estimates.

Our 2016 projected FFO growth would have been 4%, excluding the dilution from the asset sales that we conducted this year and we will have next year.

Further, on our most recent Investor Relation materials, we outlined that for 2017 we see the potential for $80 million in same-property NOI growth over 2015 from a select group of our assets, as well as an additional $72 million in annualized NOI from developments by the end of 2017.

We own and manage many significant buildings with large tenants, several of which are rolling over in 2015 and ‘16. And these larger spaces can take time to backfill.

Further, we are planning proactive investments in some of our properties such as the retail of the GM Building and the low-rise building at 601 Lexington Avenue, which have short-term dilution impacts, but long-term benefits to our company’s earnings.

Though our projected 2016 FFO growth is more modest for these reasons, we believe Boston Properties has the potential to deliver material NOI growth in 2017 given our lease up opportunities and development underway.

Through all of our comments on this call, you will hopefully get a more detailed understanding of the progress made to-date and executing on these growth opportunities.

Now, turning to the economy and the operating environment, though we had a clear volatility spike in the financial markets in August driven primarily by China economic growth fears, our views on the U.S. economy have not changed materially over the last quarter. U.S.

GDP growth is steady, but tepid with third quarter growth announced yesterday slowing to 1.5% and approximately 2.5% growth projected for all of 2015. A similar story exists for employment, where 142,000 jobs were created in September, which is lower than the average for the past year and wages are growing at around an annual rate of 2.2%.

As evidenced by the jobs data in corporate earnings, certain sectors of the U.S. economy are experiencing a challenging business environment, particularly industrial production and energy given low oil prices. Our assets are located in coastal markets that are not as directly affected by weakness in these sectors.

Office property market conditions remain healthy and improving. Office net absorption remains steady with 13.9 million square feet absorbed in the last quarter and 1.2% of stock absorbed over the last year in major U.S. markets.

Construction remained just above long-term averages of 2.1% of stock and annual rent growth was approximately 4% nationally over the last quarter and positive, particularly in San Francisco across all our major markets, except downtown Washington D.C.

We leased 1.3 million square feet of space in the third quarter having completed 89 leases and our occupancy remained roughly flat at 91.3% for the quarter. The private capital markets for real estate remained strong in our core markets as well. Interest rates continue to be favorable with the 10-year U.S.

Treasury currently trading just above 2% and transaction volumes and pricing remain at elevated levels. We continue to see strong interest from domestic and offshore investors in Class A office assets.

There is, however, a significant pipeline of real estate currently in the market and pricing levels maybe tested this fall given the supply of product, higher volatility in the public capital markets and the prospect of an interest rate hike before year end. For all of these reasons, our fundamental capital strategy has not changed.

We are continuing to sell selected assets to fund special dividends and developments, which we continue to deliver at lower prices per square foot and materially higher yields than where existing assets are trading. Now, moving to the specific execution of our capital strategy let me begin with acquisitions.

We continue to evaluate new acquisitions but are finding pricing challenging and uncompetitive from a financial return perspective with our development opportunities. This past quarter, we did close on the previously contracted acquisition of the 50% interest in Fountain Square at Reston Town Center we did not own for $206.5 million.

The pricing of the acquisition was a 5.5% cap rate on 2016 NOI and $545 per square foot. We also remain active on dispositions. Since our last call, we completed the previously described sale of a 50% interest in 505 9th Street in Washington, D.C. for $318 million and a land parcel in Gaithersburg, Maryland for $30 million.

We also just placed under contract to a user Innovation Place in San Jose, California for $207 million. Innovation Place is comprised of four existing buildings totaling 538,000 square feet. Three of the buildings are currently vacant in the fourth – with the fourth becoming vacant in 2016.

The site has a total of 26 acres and can support 537,000 square feet of additional development. It is our expectation that the user will build additional structures on the site for which we will be engaged as development manager.

This is an exciting sale for Boston Properties, in that it generates $207 million in sale proceeds, represents a gain of approximately $78 million, reduces the overall vacancy of the company and creates a new client relationship and development assignment for us.

Assuming Innovation Place closes as scheduled before year end, we will have sold $743 million in assets on a gross basis and $584 million assets on an our share basis in 2015. Our total projected 2015 tax gains from sales would be approximately $285 million and could result in another special dividend this year.

It is our expectation that we will not have additional sale activity in 2015. However, we will continue to be opportunistic with asset sales in general and evaluate targeted sales of non-core assets for 2016. Turning now to developments, we have had a very productive quarter executing our pipelines.

Starting with deliveries, we placed in service Annapolis Junction 7 from our active development pipeline. The building is a 100% leased to the GSA and it’s generating an unleveraged initial cash yield of 8.3% on our investment of $17.5 million.

We were also able to move two important projects from our predevelopment pipeline into our active development portfolio this past quarter. 88 Ames Street is a 22-story 164,000 square foot, 274-unit Class A urban multifamily development with street level retail located adjacent to our successful Kendall Center property in Cambridge, Massachusetts.

The project will cost approximately $140 million to develop and will be delivered in 2018. Further, we received our entitlements to commence the development of the Signature Site, a two tower, 514,000 rentable square foot residential development located in our highly successful Reston Town Center community.

The Signature site comprises 508 residential units and 24,000 square feet of associated retail space and preleasing discussions are advanced for the retail component. The property will cost $217 million to develop and will be delivered in 2018.

88 Ames Street and the Signature Site are forecast to generate an average unleveraged initial yield of approximately 6% upon their delivery in 2018. We have also advanced several of our predevelopment projects in Boston closer to actual development.

Preleasing continues in North Station and it is our expectation that we will be able to launch the podium phase of this project in the fourth quarter.

Further, we executed amendment to our ground lease related to the 100 Clarendon Street garage, which provides with a payment of $37 million for a lease extension to 99 years, our commencement of the management of the Back Bay station, as well as an option to purchase sites, which require entitlement above the garage and stations.

This is an exciting investment opportunity for Boston Properties over the longer term. Our current development pipeline has 14 projects in all four of our major regions and is comprised on an hour share basis of 4.7 million square feet and $2.7 billion in total development cost.

In the aggregate, the commercial space in our development is 59% preleased. These projects will be delivered in the fourth quarter of 2015 through 2018 at a projected unleveraged cash yield of over 7.5% for the office component and around 6% for the multifamily.

We have 90% of the cash required to complete these developments on our balance sheet and they will add approximately 4% to the compound annual growth of our FFO through 2018. Let me now turn over the discussion to Doug for a further review of the property markets and our operations..

Thanks Owen. Good morning everybody. While our leasing and our overall investment actions are pretty influenced by what we view is long-term perspectives on the various market conditions, you are going to hear a lot less about this from me this quarter.

And I am going to really spend most of my time talking about the factors impacting the next 12 to 18 months and the issues in our portfolio market conditions, the space that we are working on to lease or re-lease, how we are going to achieve that significant incremental NOI that Owen just described from our portfolio, as well as the growing contribution from our ongoing development investments.

That’s going to be the focus of my comments. A couple of comments on our – on some of the supplemental first though. So overall, leasing activity in the third quarter picked up from the second. We were slightly more than the second quarter by about 100,000 square feet.

Those second generation statistics had some interesting SKUs and that I sort of I wanted to highlight. In fact, each of the various regions had something going on with it. So in Boston, there was a pretty significant uptick and that was really from two transactions. The first was a lot of leasing that was done in Cambridge.

Those – leases were actually signed in 2014. And then there were a number of leases at 200 Clarendon Street and the increase in the net rents on all of those transactions was over 100%. Interestingly, San Francisco looks pretty muted. And the reason for that is two fold.

The first is that there was a large renewal at Gateway that was done in 2013 that was actually 60% of the square footage that was in the stats.

And then the EC office number interestingly, while it was only positive 25% on a net basis that was because there was a 5-year renewal that was done in 2012 on about 50% of the square footage in the EC and that was done at $50 a square foot with dollar bumps.

Interestingly, we have just completed the lease this quarter, one floor above that lease where we did a same as is 5-year renewal for the starting rent on the new transaction is $70 with 3% increases. So you can sort of get a sense of the dramatic increase in rents in San Francisco just over the past 3 years.

In DC, we have a large law firm renewal completed in ‘14 that became effective this quarter and the rent went from 46 net to 38 net, but that’s on a last contractual rent number to the beginning contractual number. So 2.5% increase is the actual GAAP rent is actually higher than $46 over the term 15-year lease.

And in New York City, there was a former city floor that was re-leased at 601, where the rent went from $109 to $79. And with 540 supplemental where we did a 20,000 square foot deal at base of the building where the rent went from $135 to $70.

Just to gauge any concerns, are our mark to market in New York City right now, as it stands in 2016 is over $9 a square foot and in 2017, it’s pretty flat and I will talk about what’s going on in ‘17 as we get into 3.99. So let me begin my formal remarks on our markets with Midtown Manhattan.

So during the quarter, we did 12 deals for about 90,000 square feet. Ten of those deals had starting rent over $90 a square foot and seven of those deals were above $100 a square foot. The bulk of our availability and rollover in the portfolio in the next few years occurs in spaces that come in rents in excess of $100 a square foot.

While it’s a small subset of the Midtown market, it continues to be a very healthy and growing one. Activity is expanding, overall there has been an average about 870,000 square feet of leases done per year since 2011, over $100 a square foot and about 30% of that is new.

And in 2015, we have already seen 900,000 square feet of activity above $100 a square foot and about 35% of that is new. Nonetheless, the transaction size continues to be small with a preponderance of the activity of leases under 10,000 square feet for non-renewals and there are relatively few deals above 40,000 square feet for renewals.

So you have the temper what’s going on in that market given the scope of the transaction sites. We are fully leased at 510 Madison, no rollover until ‘17.

We are working through those law firm rebuilds that we have been describing at 599 Lex and we are going to be getting back the three floors of swing space in 2016, late ‘16 where we already have leases out on two of those floors, with rents over $90 a square foot.

At 250 West 55th, we have leases out on all of our remaining pre-builds and we have half lower deals on two of the remaining three available floors. We expect to have full revenue contribution by the third quarter of ‘16 at 250 West 55th.

We are seeing heavy traffic across the entire portfolio, but with very limited current vacancies, most of our transactions revolve future availability.

At 767 Fifth, we are getting back 80,000 square feet in July of 2018, the expiring rent – excuse me, the expiring rent is under $100 a square foot and we expect that space to lease for over $180 a square foot. We are actively marketing the former FBO space, which will be available for lease in early ’17.

And we have active interest from tenants ranging in size from 14,000 square feet to the entire 65,000 square foot unit. At 399 Park, there are 640,000 square feet expiring in ‘17.

We have 280,000 square feet of the base leased to Citi and we are in lease discussions on 180,000 square feet with starting rents equivalent to Citi’s expiring rent in the high 80s. There was a 97,000 square foot block in the lower portion of the building. We have got a proposal out on 75,000 square feet and over $105 a square foot.

There is 150,000 square foot of block in the middle of the building, we are going to get that back in September of ‘17 if leased it about $100 a square foot and we expect to achieve rents over $115 a square foot. And the final Citi block is of 110,000 square feet of below grade space and that’s leased at about $50 a square foot.

At 601 Lex, we are in the planning stages of a major repositioning of the retail in the low-rise building. We are working on a plan to vacate the entire 140,000 square foot office building including 70,000 square feet that currently under leased to Citi.

This is going to result in ‘16 and ‘17 additional vacancy as we renovate that portion of the complex. We have no vacancy right now at 601 and so the New York team is actively looking at ways we can control currently leased space. So, we can move forward with these plans.

This quarter, we actually took back a floor at the top of the building in order to accommodate the potential repositioning.

This is high contribution space, which is going to result in the diminishing of 16 occupancy and revenue, but consistent with our core strategy and philosophy, we are making decisions with the long-term to maximizing the value of the asset and the portfolio. In DC, our development at 601 Mass opened in September, a little bit early.

The office space is 86% leased, the retail is 100% leased and the income contribution will ramp up in ‘16 and fully contribute in ‘17. This development is being delivered at an initial stabilized cash return in excess of 8%.

While the delivery impacted citywide brokerage statistics negatively this quarter, our view really is that the overall market conditions in the CBD of Washington, D.C. haven’t really changed much. The district continues to be very competitive since there just hasn’t been a lot of significant increase in user demand.

We completed another major renewal of our law firm deals at 1330 Connecticut where the incumbent tenant renewed for 15 years on 212,000 square feet of approximately 240,000 square feet currently occupied. That new rent is going to commence in ‘17. The rent rollup is over 25% on a net basis.

As part of this transaction, we will be using 52,000 square feet of 1333 New Hampshire space, which is across the street as swing space. This space is technically leased, but it’s not going to be revenue-producing until the repositioning of 1330 is over. And that space would ultimately rent for over $65 a square foot growth today.

We are making steady progress on all the availability at our JV assets at Market Square North, 901 and Met Square. Activity in Reston continues to be very strong, though with limited availability again in our portfolio. Activity really is involving, extending and expanding tenants by accommodating takeovers and sublets.

All of this is in the context of starting rents above $50 a square foot in the urban core. Our portfolio has a vacancy rate of under 3%. Overall, Reston vacancy is 14%, Roslyn is over 30%, Tyson is over 18%, and that’s just actual vacancy not availability.

The weakest subset of our DC portfolio is the GSA-related properties in Springfield and Annapolis Junction. And while the user groups want to need space, the GSA mandated densification and to-date, the lack of appropriations in the defense complex have severely limited current demand.

We hope that the changes with the House of Representatives and the changes with sequestrations and the new budget deal will in fact add to the demand for the defense complex and improve our leasing prospects in these properties. The Boston CBD continues to be a really good market as supplies dwindled over the past few years.

Although, there is speculative development in the Seaport and we are obviously adding inventory to the Back Bay with 888, demand is currently lease expiration driven. At 120 St.

James, that’s the low-rise of 200 Clarendon area, we have 180,000 square feet of availability and we have responded to three full block proposals in the last 90 days, each anticipates full utilization of the space in 2017.

At 200 Clarendon in the high-rise, we completed 88,000 square feet of leasing this quarter, including one floor in that 150,000 square foot block from 44 to 48.

While we have seen interest from a few multi-floor users, the high end demand in Boston has typically been for users under 30,000 square feet and we expect to lease this space in smaller units. As we said previously, we expect to have a rent commencement on all the space towards the end of 2016 and into 2017.

At 888 Boylston Street, we have topped out the steel, we are 71% leased. We actually completed our first retail lease this month with an 18,000 square foot multi-floor user.

We have extensive conversations going on with retailers in all of the remaining retail space at 888, which we expect to open in 11 months and a few months after, that will open a few months before or excuse me after the office space opens in the summer of 2016, and so 888 will have full contribution by the end of 2017.

Since we have no availability in Cambridge, I just have a few comments there.

Asking rents are now in excess of $80 a square foot and in spite of the recent volatility in the life science industry, as well as some job reductions around specific companies, there continues to be a flow of new tenants looking for a beachhead in Cambridge, which is home to both the life science and technology businesses.

Lack of available supply continues to be the story. The Cambridge Redevelopment Authority has made this submittal to the city for up-zoning of our Kendall Square project and we hope to have some clarity on our ability to build more space by the end of the year. There is no real update on the Volpe site disposition.

The GSA schedule suggests an award in early ‘17, which means no additional spaces at Volpe for four to five years. In Waltham, that metro market continues to get stronger driven by organic expansion. This quarter, we did 19 leases in our suburban portfolio, 150,000 square feet and we had a similar amount under lease negotiation right now.

All of the space at 10 CityPoint is committed, rents in excess of $50 a square foot for the top floor. The project will deliver in mid ‘16 at a cash return over 8%. Rents have increased 25% over the last 18 months at our CityPoint project.

While there is no speculative construction currently underway, our reservoir north renovation where we basically scraped the building other than the structure is very much underway and we anticipate rents in the mid to high 40s of significant upgrade from the expiring rents that we had in May in the low 30s. Again, this won’t occur until 2017.

At the – finally, I want to talk about San Francisco. At the June NAREIT meeting, there was a real focus on demand in San Francisco and whether we were seeing signs of concern. Now, we’ve lay off the Twitter and the limited activity in the IPO market, I think it’s become another renewed topic of conversations.

Well, between 2011 and 2014, the annual CBD leasing activity averaged about 9.3 million square feet and absorption was about 1.5 million square feet a year. Through the end of the third quarter this year, there has been about 6 million square feet of completed transactions and 1.4 million square feet of absorption.

Leasing activity continues to be healthy. Tech demand has averaged about 55% of this activity, where there has been sublet space, it’s been small pockets and it’s leased for strong rents. Last quarter, the big news was that Apple grabbed the sublet space at 235 Second.

Our largest sublet is our Morgan Lewis space at EC 3 stemming from the merger with Bingham, 125,000 square feet expires in August of 2016. We are negotiating leases for three of the five floors right now and have multiple proposals out on the rest of the space. We get the space back, as I said in August of ‘16.

The anticipated rollup is over 100% on this 125,000 square foot block.

There is speculative new construction in the city, 181 Fremont and 333 Bush and Block 40 are all under construction adding about 1.4 million square feet, but the vacancy rate is under 6%, total availability is under 8.5% and after an FAR deposit in October, the Prop M Bank is currently under 1.75 million square feet and that’s it.

Down in the valley, Apple committed to another 800,000 square feet in the new development. They are purchasing additional land in North San Jose, Palo Alto Networks is growing, Google is growing, Aruba is growing, Toshiba is growing, General Dynamics is growing, Silver Spring Networks is growing they have all committed to large new expansions.

At Embarcadero Center, we completed another 116,000 square feet of leases during the quarter. The largest deal was 41,000 square feet and the mark-to-market was over 60% on a gross basis and over 100% on a net basis. None of these transactions are in our same-store stats for the quarter.

We are now actively engaged on over 350,000 square feet of full floor tenants, including the five currently vacant floors, a 117,000 square feet of vacancy with an average starting rent on those floors of over $80 a square foot. The largest tenant is only 51,000 square feet.

The anticipated rollup is in excess of 50% on a gross basis and over 75% on a net basis on all of that space. In total, we have over 1 million square feet of near-term lease expirations and vacancy with an average rent of $53 a square foot at EC. At 535, we are now 91% leased and we have leases out on all but 4,000 square feet.

The last three deals were a foundation and insurance company and a law firm. The building should be fully contributing by the third quarter of ‘16 at a cash return of over 7.8%, 150 basis points greater than our original performance. We have 700,000 square feet of available space at Salesforce Tower.

Currently, we have leases out on 100,000 square feet totaling 4.5 floors.

We have active or multi-floor discussions defined as multiple letters of intent being exchanged proceeding with asset managers, hedge funds, VCs, law firms, consulting firms, real estate brokerage companies and other non-tech service firms that encompass more than 475,000 square feet.

Only two of these tenants are existing customers at Embarcadero Center. These requirements are all lease expiration driven for occupancy at the end of 2017 or early 2018. In summary, activity at Salesforce Tower and the rest of our city portfolio is robust as much as we had seen since we bought the property in Embarcadero Center back in 1998.

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

Thanks Doug. Good morning everybody. I am going to briefly cover our earnings for the quarter and projections for the rest of the year, but we will focus my comments primarily on our 2016 guidance that we provided.

I would also like to point out that we added a new page to our supplemental report this quarter that provides our key earnings guidance assumptions. We are hopeful that this in conjunction with the guidance explanations that we have historically included within our earnings press release is helpful.

Starting with our quarterly results, as you can see from our press release, we reported third quarter FFO of $1.41 per share. That was $0.06 per share, about $11 million above the midpoint of our guidance. The results included unbudgeted lease termination fees of $5.6 million.

This includes the $3.6 million payment we received related to our Lehman Brothers bankruptcy claim. So far this year, we have collected over $8 million from our claim, which we believe has the remaining value of about $2.5 million, though we don’t know when or if we will collect it.

We also recorded $2 million of termination fees for taking back a floor from a tenant at 601 Lexington Avenue that Doug mentioned. The remaining $5.4 million of our earnings beat included $900,000 of better than protected service fee income and $4.5 million from the portfolio.

In our portfolio, our operating expenses were about $1.5 million below our budget, all of which we expect to incur in the fourth quarter. And we delivered two developments this quarter earlier than we expected resulting in $3 million of portfolio outperformance. We projected both of these developments to deliver on October 1.

So there is no impact on our fourth quarter projections. Our projections for the fourth quarter are generally in line with our prior guidance. The only meaningful changes are that we will benefit from the early acquisition of Fountain Square that will add about – it will add about $2 million for the quarter.

However, we projected to be offset by operating expenses being moved from the third quarter to the fourth quarter and the loss of income from terminated tenants. For the full year 2015, we are projecting funds from operations of $5.46 to $5.48 per share.

Again, this represents an increase from our guidance last quarter of $0.06 per share at the midpoint reflecting the outperformance we recorded in the third quarter. Now, I would like to spend a few minutes on 2016.

Last quarter, we discussed a few larger items that would impact our 2015 earnings, including asset sales, in particular the sale of 7 Cambridge Center to its user The Broad Institute, which will result in the loss of $13.2 million of NOI.

The Broad Institute is a unique situation given that they negotiated this purchase rate as part of the build to suit development 12 years ago.

And the rent contained two components, a base rent which was used to calculate the purchase price and a large tenant improvement investment that was fully amortized over the term of the lease of additional rent. We do not have any other tenant purchase rights like this in our portfolio.

The impact of this and our 2015 sales are partially offset by the acquisition of Fountain Square. But in aggregate we project a $16 million or $0.09 per share decline in 2016 NOI from 2015 related to net sales activity.

Last quarter, we also discussed the impacts on 2016 from downtime in between leases for some larger lease expirations such as Citibank vacating 140,000 square feet at 601 Lexington Avenue, FAO vacating at 767 Fifth Avenue and lease expirations at our Gateway project in South San Francisco, 100 Federal Street in Boston and in our Washington, DC buildings.

This has tempered our same-store growth for 2016, but will be more than offset by growth in the remainder of our same-property portfolio and incremental NOI from the delivery of a portion of our development pipeline. In Boston, we project occupancy gains at the Prudential Tower, 200 Clarendon Street and our Suburban Waltham buildings.

We also will reopen the Boylston Street side of the shops at the Prudential Center in the second half of 2016, including Eataly and the completion of the retail expansion, which is 100% leased. This income will start to show up in the second half of 2016 and will be fully in place in 2017.

As Doug mentioned, we have good activity in New York City at 250 West 55th Street and expect stabilization in 2016. Year-over-year, we project 250 West 55th Street to contribute an incremental $15 million to $20 million of NOI in 2016. We are also projecting incremental income gains at 599 Lexington Avenue and in Princeton.

Doug also described the activity at Embarcadero Center. The potential revenue from the five vacant floors he mentioned is over $9 million and our anticipated rollout from expiring leases through 2017 is over $20 million. Some of this is projected to commence in 2016.

Overall, we project our average occupancy remaining relatively stable between 90% and 92% during 2016 and then improving with positive absorption in 2017. On a GAAP basis, at the midpoint of our 2016 guidance, we project our same-property NOI to be relatively flat compared to 2015.

The most significant headwinds are at 601 Lexington Avenue, 100 Federal Street and 757 Fifth Avenue, each of which is a consolidated joint venture. If you include only our share, our 2016 same-property GAAP NOI performance improves by 100 basis points. On a cash basis, our same-property projections are much better.

We have a significant amount of free rent burning off at 680 Folsom Street, 250 West 55th Street, 101 Huntington Avenue and South of Market. And also, we will experience the cash impact of the rollup in rents from early renewals we completed in Cambridge and in San Francisco.

We project our cash same-property NOI for 2016 to be up by 1.5% to 3.5% from 2015. Again, if you only include our share of consolidated joint ventures, this growth goes up by approximately 100 basis points. So cash NOI growth of 2.5% to 4.5%. Properties not included in the same-property portfolio include our 2015 and 2016 development deliveries.

These developments represent a total investment of $1.1 billion and are projected to provide an aggregate averaged unleveraged, stabilized cash return of 7.75%. We project an incremental NOI contribution to 2016 from these properties of $34 million to $40 million and growing to over $70 million by the end of 2017.

Non-cash rents, including both straight-line rent and fair value rents will be down significantly in 2016, as much of it will convert to cash rents. We project our non-cash rents to be $30 million to $50 million in 2016. That compares to our current 2015 projection of $90 million to $95 million.

We have four maturing mortgages in 2016 that total $580 million and we project interest expense savings of $8 million assuming we complete a $500 million financing in the fourth quarter of 2016. This is baked into our interest assumptions for the year and we currently project interest expense of $400 million to $420 million for 2016.

This is net of capitalized interest associated with our development pipeline of $38 million to $48 million. We have not made any other financing assumptions, though we continue to monitor the market in advance of our $3.6 billion of aggregate debt expiring in 2016 and 2017.

We continuously evaluate the costs associated with an early refinancing, which could occur later this year or in early 2016. Any transaction would result in a significant prepayment penalty there will be a charge to earnings in the period we complete the refinancing.

We also continue to layer in forward starting fixed rate hedges targeting a corporate financing in late 2016 and our $1.6 billion loans on 767 Fifth Avenue that expires in late 2017.

With our acquisition of our partner’s share of Fountain Square and the sale of 505 Ninth Street combined with transition between leases and some of our consolidated joint ventures, we project the FFO deduction for non-controlling interest in property partnerships to be lower in 2016 at $95 million to $115 million.

So overall, we project 2016 funds from operation of $5.50 to $5.70 per share.

At the midpoint of our guidance, we are $0.13 per share higher than 2015, which reflects approximately $0.22 and growth from our development deliveries, $0.10 and growth from our share of portfolio NOI, $0.08 of lower interest expense, offset by $0.09 of dilution from asset sales, $0.04 from higher G&A expense and $0.14 of lower termination income.

The dilution from selling assets in 2015 has an impact on our 2016 growth profile. If you exclude the impact from asset sales, our FFO growth at the midpoint will be approximately 4% even with some of the transition we are seeing in the portfolio.

Our portfolio was well-positioned for additional growth beyond 2016 and we anticipate improving our occupancy, adding incremental NOI from the existing portfolio and from our development investments. That completes our formal remarks. Operator, if you can open the line up for questions that will be great..

Thank you, sir. [Operator Instructions] Your first question comes from the line of John Guinee from Stifel. Your line is open..

John Guinee here. Thank you very much. First, a couple of questions for Owen and then one for Ray Ritchey or maybe this is Doug.

Back in 2010 or 2011, Princeton Corporate Center came on, you sold it, you backed out what are your thoughts on Princeton Corporate Center these days?.

Well, it’s called – we call it Carnegie Center, John. .

I am sorry..

That’s alright.

And I think the basic fundamental philosophy down there is that we have been able to find the real niche with the pharma, biotech and some other industrial companies, many of whom are growing and we have been able to both capture additional occupancy, as well as additional users where we are building a building as an example for NRG right now and our plans are, at the moment to continue to have a thriving 2.5 million square foot campus, where we have growing tenants though where we hope to see rising rents and we can accommodate future growth..

Okay, great. Ray Ritchey, you are deep in the teeth of the GSA deals, your TSA lease.

Can you kind of talk through whether we are in the first inning of the GSA movement or are we halfway through? And how many more feet are you going to see GSA move into state-of-the-art metro-centric buildings in the near term?.

Thanks, John. First of all, in TSA, obviously we are involved in a protest there. So, it’s like we will not comment on that except to say that we would not file the protest, if not we didn’t feel good about our position.

Number two on GSA in general, you may have saw where DOJ just signed a lease for over 800,000 square feet on a to-be-built complex here in the NoMa District of Washington, and I think that’s indicative of the fact that current landlords or existing landlords have a hard time meeting the space allocation needs.

And that these larger requirements more likely than not will be forcing new development. And as we control several sites that would be responsive that we are encouraged that that maybe the case.

Having said that, we are still aggressively pursuing renewals at a number of our buildings where leases expire in ‘16 and ‘17 and because of the strategic nature of those specific buildings, we feel really great about the renewal prospects for our buildings..

Great.

And Owen, are you going to be running with us Wednesday morning at NAREIT?.

Looking forward to it. Thank you..

Alright, thanks a lot, guys..

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

Good morning, guys. In your remarks on sales force, you spoke about the non-tech sort of demands from users.

What are you seeing on the tech demand side of things? Has the sales force sort of naming rights been an issue or are you seeing larger source of requirements than you thought you would when you built that?.

I think what we are seeing is exactly what we would have anticipated seeing with regards to the building. This building is in the premier office address in San Francisco at this point.

And given the relatively higher rents that we are asking relative to other parts of the city and other properties, we anticipate that the market demand would be geared towards the financial services companies with lease expirations driven occupancy needs. And so I think we are seeing exactly what we would have expected to see..

Doug, while I have got you on the line, FAO, you mentioned perhaps a single user, perhaps multiple users do you have an appetite one way or the other?.

I think our appetite is to maximize the revenue and maintain the image of the building. And if it comes in the form of two or three transactions, that’s okay and if the right brand awareness organization wants the whole 65,000 square feet and they are prepared to pay what we consider a fair rent, we will do deal with them as well..

Great.

One quick one for Mike, Mike, what’s driving the big G&A ramp next year?.

I am sorry, what was that?.

What’s driving the new G&A ramp into ‘16?.

So, on our G&A, we have really just assumed cost of living adjustments on our 2015 general G&A.

And then we do have a long-term compensation plan that is identical to the plan that we had in ‘15 that is in there and the difference is that the plan that is rolling off from ‘13, the unvested piece of that is just less than the charge for the first year for the plan that is projected for ‘16, but that plan is identical – projected to be identical to what the plan we had in ‘15 is.

There is really two pieces..

Alright. Thanks guys..

Yes..

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

Good morning, guys. Owen, you mentioned that asset prices maybe tested this fall.

And I am just hoping you guys maybe elaborate a little bit on that statement and just what dynamics you see it play there and do you think there are certain of your markets that might be more vulnerable than others?.

Yes. So, we have had as you know now several quarters/years of I would say very strong capital market conditions, particularly for Class A assets. And from all the evidence that we have of deals that we are involved in and deals that we watch, that market conditions still exists.

However, I made the comment, because there have been a few new things that have happened over the last quarter. We had some clear market volatility, downdraft in the equity markets in August, which is now recovered, but clearly the volatility levels are higher. I am sure that’s had impact on some investors. We are closer to the end of the year.

So, everyone has got a different belief on what interest rates are going to go, but we are closer to a possible December rate hike. And then lastly and anecdotally, a lot of what we see and what we hear from the industry, there is a significant pipeline of assets for sale, both office assets and other asset classes currently in the market.

So, I just make the point, again, we have no specific deal evidence of change, but there are a few of these moving currents, which could have some impact on it and we will have to see..

Any evidence….

Yes, I think the – I don’t think there is anything in my remarks that are targeted towards any one specific market. I think we have mentioned before, the asset – attractive asset pricing that we are seeing exists across all of our four markets. And these factors that I mentioned, I think would have impact on all of them..

Okay and so no evidence yet of bidding 10 smaller or maybe overseas buyers taking a step back?.

Not specific, no..

Okay. And also your stock has been trading at a pretty wide discount to NAV here recently.

And I am just curious whether share buybacks are on your radar at this point and just how you are thinking about that option versus say new developments?.

We have obviously been watching our stock price, Jed and we talk about it and we have even addressed it with kind of our board and talked about it. And our view is that we have got a great use of capital for our developments.

If you look at our liquidity and you look at our capacity, which is actually significant given our leverage, we certainly have capacity, but then you look at the impact, the accretion impact of doing a share buyback of $1 billion or $1.5 billion or even $2 billion and it’s not that meaningful to us given the fact that we think we are going to have alternative investment opportunities and continue to have new development given our shadow pipeline over the next few years.

So, we don’t want to give up that capacity for some sort of short-term gain when we have great opportunity in the future..

Okay, it sounds good. Thank you..

Your next question comes from the line of Jamie Feldman from Bank of America. Your line is open..

Great, thank you. So, you have done a good job of laying out the $80 million of potential NOI upside through year end ‘17 and provide advice on this in the past. And just listen to your comments, it does sound like maybe there is some 2017 NOI that might be moving out. So, I guess my question is two parts.

Number one, can you just bring us up to speed on, of the $80 million, how much of that is in the bag? And number two, when we think about that $80 million, is there some movement in ‘17 that might be a drag again?.

Jamie, this is Doug. So, it’s hard for me to sort of describe what is in the bag or not in the bag. I mean, as an example, I described and might put some numbers around all of the rollover that we have in Embarcadero Center.

And I also – I put some perspective on the activity we have in Boston and we have previously talked about what’s going on at 100 Federal Street. All of that, I think is activity that we are confident is going to progress in the appropriate manner, but none of it is “in the bag”. But I – we feel pretty good about it.

With regards to ‘17 and interestingly I actually went through and looked at our entire portfolio from 2017 to 2020, because I figured somebody – someone might ask if there are any other really large rollovers in our portfolio.

And in ‘17, aside from the square footage that I described at 399 and I think I gave some clarity on the fact that much of that space is likely to going to be leased prior to those leases expiring. In fact we may get some leases done in early 2016 on that space.

I think that we are feeling relatively comfortable that, that space is not going to be a drag on our earnings on a going forward basis. And then when you skip until the 2018 and we have space at $45 a square foot, a big chunk in Cambridge that’s rolling over. I wish we can have the space back today, so I can lease it today.

Then in 2020, we have the Estee Lauder space at the General Motors building 757 Fifth that’s just going to rollover, which has got an enormous amount of embedded upside in it.

So on a going-forward basis, while I think we will continue to see downtime between major lease expirations, it’s nothing like what we are seeing at the moment where we have the concurrence of both the assets in Boston at 200 Clarendon Street, 120 St.

James, changes at 100 Federal Street, what we are doing at 601 and what’s going on particularly with the retail space at General Motors building all happening within the same 12-month period of time..

Okay, that’s very helpful.

And then – so I guess to your comment, you feel very comfortable on some of it, can you quantify of the $80 million, how much is that?.

I will be able to quantify it in future quarters..

Okay.

And then turning to Mike, do you have a sense of what your guidance means through 2016 FAD?.

Well. Yes. I mean obviously, I had some comments there relative to our same-store cash being higher. And I made some comments on what our free rent and straight line rent is going to be which is significantly lower than it’s going to be in 2015.

The other thing I would point out is we have done a lot of leasing in 2015 that has – in ’15 and that was just a lot of this early renewals and take-backs and deals that we did. So the leasing transaction costs that we are seeing in 2015, I think are higher than what they have been historically because there has been so much volume of leasing.

So as I look at our occupancy projections and I look at 2016, I mean I am looking at probably doing 3.5 to 3.7 million square feet of leasing in order to achieve our projection. So you can throw whatever transaction costs you need to throw at that based upon some renewals, some being new.

But if you use $45 or $50 a square foot, you are talking about $160 million, $170 million. And then we talked about our cash rents and our CapEx, I would expect it to be similar next year to this year. We expect this year to be somewhere in the $70 million range, I would expect that to be similar.

We do have some more significant work going on like this year we had Hancock lobby and we have started the 599 lobby and the elevator work at 599 and that’s going to go also into next year. And we will do some work at 399 next year and some other buildings.

But overall, I mean I would see it being an FAD of somewhere around $4 somewhere $3.80 to $4.20, something like that per share, which is higher than this year by probably 10% to 15%..

Okay, great. And then just final question, you mentioned a good pipeline of leasing for Salesforce Tower.

And I know you have said in the past that tenants in those markets tend wait closer to occupancy date to sign leases, what’s realistic in terms of what we should thinking about for when you start to put some more leasing on the board there?.

Well, as I said we have 4.5 floors that we are currently in lease negotiations. That means we have sent a lease and they have sent comments back and we sent comments back to that. And I would expect that that 4.5 floors we will be done close to the end of the year, maybe before the end of the year.

And then we have got proposals that we are trading back and forth with a multitude of tenants, so I said 475,000 square feet.

Do I think we are going to have any of those physically leased before the end of the year given that it’s November 1 on Monday or November 3 on Monday, probably not, because it generally takes 90 days to 120 days to sign a lease unless there is a crucial need for delivery of the space sooner than that.

And obviously we are not going to deliver the space until early 2017. But we think we are going to have consistent theories of leases to announce in the first – in the second quarter of next year or with all the work that we have going on right now.

And Bob, I don’t know if you want to comment on that?.

I will just go on a limb and say that we will be 100% leased when the building is completed..

Alright. Thank you..

Operator?.

Your next question comes from the line of Ross Nussbaum of UBS Securities. Please go ahead. Your line is open..

Thanks. Good morning. I am just trying to get over that last bold statement there.

While we are on a bold statement in San Fran, can we talk about the status of your potential development at Fourth and Harrison?.

Sure, I will give a couple of brief remarks and then I will let Bob describe it. So we purchased an option or we entered into an option agreement on Fourth and Harrison and we have done our – we made our preliminary submission for the city and there area a series of entitlements.

And I will let Bob describe them in more detail that need to be garnered in order to start that project. One of them is referred to as the Central SoMa plan, the other one is a Prop M allocation. And Bob you can describe sort of the timeframes associated with going to that process..

So the Central SoMa plan is an area that affects from Market Street, south of the freeway and our Fourth and Harrison properties included in it. It’s anticipated that plan will be approved sometime next year, it was supposed to be this year, so it could potentially drag on.

Prop M is probably the bigger factor that affects us because there is a 10 million square foot pipeline of planned projects. And we are one of those projects that are going have to compete for that square footage until Prop M either gets voted out or some other type of solutions realized.

We just submitted our preplanning application a couple of weeks ago. We have got a meeting with Citi in two weeks to review the plan that were very preliminary as far as going through the planning process.

And at this point, we really aren’t certain what’s going to be approved or have to change with the project, but we will keep you posted as it materializes over the next couple of months..

Okay. I appreciate that.

Shifting over to New York, can you remind me on the rework development over – across the river, is that a fixed rent deal with bumps or do you guys have any kind of a profit-sharing arrangement like some other landlords have done?.

It’s called Dock72 for future reference and John Powers, I will let you describe our arrangement without talking about the specifics..

No, there’s – it’s a straight lease for 240,000 square feet. It does have increases in the lease over the 20-year period. There’s no percentage of profits or any – anything else..

Thank you..

Thank you. Your next question comes from the line of from the line of Brendan Maiorana from Wells Fargo. Go ahead.

Your line is open?.

Good morning.

So Mike, probably for Mike LaBelle, so your same-store cash NOI growth that you shared, 2.5% to 4.5% seems many fully higher than these bare our expectation was an you talk last quarter about some of the pro-active space that you are taking back, which, I think, in aggregate, you said maybe hurt the ‘16 in run rate by about 200 basis points.

Is that still the case or is maybe some of that drag that you initially expected in ‘16 not going to show up?.

No, that $34 million of drag is still expected. Again the cash growth is coming from 101 Huntington Avenue. We did the lease with Blue Cross Blue Shield, had pre-rented it in 2015 and a little bit of cash rent, full cash rent in 2016. That’s a big lease.

The leases at 250 West 55th Street and 680 Fulsom all had a lot of free rent during 2015, no free rent in 2016. And then the renewals, I mean, in Cambridge we did three big renewals in 2014 and 2015 where we increased rents from $45 to $70 plus.

And the bump in the cash doesn’t come until the natural lease expiration of those leases, which was in 2016. And same thing in San Francisco with some of the early deals that we did on some of the firms in Embarcadero Center and it just has a meaningful impact on the cash flows and the growth in them. So, that’s really where it’s coming from..

Okay, great. And then with respect to the $80 million of growth kind of by the end of ‘17, my recollection from the slides that you guys have provided is that there were some of those assets, which are actually what we are talking about a little bit of a drag in ‘16 and then become growth thereafter.

Is there, on a net basis, is any of the $80 million really positively contributing to ‘16 or is that really kind of ‘17 and thereafter growth?.

Some of that will be – will start to commence in ‘16. So, as an example, if we lease 5 vacant floors of Embarcadero Center rent at $80 a square foot, I think Mike said it was $9.5 million and if per chance all of those leases commenced in August of 2016. We get the bump in 2016 and it would obviously be there for ‘17 as well.

So, the $80 million is the totality of the incremental cash flows and some of it will be occurring earlier than the end of ‘17..

Okay, great. And then just last one to your occupancy guidance, 90% to 92% is about – the midpoint of that 91% is about in line with where you are today.

Is there any major trend in terms of how occupancies likely to migrate throughout the year, is it expected to be roughly flattish?.

We have got rollover at the end of the year with Gateway. We have got the rollover at 601. So, my anticipation is that it will go down at the beginning of the year and then it will grow through the years. So, we could be sub-91% at the end of the year, beginning of the year and then kind of grow up closer to 92% through towards the end of the year..

Okay, great. Thank you..

Your next question comes from the line of Vance Edelson from Morgan Stanley. Go ahead. Your line is open..

Good morning. First on Innovation Place, it sounds like a lot of future lease up in development potential ahead, which will partially take part in, but could you just walk us through the thought process in handing the reins over and is there any gain on sale there? Thanks..

The thought process of the sale was that was the preference of our clients. And in my comments, I mentioned a gain, which I think is $78 million..

Yes, that’s also in our guidance for net income. There is the GAAP gain within the guidance for net income and our guidance that we provided. So, there is a GAAP gain and there is also a tax gain..

Okay, perfect. And then it sounds like you have got some good prospects for a permanent solution on the FAO space.

Could you give us a feel for the potential NOI upside ballpark when you feel that retail space if it works out the way you want versus the current temporary tenant and versus when FAO was there and could maintaining the buildings image as you mentioned could that weigh on revenues significantly?.

So, I am going to – this is not going to – to be very satisfactory, but given that we are talking to specific tenants, I just don’t feel comfortable front-running what we might charge any particular tenant for the space.

I can tell you that the contribution from that 65,000 square feet was in and around $20 million prior to the termination of the lease and we plan on significantly surpassing that number.

And I don’t want to – I mean, you are not going to be able to get me to say what significantly is defined as, but you are aware of what other space rents for on Fifth Avenue.

And as I said before, our advantage is that we probably have one of the most highly trafficked plazas on the Avenue, particularly with the Apple Store and the demand that it generates the little bit of a challenges that we have at plaza. So, the storefront is not right out on the street, which has its benefits and its disadvantages.

And so we have to work through all of that with the various tenants that we are discussing on the space with..

Okay, got it. And then just looking at the development pipeline, it’s still largely office, but the two groundbreakings during the quarter were resi where you are getting 6% yields versus say 7.5% on the office side.

Should we expect more of the same going forward with new projects more in that lower yield bucket and then what are the other considerations there as you think about the capital deployment?.

Well, I think that if we do more residential projects, I think that we would anticipate that the yields will be in the similar ballpark when we are doing office buildings and we are generally trying to generate cash-on-cash returns in excess of 7% as I described the deals that are coming online in ‘17 for a full contribution will be in excess of 8%.

So, I think that, that is our goal and that is what our mission is obviously depending upon the particular site and the particular structure of the lease and who the tenant is, it can be varied..

Got it. Okay, thank you..

Your next question comes from the line of John Kim from BMO Capital. Go ahead. Your line is open..

Thank you.

Doug, you provided the diversity of tenants actively looking at Salesforce Tower, I was wondering if you could do the same for Embarcadero Centre and if there is any potential to attract tech tenants there?.

So, the Embarcadero Center activity is primarily at the moment in terms of the full floors, asset manager, money manager and law firms.

And interestingly, one of the fundamental things that we are discovering is that as much as people like to and want to sort of redo their space, the cost of re-tenanting space is astronomically high and it’s getting higher in these markets both through construction cost increases from inflation as well as the demand of labor.

And so the installations that have previously been built have – in fact have some utilities.

And so we have, for example, law firms that are looking at some of that Bingham McCutchen, now Morgan Lewis space and saying we can figure out ways to make use of this space and instead of having spent $140 a square foot when we have to spend $85 or $90 a square foot.

On the tech side, we actually are seeing some amount of tech looking at Embarcadero Center and I think honesty largely it’s because there is so little available space now in the south of a market location that tenants are sort of looking for blocks of space wherever they can find it.

And we will have some small blocks of space and we continue to be a very viable alternative for those types of users.

And Bob, I don’t know if you want to make any additional comments?.

No, I think you pretty much covered what’s happening in Embarcadero Center. We have done a few tech deals here, but nothing of significance. We have had some tech tenants like Microsoft look here that landed elsewhere. And I would agree with Doug as the market gets tighter, we will probably see more of them..

In the similar vein, you have WeWork in a couple of your developments, do you see them backfilling any of your near-term expirations?.

I think WeWork is an important user of space in all of our markets and to the extent that it makes sense for their business model and it makes sense for how we are marketing and leasing our space for us to come together. We will consider those opportunities..

I had a question on the special dividends I think you mentioned that it would likely get paid.

What is the scenario in which it wouldn’t be paid? Are you in any late stage of any acquisitions that you are looking at?.

As we mentioned in prior years, we and the board will make that decision at year end based on our net income. We did provide the gain associated with the sales to try to help you understand what the potential for that could be. I did mention that we don’t contemplate having any additional sales for this year.

And I also mentioned that the acquisition environment continued to be challenging, but the final – any dividend and the amount of any dividend won’t be finalized until later in the year..

Okay.

And then finally, Owen, maybe can you provide some commentary on Brookfield’s joint venture with the Qatar Investment Authority at Manhattan West this week? Any implications for office pricing or sovereign wealth funds’ appetite for development risk?.

Well, I think it’s another indication as we were talking about earlier of the interest in both offshore and we also see interest from offshore investors, but I think it’s another example of offshore investors being very interested in high-quality U.S. real estate in core markets.

And I think that there is also I think increasingly – increasing interest on some sovereign wealth part – some funds part not on all and moving up somewhat in the risk curve and trying to achieve higher return while we are taking the risk and I think this investment like Qatar in that project is an example of it..

Did the pricing surprise you at all?.

Honestly, I don’t know that much about the pricing..

Got it, okay. Thank you..

Your next question comes from the line of Brad Burke from Goldman Sachs. Go ahead, your line is open..

Hi, good morning.

I was hoping you can give us some coder on how should we think about the magnitude of the podium project at North Station since it sounds like that might be a near-term start and since you will be capitalizing interest in G&A on that and any other projects that come out of the shadow pipeline, I was wondering what the guidance contemplates if anything, in the way of new incremental development for capitalized interested in G&A?.

So the podium project is approximately $285 million. Right now, we are assuming that Delaware North if he started we will go forward with it, so obviously it would be half of that. And we also assume that if we have Delaware North as a partner that we will put some additional third party financing on it. So that’s sort of the magnitude of that.

And then next piece would be the residential and hotel sites, which are pretty integral to one-half of the building. And then the last piece of the Office Tower, which is I think is the longest lead item from our perspective because it’s more tenant specific.

And I think we will have a better sense of where Delaware North is on those two projects in the next quarter. And as Owen said, when we talk to you in I guess early January or late January we will have more flesh to put on the bone..

We have not included the starts of these.

They don’t have a significant impact on our earnings, I mean there could be some additional capitalized interest that is not currently in our model and our guidance for this, if there is whatever dollars are spend out it could improve our interest expense a little bit because our capitalized interests might be a little bit higher, if we were to start that project..

Okay.

And then just an update because you continue to push and development, just what you are seeing at construction costs in the market and how you are thinking right now about the rest of the construction costs maybe take a big step up from where they are at currently?.

So I think I have said this previously and it will be a consistent message, which is as a little inflation as the Fed is and others are seeing in parts of the consumer economy. Construction market in San Francisco, Boston, Washington, DC and New York is seeing significant inflation defined as right now somewhere around 6% plus per year.

And so we are doing everything we can to make deals and do our bidding sooner rather than later and do buyouts on long-term lead items and get our drawings in a position where we can do that thoughtfully as quickly as possible. And we build all of that inflation into the budgets that we provide you.

So a budget that for a building that’s going to commence in 2016 or ‘17 will have built in inflationary creep in the hard cost numbers to take care of what we consider to be a reality of the market today..

Okay.

So that 6% or so number is what we should think about you guys underwriting for cost inflation?.

Yes..

Thank you..

Your next question comes from the line of George Auerbach from Credit Suisse. Go ahead, your line is open..

Good morning it’s actually Ian Weissman here.

Just a couple of questions, as I listen to you comments about San Francisco and a way that also what Kilroy is saying about the continued stringing in that market, I was wondering if you can help us understand as you guys think about leading indicators for demand, what should we be focused on, a lot of times people focus on sub-leased space, but how do you think about lack of IPOs this cycle or growth space or private market valuations?.

So Ian, my comment to you would be as follows, which is I think the thing that we first look at is we look at the amount of venture capital led investment that’s occurring in the various markets in the country and how that measures vis-à-vis the last four quarters or five quarters in years and what it sort of looks like historically and because that sort of where a lot of it starts particularly on the tech side.

And then we expect that there will be failures that the changes that are occurring in the technology space and the number of entrants into various product categories are not single.

And so as an example, in the mobile payment system, there are five or six tech companies that have all either attempted to go public or are moving towards that direction and have aligned themselves with other tech companies. And in my opinion, they are not all going to be successful, right.

So Samsung has their own pay, Apple Pay is out there, PayPal is out there, Visa has a product, Square has a product, they can’t all possibly be on every mobile payment service in every retailer in the country because it’s just too many of them. And so we anticipate that there are going to be failures.

And so when we look at things like layoff at Twitter or other blowups, on a one-off basis those are the types of things that don’t worry us.

Where we start to see significant layoff due to global economic concerns and major changes in what’s going on from a GDP perspective, that’s where I think we would start to feel really uncomfortable about the demand characteristics of that particular marketplace.

And it’s really hard to sort of see with the canary in the coal mine is on that in the current environment. I would just add to that. Look, I think there are metrics that we can all look at. I think the venture capital investing historically versus rents is certainly an interesting one.

But I think we also rely heavily on what just what is our expense on a day-to-day basis in the marketplace.

I mean given the portfolio that we have and the insights that we have and what’s going on in the market, we have watched with some wonder over the last couple of weeks, all of the negative press and commentary about the San Francisco market when our actual experience is completely inverse of it as Doug and Bob described..

That’s helpful.

Just two other questions, as you think about your non-core, I should say asset sales next year, can you maybe help us understand a little bit better or walk us through what some of those low-growth assets are or maybe by market?.

Look, we will continuously be evaluating our portfolio for assets that would be in non-core areas. Some examples of that that we – of assets like that, that we have sold over the last few years have been some of our Suburban Boston, outside of the Waltham assets, some of our suburban Maryland assets.

We – to sell, we not only we have to determine if they are non-core, but they also have to be leased at a level and has to be a strong enough capital market where we feel like we are getting an attractive price to exit.

So what we are going – what we did at this year and what we are going continue do in ‘16 is to continue to look at those assets, see what the leasing status is, see what the market conditions are and see if we have an opportunity to sell those assets at an attractive level for shareholders..

That’s great.

And finally, this might be a tough question to answer as we sit here in 2015, but Owen you said that ‘17 could be a year where we can experience or you guys can experience meaningful growth, can you kind of just put some parameters on that for investors?.

Well, what we have tried to do following on our last call was to put out a slide in our recent Investor Relation materials and also, Doug and I and Mike spent a fair amount of time trying to describe it today.

We are obviously not putting out ‘17 numbers, but what we tried to do is say for these – for a select group of assets that are again shown in the slide in our IR material, we think that the same-store NOI for those assets. And these are the ones that are – many of them are experiencing a downdraft and then an updraft.

But for those assets, we see an $80 million increase in same property NOI from ‘15 to 2017. And then we also wanted to point out as we have been describing and as you have discussed, we have a very active development pipeline and portfolio.

And if you do the math on that, with our projections, we believe that we will add an additional $72 million in annualized NOI from our development portfolio by the end of 2017. So, those are the numbers that we are using now to hopefully give you some feel for what 2017 could look like albeit I recognize it’s an incomplete picture..

I appreciate that color. Thank you so much..

Your next question comes from the line of Alexander Goldfarb from Sandler O’Neill. Go ahead. Your line is open..

Great, thank you very much. Just two questions for me.

The first one is for Ray Ritchey, now that you guys have bought out Beacon on Fountain Square and consolidated all the Reston Town Center, does this allow you to accelerate some of your redevelopment plans or regardless of whether you owned it in a partnership or not it doesn’t change the timeline with regards to future redevelopment?.

Thanks, Alex. The original density of additional development pad in the Town Center per se was acquired where we bought the first space 2.5 years ago. And we have been going the last two years to position that asset for development and it’s really a two-phase asset.

The first as we talked about today is the 508 and the 20,000 square feet of commercial space, 508 units of residential, but we are also working on another office tower that will be approximately 270,000 square feet and we are taking steps to put that in position as well.

And then of course, we still have the Gateway side, which has the potential of upwards of 3 million to 3.5 million square feet of space in mixed use development that will be forthcoming when Metro comes. So, Reston is great today, it will be even greater in the future..

Okay. And then heading out West, the innovation and the sale of Broadcom, can you just help us put some parameters around the pricing? With the all-in additional rights, it looks like it’s about $190 a foot.

So, if you can just give us some perspective on your thoughts to sell versus keep it and do that development for your own account?.

As I mentioned earlier, another question came up about that. It was the preference of the client to purchase the site and own the buildings versus us continuing to own the buildings and lease them. So that was the driver..

So, Alex, first of all, we didn’t say who the tenant is, so those are your words not ours for the record. So, when we think about that site in North San Jose, which is Mountain View in North San Jose and Sunnydale and Santa Clara all are very different types of markets.

The net rent that you would achieve today on 1980s vintage building is somewhere around $2 a square foot. And so you can sort of back into what the economics might be on leasing the space recognizing that in order to lease those buildings there needs to be tenant improvements and brokerage commissions on all sort of things.

And then, obviously, while we have been able to and very thoughtfully create additional density there. In order to do that, there has to be a change in the configuration of the way the parking is currently operated, i.e., there needs to be structured parking garages. And it’s not a paid parking type of a situation.

So, you also have to consider what the costs are of replicating the parking for the existing buildings as you build the additional 500 plus thousand square feet of density and what the cost of that is. So, all of those things factored into the pricing that we think was a strong price, a fair price for both us as the owner and for our potential user..

Okay, thanks a lot, Doug..

And I just want to reiterate what I said earlier is how pleased we are with this transaction given the price, given the vacancy that we will not be experiencing in the company and the new client relationship that we have in the development assignment. So, we think it’s a terrific transaction for the company and for shareholders..

Your next question comes from the line of Vincent Chao from Deutsche Bank. Go ahead. Your line is open..

Hey, good morning, everyone. I actually thought I had jumped out of queue here.

Most of the questions have been answered, but I guess just going back to the free rent conversation, you mentioned a number of leases that are going to have some burn off here in ‘16, but I guess can you just tell us what the dollar amount of free rent is in the third quarter numbers and what that looks like? Because I guess the issue with a straight line rent guidance you provided is that, that would include some additional free rent and straight line rent for new leasing activity, I think.

So, just curious what level of free rent is actually coming off in ‘16 that’s in the third quarter numbers?.

Well, third quarter numbers for non-cash rents, about $18 million, $19 million. And again, for the full year, it’s $90 million to $95 million. It started off around $30 million in the first quarter and it’s tailed down. I expect the fourth quarter to be kind of comparable to where the third quarter is.

And then the 2016 numbers will be significantly lower than that. And it is a combination of some fair value rent going down as well as some straight line rent going down, it’s both of those things.

But the big pieces I mentioned we are in the pre-rent piece, the fair value pieces, there is some 767 Fifth and Hancock, where we saw some rollovers occur in ‘15 and also in ‘16 with 767 Fifth, where you are going to see that come off and it’s just going to be greater in ‘15 than in ‘16. Those two buildings are also contributing to it..

Alright. Okay, thanks..

Your next question comes from the line of Tom Lesnick of Capital One. Go ahead. Your line is open..

Hey, guys. I will be brief, because obviously the call is going on quite a long time, but I am sorry if I missed it earlier, I was cut off we had a fire alarm in the building. But, Ray, this might really be for you.

Obviously, you guys have decided to keep multifamily at Reston on balance sheet, but looking out towards the projects site at Gaithersburg, I guess, what drove the decision to sell to Camden and were you looking at any other potential counterparties? I know obviously equity residential just sold a lot of their stuff out in that direction to Starwood, so just wondering what the overall plan and thought process is there?.

Well, Tom, on the multifamily, specifically to Reston and wherever multifamily is part of a mixed use development, we tend to hold on to those, because we want to control the environment for our office and retail tenants as well.

So, in places like the Back Bay or certainly Reston Town Center and other mixed use projects look to us to continue to own those. Now, the situation in Gaithersburg with Camden is completely different. That’s a greenfield suburban site. We still haven’t developed anything vertically there yet. We sold an adjacent site to lifetime fitness.

Just seemed sense to take our profit on the land, sell it and let Camden experience the great joy of going vertical. So, long story short, we are going to keep the stuff that’s integrated into our projects and may continue to sell the stuff that’s one-off and not key to our mixed use development..

I appreciate that insight.

And then my last one, just quickly, wondering if you can comment at all on the objection to the TSA award and where that stands?.

Well, I guess I will take that one. So, we have competed for the headquarters of TSA and it was awarded to another party. We had a sense that the GSA did not conduct the award as anticipated and we filed a protest. That’s all we can say about it at this point in time.

We are awaiting the final resolution and we will see what happens when the judge makes his ruling..

Alright, appreciate it. Thanks guys..

At this time, I would like to turn the call back to management for any additional remarks..

Well, that concludes our questions. Thank you very much for your time and attention when we look forward to seeing many of you in NAREIT in a few weeks. Thank you very much..

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