Good morning and welcome to Boston Properties Fourth Quarter 2018 Earnings Call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. At this time, I’d like to turn the conference over to Ms.

Sara Buda, VP Investor Relations for Boston Properties. Please go ahead..

Thank you. Good morning everybody and welcome to Boston Properties fourth quarter 2018 conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K.

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

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.

And now I'd like to turn the call over to Owen Thomas for his formal remarks..

Thank you, Sara, and good morning everyone. We just completed another strong quarter capping off one of the most productive and successful years in Boston Properties' history. Specifically, in 2018, we completed 7.2 million square feet of leasing, our second highest level of annual leasing ever.

We delivered and placed in service 2.3 million square feet of new developments, the commercial component of which is a 100% lease. We commenced 2 million square feet of new developments, which are 80% preleased in the aggregate with strong customers such as Verizon, Fannie Mae and Leidos as anchor tenants.

We completed important new acquisition joint venture including Santa Monica Business Park, doubling our Los Angeles presence, and a site at 3 Hudson Boulevard in New York that can accommodate 2 million square feet of new development. We completed approximately 720 million of non-core asset sales.

We increased in-service portfolio occupancy, 70 basis points over the years to 91.4%. And lastly, we increased our regular quarterly dividend 19%. In fact Boston Properties has increased its regular quarterly dividend by more than 46% over the past three years.

And more recently in the fourth quarter of 2018, we generated FFO per share in line with prior guidance, and up 7% year-over-year. We leased 1.8 million square feet including of 300,000 square-foot leased with Millennium Management at 399 Park, bringing this focus asset to 93% leased.

We raised $1 billion as the green bond in the unsecured debt market on favorable terms, and we increased the midpoint of our FFO per share guidance for 2019 by $0.11, raising our projected 2019 growth to over 10% at the midpoint.

Our performance in 2018 highlights the key characteristics that make Boston Properties unique and its ability to generate growth and shareholder returns in the office sector. Our high quality Class A assets allow us to attract premium rents from long-term creditworthy tenants.

Our scale and diverse yet concentrated market selection allows us to benefit from growth within the strongest markets in the U.S., while minimizing risk of single market sector or customer weakness.

Our development expertise and portfolio of sites gives us the opportunity to win important mandates with customers and ensure our growth is driven by a strong pipeline of preleased development, driving higher return.

And our modest leverage and growing portfolio NOI provides capacity for new investment without issuing public equity, also driving FFO growth. I'm very proud of our team at Boston Properties and what we are able to accomplish in 2018 through our experience, relationships, teamwork and commitment to success.

Now let's turn to the market environment, which has become increasingly dynamic and trends impacting our business. Economic growth in the U.S. and worldwide, hit an inflection point in the fourth quarter. Global and U.S. GDP growth is slowing and elevated trade tensions as well as government dysfunctions given the recent U.S.

shutdown and Brexit will have a further negative impact, so called globalization is taking hold and possibly accelerating. As a result, central banks including the Fed in December and January shifted to a much more dovish tone on interest rates and quantitative tightening. As a result, 10-year U.S.

treasuries now at around 2.7% which is about 50 basis points below its high in early November. So what does all this mean for Boston Properties? First, we're not overly concerned about the near-term recession and expect slowing U.S. economic growth to plateau and stabilize above 2% at least for now.

Second, our long stated view and interest rate risks are overblown has proven true and given the recent Fed rhetoric, we certainly expect rates to stay low for the foreseeable future, a significant positive for real estate value. Lastly, we see no current signs of abatements in mostly robust leasing markets we have enjoyed.

So, we recognize leasing activity lags economic growth and financial market movements and therefore risks of slowing leasing activity or higher. We remain constructive on further investing activity given economic growth and low interest rates.

That said, we have adjusted our risk thresholds and we will be increasingly discerning our new acquisitions of launching new development.

We continue to believe investment in new developments is more accretive to shareholders and repurchasing our shares, and we will continue to use private equity capital to help fund new investments in order to avoid either issuing public equity at our current share price or materially increasing our leverage.

In the private real estate market, significant office building transaction volumes increased to 24% in the fourth quarter and 4% for all of '18. Though investors are increasingly selective there were multiple significant office transactions completed again at sub 5% cap rates in the fourth quarter of last year.

Examples include here in Boston in the Financial District 53 States Street sold for $685 a foot and a 4.6 cap rate to domestic operator with U.S. and non-U.S. capital. This was a 1.2 million square-foot building that was or is 94% leased. In Beverly Hills, UTA Plaza and Ice House sold for $954 a foot and a 4.6% cap rate.

This is a 240,000 square-foot property and fully leased and sold to a domestic opportunity fund. In New York, 425 Lexington Avenue located near Grand Central sold for $940 a foot and a 4.5% cap rate to a domestic real estate firm. This is a 750,000 square-foot building and is 95% leased.

In Mountain View, California Shoreline Technology Center sold for $1 billion or $1,250 a square foot and a 3.5% cap rate to a user that occupied 92% of the building. This is a 12 building 52 acre site is 800,000 square feet and is fully leased.

In San Francisco, the 110,000 square-foot 100% leased 345 Brannan Building sold for $1,326 a foot and a high 4s cap rates to a domestic REIT. And finally in Washington DC, 1111 Pennsylvania Avenue sold for $1,032 a foot and 5% cap rate to a domestic investment manager. This building is about 340,000 feet and is fully leased.

Now moving to our capital activities, as mentioned, development continues to be our primary strategy for creating value and we remain active pursuing both new preleased projects and sites for future projects. Since our last earnings call, we progressed further our development pipeline activities.

With the recent deliveries into service of the Salesforce Tower and Spring Street, our current development and redevelopment pipeline stands at 11 office and residential projects comprising 5.3 million square feet and 2.7 billion of investment for our share, most of the projects are well underway and we have $1.6 billion remaining to find.

The commercial component of this portfolio is 78% preleased and the aggregate projected cash yields are estimated to be approximately 7% upon stabilization. Also in 2019, we expect to commence the development of 2100 Pennsylvania Avenue in Washington DC and 325 Main Street in Cambridge.

These projects aggregate 870,000 square feet, $760 million in new investments and are 75% preleased. We also completed three new acquisitions. In San Jose, we ground lease with the right to purchase next year Platform 16, a site with the potential for 1.1 million square feet of new office development.

The purchase right is for approximately a $125 per square foot for the site which is located within walking distance of Diridon Station, San Jose’s primary transportation hub with active Caltrain, BART, and future high-speed rail and adjacent to Google's plant 8 million square foot transit village.

Large scale transit oriented site in the Silicon Valley are in high demand and rare. We are also in discussions with capital partners to make a significant investment in this site and the eventual vertical development.

More recently in January, we exercised an expiring purchase option for all the remaining development land at Carnegie Center, which can support up to 1.7 million square feet of future development for $42.9 million.

So growth in the Princeton market is modest, we have uses for a portion of the property and believe our Carnegie Center asset is more valuable with the existing buildings and development opportunity unified.

Also this month, we committed to purchase Heinz's 5% interest net of our advances in Salesforce Tower and settled their carried interest arrangement. Lastly, on capital activities, we have an extremely successful year for disposition, selling $720 million of non-core assets and exceeding our $300 million goal for the year.

In the fourth quarter, we completed the sale of 1333 in Hampshire Avenue in Washington DC for a $142 million. We call this asset will be vacated by Akin Gump in 2019 and in is as releasing of the building doesn't fit our current operating strategy.

We presold the TSA Development project in Springfield Virginia for $98 million, which is a reimbursement of cost today including our land. If you include the future funding assumed by the buyer, the total sale price is $324 million including development fees to Boston Properties and the forward cap rate is approximately 6%.

Given this is a GSA leased asset with flat rents in a suburban location, we would have sold the asset at completion and elected to do it early to free-up capital for our growing development investment.

We completed the transfer of our 50% interest in Annapolis Junction One, a 118,000 square foot property located in suburban Maryland to our JV partner in the property. It is our intention to exit the remaining assets we hold in Annapolis Junction overtime.

And we fully exited our investment in Tower Oaks preserve business Park in Rockville Maryland by completing in December the sale of a 41 acre parcel of land for $46 million and in January the sale of 26 Tower Oaks, a 179,000 square foot building for $22.7 million or a $127 of square foot.

In summary, 2018 was a very successful year for Boston Properties. Given our robust development pipeline and lease-up activity for in-service and assets and like our home town favorite New England Patriots, we’re well positioned to put more wins on the board in 2019 and beyond. Let me turn the call over to Doug..

On the margins, there has been a lot of new construction delivered or soon to deliver and the overall availability rate has actually helped steady. And it's actually gone down slightly in Midtown.

The addition of new construction underway at 425 Park in One Vanderbilt, 50 Hudson and 6600 Boulevard and the repositioning of buildings like 550 Madison all have acting rents above a $100 a square foot and a $100 plus acting rents are prevalent all over Midtown South. So the inventory of high end space has increased significantly.

There was over 4 million square feet of leasing over $100 a square foot last year including renewals in Manhattan in a total market activity of about 38 million square feet. 85% of the deals above $100 a square foot were under 50,000 square feet and averaged around 15,000 square feet. The leasing activity drops dramatically above a $120 a square foot.

Overall, we continue to see concessions the free rent build out time in TIs remain very constant and slight uptick in rents in those buildings or submarkets that have gotten tighter. Moving to Washington DC, it continues to be the most challenging market conditions amongst our regions.

As you read in our press release and heard from Owen, we have reduced our portfolio exposure in both the CBD and suburban DC market through asset sales. Our new activities are focused on the long-term leases we have signed that will commence with the delivery of our new development between 2020 and 2023.

In the CBD, there are lot of new partially leased deliveries and relatively little new demand outside the flexible office providers that actually absorb over 800,000 square feet in 2018.

Based on our experience and that's where we have one of these providers, their customers are small entities and operators that are truly aggregating demand that we could never accommodate. This has been a really good thing. With base rent on leases that are stable it's all about concessions and rent commencement days.

We have and we will continue to use our operating skills and relationships to gain occupancy at market terms and we will do as many 4000, 20,000, 50,000 square feet deals as necessary to feel our availability in the CBD.

The Washington DC region makes up about 17.8% of our total company NOI, down from 21% in 2015 with the CBD at just over 7% of our total NOI so relatively speaking a small portion of the Company's assets.

The Northern Virginia portfolio comprises over 53% although regional contribution is growing and has much better leasing activity due to the more diverse demand days which contains a significant number of government contractors, technology companies and other corporate users.

We have a number of renewal discussions underway including our 492,000 square feet at the New Dominion, which is leased to the GSA as well as the 275,000 square feet tenants in Reston Town Center.

In 2019 and 2020, we will have exposure on our Reston portfolio, as Leidos relocates from their 170,000 square-foot accommodation into the new 270,000 square-foot premises at 1750 and tenants who growth, we were not able to accommodate in 2017 and 2018, we just didn't have the space start to lease.

We are in active discussions with two existing tenants. They are looking to expand their 50,000 square-foot installations to new tenants looking for a minimum of 75,000 square feet of piece and a whole host of 7,000 to 10,000 square-foot users that are focused on our amenity rich environment.

We will be rolling out a number of place making enhancements during 2019 to our Town Center assets as we get ready for the addition of Metro in our Reston price redevelopment which will open in 2022.

Moving West, in LA, we brought Colorado Center to 100% leased and with our limited availability at the Santa Monica Business Park we are focused on early renewals at both properties. With the expected relocation of HBO in December of '20, we have the ability to accommodate the growth of other tenants at Colorado center.

And at the Santa Monica Business Park, we are working on getting ahead of our 2020 expirations. The West LA market had an active 2018 beginning of 2019 as a number of large technology companies expanded their footprint in the area.

This included Google and Facebook and Apple and Amazon, the same name that you hear by the Silicon Valley as well as a number of flexible office operators including new work and spaces and industrial. Rental rates continue to rise and there are limited big walk availabilities in the West LA market.

The story in San Francisco CBD is lack of availability. The vacancy rates are at its lowest levels since the last cycle began after the great financial crisis. There are virtually no direct or somewhat space in the market over a 100,000 square feet other than 50 deals.

The only new construction the first admission development won’t deliver until 2023 at the earliest. We understand there is a leasing negotiation for all over the 255,000 square feet at 633 wholesome the only large addition flat major renovation undergoing the city right now.

A technology company just leased a 150,000 square feet at One Maritime adjacent to Embarcadero Center and the majority of Salesforce Sublet when they moved into our building at Saleforce Tower has been leased.

This Central SoMa plan is under a sequel litigation and will likely delay the ability to commence construction even if the Planning Commission grants the particular site entitlements and allots a plot and allocation. There continues to be significant demand in the market.

Since 2011, more than 50% of the annual leasing has come from the technology companies and the total occupied base of the market has move from 22% tech and 2013 about 15 million square feet to more 37% in ’18 or 30 million square feet, so with double almost more than we could possibly have imagine.

In our portfolio, Salesforce Tower, 535 Mission, 680 and 690 Folsom, 50 Hawthorne are all 100% leased. And Embarcadero Center, we ended the quarter at 91.4% and completed 258,000 square feet of leasing within existing rent in place of $61 a square foot growth and new starting rent of $85 a square foot up 40%.

The lease commencement to run from February 19 through July of 2020, when a new tenants take those action of the 125,000 square feet of EC3 when the existing tenant than vacant. If you include all the space that is either leased but not yet occupied of our office occupancy, it would jump to 95%.

And we currently have another 250,000 square foot under negotiation that could be completed during the first quarter of 2019. If you want a floor space at Embarcadero Center, you’ll probably have to wait until the next delivery of available space in November 30, 2019 when our next full floor not under negotiation expires, a long time.

Last but not least, all three of our Boston markets, the CBC, Cambridge and Waltham Lexington continue to be the beneficiaries of ongoing growth in the technology and the life science sectors along with the very manageable new construction.

The new buildings that have been started have been size to the market with a very little aggregate speculative space. Our 100 Causeway Way project which is expect to open in ’21 is a great example. We announced the start of 640,000 square foot tower with a 437,000 square foot commence.

An existing tenant at the Podium building at 100 Causeway Way picked up 66,000 square feet for expansion and we’re negotiating lease for the final 125,000 square feet.

In Waltham, we started a 211,000 square foot building at City Point with a 110,000 square foot lease and have since leased another 121,000 square feet and have 75,000 square feet remaining. In the last few months, there were additional growth announcements in all of our Boston markets.

In Cambridge a life science company committed to a 900,000 square-foot new series of building, and we signed our 365,000 square foot release for three 325 Maine, which we hope to start construction during the second quarter of this year.

In Waltham, the only significant speculative office development during this cycle has activity that will bring its occupancy to 75%. And in Boston's Financial District, last week State Street Bank committed to be lead tenants in the 500,000 square feet of space at One Congress.

And the remaining 0.5 million square feet in that project and the backfill of their existing location at One Lincoln should be satisfied by other demands. The challenges we have in our Boston portfolio is not just similar at Embarcadero San Francisco lack of space. So, we are focused on future explorations.

In late '17, our tenant at 33 Hayden Ave in Lexington 81,000 square-foot has with a 2019 December exploration made the decision to relocate into Boston.

During the first week in January, we terminated their lease, and signed a lease for all of the states with the life science company that will take occupancy at the end of this year with a 94% increase in the rent.

At 111 Huntington Avenue, we leased two floors one expiring in December 2020 and the other expiring in December of 2021 with an increase of 37% to a growing tenant in that building. And to give you a sense of the changes in market rents.

At 200 Clarendon Street, we leased a 30,000 square-foot full floor for a short-term about a 1.5 year in the middle of 2017, that space became vacant in August of 2018. Late last year, we've negotiated a similar term lease at a 12% increased in rent as it is based.

Rents in Boston, Cambridge and Lexington had strong increases in 2018, along with a decline in concessions and we expect the same in '19. So as I stated at the outset, at this moment, the conditions across our entire portfolio feel very much the way they did in 2018. And I'll stop there and let the call go to Mike..

Great, thank you, Doug. Good morning. As I always said, we end at -- we had another strong quarter in the fourth quarter. Once again, our portfolio of revenues increased sequentially just over to 4% over last quarter and 7% year-over-year.

We also grew our share of same property NOI by 3.4% on a GAAP basis and 7.9% on a cash basis over the same quarter last year. And net rents on our second generation leases that commenced this quarter were up over 11% over the expiring lease, all of these are positive trends.

Our occupancy climbed to 92.1%, which is a 100 basis point higher than last quarter, if you exclude the delivery of Salesforce Tower. We brought Salesforce Tower into the in-service portfolio this quarter at 70% occupancy which dampened our overall occupancy to 91.4%.

Salesforce Tower is a 100% leased, and we expect all of the office tenants will be in occupancy by the end of the third quarter of 2019. We issued a $1 billion green bond with a 4.5% coupon in the quarter and use the portion of the proceeds to redeem $700 million of high coupon 5.78% bond that were due to expire in late 2019.

We booked the loss on debt extinguishment of $16.5 million or $0.10 per share, which was primarily the yield maintenance penalty for paying off the bonds early. This charge was included in our adjusted guidance issued in December. We are now taking care of all of our material debt, maturities through late 2020.

We reported fourth quarter funds from operations of the $1.59 per share and full year funds from operations at $6.30 per share, which was in line with our guidance. Portfolio revenues and management service fee income were both slightly ahead of our plans but they were offset by higher than projected G&A expense of approximately $0.01 per share.

As Owen and Doug described we had a fantastic year of leasing and the fourth quarter was no exception. We signed over 1.8 million square feet in the quarter, including 750,000 square feet in mid town Manhattan.

The vast majority of these leases had no impact on the fourth quarter earnings results, but they will have a positive impact on 2019 and beyond.

In addition to the significant leasing activity in New York City, we also have strong activity in San Francisco and Boston both for new leases on vacant space, as well as the large number of early renewals for leases expiring between 2019 and 2021 where we expect to get increases in rents.

Based on the continued leasing velocity we are increasing our assumption for year-over-year growth and our share of 2019 GAAP same property NOI by 75 basis points at the midpoint to 4.5% to 6% over 2018.

We are keeping our cash same property growth assumption at 4.5% to 6.5% as many of the deals we are tracking are early renewals or new leases that will not commence cash rent until late in 2019 or 2020. As a result, we have also increased our assumptions for 2019 straight-line rents by $10 million to $85 million to $110 million.

In our non-same property portfolio we are moderating our assumption for the incremental NOI growth in 2019 slightly but $5 million at the midpoint of our range due to minor changes in occupancy timing in our development portfolio.

This is comprised of pushing back occupancy by a month or two for some of our office users, as well as the retail space at the hub on Causeway based upon adjusted build out schedule. Generally, our clients are in control of their build out and pay rent on a fixed date.

However, we cannot recognize revenue until they complete their work which is not in our control. We are often able to pick up the difference by continuing to capitalized interest, which you will see in our interest expense assumptions.

We've increased our assumptions for development and management services income to $40 million to $45 million for the full year an increase of $3 million at the midpoint from last quarter's guidance. The most significant change this quarter came from our sale of the TSA headquarters development.

We've entered into a development agreement with the buyer and we earned fees for our development services over the next two years. And lastly, we are reducing our interest expense assumption by approximately $8 million in 2019. We now expect net interest expense to total between $410 million and $425 million for the full year.

The reduced expense assumption is from a combination of the new bond deal and bond redemption transactions in December and a reduction in our projected line of credit usage, primarily due to the sale of our TSA development.

Our capitalized interest projections have remained steady with the last capitalized interest for the TSA development offset by higher capitalized interest for our other developments. So overall, we are increasing our guidance for 2019 funds from operations by $0.11 per share at the midpoint to a new range of $6.88 to $7 per share.

The increase is comprised of $0.7 per share from higher same property portfolio NOI, $0.5 per share of lower interest expense, $0.2 per share of higher fee income offset by a reduction of $0.3 per share of NOI from our developments.

Our guidance does not include any additional acquisitions or dispositions, other than what we included in our press release. We are continuing to see positive trends in our markets, resulting in leasing successes that are driving up our organic growth.

Additionally, our development pipeline is well leased and provides assured external growth over the next several years. This combination of both internal and external growth points to very strong FFO growth at our midpoint for 2019 of over 10% from 2018. Operator that completes our formal remarks, if you can turn it over to Q&A that would be great..

[Operator instructions] Your first question comes from Manny Korchman with Citi..

Just focusing on New York for a second, if you think about Brookfields announcements that goes back at 2 Hudson Yards.

Just wondering if that curtails anything about your 3 Hudson developments whether it'd be your desire to go spec or wait for tenants to come in or if there is any shift in timing for that development?.

So, I'll make a brief comment and join in John Powers, I'm assuming you're on and you can you can add on. So at the moment with the two developments at the Hudson Yards, there is -- in one building, there’s just over 1.5 million square feet and the other building just over 1.2 million square feet of available place.

And if the announcement that you saw yesterday, it's actually true that the Brookfields tends to start on spec that's another 2 million square feet. So, that's 4 million square feet right there. And then obviously, you have other buildings in Midtown Manhattan that are under construction.

I think that we would certainly be looking to have a significant amount of preleasing before we started.

John?.

Well, Doug's giving you the facts there. On our situation, we've been working hard since we closed the deal with Joe to redesign the building and we've done that. We're in a 100% BDs now.

The construction is ongoing on the foundations and we're talking to some tenants in the market, but clearly we need a significant interest from tenants to move forward with the project. We're very excited with the redesign by the way and it's been very well received by the tenants that we showed it to..

The other question I was just looking at sort of new markets and new submarkets you're looking at. Is there anything else out there that you're actively tracking that you could share with us right now..

Manny, it's Owen, good morning. Nothing outside the perimeter that we've described..

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

I wanted to ask on some of the components of your guidance change this quarter from last quarter which includes the higher occupancy assumption.

What was that primarily due to? And also if you could talk about the termination fee where this was coming from and how likely it is you are going to release the space?.

So, the guidance change is obviously we increased our guidance last quarter and we also announced I guess earlier this month that we signed a bunch of leases that Doug spoke of in New York City which is over 550000 square feet. We were working on some of those leases last quarter, but they clearly weren't complete.

So, we were certainly handicapping the likelihood of those things. And I would say, the execution of those leases some of which are starting you know revenue although not cash revenue in the first and second quarter brought up the drive up the bottom line of our guidance because we got those things.

I would say that with a continued velocity of activity that we're seeing in our markets is driving up the high end in the overall guidance range. So those are really the two pieces that are on that are hitting occupancy the increase in the occupancy and the increase in guidance range.

Obviously a little bit also came from interest expense as I mentioned. On the terminations, Doug really spoke about the recaptures both in Boston, suburban Boston, he mentioned one and in New York.

So we're recapturing space that is expiring, a year from now or even five years from now, and we are getting termination payments that will that are driving our termination income guidance in 2019, which is higher than 2018, but were doing that because we have leases that are signed.

So, there may be some interruption in cash rent while that tenant builds out their space, but ultimately what we're doing is we're signing leases now and based and very strong market at strong rental rates that are much higher than the expiring rental rate because we think that we want to take advantage of the market condition we're in..

And then if I can ask on the sale of the TSA developments and the impairment that you took as part of that sale.

Is your view that the market value of this asset will not exceed the cost? And if that's the case, what's really changed since you out of growth of development?.

So, there's a, I would say a lot of financial counting minutiae that's involved in how we recorded the sale of the TSA development. I would just point out two things.

One is that we are guaranteeing completion and we are also entitled to any savings under the contingency line item in the budget, as well as we are getting significant development fees when you include those things along with clinical with our land cost was. This was a profitable development for us from a valuation creation perspective.

And that counting just let us to having to report as the way it was reported..

Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets..

Owen, just going back to your commentary about being a little bit more cautious on how you guys are looking at developments other than kind of higher preleasing targets potentially on some of these.

Are you guys changing at all your yield requirements or any other underwriting kind of items?.

Yes, I wouldn't say that we changed our yield requirements I had pointed to you in fact, the reference rate the 10 year U.S. treasury drop 50 basis points in the last few months. So by keeping our yields flat in essence we increased profit. But I think the answer to your question has a couple of things.

One, as you suggest, you know what kinds of preleasing are we going to require for new developments, and I know everyone wants us to give a precise number on that question and that's not really feasible or possible given that all circumstances are different depending on the scale of the building and the economics, and the velocity in the market, and all that type of thing.

But yes, I do think we will today seek to have even more preleasing before we launch new developments, and also I think it's being disciplined and looking at new acquisitions of both buildings and sites I mean for example, recently we were chasing a site that we were interested in here in the Boston region and we topped out, at a particular value and at least based on the knowledge that we have today, we are not going to win that.

So that would be an example of the increase disciplined that I described..

Yes, Craig, I think in big picture our underwriting criteria have just gotten a little bit more stringent or you thought you might lease up space quickly by elongated where you think you are going to be able to have to provide an improvement allowances or get rental rate increases you might temper those expectations.

And so it just all adds into the formula and so it just makes it a little bit more difficult to go after something that we otherwise might have been more aggressive on a year ago..

And then on Platform 16 just some clarifying points. On the purchase option of 125 bucks a foot, is that on the buildable 1.1 million? Or is that kind of land that they are….

Yes, that’s on the buildable..

So you guys are looking for all like 137 million potentially on that.

And then are you guys the way the co-development is going with a partner are they kind of doing the non-office and you guys are doing all the spend on the office? Or could you just give us a little more color on how that works?.

So this is pure office development, and the group that put it together is staying involved in the development component, and we are the principal capital partner and we will ultimately own 100% of the asset. All being said as Owen described, we are in serious discussions with a capital partner to participate in our interest on a long-term basis..

Have you guys had discussions with tenants? Or your discussions about higher preleasing with this project given the adjacency to Google and everything going on in San Jose kind of require less in your view to go forward or how are you guys thinking about it?.

So let me just answer the question in the following way and then I'll let Bob talk about leasing conversations.

So, the property is an assemblage site and we are literally as we speak I believe, doing surveying work and within expectation that we are going to demolish all the existing structures, do all the relocation of utilities and what we refer to is the enabling work that’s all going to go on over the next six plus or minus months.

Then this is a structure of a series of buildings and they all sit on top of a subterranean parking structure. And we will then make a decision as to when we want to start that subterranean parking structure and how we would phase. And this is a feasible project.

And so, you know no different than when we started our conversations about Salesforce Tower back in 2013. We are moving forward. We are excited about the project and we are hopeful that leasing markets will provide us with a tenant or tenants well in anticipation of our commencing instructions but you never know.

So Bob do you want to just comment on the leasing activity?.

Yes, we had discussions with tenants and we plan to talk to other tenants. I think the important thing to point on the site is it's the only transit oriented site between San Francisco and San Jose that will have both Caltrain and BART access.

BART has actually just started construction this past week where you can provide up to 1 million square feet at a location..

Hey, Doug, it's Jordan Sadler. One other quick one for you, if I could. Your cadence on the New York City in the prepared remarks seemed pretty positive particularly given the asking rents on new development.

Do you expect New York to see an improvement and net effectives in '19?.

We certainly think that net effective rents are not going down and that there will be modest increases in the rental rates and the concession packages will have half blackout..

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

As you guys mentioned, these are some turbulent times with respect to what’s going in DC, given that the government is your second largest tenant, I was just hoping you guys could touch on any specific areas within your portfolio? Do you think could see some disruption because of the shut down and also if you could touch on any possible effect on Fannie Mae as you guys move ahead with their 850,000 square foot build to suit in Reston?.

Ray or Peter do you want to take that..

Well, I’ll start and Peter can jump on. First of all as relates to GSA, one of the great things about leases there, they are long and strong and not related to annual appropriations. So, we have seen actually no change in the current GSA structure as relates to our existing leases.

We have a major lease expiring here in a few months and we feel very, very confident about the renewal there. As it relates to Fannie Mae, it remains one of the most profitable entities in the Unites States government. So, we are very much positive about the outcome of the development. They’re still keeping all those space.

They have the option to take more. They’ll be in our conference room today just to talk about the status of the construction, and we’ll force them ahead, doing very good about the NMA..

Yes, I’d also jump in.

The deal that was referenced earlier in the call at New Dominion is actually what the government agencies that's already exercised their independent leasing authority, and it happens to also be a mission critical location for the government and the buildings are at the highest level of security that’s provided would be almost impossible to replicate in any kind of reasonable timeframe.

So in that regard, we feel very good about the near term exposure..

And we have also mitigated our exposure with the sale of 580 and the presale of GSA. So, our exposure to the government is much less than it was even three or four months ago..

And then maybe, Mike, can you just touch on the Salesforce buyout? How was the 187 million calculated? Or maybe how is that allocated between the buyout of the 5% interest in the property? And any promotes that were paid? And how does that bio affect the yield on your total investment in the property?.

So, Blaine, this is going to be really unsatisfying answer, but we’re in discussions with the City Assessor right now and it's just not appropriate to discuss how the valuation was done and what it was, how all of those sort of elements were figured out, we just can’t talk about..

Lastly, noticeably, the estimated total investment on 159 East 53rd increased quite a bit from 106 million last quarter to 150 million this quarter.

Can you just touch on what change there and is that going to have any effect on the pro forma yield that you guys are looking at?.

So, the reason that the cost were driven up were almost entirely due to the lease that we have with NYU which is a 30 year lease versus what we originally underwrote which would have been a shorter term lease, effectively kind of 15 years would have been what we would have underwrote.

So the leasing commission associated with that and the tenant improvement associated with that are the majority of that increase and that lease officially came out of escrow within the last quarter. So we determine to put that into our budget this quarter because there was uncertainty.

The only other thing that really changed on this, we’re making some enhancements to the retail aspect of the job and improving the design and what the retail environment and atmosphere is going to be that takes the most significant advantage of the opportunity that we have to upgrade the place taking there, so that's a design is driving a little bit more cost into that part of the job, as well.

And but we still expect the project to meet the return criteria that we typically sellout for this type of development..

But just to be perfectly honest about this, this is a place making exercise as we said there is a great incremental investment on the works that we did at $159 to the 185,000 square feet that we release to the tenants that taking for 30 years.

The incremental return on the capital for the food hall and the other "place making experiences is de minimis", and it’s really going to be reflected in the ability to rent space at 601 Lexington Avenue, 399 Park Avenue, and 599 Lexington Avenue, so it's not really -- the yield was not with that result..

Your next question comes from the line of James Feldman with Bank of America..

I'm hoping to get related thoughts on co-working and what you think that tenant base is going to mean for the office sector going forward? I mean we've seem, rework has had a little bit of trouble raising its flash around the capital and we've seen kind of proliferation of different types of approaches to that business.

So, as we -- just kind of an update on what your latest thoughts are and what you think it's going to mean for you guys?.

It's Owen.

Look, we continue to believe co-working I'll call it shared workspace business to be an important sector of the office business it's been, it's been an important net absorber of space, I think in the markets where we operate, the total square footage of this lease by these operators today is somewhere between 2.5% and 5% depending on the city and it has been growing.

We work as clearly the leader by scale, but there are other operators and in fact as discussed on our prior call where we've been doing it some of it ourselves on a small scale basis in a couple of our buildings.

So I think the business has created important new options for customers for individual and retail customers it's a way to get into a community and a high quality space and in many cases, high-quality buildings and from landlords it's aggregated demand that would be otherwise very difficult to leases too. So I think that's been very positive.

And I think for a larger companies it's given them flexibility, we don't see companies -- large companies taking all of their space requirements and putting it into shared workspace, but we certainly see some of them procuring single-digit percentages of their space on a flexible basis to try to manage that -- the space procurement process which can be difficult, when human resource requirements are a lot more volatile than their ability to procure space.

So, there has been a lot of press lately about we work ability to raise additional equity capital that may have some impact on the business.

We don't know yet, but in general, I would say this sector is an important part of the office business, and as we think it's been a very positive and many of the shared workspace companies like we work are important customers of Boston properties..

And Jaime just to add a couple more thoughts, so if we think about our portfolio and how the flexible office operators have impacted our portfolio and the margin we think it's been a positive trends for the kinds of spaces that we have listed them in the places where we have lease that space and at the same time and I don’t think its coincidence we have done more large, long term leasing with corporate customers, call it the last 2.5 to 3 years than we have ever done in our history.

And our average lease rent has actually gone up slightly as opposed to down slightly. So it has not impacted our business at all in terms of our portfolio other than again in those instances where we have done a transaction with one of these operators we think it's incrementally help us in some way shape or form.

In Washington DC its aggregating demand and Embarcadero center it changed the image of a particular space which we use as a showcase to demonstrate to nontraditional tenants how they could use Embarcadero centers infrastructure to change the image of their space at 200 Clarendon St.

we were struggling with convincing people that this was not a attired state financial services building and we did a transaction and then we got a whole host of customers who actually use the flexible officer provider space on a short-term basis while we were building out their space in the building so it was a great shock absorber.

So there are lots of different reasons why this company works. And it is here to stay there are clearly places where all kinds of companies think about how this might be helpful to their portfolios, but as Owen said it is not going to displace the business that we are in.

And we are very comfortable that we can work cooperatively with these types of users in a symbiotic way..

Do you have any thoughts on how much larger the sector can become? I know you have mentioned that kind of less than 5% to most markets..

Well, so I think its market dependent right. I used an example of San Francisco and in San Francisco there just over call it 3 million square feet of space. There is no availability there are no blocks of space.

If they wanted to double in size they would have to take every single block of space that is coming available in the next year two years three years in order to get there and that’s just not going to happen.

Similarly, in Boston it’s a very competitive market and so it's just going to be really, really hard for them to grow in a meaningful way relative to the percentage of the market. So I think it's going to be different market by market.

Bryan, do you any thoughts on that?.

Yes, I think part of it is also identification of product bifurcations. So for example the traditional co-working is different than enterprise leasing in the smaller spaces without the community aspects to it.

So it's almost a totally different product and what's taken place out there is everybody is lumping everything together and it creates some illusions that you probably are not necessary in terms of the size and scope. So a lot of this has to do by defining what the product is.

So as an example with our flex product we don't have the community managers, we are not looking to provide additional services. It's just highly flexible space that’s a shorter-term lease and that's quite different than other products. So a lot of it has to do with their business lumping everything together..

And then, we have seen a lot of large leases from tech and media companies in the last couple of years.

What gives you comfort that the space that they will use and we are not seeing excessive expansion here?.

So Jaime, in comparison to 1999 to 2001 year in the dotcom era, the companies that are taking down the space are what we refer to in our small circle is tech tightened and these companies which have multifaceted businesses, multifaceted growth aspirations, and they are hiring people at enormous rates.

And so, they are filling their space as quickly as they can get it. And interestingly what is going on is that they are looking to find those locations that are closest where the talent is and where they can attract the talent.

And just as again sort of to talk about Downtown San Jose, the reason that side is so interesting to us today and remember that we do have another site in Downtown San Jose that we have owned for 20 years and we haven’t gotten going yet.

So, this was the double down in Downtown San Jose, is that the idea that companies are going to put their employees that are living in the city of San Francisco, put them on coach boxes and have them travel down to 280 or the 101 for up to three hours a day of the commute it's just becoming really tired.

And so having the ability to have a transit oriented location, where they can get on the Caltrain Bullet stop in San Francisco and be down in Downtown San Jose in about an hour is a very, very attractive preposition, and Google has also made a commitment to build housing and retail and also some other things.

So, it was going to become a really interesting Downtown. And our view is that the market has really changed down there. And so what was once going to be an 800 plus thousand square foot either office or residential site at the Plaza at Almaden, we are now permitting for a minimum of 1.3 million square feet and could be larger than that.

The parking ratios have changed. The use of trifurcation has changed and we just think these are the types of locations where companies are going to go.

And you’ve obviously seen Amazon and Google and Facebook make tremendous piece of the base acquisitions across their marketplaces, not just in Silicon Valley, but in Los Angeles and in Austin and in Boston and in Washington DC.

And we just -- we’re comfortable with these companies are long-term growth organizations that are going to be very aggressive about hiring talent to feed their businesses..

Your next question comes from the line of Garrick Johnston from Deutsche Bank..

How was the entitlement process for new CBD development currently shaping out by market? And I was wondering if you had experience any deltas notable we're sharing?.

So, do you have half hour 45 minutes, that’s how long will take to answer that question. Why don't I let Bob Pester talk about what’s going on in San Francisco.

Obviously, with our site at Fort Harrison and at the CBD site, and then I'll let Bryan talk about, what’s going on at Back Bay in Boston, Boston because those are sort of the two entitlement opportunities that are in front of us right now..

In San Francisco, the Central SoMa plan was proved and immediately there were four lawsuits filed which all are CEQA land suits, which pretty much will put everything on hold unless they are settled or someone could elect to go ahead and be subject to whatever happens in the lawsuits.

San Francisco continues to be probably one of the most difficult markets in the United States to get entitled in, and other than the 6 Central SoMa sites that are called super sites. The Giants Mission Rock in Pier 70, there is not a lot on the horizon as far as feature development in San Francisco of any significance..

So in Boston, our project in the Back Bay is probably most significant on the commercial side. We do have some residential components to it and we see that to be at least the couple more years of permitting. But not having to do with anything other than that’s the process and it’s a complicated site over a transportation hub.

So the Back Bay has limited amount of foreseeable, will say product line coming on in the commercial side. And that goes for Cambridge as well. We are seeing as it was noted earlier a real discipline amongst the developers who have states that are permitted and all seem to be conditioned on preleasing as well..

And just last one for me. It was interesting to see the land acquisition at Carnegie Center in Princeton.

I was wondering, if you just share some further thoughts on the suburban addition? And I'm assuming this would be a preleased type of development perhaps life sciences, anymore inflow there would be interesting?.

When Boston Properties bought Carnegie Center 20 years ago, we bought the buildings and we got plus option to purchase the site. And over the years, we have purchased a handful of the sites and done build the suites for customers. That option expired last year.

So we were faced with the decision on whether to let the option expire or to exercise and purchase all the land part. So we access -- we obviously elected the latter. So we do have all this land, we acknowledge Princeton is not our fastest growing market. That all being said we do have some uses for the land.

So for example, right now we have a customer parking need that we're going to satisfy with the -- with one of the lots that repurchase, we anticipate our ability to sell some of these individual paths which we will do, but perhaps most importantly, our perspective is our investment in Carnegie center is more valuable with the buildings and the development opportunity, unified rather than as they are being separated and that was a key driver of the division..

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

So two questions, first, just sort of continuing on the Princeton theme. Mike, you spoke about getting exciting, fully exciting Annapolis Junction. Princeton, it sounds like you may exit as well or you may keep.

But as you outline your guidance for this year, is there a certain amount of dispositions that's in their meaning if you fully exited Annapolis Junction or anything else, does that impact your guys ability to deliver on your growth this year? Or is there some potential that dispositions could disrupt what you guys have laid out?.

Alex, I am going to answer the former and I'll let Mike jump in on the latter. So, we have no current plans to exit our Princeton investment. We do think purchasing this land for the reasons I just outline on the last question, we think our investment in the whole project is more valuable by owning the land, but we have no near term plans at exit it.

That all being said a week intend in 2019 to continue with our non-core asset disposition plan and again we haven't finalized our exact list this year, but I would anticipate that it will revert back to levels of '16 and '17, which would be and accounted to $250 million maybe $300 million sales in 2019..

And Alex, as reflected in guidance as I mentioned in my call notes. We haven't included anything additional other than what's in our release for asset sales within our guidance. So some of what were selling as Owen said is non-core some of it is land parcel that we don’t think we're going to develop, so we really don’t have a meaningful impact.

Than a lot of the other non-core stuff you're talking about is kind of suburban stuff that is not that big. So, yes, some of it does have NOI that would come out so we're going to get cash and we would deploy that cash so that would help and it would reduce our line of credit usage.

So there is kind of both sides of it and without knowing exactly which assets there are we think it was inappropriate thing to do that kind of put up ex amount in the guidance. We would rather just say there is nothing in the guidance and give us time to think kind of things we are thinking about.

But I don't think it would have a meaningful its not going to be huge, its not going to have a meaningful impact..

And then the second question is sort of continuing the co-working theme. Dock 72 initially takes occupancy in the second quarter of this year, still only 33% leased. It's one sort of outlier in your New York portfolio. Presumably, you want to lease it up before assessing what your options are with it.

But as you stand today, what are your thoughts on keeping that versus selling it as I say, it stands out versus the rest your portfolio in New York?.

So Alex, we have no plans to sell Dock 72. Our current focus as you suggest is certainly leasing the asset and that’s what we are focused on now..

Your next question comes from Tom Catherwood with BTIG..

A quick question on New York and then Reston; In New York, Mike or I think Doug, I appreciate your commentary as far as leases over $100 a square foot. You mentioned though obviously the slower demand when it goes over $120 a square foot.

What are you seeing as far as interest in and options for your vacant space at 767 Fifth?.

So, John, do you want to take that..

Yes, well, we think the market last year was really hot 32.4 million. We haven’t had a year like that in New York since 2000. So, this is really a lot of momentum. And notwithstanding the equity market jitters at the end of December, having talk now to a number of brokers and looking at the market, things still do you rolling along.

So, we are optimistic about what's happening at GM, but we do have competition coming on place during the year. 425 Park is going to be a great building and 550 Madison the top floors are going to be good.

But we think the product is still outstanding the best in the market and we are starting to work on those blocks that are coming up in '19, '20 now..

And then, John, maybe one more on the GM building, anymore clarity as far as the timing of the ins and outs for the retail portion?.

Yes, we are working very hard with Apple on the Apple Store, and we don't have a date, but certainly that date will be sometime in the first half of this year. And we are working also with Under Armour because Apple is the temp store now and wants to stay there and we work things with Under Armour.

So that will work for them although the Under Armour still will be delayed, resulting as the result of the Apple staying in the temp store. And we do have some Cartier left of course and we do have some interest in that space, and we think just something there in the first half of this year..

And then just quick one on Reston. Doug, I think you mentioned a place making project down in the town center and making some improvements there.

What were you referencing to? And do you have a sense of what that cost impact could be?.

Peter, do you want to take that?.

Sure, so, this has been going on for probably in terms of design and rebranding of the lower year. And in the next quarter or so, we’re going to start the actual physical improvements. We have done a few minor ones.

To a lot of the public around, through the Town Center there’s a few been there, there is a number of larger public open venues, the pavilion area around the fountain et cetera. And I would say over the course of probably the next 24 months, we’re looking at investment that’s probably plus or minus in the $3 million.

We’re also in the Fountain Square buildings which the original office building already underway with redoing those lobbies which were ready for the refresh that is 25 plus years old. So, I hope that answers your question..

Your next question comes from the line of Daniel Ismail with Green Street Advisors..

Just a bigger picture question on the utilization space by your tenants. One of your peers in some recent years articles have suggested that the justification trends of the last few years may have over short the mark.

Curious what are you seeing in your end portfolio with respect a new or renewal leases? And how you guys are planning for new developments in terms of space per employee?.

So, why don't start with Bryan and then if any of the other guys want to chime in, they should do that..

Yes, one of the things that ties with the question about how clients are using their space earlier, was that the sophistication with these clients are working with the great examples of Verizon, is incredible versus let’s say the year 2000 when you had growth from tech companies that were gabling down space and really didn’t have an idea of their utilization, their growth rates et cetera.

What we’re finding across the board is the sophistication of the users is very knowledgeable of how they are use that, how much space they’re going to use it, and its far more accurate in terms of their needs.

So because of that we can shift that also been a great discipline that’s been added to the market and then you add that with the shock absorbers that Doug mentioned in terms of how they are using some of the these shorter term space. I think it's really healthy..

Bob, you might want to describe how everyone has been building out Salesforce Tower, right. Because it’s the newest sort of CBD building that we have and how their "program" has worked..

The build out varies the tenant on the type of the tenant that I can say in the case, Salesforce it's all been seeding for the most part and they're about a 160 square feet per employee. I know that they have relaxed their requirement as far as trying to get tighter than that.

Initially, I think they were targeting a 120 when Ford Fish was there renting the real estate department..

Okay, that’s helpful.

And maybe just staying in San Francisco, have you guys noticed with I know it's only about a month in 2018, but any impacts on proposition fee either on the tenant side or near and if your ability to push through that increase on new leasing?.

Yes, I would respond that. We haven’t seen any pushback from tenants on that and we haven’t seen any tenants that leave the market based on -..

We have time for one final question and that question is a follow-up question from the line of Manny Korchman with Citi..

Thanks for taking follow-up guys.

Just Doug or John, could you just run through your rent growth expectations throughout the different submarkets of New York?.

John, you want to start?.

Rent growth in submarkets of New York. So, first, when we say, we don't have a lot of space to lease. So, if you are talking about our buildings, there is only a few building -- few pieces of space that we have to look at.

I think will do well at GM and will have some rent close there clearly the block we have left at 399 there will be wrinkles there and that's probably states that over a $100 a foot. 159 is all leased and I guess when we look at the base of 510, I would say will definitely have rent growth there over the deal we've had in place..

Okay, I think that completes all of our questions. Thank you everyone for your interest in Boston Properties..

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