Good morning, and welcome to Boston Properties’ Second 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 the question-and-answer session. At this time, I’d 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 Reg G requirement. 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, 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 and good morning to everyone. On current results, our FFO per share for the quarter was $0.05 above our prior forecast and $0.05 above Street consensus, due primarily to operational outperformance. We also has a result increased the midpoint of our full year 2017 guidance by $0.04. We’ve leased approximately 2.8 million square feet year-to-date in our portfolio. This includes 926,000 square feet in the second quarter and approximately 1.3 million square feet of leasing already in the third quarter, including a renewal of Estee Lauder at the General Motors Building, as well as lease with Marriott, which commences the development of their new headquarters. Our in-service office portfolio occupancy increased to 90.8%, up 40 basis points from the end of the first quarter. We had another quarter of strongly positive rent roll ups in our leasing activity with rental rates on leases that commenced in the second quarter up 18% on a gross and 28% on a net basis compared to the prior lease. Lastly, year-to-date, we’ve raised significant new capital and either commenced or secured nearly $1 billion in new developments, the office components of which are fully leased. So moving to the economic environment, the tepid yet consistent growth of the U.S. economy continues and as a constructive force for our business. U.S. GDP growth picked up in the second quarter, as current estimates are 2.6%. The employment picture also continues to be healthy with 222,000 jobs created in June and the unemployment rate steady at 4.4%. Though the Fed has hiked rates three times since December and continues to signal more is coming, the capital markets are diverging as the ten year U.S. Treasury remained low at 2.3% and has dropped approximately 15 basis points year-to-date, and 10 basis points since the end…

Thank you, Owen. Good morning everybody. I’m going to start, just a little bit of color on our same-store statistics. So we had a pretty healthy increase as Owen described in that same-store portfolio. And remember, those are the leases that commenced this quarter, those are not necessarily leases that were signed this quarter. So let me just give you a color on that pool. So in Boston, there was about 370,000 square feet in the same-store, in the Putnam transaction, which we completed over a year ago at 100 Federal Street is finally coming into play. Again it’s sort of one of those things where we talked about a repositioning we talked about leases that were signed and we had to be patient about when that revenue was going to come in, but the revenue is there. In San Francisco, there’s about 230,000 square feet from Embarcadero Center, and it’s really just a continuation there of all the renewals and relocations that we’ve executed over the past 12 plus months, where we’re seeing those roll ups of between 40% and 50% on a gross basis and in excess of 60% on a net basis. In New York City, there’s about 300,000 square feet and that includes – actually a deal that we did back in 2014 at 601 Lexington Avenue with a major law firm, which again had a big increase and it’s showing up this quarter. And then Washington DC which was on the negative side, there’s about 127,000 square feet of space in Northern Virginia and the biggest deal there was actually a law firm renewal that was done in the beginning of 2016, where there was a pretty small downtick, it was about $0.65 a square foot and that lease had 2.5% escalators and it’s for…

All right, thanks, Doug. I’m going to get started with a discussion of our results for the quarter. Our top line revenue growth was strong this quarter and is reflected in an increase in net operating income from the portfolio of $14 million, net of termination income. We gained 40 basis points of occupancy, which included significant gains at 100 Federal Street and 200 Clarendon Street in Boston, 601 Lexington Avenue in New York City, and our Suburban Washington, DC. Portfolio, mostly from leases that were signed in previous quarters and what revenue has now commenced. This also shows up in our same-store results for the quarter, with our share of same property NOI up nicely at 3.9% versus last year. In June, we closed our $2.3 billion 10 year refinancing of the GM Building at a GAAP interest rate of 3.64%. The repayment of the existing debt resulted in a noncash gain on debt extinguishment this quarter of $14.6 million. This was in our guidance and I spoke about it last quarter. It is from the acceleration of fair value interest and is now cleaned up and will not recur. Since it is related to a consolidated joint venture, our share is $9 million with the offset in our noncontrolling interest line. As I mentioned last quarter, the loss of noncash fair value interest will increase our interest expense going forward. In 2018, we project our interest expense to be between $390 million and $410 million compared to our 2017 guidance of $355 million to $368 million. This represents an increase in interest expense of $38 million or $0.22 per share in 2018 at the midpoint, which you should reflect in your models. For our earnings, we had a solid quarter and reported funds from operations of $0.67 per…

[Operator Instructions] Your first call is from Jed Reagan with Green Street Advisors.

Hey, good morning guys. You described a lot of good recent in pending leasing activity at Salesforce Tower. Just curious if you can explain briefly the drivers behind pushing that stabilization date out a couple quarters?

So the – on the stabilization, we have gotten, I guess, information from Salesforce on their planned phasing in. So as the building gets closer to completion, it’s going to complete at the end of this year. Salesforce has basically six phases of work that they are putting into place and we can start revenue recognition on the space when they complete their TIs. So basically, they’re going to start moving into the building at the beginning of 2018 and over six quarters, they’re going to phase in to these six phases. So the last quarter of their move-in is going to be at the beginning of the third quarter of 2019. I would say that they are paying us cash rent before they’re actually physically occupying the space because the way the lease works, there are set dates in the lease for each phase when they have to start paying cash rent. So we’re actually going to be putting a bunch of deferred revenue up on our balance sheet as they pay cash rent and before they occupy, because we can’t recognize the revenue. And then when they occupy each phase, we will recognize all that deferred revenue over the term of the lease. So our cash will be coming in earlier. It’s just we won’t be able to recognize it as revenue.

Okay, that’s helpful. Thanks. And you mentioned that pre-leasing requirements have increased recently for developments. I was just wondering if you can quantify where you’d peg that today versus maybe what that threshold was, say, a year or two ago?

So, Jed, it’s hard – it’s Owen, it’s hard to give you an exact number on that, it depends on a lot of factors. What’s the size of the building, what’s – how active is the current market, what is the kind of leasing dialogues that we’ve had, but as an example several years ago, we launched 535 Mission in San Francisco on a spec basis, we probably wouldn’t do something like that today. And also as an example, most of the transactions that you’re seeing us do today, they’re substantially, if not fully pre-let, so we’ve announced recently Akamai’s headquarters, fully pre-let, Marriott’s headquarters, fully pre-let. We talked about the 300,000-foot anchor commitment were trying to secure at 2100 Pennsylvania. So it’s hard to give you an exact number. It depends on a lot of factors but we want significant pre-letting in our new developments.

I’ll give you a real life example. So the tenant that Owen and I described is looking at Reservoir Place North at 72,000 square feet. They asked us for proposal for the next building at City Place and we said we weren’t going to give them a proposal because 73,000 square feet or 80,000 square feet or a 200,000 square-feet building was not enough for us to deem it appropriate to start that building.

Okay, appreciate that. I’ll hop back in the queue.

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

Thanks. Just turning to the Estee Lauder renewal. Could you just explain when the shrinkage of this space happens and what year? And your comfort level in taking back 75-year – and your comfort level in taking back 75,000 square foot of space along with, what type of package you have to offer to keep the tenant rather than have him go to somewhere else. Let’s start with that. Thanks.

So let me start, and I’ll let John Powers chime in. So Estee Lauder has a lease through at the beginning – middle of 2020, and that lease is remaining in place. And they signed an extension on 220,000 square feet and we will begin to provide them with some swing space sometime towards the end of – or middle to end of 2018. So they can start their work. And I’ll let John keep going from there.

Well, I don’t have too much to add. They may in fact increase their square footage over the next period of time. We don’t really know that. They have flexibility take significantly more space.

Okay. As far as the rents, I mean, is this rolls down on rents flat. How should we think about that?

You should think about it as follows. When we bought the building back in 2008, there were two leases that were very, very, very billable market, and one of them was Wild [indiscernible] the other one was Aramis, Estee Lauder. We were able to keep both of those tenants in the building and we will be able to offer those tenants really attractive lease rates. That were probably lower than what we would charge a tenant that was taking 15,000 square feet or 20,000 square feet or 30,000 square feet in the building. And so it was a win-win situation for both parties.

Okay, that’s helpful. Just last question, you talked about some of the activity at 399 Park and the low rise of 601 Lex. Sounds like the activity there is pretty good. How do you feeling about getting leasing announced before year-end for the bulk of the space for both buildings?

John, you want to take that one.

Well, we have some good prospects. We’re trading papers. So we’re optimistic we could have it done by recent, but maybe it will drift into the first quarter. These are big leases and after you have a term sheet. It’s typically 90 days to get it signed. So we do have good interest. On the three prospects that Doug mentioned, the 399, they’re all on different time frames. So one of them probably would certainly be done by the end of the year, the others probably would be in the first quarter.

Okay. Thanks, John and Doug.

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

Thank you. So I just wanted to dig in a bit into your comments around the high-end of the market, you mentioned pricing is not an issue, but the depth and maybe just private tenancies. Can maybe just give a little bit more color. What you seen exactly at some of the higher-end space, maybe a 399 Park and some of the tenants that are looking at some of the floors that are at vacant in the GM Building?

Do you want to start with that one, John, and then I’ll add to color this time?

Sure. I think we have some good activity at the GM Building. It’s funding in the market is, as Doug said, pretty flat in terms of the pricing today and it’s more pressure on the TI dollars, but there’s a pretty good activity. So we have a floor and a part of the floor available. So we have two or three tenants looking at that at GM. We had two or three tenants looking at the four floors, or more than four floors in the Tower at 399.

And again, just – this is sort of my market commentary. There are lots of tenants, who are prepared to pay in excess of $100 a square foot to be in, as I described, the 19 buildings that may deal this quarter. The challenge in the market in Manhattan is that, the tenants that’s paying well in excess of $100 a square foot is a smaller tenant. And so, it’s a question just of the size of that pool relative to the amount of square footage that is coming onto the market over time. And I think that is where the rubber is going to meet the road. They will continue to be, and we believe lots of single floor and two-floor deals, and 30,000 or 40,000 or 50,000 or maybe even some 80,000 or 90,000 square foot deals. It’s hard to imagine there being hundreds of thousands of square feet of leases from single tenants in the marketplace that well in excess of $100 a square foot in the current environment. Doesn’t mean it won’t happen in three or four years, but in the current environment, it’s not what we’re seeing.

Okay, and just to clarify, on the GM – on the Estee Lauder space, you mentioned that there will be some swing space. Are they taking some lower floors while you redevelop some stuff? Can you just maybe walk us through how that will work?

Sure. Go ahead, John.

Yes. You noticed, I think it was last quarter, we took some termination income at GM. And we did that to provide swing space for Estee Lauder to swing through the building. They need at least two floors to rebuild as they go through their space.

Okay, great. So thank you.

So just understand this process will take them about three years to do and they’ll be making decisions on which brands to keep there, and which ones to move. So we won’t know the answer to exactly how much of space they take for probably another year or two.

But as of now, they’ve committed to roughly 50,000 left space, is that correct?

That’s correct. We’ve given them a lot of flexibility, because they are repositioning their whole portfolio and they have a number of different brands and there’s a lot of completed decisions that they have to make. So we decided to go in early, get this deal done and allow them the flexibility. So the commitment they’ve made is the minimum commitment. That maybe the final commitment, but as I said, things will change over the next two years.

Okay, great. Thank you.

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

Good morning, everyone. Maybe if we turn to LA for second, it’s a market that you’ve had some successful leasing at Colorado. What do you see in terms of other opportunities there and would you stay sort of in that West LA submarket or would you go a little bit broader?

We have been – as we’ve mentioned in prior calls, growing LA is the priority for us. We’ve had initial success with Colorado Center and we want to build on our toehold there. We have been looking and studying a number of new investments, some of them have been offered by intermediaries, more broadly, and some of them are more private discussions, some of them are acquisitions, some are development and redevelopment. We’re continuing to track – I’d say probably a little under half a dozen things at this point. The perimeter is more or less consistent with what we’ve been talking about, which is more West LA, Santa Monica, Beverly Hills, Hollywood, El Segundo, those kinds of areas as opposed to downtown. And – but again, as we did with Colorado Center, we’re not trying to grow just for growth’s sake. We want to, in addition to growing, we want to make money for shareholders in the process and we feel, we did that on Colorado Center and that’s our bar for new investments.

Great. And then maybe, Mike or Doug, if we turn back to your slides that you presented at NAREIT, has anything changed in terms of timing there either from the contribution from the developments or sort of the expectations of when NOI kicks in from the projects outlined there?

Honestly, Manny, the only thing that’s changed is the developments have kind of gone up slightly I think it was 241 and not 242 or 243. So it’s gone up a little bit, because we’re, honestly, we’re able to achieve more income from Salesforce Tower than we originally thought we would. But, again, we were very circumspect about the specific timing of our development in terms of when it was going to be put in services and it’s the first question this morning addressed that the timing of the income from the largest tenant at Salesforce Tower is just – it’s not in our discretion. We know when the cash is coming in, but we don’t know when the revenue recognitions are going to occur.

Got it. And final one for me, just – could you share your thoughts on your Street retail, it’s been a big topic of discussion and especially maybe as you’re leasing up at 399 and other places?

I’ll make one comment, and then I’ll let John respond. So our Street retail is a pretty de minimis amount of square footage, although it has a lot of value. And we have a couple of spaces on Madison Avenue, and we’re in reasonable constructive conversations with a few tenants there. And then the bulk of our retail in Manhattan is about food and "lifestyle choices" AKA, what we’re doing at 601 Lexington Avenue with our repositioning of the retail there, and I’ll let John describe what’s going on there.

Well, we’re repositioning the base of 601. As you know, putting in a food hall there and we’re out to lease with a, let’s say, a master retailer that would run the whole food hall for us. I guess, the retail in Manhattan, as Doug said, we don’t have a big exposure. Clearly, the market is soft in many places.

Thanks everyone.

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

Thanks, guys, good morning. Just curious, your commentary about TIs going up, kind of rents staying in place. Just kind of curious how that dovetails to the type of yield you guys are expecting on some of these build to suit developments? I mean, where should we expect those returns come in versus maybe 12 to 18 months ago?

Well, we mentioned in our remarks that the new developments that we are adding, we believe on pro forma basis, are going to yield for the company roughly a 7% cash yield. And that has more or less been our target for commercial development. We’ve been through that from time to time, if we have material preleasing, and frankly, we’ve achieved better than that. So I think the yields have stayed relatively constant. I think that’s logical given where interest rates have stayed. I think of the development, the risk bar has really gone up more on the preleasing – with our preleasing requirement, which we talked about further. And then on residential, the yields are probably 100 basis points lower in general, when we look at new development.

That’s helpful. And then, just turning to kind of co-working space, you guys – WeWork’s at about 83 bps plus what’s coming on at Dock72. And you guys are talking about, I’m also looking up in the Boston area or co-working tenant looking up in the Boston area. Just curious, how much exposure you guys want to that kind of vertical from a tenant perspective?

Let me try and describe the answer to your question in a couple of ways. So number one, we are affirmatively believers that co-working and the aggregation of small tenant users is a good thing for the market, and it’s a good thing for our properties. And so we have been very accommodative and outward in terms of being receptive to those types of users. There are a whole host of these organizations now. Some of them will not be successful and some of them will be very successful. Obviously, we have a position with WeWork, from a tenant perspective, we don’t, we have no investment and we work as an equity owner and we’ve had that question before. And we have been pretty dogmatic about modest amounts of tenant improvement exposure there and high-quality secure deposits in the form of LCs and guarantees of their mothership in various cases. So we are – obviously, there are limited they’re not full guarantees. So we are thoughtful about our exposure and there’s clearly a limit in terms of how much we would have, no different than I think, there’s a limit and how much we would have lot of different types of tenants, particularly ones that are in their more nascent origination as opposed to a company that’s been around for 15 or 20 years. And so we’re just going to – we’re going to be thoughtful about it.

Great, thanks guys.

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

Great, thank you and good morning. Owen, I want to go back to your comments on the capital markets. And I think you said bids are rotating geographically. Can you just talk about that rotation, especially as it relates to China, which has been in the news, maybe pulling back capital? Thanks.

So, Jamie, this is a hard thing to exactly quantify. A lot of this is anecdotal and what we see and who’s doing which deals where and what we hear about. But, couple of things: one, as I mentioned, I do think the bid for the kinds of assets that we own remains strong. And I gave bunch of examples of things trading this quarter in the low 4s cap rate. And a lot of them traded to non-U.S. investors. When I talked about rotation, I do think there have been a few adjustments over the last quarter. Again, this isn’t – a switch doesn’t flip. These happen slowly over time. We’re seeing, for example, more Korean investors today, I would say, than we saw a year ago. I would say, we’re seeing more Japanese investors in the market today, than we saw, say, versus a year ago. So – and then some of those investors that we saw a year ago, again this isn’t always the truth – or always the case, but for example, investors from Canada maybe are slightly less active, or the Middle East. Again, there are examples of transactions to being completed by all these groups. But that’s just our feel in terms of the tenor of the market. In terms of Chinese investors, look, I am aware as you are of probably specific examples of where capital controls are put in place and specific investors have been taken out of the market. But I do think there are lots of examples where Chinese corporations as well as sovereign funds have made major investments. These are in the U.S. or globally over the last quarter. So I don’t think there is a general wall that’s been built up around China that has cut off outbound capital. And I think, if anything, the Chinese capital has been quite robust over the last quarter.

Okay, that’s helpful. And I guess just very recently, is there a change in that or – in China, specifically?

I can’t tell you that I think there’s been a change in regulation in China that’s cut off capital flows. I could – I know of – or I’m aware – I think we’re aware of some specific examples of investors that have suddenly gone out of the market. But there are definitely other Chinese investors that are actively pursuing transactions, not only in the U.S. but all over the world. And that capital remains flowing.

Okay. And then, Mike, I appreciate your color on how to think about interest expense for next year. And you guys seem like you’re trending ahead of your core guidance. So as we think about 2018 – and I know you made some comments on the last call, you’re kind of starting in the hole with 399 Park, but any thoughts on how the core outlook looks for next year in terms of same-store and if the better than expected trend from this quarter and the rest of the year is going to help that?

I don’t think anything necessarily changed from last quarter. On the same-store, the challenge we’ve got is that the 399 Park drop is 250 basis points of our same-store, effectively. So we’re going to have growth in the rest of same-store, and the question is how much is it and how far can it overcome that 2.5%. And what I said on the call last quarter was that I thought it was going to be positive. So it was going to be able to overcome the 250 basis points. I don’t want to get more specific than that because there’s a lot of time between now and then, and we’re not going to give guidance until next quarter.

Okay, thanks. That’s helpful.

Your next question comes from the line of Vincent Chao with Deutsche Bank.

Hey, guys. I think most of my questions have been answered here, but just maybe a quick one on the guidance. Given the beat in the quarter versus your own expectations and excluding the deferred expenses, I guess I’m just wondering with the $0.04 increase based from the straight line being a little bit higher on better leasing activity, curious why it seems like roughly $0.02 upside versus 2Q expectation wouldn’t have maybe flowed through a little bit more, resulting in a little bit more upside. Or was some of that just earlier timing of expected leasing?

I think it mostly was earlier timing. We project that these things are going to happen. We don’t know exactly the date. And when you get a renewal done 45 days in advance of when you expected a quarter ago and you get to start straight-lining that 45 days earlier, it has an impact, but then it’s in our model already for the fourth quarter, right, that, that was going to happen. Same thing with kind of new leases. When you get something done 60 days early, it’s still in the back half of the year of happening, but it’s just happening a little bit sooner. So that’s most of what it is.

Okay, thanks. I don’t know if I missed this from earlier, but did you provide the cap rate for the Carnegie acquisition?

We didn’t. So it was a competitive and attractive cap rate.

I mean, I’m going to speak off the top of my head because I don’t remember. I want to say that the building was like 80-somewhat-percent leased, and it was in the mid-7s.

Yes.

So I think our stabilized number was somewhere close to 8.5% or 9% once we complete the leasing.

Okay, thank you.

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

Good morning. Doug, Doug, can we go back to – on Midtown versus the far West Side. You’ve spoken about the price point and the value space that existing buildings provide versus new construction. But clearly, if tenants are looking for efficiencies or modern space, the new construction is better, and yet the existing buildings are still winning tenants. So are there other things that the existing Midtown buildings offer apart from just value space that keeps tenants going – coming back versus going for the more efficient floor plates?

John, do you want to start with that, and I will add on?

Sure. Look, every tenant is different, and every tenant has its own buyer characteristics. We’re dealing with tenants now that have no interest in going to the West Side at all. We have other tenants in our portfolio that went to the West Side. So the Midtown core is still where most tenants want to be. It’s – many of the tenants that went to the West Side couldn’t find space in the core because of the size of their requirement. So the core of Midtown is very, very stable. And furthermore, the West Side is almost completely leased up now.

Okay, okay, that…

So those are not opportunities. When a tenant goes into market, like for example, BlackRock went into market, where are their opportunities? They only had two opportunities in Manhattan. There was no space that size on the East side at all. So they had opportunities to stay in their location. They were split. They wanted to consolidate. They could have gone downtown or they could have the building constructed in the West Side, and that’s what they chose to do.

Okay. But John, I appreciate that. And then the second question, just with all the news around MTA in infrastructure and the need there, I know you guys have the MTA site in Midtown. Are there other opportunities where – for public partner – public-private partnership where you guys can help sort of with capital needs that the MTA may have and get additional development sites or redevelopment sites?

So Alex, a couple of things I want to mention. So on that, there is nothing – there should be, I wouldn’t say there’s anything identifiable that we’re actively working on, but there are multiple examples in our overall corporate portfolio where we’re working with transportation authorities on building great buildings. A great example is the Back Bay development where we’re working with MassDOT and don’t forget the origins of the Salesforce Tower where the Transbay authority that is building a major transit hub in San Francisco. So this theme of public-private partnership is very prevalent in our portfolio, and I would assume it would continue. I think the other thing I just want to touch on, on your question about Midtown versus Hudson Yards and what’s the tenant reaction that we’ve had, certainly, I agree completely with John on a lot of this is the tenant’s preference on where they want to be. I think the other things that I would mention that are important that we hear is transportation infrastructure. When you think about the Grand Central Terminal, all the subway lines, the transportation infrastructure that exists in Midtown is, again, very, very competitive. And also, I think the other thing that’s happening, and obviously, we’re contributing to this, walk around Midtown. Look at the amount of scaffolding and the work that’s going on and the – and a lot of this work is improving the infrastructure that’s there. And we’re doing it with our own amenities and our own buildings, and I think you’re seeing other landlords all over the district doing this.

Okay. Thank you, Owen.

Your next question comes from the line of Rob Simone with Evercore ISI.

Hey guys, good morning. Thanks a lot for taking the question. A bunch of mine have already been answered already. But just on Colorado Center real quick. I read a couple months – about a month ago or so that HBO is giving back about 130,000 square feet. I think it was in 2019. Can you guys comment on that? And I think, Mike, you cited a mid-6% is a stabilized yield. Does that expiration impact that yield at all? And if so, by how much? Thanks a lot.

So let me comment, and I don’t know if Ray is on, but he can – I’ll let him add if he’s available.

Ray is on.

Great. HBO has a lease expiration in the beginning of 2019. We are not aware that they have made any conclusive plans to leave. There have been a lot of articles that have been written about their interest in going to a new development that is yet to start. I’m not a soothsayer, but I think it’s going to be awful hard for a new building to be built that hasn’t started yet for them to be in it by that time in 2019. So I wouldn’t put a lot of confidence in everything you read and the timing of everything you read.

I would also add that if HBO does move out, we have tremendous internal demand within Colorado Center that would back fill the HBO space with a substantial uptick in the current space with HBO. So we’re not at all concerned. The HBO space is probably the best space in Colorado Center, and it’s probably 30% to 50% below market. So we’re – it’s not going to be – if they do depart and then, as Doug said, that’s still in question. In the event, that will be greeted with great glee with the current tenants in the Center.

Thanks a lot guys, really helpful.

And just one last comment on that, just – they are the tenant probably with the least mark-to-market – the lowest rent and the highest mark-to-market that we have in the Center.

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

Hi, good afternoon, guys. So Erin Aslakson here for John. Quick question on Estee Lauder lease. On a net effective basis, I guess, in 2020 this will commence, obviously, rents are actually increasing quite a lot. Would that be a fair assumption? And can you quantify?

So Erin, I don’t want to be [indiscernible] or snarky about this. I don’t feel like – it’s – we’re not in a position to describe what is happening with a specific tenant. The rent will be going up from where it is today, but after that, it will bleed through and you’ll see it in our portfolio statistics and you’ll see it in our same-store, but we’re not going to break out what a specific tenant is paying.

Okay. That’s fair. Thank you.

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

Thanks. Just one for me, probably for Doug. Appreciate the color on the rent spreads on the 1.3 million square feet of commenced leases during the quarter, but obviously, that’s a little backward looking. So I was wondering if you could talk a little bit about what you’re seeing for the spreads on the leases that were executed in the quarter and whether we should expect any trend, up or down, for spreads in the coming quarters and into 2018.

I can tell you – I don’t have a list in front of me as we speak, but the majority of the leasing that’s been done this quarter at the 200 Clarendon Street Building has a dramatic uptick in rents. We were – we took space back at somewhere between $35 and $45 a square foot, and we’re getting rents between $55 and $80 a square foot. So that piece is dramatic. The – all the Embarcadero Center leasing is going to be consistent with the leasing that we’ve been doing over the past few quarters where we are generally getting somewhere between a 40% and a 50% gross markup in our leases on a fixed rate basis. And I think I said this before, in the leases that we are doing at 601 and at 399, it’s a pretty flat running-in-place kind of perspective. So as you look forward, we basically said we need to work really hard, and John and his team are working really hard to put us in a position where we currently are. We’ve got close to 500,000 [indiscernible] we’ve got an average rent there that’s just over $105 a square foot. And that’s where we intend to probably achieve on a lease-to-lease basis when that leasing is done. So we have a modest uptick there, but that’s where the bulk of that $50-plus million is going to come from.

Very helpful, thanks.

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

Thanks. Looks like we’re about a year away from the initial occupancy of Dock72. Can you just provide an update on leasing prospects there?

John?

Well, this deal is up to seven on the West and up to the 12 out of 16 floors on the East. You are right, we’re about one year away from occupancy there. We have no specific deals on, but we’ve covered the market pretty well. We’re bringing a bunch of brokers out there next week. And I think this is a product that will lease once people see it. We have no land costs, so we’re at an advantageous position.

Is transportation the major issue at this point as far as getting tenants comfortable with that?

Well, there are a lot of issues. It’s in Brooklyn, so that’s a different market. There is a transportation issue. We do have the ferry now, and that’s going to be a big plus.

Okay. And then you provided the appraised value at Colorado Center, I was wondering if you had done the same thing with the valuation of the GM Building.

We didn’t, but it’s probably available at $4.8 billion.

Okay, thank you.

Your next question comes from the line of Rich Anderson with Mizuho Securities.

Thanks for sticking with us. Doug, regarding your comment on the bridge and the fact that you only have two remaining tenant-disruptive redevelopments planned that haven’t commenced yet, I think Metro Square and 1333 New Hampshire, I’m curious, do we view that as an indication that this huge pace is truly going to decline in terms of redevelopment? And I guess, how important is it to BXP as a publicly traded company with investors, analysts kind of patiently waiting to see this incremental activity decrease over the next three years, thereby allowing the full cash flow potential of the company to come through? Is that important to you? Or is it kind of out of your hand like HBO lease, Colorado Center, then you kind of have to do something? I’m just curious where your mind is about how anxious you are to see that cash flow really start to matriculate to the bottom line.

Yes. So I think it’s a really good question. I’m sorry, you had to wait this long for it. It’s very important to us. We – and I’m – we’re going to spend a lot of time talking about this when we all get together in October. We have effectively repositioned the portfolio for a long, long time. You don’t do things like what we’re doing at 399 Park Avenue or the plaza of the General Motors Building or the flagship at the Prudential Center or the re-skinning of a suburban office building that was built in the 1980s. You don’t do that every 10 or 15 or 20 years. You do it every 30 or 40 years. And we happen to be in a position where we decided that this was the right time to do all of these things because of the lease expirations. Buildings like the 120,000 square feet that potentially is expiring at Colorado Center are basic tenant improvements jobs, not repositioning jobs. We are doing the amenitization and the repositioning of that site outside of worrying about the disruption of tenant spaces because it’s not going to impact them. It’s only going to impact the amenity spaces. So we feel really good about where we have positioned the portfolio for a long, long time. We are going to have lease expirations, and some of them will be a little bit lumpy. When I look forward to sort of 2019, as an example, there are a couple of big ones in Washington, DC, but the GSA buildings, there – these are hardened buildings with unusual tenants in them. We fully expect the tenants to re-lease those buildings. There’s going to be virtually no capital put into them. Things like that are going to happen in the portfolio all the time. But in terms of taking a building out of service and doing something major to it that impacts our ability to lease the space, we basically push through it all.

Okay. If you just allow me, it was mentioned – I think John mentioned West Side is now fully leased, but a lot – or many have not made the physical move yet. So is there a risk optically that Manhattan office vacancy rates could come down even though you know it may be coming when companies actually make their physical move to the West? Is that something that you have to manage the message a little bit on?

Well, let me pick that up. So we look obviously at the leasing statistics very carefully, and we obviously are aware of the supply that’s coming out, and we try to think through the timing for the new supply and what the market will look like at that time. And as you know, we’ve taken various actions in our portfolio, actually, several years ago in anticipation of the current supply that’s coming into the market. So I think that our view is if absorption – net absorption continues at what it’s been over the last few years that we think that – of this new construction in New York generally can be absorbed. I mean, you’re going to have tenant movements in new districts, and there may be some pockets of strength and weakness, but in general, we think the market can absorb it. The issue is will that net absorption continue, and that is more economically driven. I think New York is a vibrant and a competitively successful city and will continue to be that way, but if we have some kind of downturn in the overall economy and the net absorption goes away, that will be more harmful to the market, I think, particularly given this new supply that’s coming on.

Right. And I guess it’s just, right now, tenants are in two places, the pre-leased number in the West Side and the existing numbers point East. And that’s my only point. But I guess it’s just that it’s happened at such large scale that’s why I asked the question. And then the last question for me is the Princeton investment, I recognize this is relatively small in all scheme of things, but does that make your total investment there more marketable? And do you ultimately see Princeton as a larger kind of portfolio, a sale candidate down the road? Or are you committed long term to Princeton?

So we – you have to break Princeton into two pieces, first of all. You have Carnegie Center and Tower Center. So you look at – all our statistics are on a Princeton basis, but those two assets are very different.

Okay.

Tower Center is more challenged. We’ve had more difficulty in leasing it, and I would describe it as non-core. If you look at Carnegie, different story. It’s perennially in the high 80s, low 90s. In terms of occupancy, we have a strong tenant base there, a lot of international pharma companies. We’ve made significant investments at Carnegie, improving our amenities and improving the park overall. And so this – when this property became available, there’s only three or four assets within the park that we don’t own, and we thought this was a very logical acquisition. It’s small. Doug talked about the cap rate earlier. We thought it was attractive. And of course, we can very efficiently manage it and, of course, spread all our spend on the amenities even further into that building. So we’re committed to Carnegie Center.

Yes. I would say that the incremental investment was an opportunistic investment. You have a willing seller in Mack Cali who – this is our only asset in this marketplace. They have one building across the street left. And the – we just put major money into re-amenitizing our Carnegie Center assets, and we were – because we didn’t feel it was appropriate, we were not – we were prohibiting the tenants of other landlords from using the opportunity set and the amenity spaces that we’ve created. And so we had the ability to opportunistically acquire this asset, introduce the amenity program that we have for all the other Carnegie Centers to this building and hopefully be in a position where we can, because we’re doing that, increase the rental rates in the building in a modest to meaningful way over time as well as maintain higher leasing level. And so we looked at it really on a one-off basis and said, look, it will be accretive to our Carnegie investment over time.

Good, thanks.

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

Hey, guys. Just one or two follow-ups. It looks like Midtown East rezoning, they get finalized the next week or two. And just curious to get your guys thoughts on what this means for the market. And then can you just talk a little bit more specifically about your 343 Madison development rights there and kind of what place these plans are?

John?

Yes. Well, Midtown East rezoning, it’s been hung up for a while. I don’t think it’s going to have a dramatic impact on the market in the short run. There aren’t any a lot of properties that you can tear down and rebuild with an increased FAR. And a lot of Midtown is only built according to the existing code. And we’re moving forward on the MTA site slowly, and hopefully, we’ll have that tapered sometime early next year.

What kind of time line should we think about for maybe kicking off that project?

It would be quite a ways from now. We’d have to go through Europe, so you’re talking about several years.

Okay, thanks. And just – I think it was mentioned earlier that concessions continue to march higher across your markets. If you are to strip out the rising construction costs, sort of order of magnitude, how much increase in concessions would you say you’ve seen over the last year or so?

That is an impossible question to answer, Jed. And it’s funny because we’ve talked about it ourselves, which is one of the reasons the concessions are up is because of the costs. So if you’re in San Francisco and Article 24 has been enacted and it’s costing you $35 a square foot more to build out your space, that’s impacting the overall economics of the decision to move and to touch that space. And so it’s impacting the market because it’s just the reality of what you have to deal with. So it’s hard to divorce the two things. In addition, rents have not gone down, and there is more high-end space on the market in places like Midtown Manhattan. And when someone’s paying $125 a square foot, the tenant improvement allowance is $75 a square foot that was sort of market in 2011, is probably not an appropriate number because the rents were a lot lower in 2011. And so there’s a mismatch of concepts that are going on, so it’s impossible to sort of describe what percentage of those numbers are attributable to the inventory issues in the market. John, I don’t know if you have another thought.

No. I think Doug mentioned it earlier. It’s costing more for tenants to move. That’s the key thing. So the TI packages are up, but the price for the tenant is not down. They’re not getting more because of the increase in construction costs.

Sure, okay. Appreciate the comments guys.

That concludes all of our questions. Thank you for your time and attention. We look forward to seeing everyone at our Investor Conference in early October. Thank you.

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