Welcome to Boston Properties' second quarter earnings call. (Operator Instructions) I would now like to turn the conference over to Arista Joyner, Investor Relations Manager. Please go ahead madam.

Good morning, and welcome to Boston Properties' second quarter earnings conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. In this 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 www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website. At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward looking statements were detailed in Tuesday's press release, and from time to time in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements. Having said that, I'd like to welcome Mort Zuckerman, Chairman of the Board; Ed Linde, Chief Executive Officer; Doug Linde, President, Ray Ritchey, Executive Vice President and National Director of Acquisitions and Development, and Mike LaBelle, Chief Financial Officer. Also during the question-and-answer portion of our call, our regional management team will be available to answer questions as well. I would now like to turn the call over to Doug Linde for his formal remarks.

Thank you, Arista. Good morning, everybody. I hope everyone's having a nice summer. Mike LaBelle is going to discuss our second quarter results and update our earnings outlook for the remainder of the year in a couple of minutes. But before we turn the call to him, I want to spend a few minutes discussing the state of our real estate markets, give you some comments on tenant demand and the credit markets, and how all these issues are impacting our business prospects. As I make my remarks, keep in mind that Boston Properties' strategy, and we've said this before and we will say it again, is to operate at the top end of the real estate markets in select areas with barriers to supply. The location and the leasing composition of the portfolio really matters. And, while we do very well in good times, on a relative basis, we do even better in more challenging times. We have been in the midst of a dramatic de-leveraging of the financial world for more than a year now. The crisis in the national housing markets and the corresponding dramatic markdown in housing values continually reinforce the magnitude of the leverage in our financial system. The concerns surrounding the government-sponsored entities and the losses from residential lending at the regional banks are just the latest incarnation of the same problem that has existed for the last year. The US consumer continues to be adversely impacted by higher fuel costs, higher food costs and in addition to seeing the statistics showing up in foreclosures, we are now seeing delinquencies in credit card loans, home equity loans and auto loans. We don't see any immediate catalyst for optimism. In general, the challenges that the consumer is facing and the losses stemming from the financial…

Thank you, Doug. Good morning, everyone. Despite the economic headlines that Doug just discussed, to date we have not seen evidence of the economic slowdown in our reported results. This quarter, our second generation leasing statistics showed a healthy 17.75% increase in second generation net rents, led by the Boston and San Francisco regions, and our transaction costs were slightly lower than our historical trends, averaging $22 per square foot. Our mark-to-market grew significantly this quarter with the addition of the GM Building to $13.65 per square foot, and excluding the GM Building, stayed constant at $9.25 per square foot. When we go through our projections in a few minutes, the one substantive change that we have made was to extend the lease-up of our expiring and vacating space. But with rollover for the remainder of 2008 of only 1.9%, the impact on our future estimates is minimal. Since the General Motors Building is in our results this quarter, I thought I would spend a few minutes on a discussion of the various accounting impacts, and an explanation of how it will flow through our income statement and appear on the balance sheet. The major accounting impact comes from the application of FASB 141, Fair-Value Accounting. FASB 141 requires us to allocate the value of an acquisition and its components, including the value of the leases, land, building, tenant improvements, leasing commissions and debt. A significant component of this is the marking-to-market of each lease. With the average lease in the GM Building over $90 per square foot below today's market, the FASB 141 assessment results in a large mark-to-market adjustment of over $1 billion. This adjustment will have a substantial impact on our earnings, as it is amortized on a straight-line basis, and recorded as income over the life…

Good morning. This is Mort Zuckerman. Thank you all for joining us at this particular time. As you have heard from both Doug and Mike, Boston Properties remains very well-positioned in the markets it is in, and in its place in the markets which is at the upper end of the commercial real estate market. And, just as the upper end of the commercial residential market is doing much better than the rest of that residential market, so too, can it be said of the commercial market, and, we have found this to be the case for literally decades, and this is why we have focused on this particular dimension of the market. And in markets were there are supply constraints. So we are very comfortable with our market position and with our marketing position of the assets that we have, and have continued, we believe, to do well. For example, in occasions where there are tenants who want to sublease space, we have been able to work very effectively with them in finding sublease tenants. And in terms of acquisitions, of course, we have made a major acquisition involving not just the General Motors Building, but three other buildings which we expect to close in the next 90 days, that we believe will position us for excellent growth in the years ahead. These were buildings that were purchased at costs that are well below, well below replacement costs on a per square foot basis, and well below current market rents. And we believe, as these rents roll over, and you've heard the numbers on the General Motors Building itself, where they are estimated to be over $90 a foot under the current market, as these leases roll over, we believe we will continue to gain from that experience and…

Okay. Operator, we've got quite a few people in the queue, so why don't you start the Q&A please.

(Operator Instructions) Our first question comes from the line of Anthony Paolone with JPMorgan. Please go ahead.

Thank you, and good morning. Looking into the second half of the year, it seems like more than half of your expirations are in Boston. I was wondering if you could comment on how those leases are coming along in that market.

Got to give me a second to look at my statistics here.

I think it was 250,000 of office expirations.

There are, I would say, of the 250,000 square feet, the largest is a 50,000 square foot requirement that is in Waltham that we are expecting to do a renewal on. The second largest is two leases at the Prudential Tower that we have an agreement, we just haven't signed the lease yet. So they haven't rolled through our statistics. That is 40,000 square feet. And the third is with our building in Cambridge where we have the Massachusetts Institute of Technology in two floors and Nokia in one floor and we know Nokia wants to stay. We know MIT is probably going to leave, and we haven't quite decided whether or not we are going to try and free that building up for repositioning or we are going to sign a lease with Nokia on a longer-term basis. So those are the three largest, and that makes up 120 of the 246. So the next after that is about 17,000 square feet, and I just don't have enough clarity on each individual deal.

Okay. Then, Doug, can you talk about the dip in occupancy in San Francisco again? I didn't quite understand the move out and where the tenants went, that sort of thing.

So, last quarter, we had Marsh Mac in 180,000 square feet at EC3, as well as an 80,000 square feet in EC4, because they were physically occupied in both spaces. In the first quarter their lease expired, but they still remain in occupancy. In the second quarter, they are fully out of EC3. So at the end of the quarter, that space, which is about 100,000 square feet is now vacant, and they still remain in the EC4 space, which is really the primary driver of the occupancy decline.

Do they intend to move out of that as well?

No. That was a new 10 year lease. In fact, what we did was we took two groups. We increased one of the groups, and one of the groups actually moved to another building. So, we had two separate groups that made up 100,000 square feet. One of the groups grew to 80,000 square feet, the other group actually left the portfolio.

Okay. And then just question on developments. Can you talk about how you look at starts over the next 12 months to 18 months and the likelihood of doing spec development and where it might be?

I think that speculative development is highly unlikely in the next 12 months in this company's portfolio. If we have a tenant that's prepared to make a commitment, for example, in our property in Weston our property in Waltham, I think we would gladly start a new building, not with it being 100% leased but with it being 60% or 70% or 80% leased. If Princeton University decided they wanted to do another building in Princeton, we would certainly start a new building for them. But, I think that doing something on a speculative basis in any of our other suburban markets is almost out of the question, and we certainly aren't going to start a new building in New York City, given where we are with 250 West 55th Street until that building is committed. And we are starting, and have started on a speculative basis 2200 Pennsylvania Avenue, but Ray can comment right now on the activity there. It's been pretty feverish. Ray?

Yes. I would say that the interest we received on that building was probably the strongest we've ever received in any urban building, especially in the Washington area. We've got a letter of intent pending for about 200,000 square feet from a major law firm, and three or four other secondary leases anywhere between 40,000 and 80,000 square feet. All of this has taken place just within the last 60 days since breaking ground. We are very, very optimistic about both the long-term office and the retail leasing success there.

Okay. Thanks.

Thank you. Our next question comes from Michael Bilerman with Citi. Please go ahead.

Good morning. Irwin Guzman is here with me as well. Doug, I wanted you to balance some of your comments, balancing sort your economic outlook, you are talking about topping out of rents, increases in sublease space, extending the lease-off, and juxtapose that, with what appears to be a much, much bigger appetite to go out and do deals. I think you said you are very anxious to put out capital. Even Mort's comments, I think, would solidify that. And I know we're in a capital constrained environment and having the balance sheet to be able to do it, but I think there's a lot of equity players out there that have capital. Why be so aggressive and why be so anxious to go out and buy and not thinking that there may be a competitive environment that would drive prices higher?

Mort, do you want to start with that?

Yes. You have to have enough confidence in yourself, as we do, frankly, in terms of our ability to make judgments as to where the long-term values will be in the markets that we are in. We may not win every deal that we go after, but there will be somewhere we will. If you look at the whole situation with the General Motors Building, when virtually everybody who knew anything at all about real estate knew what a great building that was and, frankly, what a good buy it was, nevertheless, we were the ones who were able to go in there and hang in there and bring it to a close. We are not going to win every one of the buildings that we go after; but we think, even though there are good players, but we have a lot of confidence in our ability not only to acquire buildings but to then manage them and manage them well, and maintain the opportunity to maximize their value. So we believe, we bring to the table a combination of both capital and experience and management skills that gives us a serious long-term advantage. Now, others may feel the same way about their capacities, but so far, we have done very well in our acquisitions as well as very well in our developments. And we have that dual capacity to continue to build the company, and we have, we believe, as good a management group to handle both of these challenges over the long haul. And we challenge anybody to be our superior, and we're perfectly willing to be in that kind of competitive environment that's the nature of our economic system. We just think that this is a unique opportunity, particularly to buy those assets where, if we manage…

If I can just, it's Ed Linde, if I can just add one thing to that, to answer that question, which is I hope we didn't give the impression that, willy-nilly, we're going to go out and use our capital to buy anything that comes on the market. The key, of course, is to use that capital to buy the right assets that come on the market. And just as we did, and I hate to keep coming back to the GM Building as an example, but it is a good example. Just as we bought that building with a rent roll or a rental profile that minimized short-term exposure, we saw long-term value creation opportunity. That's the kind of asset that we are going to use our capital to buy. An ordinary asset or an asset that has great exposure, unless it's priced significantly lower than maybe some of these sellers think they can get, we won't take a look at. So don't think that we're going to just run out there and buy everything in sight. I hope we didn't give that impression.

Is there are things that you are working on today that are more pressing, or this is more of the next couple of years?

Well, I don't think anything is pressing. We are not forced to use that capital. We want to be opportunistic in using that capital. And it will be in the next 12 months or the next 24 or the next 36, depending upon the circumstances.

Michael, it's fair to say that our underwriting was pretty conservative over the past two to three years when we were looking at assets. If anything, it has become even more conservative, given what we are seeing in our own markets and what we prospectively believe to be a slowdown in overall business activity. And so, I do not think you are going to hear us saying that we are buying things based upon spikes in rents or significant changes in occupancy in any kind of an asset that is out in the marketplace today. I think you can be confident that the same rather conservative perspective that we have taken on underwriting is going to remain, the core principle for anything that we look at going forward.

Well, I think that is the worry, right? The worry is that there is so much going on in the economy and with fundamentals that at some point, going into these assets even with good embedded growth today, that there is some risk down the road. I just do not know if you were looking at it from an IRR perspective and how that has changed with the backdrop of increased credit cost, and increased risk, that you are certainly seeing on the fundamentals side and how you value that in looking at some of these assets.

Well, we do take that into account, and we did with the recent acquisitions, of course. We have been through a lot of these cycles in the past, and we believe we know how to deal with them in terms of assessing what we can buy, and what we should buy and how to assess their economics and their financing. As I tried to say before, we have always been long-term players and we do not have to maximize our short-term earnings if we can see on an IRR basis the kind of returns that we really believe are attractive, because the long-term, sooner or later, or the medium-term, sooner or later, it turns out to be the short-term and we have got that approach since we've been in business, before we were a public company. We think we have followed it since we were a public company to the benefit of our shareholders. We intend to follow the same basic standards and the same basic business philosophy that has, in a sense to energized our activities for the last 40 years. You are raising the same critical points that we talk about all the time when we look at different assets. We look at what the financing costs are and what they will be. We look at what the rents are and what they might be. We look at what the replacement costs and what they might be. We look at what the short-term rollover is. We also have to make a judgment, for example, as to whether or not what we are in, in the way of an economic decline, and we have been in an unprecedented economic decline and macroeconomic condition, and we take that into account. Now, nobody can be perfect in their judgment about the future. You have to allow for the various contingencies, but even within that context, when we looked at the IRRs at the General Motors Buildings and the other related assets, we came to the conclusion that we would be able to deal very well with whatever the contingencies were. If anything, we believe that our numbers are conservative and that is to say, we intend to top them on the upside, but, we're very happy if we come out where we believe we would come out. Your points are very well taken, but believe me, we address those points constantly in our dialogue inter alia and it is an exchange that goes on all the time. There are some people within our group who are very conservative about these things and they make sure that everybody knows what those points are. And some of those people indeed are on this phone call.

Good morning. This is Irwin Guzman. Can I ask about the decision to own 60% of the macro portfolio versus your prior expectation to own up to 49%? It sounded like you were aiming at owning less of the other three assets. Can you talk about what changed and whether it was driven more by your desire to own more or by your partners' desire to own less?

It was driven entirely by our own desire to own more. And I do not think I am violating any confidentiality of our conversation with our partners if I tell you that they wanted to own more than they were ultimately permitted to buy. So, to be honest with you, if it were up to me, I frankly would have bought the whole bloody thing, 100% for Boston Properties. That's how good I think these assets are. We have very good partners, and we think that we can use this as a platform to develop additional investments, co-investments with them. I believe they have the same view of it. However, it was entirely our decision and frankly, if I were to tell you all the conversations, I think my colleagues know that I wanted to go even further than that. However, we decided, based on the opportunity that we believe comes out of developing good long-term relationships, which has always been a pattern of our business practices, we thought we could do this with the co-investors that we have and that this, in the long run, would also be beneficial for Boston Properties. So it was absolutely our decision. I can tell you that it was a decision that was not as well received by our partners, who would have liked to have a much bigger play, both of them would have liked to have a much bigger equity interest.

Thank you for answering all the questions.

Thank you. Our next question is from the line of Ee Lin See with Credit Suisse. Please go ahead.

Hi, can you please explain a little bit more about the FASB 141? I see that in your projection you have $138 million for the fair value leased revenue. And my question is, does that assume that expiring leases will be renewing at current market rents, or does it mark-to-market even the leases that are not expiring? Or to ask it another way, to realize that number, do you just have to wait until the leases expire and then raised to the current market rent? Or, does it mean that you have to bring every single lease to the market rent, even if they are not expiring now?

This is Mike LaBelle. It is a non-cash item.

Yes.

FASB 141 dictates that you mark the leases to the current market and recognize the difference between what you are receiving and what the market rent is on an amortized basis over the life of that lease. So, for each lease that we have, we are recognizing the difference between the actual rent on the lease and the market rent on the lease, when we are only collecting the actual rent on the lease.

So, even for the period where the lease is not expiring, you will

That is correct.

Okay. So there is no way to actually realize that value?

When the lease expires. Presumably, we will capture that growth then, plus whatever additional growth in rents we see over the term of those leases. So many of those leases are long-term in nature and that is stating what the current mark-to-market is and over the next five to eight to 10 years, we anticipate that rents will continue to grow in midtown Manhattan, and when those leases actually roll, we will be able to capture even more upside.

I understand that part about when the leases expire, you will be able to mark that to market, but, are you also measuring the difference between the rent even for the period where the lease is not expiring yet?

Yes, when a lease is not expiring, we are recognizing the current market of those leases.

Okay, so you actually will not be able to realize that part unless you break that lease right now. Correct?

That we are really recognizing currently.

Okay, thank you.

We would not be able to recognize it in cash unless the lease were broken now.

Yes. Okay, thank you. That's all.

Thank you. Your next question is from Jay Habermann with Goldman Sachs. Please go ahead.

Good morning, here with Slone as well. Just coming back to New York City, can you just comment, I know you gave a couple examples of space being sublet in your portfolio. But, I'm just trying to get a sense of how much additional sublet space we could see perhaps in the near-term and potential impact on either market rents or vacancies.

Jay, so the example I gave was that, we had a conversation with one of the brokers that we work pretty closely within, we said, okay, so here is the list of the latest from the last call, 12 months of, at least publicly announced layoffs, RIFs, whatever you want to call them, in the financial services sector in New York City. Okay, so let's talk about all of those companies and what they've actually put on the market today, it was 20,000 jobs and approximately 1.4 million square feet. And that included a portion of the space that is being what is the right word, reconstituted or recombined with the JPMorgan and the Bear Stearns merger. The question really is how much more there is going to be and how further those cuts are going to go, in terms of the sort of core businesses and those investment banks. That is a really hard question to answer. I think the one thing that we have always recognized is that it takes capital for a large corporation to avail itself of excess space because they do not typically lay off departments, they lay off people within various areas of their institutions. So to bring people together and to restructure the way they are operating is not an insignificant capital expenditure. So many times, it is almost not worth putting the market into the sublet market in order to deal with what the costs associated with that activity are. Now, the real issue is, those people are clearly not in the market for additional space and the lack of demand from the financial services players, I think, is almost more of an impact than what the sublet space that they are putting on the market is doing. Clearly, if JPMorgan puts…

Right. And on West 55th, you mentioned briefly in your comments there was no additional leasing. However, can you just give us some updates in terms of just interest levels and are tenants simply just looking at other options now in the market?

We are continuing with a negotiation with a large tenant for space in that building and there is great interest in that space. It is a complicated transaction, and it has not yet come to fruition, and it may or may not come to fruition. However, behind that tenant are several other large tenants who have also expressed interest and with whom we have been somewhat slow to deal with because of the fact that we would not have enough space. If we make one deal, we do not have space to accommodate the second or third deal. However, there continues to be strong interest in that building, and it stems from the fact that, well, first of all, it stems from the fact that it is a great building. We are building a building that is totally consistent with what Boston Properties does. On top of that, if you look around, and we have said this before, there just is not a lot of new space in the midtown market and despite all the talks about subleased space, there is not a lot of space available in large blocks and there are tenants who are looking for new space in large blocks. So, the interest remains strong. It is not a stampede, but we are very comfortable about the leasing prospects for that building, which will not become available until 2010.

Yes, this is Mort. Let me add one other comment to that. What operates in the marketplace, not exclusively, but particularly at this point? If you look in midtown New York, there are very, very few buildings that are going to be coming on stream over the next four years. There is really one in Time Square, and there is the building that we are doing, are really the only two buildings in the marketplace that you can really to and count on. Now, you have a number of tenants, even though the market may be, in overall terms, somewhat weaker because of what we all know the world of finance is going through, nevertheless, you still have a number of tenants who are continuing to grow and who are in buildings where they have no expansion space. And the result is, they have to look for new big blocks of space. This is not something that you do overnight, people plan a year or two years ahead. And there are very few of those big blocks of space that they know can be tied up at this stage of the game. Generally speaking, you often need new buildings to find that amount of space. If you need 500,000 square feet of space today, you had to look around, and find it, it would be very difficult to find. There are tenants who need that kind of space, and that is where we have, and in a sense, because we are, I think, by far and away the best building in terms of the building and the best building in terms of location that is coming on the market over the next three to four years. We have the opportunity to get those tenants who need to move, and who need to plan in advance. We have already seen that with the first tenant, which is a 221,000 square foot tenant. They simply could not find the expansion space in the building they were in. They wanted to move to a good new building and they found one. This is the same thing that is happening for the other tenants that we have been talking to. So that is what notwithstanding the overall market, not that it does not affect the atmosphere of the negotiation and it does have an effect in that way. We will and are as aware of that as anybody. However, you do have a real marketing advantage when you are basically the best new building coming on stream over the next four years.

Right. And just to be clear on acquisition strategy, I know there were some questions earlier, but is it really the function of two items? Number one being, you expect cap rates could move higher. And number two, should we expect to see more acquisitions in the joint venture format, now that you have partnership, especially with this Middle East capital?

Yes, to both. Yes, we do anticipate that we are going to want to continue to develop this partnership, which is one of the reasons why we went ahead with them in the first place, and we think that they understand and know that we are very, very familiar with the markets that we are in and that we can manage the buildings well. We will be able to manage them to maximize their values and our values. So that is something that will undoubtedly affect everything. However, believe me when I tell you this. We are going to remain committed only to the purchase of buildings that are in the very high end of the commercial office market in any one of the markets that we are in. We believe that those still remain the best long-term values, and we are going to focus on that. Those opportunities are frankly going to be there simply because of the conditions that we have already covered and I am not saying we are going to be able to buy any of them or a lot of them, but we are certainly going to be in that marketplace.

Great. Thank you.

Thank you. Your next question is from the line of Mitch Germain from Banc of America. Please go ahead.

Good morning guys. Ray, just circling back to D.C., I know there is a significant amount of supply expected in the near term. Can you just talk a little bit about the fundamental picture in terms of demand trends?

Well, the D.C. market is like the majority of our markets. It is very much a project-by-project or a submarket-by-submarket analysis. If you look for the larger blocks in the CBD, there is really a very short supply. We made a presentation to a 200,000-square foot user last week who was looking at 2200 Penn, and that group was just shocked at the number of, or the lack of options that were available in the 2010-2011 timeframe for first-class office space. Whereas, if you go to a secondary market like Noma, there is abundance of options at a very low cost. So, again, just the constant theme of the barrier of entry to the high-end, trophy level space in all of our markets is really the theme of the story today. That theme is evident out in Northern Virginia. I think, we talked extensively about Reston and the fact that we are approximately 90% committed on 900,000 square feet, in a market they are struggling, really speaks to the flight to quality by many of our tenants. So, Mitch, it is very hard to generalize across the board on what we are experiencing versus the experiences of others.

Great. And last question, Doug. Should I interpret from your comments you are taking a more measured approach to the second development in Manhattan, basically not going to start it without a pre-commitment at this point?

I think that is a fairly accurate statement.

Yes, but I'd also think that just the timing of that assemblage and putting all the pieces together and finalizing it we always knew it was going to be available after 250 West 55th Street. So I do not think there is anything unusual in that.

In terms of available from the start standpoint, or in terms of delivery standpoint?

Exactly, exactly.

Okay. Thanks, guys.

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

Good morning. I just wanted to follow-up on one of Michael's questions earlier. I think he asked you if your IRR hurdle had changed and I hadn't heard if you said yes or no, or if you actually had given an IRR hurdle via non-investment.

The clear answer is, absolutely, it's changed. Given that there presumably is more risk associated with transactions today, given everything that we have just talked about, and the inputs into those IRR calculations clearly have changed as well. I can not tell you what the number is on any particular investment because there is really a summary of what the conditions of the particular asset are, what the leasing profile is, where it happens to be, what the cost per square foot is, vis-à-vis replacement cost. A building like the GM Building may have an IRR of X, and a building that is being built in suburban D.C. that is fully leased to the GSA for 15 years, may have a different IRR associated with it. So, there is no single answer. All I can tell you, the numbers are certainly higher than what they would have been 12 months ago.

Also, what about from three months ago? Is GM the new benchmark, and are you raising your IRR hurdle, given that you have already put or committed $4 billion worth of your capital through the GM investment and the new developments you have started over the last couple of quarters?

We are very satisfied with our projection of IRR and the GM Building, for example. If the GM Building came on market at the same price with the same IRR tomorrow, I suspect we'd buy it. In fact, I know we'd buy it. So, if that is your comparison you are looking for, I think that is the answer. I also would point out that our IRR hurdle must have been not as low as a lot of other people's IRR hurdles during the time when there was a lot of trophy properties trading for prices that we considered to be too high. So, I do not think it is as dramatic change in IRR hurdle as it is a change in the marketplace and a change in the underwriting.

Also, I think that in fairness, we should point out that when we thought that the cap rates for the sale of buildings got to levels that, shall we say, represented what, to repeat a phrase, irrational exuberance, you will note that we were considerable sellers. We sold over $4 billion of real estate because we thought the market was so frothy. At those prices we were sellers. At the prices that we think we can realize today, we're buyers. So there is going to be that kind of swing in the marketplace. If the marketplace ever gets to be the way it was a year and two years ago, we will undoubtedly look to sell some of our assets. So we are not blind to the opportunities to sell as well as the opportunities to buy. I think we have put ourselves into a position, as a result of the sales that we did make, and the financings that we did make, to be potential buyers in what we think is an opportunistic environment today for people who have capital and have the management skills to run and lease these buildings.

What do you view as your window of opportunity to put capital to work right now? Do you think you are going to have another six months or three years or?

Oh, no. Who the heck can predict what is going to go on here? We think it will go on, if I had to make a judgment, we think it is going to go on for 18 months to two years. However, who knows? Anything could change the economy, I mean, if oil prices crack to below $100 a barrel, believe me, the view of the macroeconomic potential of the United States will change. And I do not know what hell though, I did not think that oil was going to get $140 a barrel, and I think its god damn insanity that we put ourselves in that kind of a position where we do not exploit our own natural resources, and are forced to send hundreds of billions of dollars abroad to pay for our oil prices. However, that is a whole other issue. You have to read the editorials in US News to find my views on that. Now, I do think that by and large, I have to say that we have always been aware of the business cycle, and particularly the real estate cycle. That has been a big part of everything we have ever done, in terms of when we have done our financings, when we started buildings, when we started buildings on spec, when we have bought buildings, when we have sold buildings. We think we have done a pretty damn good job of making the judgment as to what is the best time to buy and what is the best time to sell. I will say, if you look at the record over the past three years, I do not know of any other REIT that was as active in the sale of really good assets. We sold the building in Time Square. We sold 280 Park, we sold a number of other buildings and we are very happy that we did. We're very happy that we are in the market now as buyers rather than as sellers because we think there is extraordinary long-term opportunities for people who have the capital, and we have the capital and understand what the hell we are doing in this whole thing. So, all we can say is, we hope that our record justifies what we have done in the past and we hope that our record will be justified again by what we do in the future. We are still long-term players in the real estate business, and only in a certain segment of the real estate business. We think we can continue to be very, very active players in the next short while, more in acquisition than in development, because of the nature of what's happened. However, we are still going to follow our basic business philosophy.

That is helpful. And then just lastly, Doug or Mike, it might have been you, I think in your commentary, you mentioned that the mark-to-market ex-GM, I think, it was flat sequentially at $9.25 a square foot.

That is correct. It is $9.25 a foot.

Okay, I just wanted to confirm that. And so, is that in your expectation, leveled off here and so hit it something of an inflection point and will likely stay flat? Or, is this sort of a temporary, a function of something else that happened during the quarter?

The way we do our mark-to-market is pretty simplistic, which is we look at what our existing in-service rents are and we have a, "this is where we think the mark-to-market would be on that space and so, to the extent that a piece of space rolls over, and it's been released at a" higher rent, it comes out of the mark-to-market, or the mark-to-market on that piece of space obviously declines. And so', it is based very much on the portfolio composition. So, it changes on a quarter-to-quarter basis, based upon what is actually rolled over. However, we still think it is a pretty significant number.

I think, getting back to what Doug said previously, given what is going on in the overall economy is we are not necessarily assuming that rents are going to be increasing in the near-term. We think they are going to stay relatively flat in the near-term.

Do not tell that to any of our tenants.

So this could level off as you continue to capture some of that rent growth through the renewals?

Correct.

Thank you.

Thank you. Our next question is from Ian Weissman with Merrill Lynch. Please go ahead.

Yes, good morning. I was wondering if you can help me reconcile something on the GM Building. Two weeks ago or a month ago rather, when you put out your initial press release, you said that the GAAP return was going to be about 7.7% in 08 at the midpoint. I think you said in-place rents were $85 billion to, or mark-to-market was $170. Today, in your release it says that the GAAP return is 10%, which would imply that in-place rents would go up an additional $30 a foot or so, so let's say almost $200 a foot on average for the building. What is the change in your GAAP return expectations from just over the last month?

We actually did not change the expectation for what the market rents are, we just went through the analysis of the FASB 141. It has everything to do with the FASB 141 obviously, which is a very, very complicated, in-depth and thorough analysis that has to be done on a lease-by-lease basis. With the additional time that we had to go through this analysis, worked very closely with Price Waterhouse Coopers, our auditors in determining what the right FASB 141 numbers were. We came up with a revised estimate, and we are very comfortable with the estimate that we have given today.

So, if you said that market rents are going up, I think you said $90, what is sort of average in place today at the GM?

The average in place at the GM is about $90. If you look at the supplemental, it says it is about $98 per square foot, but that is based upon the existing measurement of the space. Upon re-measurement of that space, if you look at each space and re-measure it, it is more like $90 a foot today.

$90 going, so the mark-to-market would be $180 on average for the building?

Yes.

Let me just make a point here about re-measurement of space. As you probably know, for those of you who live in New York, you probably notice every year as you look at the buildings that they get bigger by about 2% every number of years. It is quite an interesting diet that these buildings are on to help them grow. However, the fact is that the Real Estate Board of New York does measure space and there is a standard and the loss factor went up by 2% from 25% to 27%. And when we got into all of that that was an important thing in terms of being able to measure the difference in rent. Rent is not just rent, rent is rent times the number of rentable feet, and the number of rentable feet went up by 2%, which is not an insignificant amount.

So the 200 basis points of return expectation, additional 200 basis points has more to do, or mostly to do with the re-measurement of the building, more than anything else?

It has everything to do with the computation that was done, the calculation and the complicated nature of that calculation that we have just done a better job of analyzing and calculating that number and come to an agreement on that number with our auditors.

And does it have anything to do with the retail space at all? Or this is all just focused on office?

It does not. It is really the underlying calculations.

And just so you understand, the percentage rent is not included in the FASB 141 because it is not contractual.

Right. Okay. All right, thank you very much.

Sure.

Thank you. Your next question is from John Guinee with Stifel Nicolaus. Please go ahead.

Thank you. A couple of quick questions. Mike, is it appropriate to say going forward you're going to earn about $0.14 to $0.15 FFO per share from the FAS 141 each quarter?

Let me just quickly do the math. So, our share of it is $20 million.

Well, just take $138 million for 2009, times 60% divided by 142 million shares.

That is about $0.14.

Each quarter? Are you going to be reporting FAS or FFO, ex-FAS 141?

No. What we do, and this is all to do about Securities and Exchange Commission and Reg G and FD, and every other different way that the SEC has handcuffed us is, FFO is a defined term based upon what NAREIT has defined as FFO. That is what we are going to report. We do a painstaking job of breaking out our non-cash items in our supplemental, each and every quarter and we will continue to do that on the whole portfolio and explicitly break out what is going on all of our joint ventures, which is also done in painstaking detail. However, what we are going to report is what we have to report, which is funds from operation as defined by the white paper.

Okay. Two other quick questions. How do you think, given that NAV will become more important, given the issues with FFO that's been discussed for the last few minutes? How do you think we should look at your land position? Do you think its worth more or less than book value? Then, second, you halted the dividend increases for a couple of years while you sold $4 billion worth of assets. Do you have any thoughts on your dividend policy going forward?

I will answer the first question, which is, we believe that our land position is worth and well in excess of what its book value is. We also think that company is worth a lot more than its total book value. So, what book value really means today is anybody's guess. With regards to our dividend, the Board talks about the dividend periodically. We generally talked about it sometime in the second half of the year. We look at our capital needs. We look at our expectations on our payout ratios. We look at what our other opportunities for capital are and we do not have a stated specific policy on dividend increases.

Great, thank you.

Let me make a comment too, about NAV, which tends to get into the world of generalities. I want to be very specific about it rather than anything else. Again, consistent with what we have stated and have performed on for all the years we have been a public company and, indeed, all the years we have been a private company, there is a difference in value for the prime properties that we own in the marketplace as compared to many other properties. There is a difference between the General Motors Building and 599 Lex and 399 Park and the Prudential Center and the Embarcadero Center in terms of the way they are valued in the marketplace, in terms of the rates at which people will buy these properties that have a recognition of what we frankly have experienced, which is that they do much better in good markets and they do much better in bad markets or challenging markets, as the phrase goes. I am not sure that the street recognizes that particular difference, but it is something that, frankly, we have experienced in everything that we have done. It is a relevant consideration in terms of the valuation in the marketplace of NAV for the kinds of assets that we have compared to the kinds of assets that many other firms owned.

Okay, thank you.

Thank you. Our next question is from Lou Taylor with Deutsche Bank. Please go ahead.

Thanks. Doug, you alluded to about $500 million of additional capital in the second half. What type of capital are you contemplating?

This is Mike speaking. I talked a little bit about a mortgage loan that we are working on currently that is just under $400 million that we are working on for one of our Embarcadero Center assets, which is Embarcadero Center 4. So that would be a large chunk of that. We do expect to raise and have projected to raise another $150 million beyond that. It would also likely be term capital. So it could either be capital raised in the unsecured bond market, it could be capital raised in the convertible debt market, it could be capital raised in the mortgage market. One other thing, just to note on the convertible market, that we did not talk about in our notes, was the accounting impact of the change to the convertible market that will take place next year and just to make sure that everybody's aware of it and we put it into our press release, is that there is an accounting pronouncement called APB 14-1 that affects the accounting for all convertible debt. The result of this change, if it were to occur in 2008, would have been an additional $0.13 to $0.14 per share of GAAP interest expense, net of incremental capitalized interest, just to make sure everybody remembers and is aware of the effect of the convertible debt.

Okay. And then second question, Mike. You had referenced some return figures for the three other New York assets that are the pending acquisitions. Can you just go over those numbers again?

What I said was, the annualized GAAP NOI yield for the aggregate was expected to be approximately 7.5%.

All right. Do you have a cash figure?

We really can not give additional details on that at this time until after we close on the transaction.

Okay. And then just what's the expected closing timeframe?

We are working through actively, the assumption of the three loans that are associated with this. We would expect to have closed these properties sometime in August, I would say.

Great. Thank you. Thank you. Our next question is from Michael Bilerman with Citi. Please go ahead.

Hi, it's Irwin Guzman here. Can you just let us know whether the partners on the other three buildings from the Embarcadero portfolio will be the same as the ones in the GM?

They will be. It is an identical structure.

Thank you.

Thank you. Our next question is from Michael Knott with Green Street Advisors. Please go ahead.

Good morning, this is actually [Matt Wocash]. I am just curious on the financing side. If there was an assumable debt on GM, what kind of interest rate would you have expected to pay on the debt?

That is one that we probably are not the most appropriate answeree. The challenges associated with answering that question are the fact that there is no commercial mortgage-backed securities market functioning today, and you are talking about a $1.6 billion mortgage. The theoretical answer is simple, because you basically say, well, a normal mortgage with a, "debt service coverage ratio of blank priced in that current environment with regards to how life insurance company lenders might look at this or how the foreign banks might look at this on a swap rate basis gets you to a number, but the real challenge is that that market is not deep enough to do a transaction of that size, subject to not having" the deal completed already. Now, Deutsche Bank is in the process of selling its notes, or Deutsche Bank, Wachovia, Lehman Brothers and UBS are in the process of selling the notes on the loan. And when they sell those notes and they complete that transaction, I think we will have a better sense of where the market is today. However, that, again, the transaction closed in June and the sponsorship associated with the transaction prior to June was very different than the sponsorship today. So that, in itself, has a very meaningful impact on how the pricing of the transaction might actually be effectuated in today's market.

We did do an analysis of the debt valuation as part of our FASB 141, and as Doug said, the size of the loan creates some issues. However, we looked at what we were seeing in the marketplace for similar senior financings and for similar mezzanine financings. For those estimates, we estimated roughly 6.5%, which is approximately 250 over for the senior portion of that loan. Then, the mezzanine portion of that loan we used roughly 7.5% to value that for our FASB 141.

Thank you for your speculations.

Thank you. And at this time we have no further questions.

Okay. Thank you all for being patient enough to listen to all the questions. We realized that there were not any other calls that were occurring at the same time, so you obviously had a little more time to get to us than you might otherwise. And we appreciate your forbearance there. We will speak to you again. We will put information out as quickly as we can when we get to the closing table on the other assets in Manhattan and update our guidance based upon those transactions at that appropriate time. Have a nice summer, and we will speak to you again in the fall. Thanks.

Ladies and gentlemen, this concludes the Boston Properties' second quarter earnings conference call. You may now disconnect. Thank you for using ACT Conferencing.