Good morning. My name is Brandi and welcome to the Boston Properties’ Third Quarter Earnings Call. This call is being recorded. All audience lines are currently in a listen-only mode. Our speakers will address your questions at the end of the presentation during question-and-answer session. At this time, I would like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Good morning and welcome to Boston Properties’ third quarter earnings conference call. The press release and the supplemental operating and financial data were distributed last night as well as furnished to the SEC on Form 8-K. You can find reconciliations of non-GAAP financial measures discussed during today’s call in the supplemental package. 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 statement. 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, Senior Executive Vice President and our regional management teams will be available to address any questions. I would now like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Arista. Good morning, everyone. As usual, I’ll cover our quarterly results, market conditions, as well as our current capital strategy and investment activity. On current results, we produced another solid quarter with FFO per share a $0.01 above our prior guidance, primarily due to portfolio outperformance. We also increased our full-year 2016 FFO per share projection by $0.03. For the quarter, we leased just under 900,000 square feet, which is below our historical averages. However, we have a very robust pipeline of in-service and development leasing activity, which we think will be signed before calendar year end and which will bring our annual leasing for 2016 in line with or possibly above averages. Our in-service portfolio occupancy is now 89.6%, which is down 120 basis points from the end of the second quarter, and this is due primarily to the addition of Colorado Center to the portfolio. We have another quarter of positive rent rollups in our leasing activity with rental rates on leases that commenced in the third quarter up 6% on a gross basis and 8% on a net basis compared to prior lease. Now moving to the economy, U.S. economic growth continues to be positive, but as we all know, it’s been sluggish. Second quarter GDP growth has been revised up to 1.4%. It was 0.8% in the first quarter, an estimate for all of 2016 are 2% or less. The employment picture continues to improve gradually with 156,000 jobs created in September and the unemployment rate has remained flat at 5%. Wages have perked up a bit up 2.6%, though inflation remains low at 1.1% for the third quarter. Moving to capital markets, the ten-year U.S. Treasury has risen approximately 40 basis points to 1.25% from lows in July, which has sparked a seemingly…

Thanks, Owen. Good morning, everybody. So this is the third quarter and we introduced our 2017 earnings guidance last night, and I’m going to devote my time this morning to providing the operating background that’s behind our estimates and to describe the key drivers of our occupancy and revenue growth over the short-term, as well as those situations, where we have, in fact, completed transactions, signed leases, but are not going to be recognizing any revenue until 2018, and there’s a significant amount of that. In a number of instances, our estimates reflect investment and repositioning decisions that were made during the past 12 months, which have a direct impact on our 2017 GAAP revenues, and I want to take the time to provide incremental impact of those decisions. So let me now give you some specifics on our regions, and I’ll start with San Francisco. So during the first quarter, we completed 128,000 square feet at Embarcadero Center. During the second quarter, 158,000 square feet of leases, and during the third quarter, we completed an additional 219,000 square feet of leasing. All of these leases average a positive mark-to-market of more than 40% on a gross basis and 70% on a net basis, very consistent with the leasing spread we’ve been reporting in our quarterly supplemental. The incremental revenue from the deals we’ve now signed in San Francisco since the third quarter of last year is over $16.5 million, and will be at a full run rate starting in the third quarter of 2017. So overall market conditions we’ve been describing in the last few quarters and the San Francisco CBD really remain the same. And while it may make a headline to write that the rate of activity in 2016 is not going to be quite at the…

Great. Thanks, Doug. Good morning. I’m just going to start with a couple of quick comments on our balance sheet and then I will jump to our earnings results and our guidance. We completed a significant transaction in the debt markets this past quarter. We raised a $1 billion 10-year bond issuance at 2.75% coupon. If you include the settlement of a portion of our hedges, the all-in GAAP interest rate on that financing is 3.5%. We used the proceeds to repay two mortgages that had a weighted average GAAP interest rate of about 5.9%. So you will see the impact of the 240 basis point reduction show up as lower interest expense in our run rate going forward. Our cash balances have dropped to just over $400 million after the acquisition of Colorado Center, funding of our developments and the repayment of debt. We project our development spend to approach $1 billion through the end of 2017, and we anticipate either using our currently untapped line of credit, or raising additional debt capital as a partial funding source. Our guidance currently assumes the use of our line. Though it’s certainly possible that we may complete a new debt issuance and hold the cash short-term, which would be dilutive to our earnings guidance. With the run-up in Treasury rates over the past couple of months, our borrowing cost for 10 years in the bond market is currently about 3.2%. If you assume a $500 million debt issuance at the beginning of 2017, it would reduce our 2017 earnings guidance by about $0.05 a share. The other major debt transaction that we have our eye on is the pending refinancing of our $1.6 billion mortgage on 767 5th Avenue that expires next October. This is a consolidated joint venture with our…

Certainly. [Operator Instructions] Your first question comes from the line of Alexander Goldfarb with Sandler O’Neill.

Good morning. Owen, just the first question is with the JV with Blackstone down at Metropolitan Square in D.C., can you just give a little bit more perspective on sort of how we should think about the relationship with Blackstone? Is this going to be where, as they have buildings that they are putting on the market, we may see you guys partner and buy into those buildings, or is it more selling parts of your portfolio, or is it the two companies both going out and pursuing new acquisitions together?

Yes, I – good morning, Alex. Look, I think that we’ve done actually two important transactions with Blackstone this year. We purchased the half interest in Colorado Center from them and we are doing this recapitalization at Metropolitan Square. I don’t think I would read anything more into it than just that. Clearly, we have a good relationship and a tremendous amount of respect for Blackstone and we are very open and welcome to doing new business together. But I think it will be very situation

Okay. And then the second question is, on LA for future investment, your comments sounded a little bit as though we should be patient. But maybe you could just frame some perspective just, when you look at the companies out there, whether it’s Dougie or Hudson, they are buying like individual deals, or maybe a portfolio like Westwood, but a number of the properties that meet sort of the Boston criteria don’t seem as widespread, at least to those of us. So maybe if you could just provide a little bit more perspective on what you guys see as the opportunity set both in aggregate and then maybe as far as timing if it’s something that’s within – we should wait another six months, or it may be another 12 plus before we see more investment?

Yes. So the strategy, as you know, and as we’ve been articulating is the investment in Colorado Center isn’t one-off. I mean, we clearly feel that we are going to make a profitable investment in Colorado Center, which is great and was certainly one of the objectives, and the other objective was to get us into the LA market, which we think will be an attractive and important market for the company over the long term. But we don’t intend to go out and make new investments just to grow in LA. Each investment, as Colorado Center did has to stand on its own, and in our opinion create attractive returns for shareholders. And so what I think and if you also look at the overall company, we entered the San Francisco market in the late 1990s and it still is the smallest region of all – of the four primary markets of the company; here we are nearly 20 years later. So our intent is to grow. We view the investment in LA as strategic, but we are going to wait for opportunities that, again, we think make sense and cancel from a return perspective. And so where we are in the market today, I don’t think you should expect us to go out and purchase stabilized assets in a 4% kind of cap rate environment. Those are not the kinds of things that we are going to be doing. We are going to be looking at new developments. We are going to be looking at assets that need some repositioning or lease-up. Our focus will be on a handful of markets in West LA, and I don’t think you should put a confined timeframe on it like 6 months or 12 months, we are going to be careful and patient and wait for the right opportunity.

Okay. That’s helpful, Owen. Thank you.

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

Mike, a question for you. How much taking the properties out to put them into the redevelopment pool instead of same-store pool impact same-store growth? Said differently, if you hadn’t re-classed them and you said these are properties we own, we are doing work, but they are coming out of the pool, what would same-store growth be then?

I don’t think it’s that significant 2016 to 2017. I mean, we’ve talked about $8 million of reduction. I think that if we didn’t pull them out in the 2015 to 2016 at this point, I mean, it will probably come out in the fourth quarter, so we will have one quarter of 601 being out for the low-rise, which will be – which is – will be a little bit of impact. I think, which will have a little bit of an impact. But I would say, it’s 25 basis points maybe to 50 basis points something like that.

Okay. And on Colorado Center, you said you have deals that are close. How much capital is it going to take to get those deals in place, or is it going to be just more normal TI type spend?

So the deals that we have in place are not legally conditioned on us doing any work to the exterior areas of the buildings. There’s a tenant improvement contribution for each of the deals and I think the – I mean, the general market is in the $70 to $80 a square foot for a 10-year deal and it’s closer to $100 a square foot for a 15-year deal. And but we intend to do a major repositioning of the properties and we have a plan that we’ve come up with that we’ve discussed with TIA who are the other party in the transaction and we don’t have a firm budget on that yet, but it’s somewhere – more than $10 million and probably less than $25 million, and we will have to come to an agreement internally and with them on what the right amount of spend is and how long it will take. But that will be more of a global repositioning as opposed to what’s required for these deals. These deals don’t have any requirement from a legal perspective to spend money.

Manny, the number is about 50 basis points. It’s about $8 million on about $1.350 billion of our share same-store.

Thanks, Mike. Last one for me. Is there any agreement with salesforce in place, or any option in place where if they want more space at Salesforce Tower, they get it, or is it a new negotiation for new space?

So our lease with salesforce.com includes just the space that they have on, quote unquote their existing lease. So we have the unfettered right to lease other space to other tenants. You would think that the major 800,000 square foot tenant would be an important customer. And so to the extent we are doing things on other parts of the building, we are letting them know what’s going on. So to the extent that they have an interest in that space. They can give us their view on how we might work with them on it.

Great. Thanks, everyone.

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

Hi, guys. Good morning. Thanks for taking my questions. I guess, first, going back to the discussion about financing for 2017, and specifically mortgage debt, can you comment at all on what the appetite for balance sheet debt by life cos looks like relative to the CMBS market right now?

I think both have strong appetites. I think the CMBS market has come back very strong in the summertime after kind of a weak volatile first quarter and beginning of the second quarter and life companies were actually holding back a little bit, because they wanted to have a more even outflow. So they kind of held back in the first-half and now CMBS is more competitive than they are. You’ve got swap rates that are below Treasury rates and you’ve got – the – for leverage rates that are 50% to 60%, the spreads are very, very tight on CMBS, so they’re competitive. So I think now the life companies are trying to become more competitive and put out capital. They have more to put out by the end of the year. So I think it’s pretty competitive. I think that when we look at 767 5th Avenue, that’s a big loan. That is going to be more aligned with the CMBS market, I would imagine, because you would have to put together many other life companies to put that together given its size and the fact that most life companies are maxing out at a couple hundred million to maybe $400 million at most, or we could do a large kind of bank loan transaction, which is actually what we have today when we originally did the deal.

Got it. Appreciate that. That’s helpful. And then my other question, on the redevelopment of the low-rise at 601 Lex, how are you guys thinking about positioning rents for that space relative to kind of a – in the wide range of rents in Midtown?

John, do you want to take that one?

That’s a very unique product and we are very, very excited about it. It’s got light and air, but no views. It’s got a very good location. So that will be positioned to be in the high 80s. [Multiple Speakers] and as 10% of the entire space is outdoor space [indiscernible].

Great. Thank you very much.

Okay.

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

Thanks. Owen or Doug, it sounds like you guys have a lot of situations where the lag between signed leases and occupancy or innovation are delaying the recognition of income. But on the flipside, can you talk about anywhere that you think maybe there’s currently vacant space that could be leased quick enough to become income-producing before the end of the year and maybe provide some upside to guidance?

So I’m hesitant to answer that question too aggressively, because the circumstances under which we deliver the space are so critical to when we recognize or have the ability to recognize revenue. So we can sign leases and be in a position where the space is committed, and if we deliver the space in one condition, we are recognizing revenue day one and if we are delivering it after having removed the existing improvements, it could be 10 months, or 12 months, or 6 months delayed. So Mike’s numbers have some of that baked into them in terms of his projections for our same-store growth for the year, but it’s pretty muted because of the issues associated with the delivery conditions. So I think we will do more leasing. I don’t know whether or not we will be able to get impact from it in our 2017 numbers.

Okay. Fair enough. And then it looked as though CapEx was higher than normal again this quarter and I know it can be a little bit of a lagging indicator since it’s on leases commenced during the quarter. But can you guys just talk a little bit more – you touched on it in New York. But what are you seeing in each of your markets with respect to concessions and are you getting any pushback in any of the markets to increase free rent or TIs?

So I would tell you that overall in our markets, if you had to pick a direction, concessions are moderately up as opposed to moderately down. I think in New York City, many landlords have taken the recipe that we’ve been working with for a number of years and pre-building space, and if you pre-build the suite, you are giving a lot more money in the space than you are when you are giving an allowance. But in theory you are reducing the free rent concession significantly and or improving your velocity. I described the transaction environment in Washington DC. It’s pretty close to where it was last year, maybe it’s slightly higher. I think the greater San Francisco market, it’s actually – concessions have come down a little bit in the sense that many tenants are sort of deciding that renewing in place on average is a more economical experience for them because of the cost associated with having to relocate. So if you have a tenant in place, you can get away with a smaller concession than with a new tenant coming into that space. And then in the Boston market, the CBD is – probably had slight increase in its tenant improvement numbers not significant. Pre-rent really hasn’t become a factor in this market at all. And our suburban market actually, I think has seen a decrease overall in concessions, because – honestly, because of the stronger market and the availability of high-quality space is becoming limited.

Great. That’s helpful. Thanks, guys.

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

Thanks. Mike, you mentioned that you are going to do a little over 8% FFO growth next year if you exclude the termination income. And so I’m wondering whether FFO or AFFO growth could get even better than that in 2018 and beyond since you still have a fair amount of releasing of vacancy and development NOI to hit, which I think is a greater amount of benefit after 2017?

I think that we don’t want to talk too much about 2018. But I think if you look at what we have, we’ve got a significant amount of space at 200 Clarendon and 120 St. James that is today roughly 350,000 square feet of availability that is zero today, which is meaningful space. So I think that -- and we’ve got some other rollups in Boston, suburban Boston and Cambridge. So I think the Boston market will do very well. I think San Francisco will continue to do well. We have dealt with a lot of our rollover, but we’ve still got a little bit more to go that has rollups and we still have a few floors of vacant space. And then in New York City, Doug talked about 767 and 250 West 55th Street. Now we do have to release the 399 Park space. So depending on how quickly that comes in, that could be a negative for that year. And then, obviously, our development pipeline, we will have a full run rate of 888 Boylston Street and then salesforce will start to have a real impact to us. I think there’s some very positive things for 2018.

Okay. That’s helpful. I guess just one other one on Salesforce Tower. Can you go back and explain a little bit more about – someone was talking about the operating expense, I guess hitting for the full building at some point I think at the end of 2017, along with the removal of capitalized interest and is that an issue that affects 2017 much, or is that more of a 2018 issue?

The way that we capitalize taxes are that we continue to capitalize them on the percentage of the space that is not leased up to 12 months basically after we deliver the building. But the other – most of the other operating expenses, you do have to start to ramp up for utilities and other things and you can’t capitalize those types of things. So in the very beginning of your occupancy, you have a tough time getting positive NOI. But obviously as you lease up, you start to get that leverage.

Okay. And just quickly, could we also just get the capitalized interest assumption for 2017? Thanks.

I think we said $50 million to $60 million of capitalized interest for 2017.

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

Great. Thank you. I guess just to start, Doug, did I hear you say that you are $72 million done of the $80 million leasing target for the repositioning NOI?

Yes, so what I – so we’ve been keeping this running total and so we’ve done $72 million of $80 million on the revenue side. But remember number there’s a net reduction from some leases that were expiring that sort of go against that. So I’m giving you a gross number, not a net number. So there’s another call it $15 million to $17 million that’s sort of part of that $80 million that we still have to get done. But on an apples-to-apples basis from what we’ve been reporting from the beginning of the year, we started with zero and we’ve gotten $72 million of $80 million and then we have some negatives that have come on that we have to still cover.

Okay. And then, Mike, you talked about a potential $0.05 drag from a debt deal early in the year. Is that in your guidance, or you are saying if you do it, it would be another drag?

If we do it, it would be a drag. So we’ve assumed in our guidance that we are using our line of credit as we need it. So we’ve got some interest expense in our guidance associated with our line of credit, which we draw on as we need the money. So it gets drawn throughout the year. But it’s certainly possible, again, that we could do something much sooner than that and then we would sit on the cash and the cash doesn’t earn much. So I gave an example of $500 million, because that’s the approximate amount of capital we would need to fund out most of our pipeline.

Okay. And then do you have a view on AFFO for 2017 based on your guidance in your dividend?

What I can give you is some of the pieces to kind of help you. If you look at our projections for what we need to lease to meet our plan, we need to lease something like 3.5 million square feet of space. So depending on how much cost you throw at that, that’s probably somewhere in the $200 million plus or minus range for costs that would get hit there. Non-cash rents, we gave guidance for that of $50 million to $70 million. And I think that we would say maintenance CapEx is probably somewhere in the $60 million to $80 million range. If you look at other non-cash expenses that we have, that would offset that probably between $35 million and $45 million. So you’re talking about total adjustments to our FFO of $280 million to $320 million something like that. That would bring you down probably to, I don’t know, $4.25 to $4.50 or something like that on a per share basis, just dropping that off the guidance that I guess.

Yep. And then I guess going back to the same-store question for 2018, just kind of back of the envelope, do you guys have a sense as you were going through the numbers of where you are shaping up for 2018 same-store and what kind of pop you get over 2017 based on what’s in motion?

We’ve got projections, obviously. But there’s a lot that can change and a lot can happen. We don’t really want to get into 2018 guidance at this point.

Okay. That’s fair. And then my last fundamental question on New York City. You gave some interesting color on market leasing and some demand you’re getting in your buildings. I think you also said the $80-ish rent market is pretty good. How are you guys thinking several years out on New York City? I guess, as everyone kind of thinks about the moving pieces in the market, how do you guys think about what you are expecting?

John, do you want to try that one first?

Well, I’m very consistent. I’m very bullish on New York City. I think the New York population is going up. All the indicators here are positive. There’s not as much job growth as last year, but there is job growth this year. I think the hotels are doing well and it’s a very good market. So we think it will continue to draw people into the market, the tech sector, the TAMI sector is growing. So the long-term is bullish. We do have some supply, as we’ve talked about, coming on with the Trade Center primarily and the rail yards and that will be absorbed over the next couple of years.

And I guess in terms of prospects to push rents, [Multiple Speakers] flatten out, do you think that continues?

I’m not bullish on rents moving up. I don’t think – I think there will be some areas in the city, in some particular buildings where rents will move and there will be some places that will be a little softer, but I’m pretty flat overall for the next couple years on rents.

Okay. Anyone else want to chime in?

Jamie, I think we’ve been saying for, I think several years now that, as John articulated, New York is a healthy market. It’s a desirable city. There is job creation. I think the mix of industries is getting more diverse in a very positive way. So all that’s very positive, but there is a fair amount of supply. It’s significant on a square foot basis. It’s less significant on a percent of total stock basis, but it matters. And so when we’ve run our numbers, we see availability in New York. It’s hard to push it below 10% and when you are in an environment like that, it’s hard to push rents certainly above inflation and we’ve been saying that and we’ve been in many cases leasing our portfolio with that type of philosophy.

Yes, that’s all true. But also on the other side of that, we don’t see the availability going to 12%. It takes a lot of movement to move it from 11% to 12%. So it’s pushing somewhere around 11% aggregate in the city and we have some pipeline coming on over the next couple of years, small, as Owen said, a small percentage relative to the 400 million square foot market here, but nonetheless space that will impact the market. So we are going to be somewhere around a 11%. That’s what the availability rate overall Manhattan is going to be at the end of the year. Fourth quarter leasing velocity will probably move up. It should hit close to the 25 million that’s the average over the last 12 years.

Your next question comes from the line of Steve Sakwa with Evercore ISI.

Hey, guys, it’s Rob Simone standing in for Steve. Just kind of like stepping back and at a high level, you guys are going to do call it $1.3 billion of NOI roughly this year. And I guess our question is, once all the developments are placed in service, the biggest portion obviously being salesforce, and once you guys are through the majority or all of your planned leasing, what’s kind of like the run rate cash NOI we should be or GAAP NOI that we should be thinking about looking three years out when all of this activity, which will quarter-to-quarter introduce a lot of noise to the results, is finished, what’s that bogey you guys are targeting?

I’m going to answer that question in a terribly unhelpful way, which is I don’t think we are in a position where we feel comfortable giving you a projection three years out. We’ve given you a lot of pieces and we’ve described the average return on cost of our development pipeline and the delivery of those dollars. So if you are assuming, I mean, 7% is a number that we are using as sort of a surrogate. The number is actually going to be higher than that on a GAAP basis, because we are describing cash yields and obviously cash yields don’t include the increases in rents that you straight line and they don’t include, as Owen, for example said, what our market land value is. That’s a non-cash item, or non-GAAP item, so the numbers are going to be higher. And if you take that and then Mike gives a pretty good same-store revenue number, I wish I could tell you that we can give you more than that, but I think that’s what you are going to have to work with to come up with our three-year projection, if you want to call it that.

Yes, no, no, that’s helpful. I know obviously it’s a long way out. I guess it’s a lot of – it’s just a lot of activity that’s kind of happening concurrent to each other and it’s also not going to be a straight line up, obviously. So, yes, that’s helpful. I get it. Thanks, guys.

Your next question comes from the line of Vikram Malhotra with Morgan Stanley.

Thank you. Just two granular questions on New York. 250 West, can you outline the prospects for the remaining space, particularly on the retail left on the ground floor that I think is helping you with?

Sure. So we have one retail space left and we have a letter of intent on that space with a restauranteur.

And then just any other space on the office side?

Yes. So we have on the 36th floor, which is available and half of the 35th floor. And we have discussions going on with smaller tenants on the 35th floor and we, at the moment, don’t have any active conversations on the 36th floor.

And then just on retail going to the Plaza District, just want to get your thoughts on retail on 5th Avenue kind of around 50, 57th Street versus off-5th. And I’m just trying to understand this commentary on some weakness in certain parts of Plaza, but just want to get your thoughts on how the prospects are for on-5th versus off.

So I will give you a macro answer and then, John Powers, you can provide some micro if you want. So Boston Properties has leased all of their 5th Avenue space for the next 17 or 18 years. So we are not in the market on 5th Avenue any longer. We will have a small space on Madison Avenue coming up in the middle of 2016 – 2017 and another space towards the end of the year and they are both 1,000 to 3,000 square feet. And our view is that the market on Madison Avenue has gotten marginally better than where it was three or four years ago. So if three or four years ago, we thought the market was $850 to $900 a square foot, today, I think we think the market is from $1,000 to $1,200 a square foot. John, do you have any other comments?

No, I think that covers it.

Great. Thank you very much.

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

Hey, good morning, guys. Just following on the New York questions. I guess what trends are you seeing in terms of net effective rents in Manhattan year-to-date and is there any difference at the high-end of the market versus kind of the more moderate price points?

I think that it depends on how you define that. So I think that the way the market is working is that when you have – and most of the Midtown activity is lease expiration-driven, there’s not a tremendous amount of growth that when you have a lease expiration tenancy and they have a particular day on which their space is leasing, the market has become more flexible on meeting that date. So where it used to be that, in a bit of a stronger market, if you had a lease expiration on January 1 of 2018, and the traditional 10-year deal was 12 months of free rent and $65 or $75 of TIs, that would be what the transaction package would be. Today, if you have a lease expiration on January 30, or February 1, or March 30, or April 1, you might get the same concession package, but your rent commencement date would be a little bit drawn out. So effectively your NER, if you want to call it that, has gone down slightly, but it’s, in reality, just a way to meet the demand of the marketplace as opposed to actually increase concessions, and I think that’s the flexibility that’s being required. In addition, as I said before, Jed, there is more landlord-oriented work that is going on in Manhattan in the form of pre-built or other landlord-required obligations to tenant spaces. So there has been a push-up in concessions in that way.

But you haven’t necessarily seen the face rent growth to offset some of those higher concessions?

John, I don’t believe we have? You can comment.

No, I don’t think we have. And, as Doug said, yes, in a market that’s got some vacancy at 11% availability and some balancing between tenants and landlord, tenants still have sometimes limited opportunities. They might have two or three things even though with all the space in the market in terms of where they want to go, their size, what’s available, their timing, et cetera. But because of the market we are in with this balance, landlords are pushing out and looking at future lease expirations and matching that so the tenant doesn’t have double rent, as Doug said. And that pulls the NER down, but that’s forward leasing and that’s consistent with most lease expiration-driven markets.

Gotcha. Thanks. And can you talk a little bit about your expected disposition plans for 2017 in terms of the potential dollar value and the profile of assets you might look to sell?

I think, Jed, for 2017, we haven’t finalized our disposition plan yet. But our expectation is that we will continue to do what we’ve been doing for the last couple of years and that is selling non-core assets. So I would expect the volume of dispositions to be more in line with what we were doing in 2016 as opposed to a couple years ago.

I see. Okay. And then just as we look out to 2017 external growth plans, how should we think about the potential number of, or scale – aggregate scale of new development starts, and I know you mentioned a few D.C. possibilities specifically, if there’s any sense of kind of how much that could aggregate?

So I will give you a range. If we are able to do nothing other than this potential lease at 145, the number is call it – what Owen said $530 million. If we are successful in generating the business that Ray is chasing in DC, there’s another $0.5 billion of potential starts in calendar year 2017.

Okay. Great. Thank you.

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

Thank you, guys. Maybe to ask the kind of out-year NOI question a different way. As you guys kind of look at the portfolio and look at what your expirations are going to be two years out, are there any kind of instances similar to what we are seeing today with 601 Lex and other places, where big blocks of space may be taken offline to redevelop kind of anything that could be a step back in terms of an offset to some of the NOI coming on?

So it’s a very fair question, Craig. And I think that if we go around our portfolio and look at the amount of repositioning we have already done, the vast majority has been completed. There are a few 300,000 plus square foot buildings in Washington D.C. One of them is undergoing a renovation right now and the other one will likely start in 2019 or 2020. That’s the building over on New Hampshire Avenue, right?

Yes.

And then there’s a suburban office building in Boston that we actually are under – about to undergo a renovation on, but we actually got a – we have a signed lease for that building and that tenant would like to be, sorry, not a signed lease, a signed letter of intent and that tenant would like to be in that space in the third quarter of 2017, so that one is going to happen really fast. Our CBD portfolio by and large in New York City and in Boston and in Washington D.C. aside from that one building I just described have really gone through a pretty significant restoration and refurbishment. And then we are going to be doing some work at Embarcadero Center probably over the next two or three years to really upgrade and improve the experiences there. But not in anticipation of any lease expirations just in the form of making sure we are maintaining our competitiveness with the marketplace.

Okay. That’s helpful. And then just to go back, Owen, to your comments about kind of the opportunities you are seeing in D.C. on the development side. I mean, could you kind of go into – is that more in the District, more in the kind of Metro more broadly and how comfortable would you be doing any development other than the build-to-suit in that market?

We are looking at opportunities in the District, in Northern Virginia and in suburban Maryland. And certainly as we have described, pre-leasing is critical for us to launch projects and even more critical if we are going to do it in the suburbs. If we have a development that is fully or materially pre-leased at an attractive yield, it’s something we are certainly going to launch.

So something like north of 50% kind of a good bogey?

Oh, yes.

Craig, just to give you clear perspective. Three of the things we are looking at in D.C are 100% leased and one of them there will likely be a lease of at least 60% or 70%.

Okay, that’s helpful. And then just one last quick one, you guys are seeing the demand come back for the space you have at the GM building. Is there – could you just give some color on maybe is it a similar tenancy to what you guys had on the hook earlier? Did you guys have to change pricing there at all to reignite activity?

We have not changed our pricing from the deals that we were doing a year ago. So we have not raised our pricing, but we haven’t lowered our pricing and the tenants are very similar. They are in what I guess Owen refers to as small financial firms, private equity firms, alternative asset management firms, consultants to the asset management business, some, quote unquote, I guess hedge funds self provide.

We call them very attractive tenants.

Doug, I think the only difference might be that we thought we might have to have pre-built some of the space and try to attract 5,000 to 10,000 square foot users. And as Doug described, what we are really talking to is 20,000 to 40,000 square foot users. So that’s a half a floor to a full floor, so that’s not really doing kind of the pre-built activity.

But we will end up doing some pre-building on those floors to fill out the space.

Great. Thank you.

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

Thank you. Just on that subject of retail in New York. I was interested in Doug’s comments on the conservative percentage rents that you see there. Can you just give us a range of what conservative means and also was that commentary for Under Armour or did that include Apple as well?

So you are never going to hear us describing what the rent is or what the sales are for any of our tenants on a particular basis, because I just don’t think that’s appropriate. So the number I gave you was a revenue base for all of the retail at the building, which includes a multitude of tenants, even some banks, but they don’t give us percentage rent. [Multiple Speakers]. Yes, right. And so my point – I guess my point is is that we are well off what the peak sales were in terms of our expectations for the percentage rent and we haven’t assumed any growth. So we said let’s look at what the least exciting sales might be and use that as our baseline and everything that we get on top of that will be gravy.

But as far as conservative, are you saying below 20%?

I’m not going to give you a number, because you’ve got to understand the sales for these properties are different than they are for anything else that you would probably see in a retail portfolio.

Okay. In San Francisco, there has been a lot of media reports on the structural integrity of Millennium Tower, which neighbors Salesforce Tower. How concerned are you about this and has this impacted leasing at all?

Bob, would you like to describe that one?

It’s had zero impact on leasing and we are not worried about the building falling over. That’s the short answer.

In a worst-case scenario, what do you think happens?

I think they pressure grout and stop the building from sinking. I think it’s going to continue to sink until they come up with a solution.

Got it. Okay. Thank you.

Your final question comes from the line of John Guinee with Stifel.

Thank you. Big picture question for you guys. The – over the last 10 years, you have been highly, highly successful selling high 4% cap rates plus or minus developing to a 7% yield. Your cost of capital on an NOI basis has been a $4.5 to 5% yield. You’ve paid a special dividend when necessary. And what this has done? Is this has really helped you on an NAV value creation, but has hurt in terms of FFO growth? If you look at what’s happening in the investment sale market, as I think, Owen, you pointed out at the beginning, some stunningly high prices, but very few bidders. Why aren’t you taking advantage of this and really ramping up your investment sale program, given what can be happening in the market in the next couple years in the investment sale arena?

John, well, we have taken advantage of the sale market this cycle. We did several billion dollars worth of asset sales and joint ventures over the last several years and made significant special dividends to shareholders. We also – a lot of those decisions also were driven by the need we had for capital to fund our development pipeline, in which we’ve been employing. We will certainly consider selling additional assets in the future if we need the capital for a new investment that we make or for additional development. But what we are not doing is just selling assets when we don’t have a need for capital. As you know, our debt is lower than where it has traditionally been and we have still substantial capital to invest in our current development pipeline.

Great. Thank you.

Okay. That concludes all the questions and our remarks. Thank you for your attention. That concludes the call.

This concludes today’s conference call. You may now disconnect.