Welcome to Boston Properties Second Quarter Earnings Call. [Operator Instructions]. At this time I would like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Good morning and welcome to Boston Properties second quarter earnings conference call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with the 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 Wednesday's press release and from time to time in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements. Having said that, I would like to welcome Owen Thomas, Chief Executive Officer, Doug Linde, President, and Mike LaBelle, Chief Financial Officer. During the question-and-answer portion of our call, Ray Ritchey, our Executive Vice President of Acquisitions and Development and our regional management teams will be available to address any questions. I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Arista. Good morning, everyone. As we have done in prior quarters, I will provide an update on how we're viewing the economy and its impacts on our business, our resultant capital allocation approach and progress and some high-level remarks on the quarter. Doug will then provide an overview of our operations followed by Mike who will wrap up with a more detailed financial summary of the quarter. In particular this morning we intend to highlight specific investment decisions we have made and the resultant tenant activity which will have an impact on our 2016 and 2017 results. So starting with the environment, economic performance in the U.S. continues to unfold the way we have described in previous quarters. Economic growth is steady but modest as first-quarter U.S. GDP declined 0.2% but is forecast to be a positive 2.4% for all of 2015. Unemployment has dropped to 5.3% at the end of June but the underemployment rate remains stubbornly high at a little over 11%. Economic growth has translated into office net absorption for the second quarter in the U.S. of approximately 15 million square feet and 1.1% of stock for the last year. Technology and life sciences driven markets continue to lead the pack in terms of positive absorption. Office construction continues to increase as well with 2.1% of current stock under construction versus a long term average of 1.9%. The capital market landscape has remained fairly benign as well. The 10-year U.S. Treasury rate has risen approximately 30 basis points since our last call but remains at a historically low level of 2.3%. We and market consensus continue to expect the Fed to increase rates later this year which has stoked cap rate expansion fears and driven capital flows out of REITs, $4.8 billion from U.S. mutual…

Thanks, Owen. Good morning everybody. My commentary on the general market conditions in our four core markets is going to sound really pretty consistent with what we have described in the last few quarters. Boston, both the suburbs, the city and Cambridge, New York City, San Francisco they are all really healthy markets and they are all characterized by strong demand coming from new economy companies although there seems to be more and more [indiscernible] type users as well accompanied by stable supply characteristics and it is all resulting in improving real estate economics which I think are flowing through our numbers as you saw in our second-generation statistics this quarter. And then DC CBD continues to work through its densification issues in the relatively modest amount of new demand generators there and then Northern Virginia really continues to be a story of both strong and weak markets. The good news is we predominantly are in the strongest markets. As I discussed the operating portfolio this quarter, I think I'm going to spend some time providing some specific expectations on sort of some of the larger moving parts in the portfolio, the major vacancy upcoming rollover and discuss some of a pretty meaningful property-specific investment and leasing decisions that we're making right now all with the goal of foreshadowing our 2016 same-store portfolio. I hope this is going to provide a pretty good backdrop to the earnings guidance that Mike is going to provide for 2016 in October. Our overall leasing activity in the second quarter dropped off a little bit from the first quarter but was really pretty much in line with the average that we have been hitting for each second quarter for the last 10 years which is about 1 million square feet. Again, the second-generation leasing…

Great, thanks, Doug. Before I get into our earnings and our projections, I just want to spend a minute on our balance sheet. We continue to have strong liquidity. We have $1.3 billion of cash. Owen covered that our development pipeline has grown, it has grown to $2.4 billion with about $1.3 billion remaining to fund so we continue to have all of the capital raised to fund our current pipeline. Additionally over the last couple of years, we have utilized a portion of the cash raised from our asset sales to pay down debt. We're currently operating at a net debt to EBITDA that is now in the mid-5s. This is significantly below our more typical run rate in the 6.5 to 7 range and provides us with enhanced flexibility to fund additional investments with debt. The combination of debt repayment and the delivery of higher-yielding developments funded partially with asset sales has resulted in lower balance sheet leverage and that is despite paying out nearly $1.2 billion in special dividends in the past two years. We've also been focused on our future debt maturities and we have engaged in an interest-rate hedging program to lock in the current interest rate environment. So far we have hedged $550 million of forward starting 10 year swaps targeting the refinancing of our $750 million mortgage on 599 Lexington Avenue which is prepayable at par in September of 2016 and our $1.6 billion mortgage on the GM building that can be prepaid at par in June of 2017. We have an additional $1.2 billion of mortgages expiring that we currently forecast refinancing in late 2016 and early 2017. We continue to monitor opportunities to accelerate this financing which could occur earlier in 2016 or even in late 2015 and could result in…

[Operator Instructions]. Your first question comes from the line of Tom Lesnick with Capital One Securities. Your line is open.

I just wanted to quickly just talk about leasing CapEx for a second. It looked like it just a little higher in the quarter. I was just wondering if that was an issue of timing or what is really driving that?

Most of the leasing CapEx is really driven by the makeup of the portfolio so to the extent that we have more urban longer-term leases generally it goes up. But we have typically averaged somewhere in the neighborhood of $30 plus or minus per square foot on a consistent basis on an average basis for the portfolio and there is nothing that occurred this quarter that was significant.

I think if you look at the lease terms they were a little longer so our weighted average cost per lease term was like $5.39 I think which is in line with what our range typically is. And I think the renewals were a little bit lower than typical. Again it is just a makeup of whatever is happening that quarter so since we had more new leases versus renewal leases the costs were a little bit higher.

And then just switching gears to the build-to-suit opportunities in DC, it looks like one of the projects I think it is a 550,000 square foot project that was in final-round bidding, something was expected to be announced here in the next month or two. Just wondering if there is any progress there at 1006 Sixth Street or if you can comment on that at all?

So those are two different projects. The one that you were describing I believe was the requirement for the GSA to do the TSA. So Ray, you can comment on that and then the second one is whether we have a tenant for 1001 which is the building in the CBD.

So the TSA unfortunately has been caught up in the morass of GSA and while we expected it to take place in the second quarter, we're still awaiting the final award. It is a very competitive process but we have put forth a great offer and a terrific building in Springfield and we're cautiously optimistic that when they finally make an award that we will be under heavy consideration by the GSA. As it relates to 1001 Sixth, we're also in a very competitive process there with a major corporation in DC. We're still in discussions with that group. We know that it has been narrowed down to two or three finalists. We believe we're one of those two or three. We have designed a great building, offered them a very competitive economic package and again we're cautiously optimistic about hearing something positive there as well.

Both of these projects are effectively 100% leased so there is no speculative risk associated with any available space.

And then is there any update on the potential corporate relocation to the Wiehle Avenue site?

Well, we're in discussions with another corporation that we're under confidentiality with that is considering a site near the Wiehle Metro. Again that should be forthcoming by the next call if not sooner. It would involve us building a building there on their behalf and would involve both a land sale and a fee structure. But again we're not able to announce neither the terms nor the tenant at this point in time.

And then now that The Avant is going through really its first season of lease roles, just wondering operationally what the renewal rate is and how you guys are faring on renewal spreads?

The turnover rate is -- Peter, correct me if I'm wrong -- I think 30% and I believe we're achieving a premium over the competition of between 10% and 14% and that includes the stuff in Tyson so it has been spectacular.

Those are both correct.

The next call is from Manny Korchman with Citi. Your line is open.

Maybe if we just look at sort of the repositionings, redevelopments that you guys spoke about. How much capital do you need to commit to those projects to get them sort of to where you want them to be in 2017 and onwards?

So the capital has already been committed and it has been spent at the Hancock Tower other than obviously the rollover leasing that we will do. The project at 601 really has not been a fully vetted yet but it is probably somewhere in and around $100 million. We will also be doing a repositioning at 399 at some point in 2016 and 2017. It will be a repositioning light. John would probably describe it as an image change as opposed to a repositioning. And then the project Mike described at Tracer Lane -- or sorry, at Reservoir North is about $25 million, as Owen put out there. And the work that is going to go on at the General Motors building at the retail I think in large part will be based upon the existing tenants and most of that capital will come from the users as opposed to from us.

And if we stick to the projects that you outlined, a dipping or dragging 2016, how much of a recovery of sort of lost revenues or lost NOI do you expect in 2017 from that same pool?

If you are asking if there is a markdown or not I think there is a dramatic markup in every case. So we will get more than 100% of what we're losing in those rents. I think the only piece of space in the portfolio that is rolling over in 2016 and 2017 where we're a little bit tight on the mark to market is the low rise at 399 where right now on a cash basis, we're getting about $90 a square foot from Citi. It is actually lower than that on a GAAP basis because of a straight line rent and it is the last five years of the lease but John, you can comment on this. I think that we hope to get high 80s to low 90s on that space and higher on an average basis.

I think that will work out. We already have a couple of very good leads on that space and we're working very well in conjunction with Citi. They may be able to exit part of that early and we're in discussions with a specific tenant now for a portion of that. We do have a challenge, Doug mentioned the below grade space. It is 100,000 feet there and we will be working on that.

Maybe my last one for Owen, when you think about your acquisition pipeline or opportunities, how do you think about what you would do on balance sheet versus with a partner?

I think acquisitions today of existing leased buildings -- pricing is aggressive. That is why over the last couple of years we have been pretty active sellers of property. The building in Washington that we just announced at a little bit over $1000 a square foot is the best example. So the way we're thinking today about acquisitions of again new existing leased buildings is in partnership with Capital Sources, some from the U.S., some from outside the U.S. where we would make a significant coinvestment but we would enhance our return through compensation that we earn from applying our real estate skills whether it be managing the building, leasing the building, providing capital improvements or whatever is required.

Your next question call is from Jamie Feldman with Bank of America Merrill Lynch. Your line is open.

Can you talk a little bit more about the leasing demand for some of the space you are planning to backfill in 2016, 2017? Specifically the bigger blocks in New York and Boston?

I will let Bryan talk about Boston and then John can talk about New York.

One of the things that Doug mentioned earlier was the condition of our supply side in Boston. And one note that we're watching is our competitive set, those buildings that we really compete against on a day-to-day basis in each market is below 6%. And in Cambridge as an example, it is actually sub 2%. So we have got really, really limited supply in terms of who we're competing with on a day-to-day basis versus the whole greater market. But we have actually seen a 3% drop in the CBD market as well in terms of vacancy. So the absorption has been really quite good. We have got good job growth in all sectors. I think the surprising zone to us has been the financial industry that Doug mentioned. We didn't anticipate seeing call it stabilization and job growth especially with the smaller firms on the BC side. So we're seeing it in I think every category. It is not just the tech sector anymore or the biotech sector that we had earlier call it in the recovery of the market. The other side that has been quite surprising is the demand side in the Waltham market. Doug mentioned that we have done two deals with shoe companies. There is companies out there that are growing rapidly and it is all based on original shoe industry and the brands that are growing out there and it is really being perceived as a wonderful place to grow a company right now.

Just to give you some specifics, Jamie, so the big quote unquote holes in our portfolio from an occupancy perspective right now our 100 Fed and at the Hancock Tower and I think I described that we have got literally more demand than we can actually find space for. So we're actually taking space back from tenants and restacking 100 Fed to deal with the 180,000 square feet of availability there. We're in active discussions with tenants on the low rise portion of the Hancock Tower and again based upon what I said about Cambridge as well as the attractive nature of that space, we feel really good about the prospects for that and the pricing that we're asking. I will be brutally honest with you, we have known about the vacancy at the top of the building for the last couple of years and we have yet to lease any of those floors but it is a terrible showing. On the other hand, we're asking for pretty big rents. I mean the rents that we're achieving at the top of the Hancock Tower are starting in the low 80s and higher. And so the pond that we're fishing in has relatively few fish and so we're being patient about that. But we're very confident that they will come by and that we will be able to lease that space and that is why I'm saying that I believe we will do some leasing in 2015 we will do some leasing in 2016 but we may not have revenue produced on that space until sometime in late 2016 or early 2017. And those are really the blocks there. John, do want to comment on New York City?

Yes, there is not a lot of space so I'll make my comments very brief. 250 is going very well and we have a lot of traffic at the top and we have some term sheets out now. So I think that that has been very well received in the market. We will get some space back from Wiehle. We already have interest in that space, we already have a very nice proposal on a big block part of one floor. We talked about 399 before. Certainly the Towers space, the base, the X Morgan Lewis or existing Morgan Lewis space is not a concern at all in this market, we already have a deal on a big block of that. Doug mentioned that we're doing some significant work at 399. We're tuning that up now with our marketing package. I think the building needs a little bit of loving care and money and we're going to do that and we have done that in a very careful calculated way. So our marketing on that building will really start with images and renderings, etc. in September. But as I said before with regard to the low rise, we have already been in discussions with Citi potentially on getting back perhaps one of the floors or more a little earlier and to target that with some large tenants we're talking about.

If I could just mention one other thing, we will be adding something that is going to be pretty spectacular at 399 where the Citi auditorium is now on the top of the 13th floor. We're going to put a pavilion there and it will be a green space, it will have a green roof, it will be outdoor space, it will be pretty spectacular and we will connect that with the 14th floor when the lease expires there in 2017. I think that will be a very big enhancement for someone that wants a conference center on that space, a reception on that space. And because of the elevated situation in the building, this may be too micro but Citi had a couple of private elevators. We would be able to connect those directly to the low rise floors so that is, we're very excited about that.

Some additional color on Boston, this is Bryan Koop, I cannot remember a period of time when we have had as much call it discussion and activity with our existing customers about growth. It is everything from small growth 5000, 10,000 square feet to even large chunks of space, 50,000 to 100,000 square feet. But our existing customer base is where I think we're going to see a good bit of our absorption.

Okay. I guess just on New York in terms of the big block demand, I mean you guys sound pretty comfortable you will be able to lock in tenants for both 601 and 399 when that time comes?

601, the only block that we will have at 601 will be in the low rise building, that is 145,000 feet. And we're working on a repositioning of that. If it works out the way we want it to, I think that will be a very unique offering in the market in terms of the location, in terms of the outside amenities and what we want to do there. But more on that later. The block at 399 I already spoke about, we already have some interest on.

Just to reiterate what I said in my comments, Jamie, so we don't have places to put Citibank right now physically and we want to relocate them out of that low rise block so that we can reposition and redevelop it and so our guys are creatively looking to figure out ways to take some space back that is currently rent producing and move Citi into that space so that we can actually do this work which is again as I said, we're looking to create vacancy so we can put the capital in to reposition the building to ultimately dramatically enhance the concourse area, the atrium and this low rise space which has a dip in 2016 and 2017 but it is going to be fantastic for the asset as well as for that corner where we have 399, 599 and 601 in a couple of years.

And I guess just back to the question on working with a partner to maybe expand the portfolio. We have got the EOP trade in the pipeline, would you be interested in going to a new market?

Jamie, we're always open and considering new markets. In the markets we would like to be in, I don't think the pricing issue is much different from what we have been describing about our core markets. Also I would point out I think our move into Brooklyn is somewhat of a new market for us albeit in New York City.

Your next call is from Brendan Maiorana with Wells Fargo. Your line is open.

Maybe Owen or Doug, so just on the Dock 72 development project there, I guess you guys have a substantial prelease there for one third of it but it is a development project, it doesn't deliver it looks like until maybe late 2017 or early 2018. And it is more of an emerging submarket as opposed to the typical BXP establish submarkets. Does this investment and development project suggest that you guys feel really good about the economic cycle over the next few years?

I think as I mentioned in my remarks and I have been mentioning over the quarters, we do feel the economic recovery though it has been modest, it has been steady. And we have been getting positive absorption of office space as a result and if you look at where tenant demand and where the real net absorption is, it has been for it the technology, life sciences and other creative tenants and there are districts in major cities throughout the world that are becoming increasingly acceptable to corporations particularly in the technology area. And so we could go city by city and identify new areas that were atypical office locations and I would say Brooklyn is in that category and if you look at what is happening in Brooklyn today, the rent growth that exists, the transit avoidance that Brooklyn provides, we think it is going to reflect tremendous growth for us in the future. So again, we're increasingly making investments if you look around the portfolio of buildings in our core markets or in related core markets that are designed to be attractive to the whole technology, media and life science industries.

I think that is the gating issue which is as we have looked at the Manhattan market, we're very comfortable with our portfolio in midtown Manhattan and the tenant customer that we're pursuing for that portfolio and the growth that that customer is seeing. And we've talked about it ad nauseam before and our ability to lease even large floor plate spaces on Park Avenue that were once headquarters for the universal banks and there are other types of users for that. But we have also recognized that there is a group of tenants that had migrated first to Midtown South and now they are migrating some to the West side, some downtown where many of those employees are coming from Brooklyn and where we're able to build a brand-new building that has all the attributes and the quote unquote cool nature from a physical perspective of what you can get in a building that you could find in Midtown South and others and do it at a much more affordable price than you can achieve today in the same types of buildings and closer to the demographic of where those people actually live and the commuting patterns. And so it is not predicated on a dramatic improvement or continuation of a boom in the economic cycle as much as it is a recognition that this is the reality of how users want to be locating their requirements in the new world of user demand that Manhattan is now seeing.

And then just with respect to outlook on asset recycling, so I think your guidance for the year is $750 million of dispositions. I guess you've -- maybe $200 million is closed year to date, you have got the 5059s which is going to be more. How are you thinking about dispositions for the remainder of the year? Could that guidance number, could it actually come out much different than that number? How should we think about maybe dispositions relative to acquisitions because my read of your comments about potential JVs or what have you maybe seems like you are a little bit more optimistic that you could close an acquisition versus prior commentary?

To answer your question on the dispositions as we have been saying, our target is 750 and we have done 377 so far this year measured as our share. I think we still feel that the target that we provided is roughly accurate. We have some additional targeted sales that we're considering. We hope to accomplish them and that will result in something around $750 million. I don't see a big break either way on that. On acquisitions, it is very hard to target acquisitions and in fact we don't do that. What we do is we look at investments that we think are in terrific markets that are great properties and we selectively pursue them and if we're able to accomplish the acquisition on economics that make sense for us, we will move forward and if not we don't. So we're out there, we're looking at things but I don't think you should interpret anything from our remarks that we're more likely or less likely to do any acquisitions before the end of the year.

Your next call is from Vance Edelson with Morgan Stanley. Your line is open.

So more specifically on Dock 72, can you comment on the terms and the discount if you would characterize it as such that someone like a WeWork requires to make a 20-year commitment to a fairly large block versus the $60 per square foot that I think you mentioned you hope to get when you lease the more conventional way?

Well, WeWork brought a lot to the table to this collaborative effort and my now long experience dealing with ground-up development and major buildings, the anchor tenant always gets somewhat of an advantage deal and WeWork did in this case. But the other issue is WeWork took primarily the base of the building which will in most cases rent for less and we're comfortable with their terms and it has been folded into our pro forma. Finally, let me say that they do have options and the options that they have will be at a different price than they paid for their initial take.

And when you say they are bringing a lot to the table and you are referring to them as a codeveloper, just to be clear, could you expand on their involvement? Presumably there is no financial commitment it is just planning and advice so of speak given their experience with collaborative space, is that a good way to think about it?

We're going to have significant amenities space there. We're going to have a very interesting food offering [Technical Difficulty] we will have a basketball court, we will have a lawn for our different activities. We have conference space, we have a very, very large wellness center and they are curating all of that on our behalf under an arrangement. So we think that that is going to add something. They are very good at doing this. And we think that also their input and impact to the development is going to be a positive in terms of other tech tenants and when they look at WeWork, many of them think they are like-minded and want the same things and I think they have been very, very successful doing a curation of different parts of their member base, dealing with parts of their member base.

And then just sticking with the Navy Yard in general, the transit avoidance that you mentioned notwithstanding, one of the concerns we hear is that the subway stops are not particularly close. So do you have any comments on future transportation or mass transit enhancements that might remedy the situation especially given the possibility of more development there over time? Or do you picture the employees living so close that that is how they are avoiding mass transit?

Certainly there is a move to, as Doug said -- to Brooklyn as a choice to live for many of the TAMI workers. That is a clear trend that has been going on for quite some time. And if you drive around Brooklyn, you probably see as many or more cranes there than you do in Manhattan and most of that is residential. So certainly that is a part of it but clearly a big part of that is going to be dealing with what I call the last mile issue. So just to put this in context, 70,000 people worked in the Navy Yard during World War II. They all got to work, they all went home and most of them used subways. The Navy Yard is within one mile of about six different subway lines. So the question that -- the challenge we really have is to solve this last mile issue because where those people walk the last mile, our creative workers probably don't have the time or want to allocate the time to do that although a lot of them will bike and I think biking is part of the answer here. But we will run two shuttle services. They will be reliable, efficient and very tech friendly. We will put these together in collaboration with WeWork and the Navy Yard and we will run those two locations, one on the G train by Washington Ave stop and one between the A train and the F Train. And these trains for example, you get to the A train, the first stop is the Folsom Street in New York plus these trains go out into Brooklyn to a lot of places where these people want to live. So we think we have a last mile problem. We know it, we have studied it and we're going to have a very good solution that we think is going to work very well.

And then just one last question shifting gears, down in DC it sounds like a lot of your decisions these days are driven by your long term prospectives. So could you comment on how the CBD's strength or lack thereof may have played into your decision to sell 505 Ninth or would you characterize that decision as one that is more long term in nature and would have been the same even if DC had made a major step in the right direction in the past year?

I will take a crack at that. It is Ray Ritchey. The specific on 505 Ninth Street was really a concern and a respect for our partnership. We have a 50-50 partnership there with two families that have generational concerns. We looked at the point in time both in the cycle of the building and the cycle of the market and we felt it was best to advise our partnership to take it to the market and see what we could get. And we're going to net a value over 1000 square foot. We're still strongly committed to the CBD, Washington DC. The successfully have at 601 Mass I think demonstrates the depth and breadth that the market is still there. Our ability to retain tenants in our existing buildings and attract new ones while we do have vacancy, we're still all-in in the CBD in Washington DC.

I can also add to that as we said in the past on dispositions, I think more or less fall into a couple of different categories. One, assets that we would consider non-core going forward and others where we frankly got we think a very attractive price relative to the economics in the property. And this deal given the pricing that I described we felt it was an attractive opportunity for us to raise some money.

And to be fair to your question, we have sold a lot of assets in DC. But I think the gating issue for us has been when you sign a 20 year lease in DC with 2.5% or 3% increases, you have effectively created a long term bond and this is exactly what the sovereign wealth fund and domestic pension fund advisors are dying to own. And there is not a lot of churn in these assets that we can do on a going forward basis until those leases expire. And interestingly while we have had the success of moving tenants within our portfolio in some of our other markets or within buildings, in DC interestingly enough because of the long term nature of these leases, we haven't really done a lot of that. So when we look at our portfolio and look at our portfolio as to what is most salable, it hits the needle on the head and it is the kind of assets that are exactly what are most desired in today's capital markets.

Your next call is from Craig Mailman with KeyBanc Capital Markets. Your line is open.

Maybe just talk about San Francisco a little bit. It sounds like you have some good activity at Salesforce Tower but 181 Fremont is still last I heard vacant and then Park Tower looks like it is going forward. I know the completion dates are a little bit different for the three assets. But can you talk a little bit about how that is affecting tenant conversations and potentially rent growth in that couple of block radius?

First off, 181 Fremont, it is all lower floors that they have available and they are much smaller floor plates, they are 14,000 square foot range. So although it is competition we don't see it as great competition for the floors that we have available at Salesforce Tower. Block five, not going to deliver until probably 2019. It has all the trailers and construction activity for the Transbay Terminal right now. I know they keep saying that they are going to deliver in 2018. I just don't see how that is going to happen. Again, that is a smaller floor plate building and it gets smaller as the building rises. It is a nice building with outdoor decks but it is probably going to lag us by a year and a half to two years. Although it is competition I don't see it as major competition for us as well. I know Doug mentioned on Salesforce Tower that we have got good activity. We're actually exchanging paper with several tenants right now and the tour activity is as good as I have ever seen on a building under construction.

And then, Mike, I know you had mentioned maybe doing some debt repayments earlier depending on what the prepayment is. Could you just walk through kind of what pieces of debt are potentially kind of 2015 repayments and kind of what you're NPV analysis or cutoffs would be to do that in 2015 versus wait until 2016?

So we've basically got three pieces of debt coming due, the smallest one is Fountain Square which is a building that we own in a consolidated joint venture right now and we expect to be buying it out sometime either late this year or early next year. And that loan can be prepaid in I think it is April and we would just pay that off, that is about $200 million. And then there are two bigger ones which is Embarcadero Center and the Hancock Tower loan and those total about $1 billion. I would say those are the two loans we're thinking about with regard to maybe doing something early and that is why we haven't been targeting our hedging toward those two financings. What we really kind of think about is okay, how much is the prepayment penalty and if we bundle that into our costs, what does the breakeven rate have to be when we can pay these loans off and how do we feel about that breakeven rate versus our view of rates? It is somewhere between 75 and 80 basis points, something like that today. One could say that is attractive. However, the prepayment penalty does come down significantly every month that we wait. So we're tracking this on a monthly basis depending on what the yield curve does. If you look at the yield curve and what it says it is going to do today, that breakeven rate drops below 50 basis points in early 2016. So that would be maybe a more attractive time, we will see what happens. The yield curve doesn't ever seem to be completely right as we all know but that is the kind of analysis we're thinking about so we don't have a specific point in time in mind but we're monitoring it and if we see an attractive window I think that we will go forward with it.

Your next call is from Gabriel Hilmoe with Evercore ISI. Your line is open.

I guess, Mike, I realize you are not giving official guidance for next year yet but obviously a lot of ins and outs going into 2016 which it sounds like next year may be somewhat of a mirror to 2015 at least from a same-store growth perspective. But can you just walk through the pieces that will be coming into the same-store pool next year that I guess will at least be additive from development that isn't directly impacting same-store results this year? And I guess if you can quantify just what the expected cash impact is that maybe is offsetting -- I think you mentioned the 2% hit from 601 Lexington, 100 Federal, FAO and some of the other drags?

The three buildings that will be coming into the same-store that aren't in the same-store this year are 250 W. 55th Street, 535 Mission and The Avant. So, those three haven't been in our quoted same-store numbers that I give to you. The Avant is leased up through 2015, it is fully leased now so it has been fully leased for the past couple of quarters. So it will have an increase but not a significant one. 250 as Doug mentioned I think in our supplemental, it is 70% leased. As Doug mentioned, it is 89% leased with leases that haven't commenced it and we've got good activity on the rest of the space at the rents that Doug and John had mentioned. So I think that is going to be a big mover for us next year from both a GAAP and a cash basis because probably through half of this year some of the tenants were in pre-rent. I mean Case-Shiller was in pre-rent through the first half of this year. You actually saw our straight line go down from the first quarter to the second quarter. They were the reason and there are some other tenants that are in pre-rent in 2015 that won't be in 2016. And then at 535 Mission, kind of obviously smaller building but kind of similar story with some terms of the lease up with that. Again I don't want to give you specific numbers right now but those are the kind of bigger drivers from the development pipeline that are going to help.

Okay, I think you mentioned what the expectation of at least what the FFO impact was going to be. Could you just maybe repeat that?

I mentioned that there is $35 million of transactions that Doug mentioned where we're going to lose occupancy that will be a negative. On the development pipeline, I indicated that we would be stabilizing $850 million of developments between 2016 and 2017 that by the end of 2017 when those are all stabilized, they are going to add approximately $70 million of GAAP NOI and have a cash return of between 7.75% and 8%. But again that is stabilizing through 2016 and 2017. So it will start to influence and a building like 601 Mass Avenue is a building that will help us in 2016 but it is not going to be in the same-store in 2016. None of those developments the $850 million will be in the same store in 2016 but the income that is starting to come from those things will start in 2016 and help us.

Your next call is from Brad Burke with Goldman Sachs. Your line is open.

I appreciate the comment that you are able to fund with cash everything that you currently have in the development pipeline. I was just hoping to get an update on what you are thinking about in terms of the possibility of paying a special based on the sales activity that you have had this year? And if you were to pay a special, how we should think about sources of capital to fund the current development pipeline and then in anything else that you might add to it?

I can tell you that the gain associated with the assets that we have sold already as well as the projected gain for 505 W. Ninth assuming it sells, is approximately $200 million. From a taxable income perspective, we have sized our regular dividend to be generally in line with our taxable income. So I would expect that that $200 million or somewhere thereabouts would be excess. We have set these up as 1031s to try to retain that cash but we have talked about the acquisition environment and the low likelihood of us being able to put those into exchanges. And with 505 Ninth Street is a joint venture so you really have to acquire in the same joint venture so I would say that is pretty unlikely that we would be successful in doing that.

Just to sort of answer the second part of your question, there are absolutely no capital raising liquidity issues that we have regardless of what the special dividend might be based upon gains on sale so that is not a factor in the way we're thinking about this. As Mike described, we're running at the lowest EBITDA ratio I think we have ever run as a public company. And I think it is a little premature to talk about our dividend policy without having had a conversation with our Board which we generally have toward the end of the third quarter because it is not appropriate to get out ahead of that.

Okay, but just reading into that, we should think about incremental sources of capital being balance sheet cash and debt versus significant additional asset sales as we think about 2016. Is that a fair way to summarize it?

Owen said $750 million was 2015. I don't think we have described what if any asset sale plans we have for 2016. And we're not, I don't think at this point we're prepared to talk about that, but we do not -- I want to emphasize this -- have a capital liquidity issue. We're sitting on more cash than we have ever sat on and we continue to find opportunities to increase our cash flow from the portfolio. And many of the new projects that we're entering into like the Brooklyn Navy Yard are with partners where we will provide third-party construction financing for a significant portion of the capital structure. So again, the amount of equity, quote/unquote or our share of the capital is not significant relevant to what it might have been had we done things on our own and we were doing everything on our balance sheet.

And then just a quick one on GAAP same-store guidance for 2015, you have been trending above the full year guidance for the first half of the year. And I think I heard you indicate that occupancy would be relatively flat with current levels for the balance of the year. So you gave us a lot of things to think about over the next couple of quarters, but I was hoping that you could highlight a couple of the bigger ones that might be driving the expected deceleration.

We talked about the GM Building with FAO Schwarz. I mentioned from a GAAP perspective, that didn't have a material impact to the full year. But we recognized a lot of termination income from that deal this quarter. So for the last two quarters, that building will have a lower contribution. I think that from an occupancy perspective, I said that we would be approximately where we're. Last quarter, I think I said we would be slightly below 91%. Our occupancy projections are really in the same place that they were. So they are going to be somewhere around 91%. It could be slightly below, it could be a touch higher, but I consider that generally stable with what it is now -- below 91%, I'm sorry. So that is really kind of the drivers.

Your next call is from Jed Reagan with Green Street Advisors. Your line is open.

I know you are not giving 2016 guidance yet but broadly speaking just given all of the moving parts you have outlined, is it fair to think about 2016 as sort of a transition year with flattish type of occupancy and cash same-store NOI growth just sort of akin to this year?

I would characterize 2016 as a year where we have made some explicit decisions to take some chips off the table in order to reposition assets for the long term that will be significantly accretive to our NAV and our earnings on a going forward basis. And so those things have significant impacts. So not sure that is a transition, those are explicit decisions. Transition is you have a lot of roll over and you have to sort of run through the rollover. We have that every year. We may have a little bit more in 2017 actually than we have in 2016 because of what is going on at 399 and that is a pretty big chunk of space. But I would characterize 2016 as we're making some very explicit investment decisions and we have chosen to take some chips off of the table from an occupancy perspective in order to reposition and improve the long term cash flow characteristics and value of some of our assets.

And just wondering if you have seen any evidence at all of upward pressure on cap rates in your core markets just given some of the recent changes in treasury yields and borrowing costs? And I guess related to that, Mike, you mentioned the sub 4% execution you would get on 10 year bonds, today just wondering if that would be closer to 3% or 4% at this point?

On the question with respect to the weight capital or interest by investors we have not seen any diminution in that at all. And I would also point out that a lot of the investors that we see in the marketplace are not using significant leverage so I don't think interest rates have as big an impact at least for Class A office properties in our core market.

I think somebody mentioned some Blackstone selling. You are likely going to hear about or see a print on the assets that Blackstone is currently selling in Boston and I don't think we're surprised at where those assets are going to trade. And they are going to I think look at again you are going to look at our portfolio and you were going to go wow. We purchased a building in 2011 at the Hancock Tower now called 200 Clarendon Street for $435 a square foot and it is the superior asset in the city and you are going to see I expect a print that is more than double that if not significantly more than that over the next month or so with those other assets. And it is a demonstration that there is a continued desirability for these core iconic assets in our markets. And interestingly in some of these markets, they are starting to become somewhat of a scarcity issue as well because there are relatively few assets that will likely be sold over the next number of years. And the new buyers that have come in are I think what one would characterize as not transitional buyers but long term buyers who expect to own these assets not necessarily forever but certainly for an extended period of time with a very long term horizon in terms of how they are going to invest in the assets.

And then just, Mike, on the unsecured debt question?

So the unsecured debt market right now, our credit spreads are somewhere in the 150s I would say for 10 years. So we're talking about a borrowing rate today of somewhere 380 to 390 probably and if you were talking about the secured debt market, I think that for high quality assets that have pretty low leverage, 50% to 60% leverage, you are talking 160 basis points, 170 basis points maybe a little bit tighter than that. And then as the leverage goes up, it could be north of 200 basis points but generally borrowing costs again are in and around 4%. The other thing I want to mention on your same store question is when you look at the quarterly same stores -- I'm quoting an annual same-store so in the supplemental we quoted quarterly to quarterly so a property like The Avant might be in the quarterly to quarterly but it would not be in the annual to the annual. So there is a little bit of a difference in the same-store profile when you think about that.

And just last one on the upcoming GSA expirations you guys talked about in DC, do you think they will be making long term decisions on those spaces or do you think it could be more of sort of a kicking the can down the road and short-term holdovers over the next couple of years?

On the bulk of it, it is likely going to be kicking the can for the reasons Doug described. There are going to be certain procurements similar to the one we're chasing down in Springfield where because it is a consolidation and they may be able to align the need for new space along with the fact that the existing facility doesn't meet the necessary security requirements that they are actually going to go and make the jump because they have been able to argue to Congress that they need the money for the consolidation. But I think the bulk of it will likely be kicking the can for as I said the reasons Doug described.

Your next call is from John Guinee with Stifel. Your line is open.

Doug, you said something very interesting when you were talking about the General Motors retail space where you just offhandedly said that that cost would be covered by the retail tenants which sort of begs the question on office tenants. It seems to us that tenant improvements have been stubbornly high despite improving markets. Is there any chance that tenant improvement costs or releasing costs come down as these markets continue to improve? Or is that cost sort of embedded in the business and the landlord is effectively a financier of the tenants?

I will give you a general comment, John and if any of our regional folks want to chime in, please feel free. I would say that the marginal change in tenant improvement dollars has been de minimis through good and bad cycles other than with renewal tenants in the hyper hot markets where we basically say if you want to renew we're not giving you any money. I think the actual cost of doing improvements has gone up exponentially over the past four or five years and so what once would cover a tenant's build out at $65 or $70 a square foot is probably covering maybe 50% of it in our CBD locations. And so I think that it is a factual part of the business that we're all in. But we certainly don't see it other than in Washington DC where the market has been weaker; we really haven't seen much of an increase in it over the past four or five years either.

Your next call is from Manny Korchman with Citi. Your line is open.

If we just think about your multifamily comments you made in the pipeline going forward, what kind of dollars are we thinking about in the multifamily projects?

There were two that I mentioned that were in the pre-development pipeline and I don't think we want to get into a tremendous amount of specifics over their costs and we're still working out all the details of it. But I would say approximately actually a little bit depends on, it depends on some decisions that we make about some of the projects that we have. If I had to give you a range I would probably say $300 million to $600 million.

And would those be long term holds within the portfolio or something more like the Avenue where you would hold it until you sort of found a good spot in the cycle to sell?

We're not building the residential to sell it when it is complete because it is residential. There were some case facts around The Avenue that led us to conclude that was a good asset to sell but they are not immediately targeted for sale when they are complete.

And my final question, given the partnership you discussed with WeWork in Brooklyn, any considerations or any discussions with WeLive on the residential side of things?

No.

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

Well, just to summarize, we were slightly above consensus for the quarter. We increased our guidance slightly for 2015 and hopefully we provided you helpful details on investments that we're electing to make to enhance our portfolio that have some impact on 2016 results. With that, thank you for all of your attention.

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